Tired of Strategic Planning?

Tuesday, November 4, 2003

Eric D. Beinhocker & Sarah Kaplan, The McKinsey Quarterly 2002 Number 2 Risk and resilience, http://www.mckinseyquarterly.com/article_page.asp?ar=1191&L2=21&L3=37&srid=69

Better Business & Planning Practices

Many companies get little value from their annual strategic-planning process. It should be redesigned to support real-time strategy making and to encourage ’creative accidents.’

"...chance favors only the prepared mind."
- Louis Pasteur

Senior executives generally agree that crafting strategy is one of the most important parts of their job. As a result, most companies invest significant time and effort in a formal, annual strategic-planning process that typically culminates in a series of business unit and corporate strategy reviews with the CEO and the top management team. Yet the extraordinary reality is that few executives think this time-consuming process pays off, and many CEOs complain that their strategic-planning process yields few new ideas and is often fraught with politics.

Why the mismatch between effort and result? Evidence we culled from research on the planning processes at 30 companies (see sidebar, "About the research") and work with more than 50 additional companies points to a common dispiriting explanation: the annual strategy review frequently amounts to little more than a stage on which business unit leaders present warmed-over updates of last year’s presentations, take few risks in broaching new ideas, and strive above all to avoid embarrassment. Rather than preparing executives to face the strategic uncertainties ahead or serving as the focal point for creative thinking about a company’s vision and direction, the planning process "is like some primitive tribal ritual," one executive told us. "There is a lot of dancing, waving of feathers, and beating of drums. No one is exactly sure why we do it, but there is an almost mystical hope that something good will come out of it."

But something good ought to come out of it. In a business environment of heightened risk and uncertainty, developing effective strategies is crucial. But how can companies reform the process in order to get the payoff they need?

New goals for strategic planning

Part of the answer lies in taking a fresh look at the substance of business unit and corporate strategy. But a more important—and often overlooked—element is to rethink the process by which strategy is made. It can even be argued that without a strong process, it is unlikely that the substance will come out right.

A key starting point is the acceptance of the counterintuitive notion that the strategic-planning process should not be designed to make strategy. Henry Mintzberg, a professor of management at McGill University, calls the phrase "strategic planning" an oxymoron.1 He argues that real strategies are rarely made in paneled conference rooms but are more likely to be cooked up informally and often in real time—in hallway conversations, casual working groups, or quiet moments of reflection on long airplane flights.

What then is the purpose, if any, of a formal planning process? Our research persuades us that the exercise can add value if it has two overarching goals. The first is to build "prepared minds"—that is, to make sure that decision makers have a solid understanding of the business, its strategy, and the assumptions behind that strategy, thereby making it possible for executives to respond swiftly to challenges and opportunities as they occur in real time. GE Capital, for instance, has consistently proved quicker to react and better able to value acquisition opportunities than have its competitors. Part of this success is due to a strategy process ensuring that GE Capital’s executives have a strong grasp of the strategic context they operate in before the unpredictable but inevitable twists and turns of their business push them to make M&A and other critical decisions in real time.

The second goal is to increase the innovativeness of a company’s strategies. No strategy process can guarantee brilliant flashes of creative insight, but much can be done to increase the odds that they will occur. In addition to formal planning at the business unit level, for example, Johnson & Johnson uses crosscutting initiatives on major issues such as biotechnology, the restructuring of the health care industry, and globalization in order to challenge assumptions and open up the organization to new thinking.

In our research, we didn’t find a single company that was best at achieving both of these goals, although GE came closest. Instead, companies tended to be better either at the formal process of creating prepared minds or at the more informal process of driving strategic creativity. In addition, we found that some practices of companies in the sample were very specific to their industry or culture. What we will describe is thus not a single company’s best-practice process but a composite picture, drawing ideas from a number of companies and focusing on what we have found to be the most transferable ideas.

Preparing minds

Most companies have an annual cycle of strategic-planning reviews that typically culminate in a presentation to the board. While the process itself might be quite formal, at its heart it is just a series of meetings. The trick is to transform them from the "dog-and-pony shows" that many companies now experience into true conversations that prepare the minds of the executive team for real-time strategy making in the year ahead. We have found that the key to designing effective strategy conversations is getting a number of critical details right.

Start with a commonsense approach about who should attend. Real conversations take place not in large groups but in small gatherings of no more than ten. Attendees at strategy reviews should thus be strictly limited to the principal strategic decision makers—the CEO and the head of the unit, along with the group or sector head, the chief financial officer, one or two of the unit’s crucial managers, and the head of corporate strategy. The exact list will differ from company to company. More executives will fight to be involved, but they can be kept "in the loop" through other forums.

Resign yourself to the fact that in-depth discussions of strategy take time. Calendar-challenged executives may chafe, but most CEOs we interviewed claimed that they want to spend about a third of their time on strategy. That amounts to 80 days in a 240-working-day year. Against that backdrop, it doesn’t seem unreasonable to spend 20 to 30 days (that is, 15 to 25 days for business units, plus 2 to 5 days for sector and corporate strategy) in intensive, well-prepared discussions of strategy.

The venue should, if possible, be the site of the business unit; the CEO will get a better feeling for what is going on there, and the spirit of the session will be less "a summons from headquarters" and more a true discussion.

Above all, companies should avoid combining strategy reviews with discussions of budgets and financial targets, because when the two are considered together, short-term financial issues dominate at the expense of long-term strategic ones. As an executive put it, "If they haven’t already talked about the numbers, they’re gonna talk about the numbers." Thus, the best-practice companies we surveyed organized two clearly demarcated meetings: a full day on strategy with each business unit and a shorter meeting, at a different time of year, to set financial targets. The two are then coupled in a rolling annual cycle; the financial plan is an input for the strategy discussion, which in turn is an input for the next financial plan (Exhibit 1 shows a sample calendar).

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