Many executives believe that the strategic planning process is synonymous with strategy formation. Wikipedia acknowledges the relationship between the two with the following definition: “Strategic planning is an organization’s process of defining its strategy, or direction, and making decisions on allocating its resources to pursue this strategy.” The site also defines strategy as “a high level plan to achieve one or more goals under conditions of uncertainty.” So, certainly from a theoretical perspective it seems like strategy should be derived during the strategic plan process.
Unfortunately, my experience indicates the typical strat plan process does not drive company strategy. I first reached this conclusion while participating in the strat plan process of my Fortune 300 company. The strategic planning process devolved from the higher purpose defined by Wikipedia into a business unit resource allocation exercise. Our business unit’s strategic planning efforts were dedicated to providing the minimum revenue growth commitments for the next 12 months in exchange for the maximum resource allocation over that same timeframe.
Winning or losing this negotiation had a direct impact on executive compensation. In this kind of corporate environment, management was incentivized to propose tactical approaches with short-term payback. Presenting high-risk, high-reward strategic activity was unlikely, because in the budget allocation game, senior executives rewarded the more finite opportunities with precious expense dollars. Since business units usually knew the limits of the coming year’s expense increase, a short-term program would need to be eliminated for every long-term program proposed. A further disincentive was the recognition that for every long-term strategy proposed, the business unit heads risked losing an expense allocation to another business unit presenting a better short-term payoff.
I’ve observed similar approaches to strat planning in other companies too. So, the term “strategic planning process” is really a misnomer because strategies are rarely introduced during its namesake process. There is no incentive to propose strategies with long-term potential because they are less likely to receive funding. If strategic issues arise during the strategic planning process, they are usually tabled for a more-detailed examination outside the process.
Quite frankly I agree that strategy formation should not be included in the strat plan process. That’s because I define strategy a bit differently: “a planned set of structured decisions that leverage company competencies into a better business outcome.” This outcome could be financial growth or it could be the mitigation of some negative environment impact. The goal of strategy is to proactively manage a company’s evolving environment, a complex business activity that requires time and focus.
Based on my definition, the key requirement for successful strategy formation is the “planned set of structured decisions” phrase. Strategy formation cannot be performed in a one-off event; it must be planned over a set of structured meetings. The best strategy is formed when a wide array of alternatives are presented, followed by a collection of data specifically related to the issue under consideration. Strategic issues require detailed analysis and meaningful dialogue, with input from executives representing a wide array of business disciplines. Realistically, these activities can only be successfully accomplished when the executive team dedicates their focus on one strategic issue.
Strategy formation cannot be performed using the broad-brush approach usually seen in a company’s strategic planning process. Executives are so busy focusing on the short-term budget-setting and resource allocation functions of the strat plan that they cannot focus on a new strategic course of action.
Strategy formation needs to separate from the typical strat plan cycle in order to be successful and have the greatest impact on the company.