Article written by Michael Froehls, originally published by the University of Texas Austin.
In the first article of this series, we looked at the known and lesser-known benefits of strategic planning. In the second article, we outlined ideas about how to make the strategic planning process (SPP) more efficient. Let’s now address the question of how strategic strategic planning really is, where some typical shortcomings are, and what companies can do about it.
The Strategic Planning Process Works Best in Stable Environments
Designing a plan means making assumptions about the future. The more stable your industry and the future turn out to be, the more reliable your plan will be. Thus, in industries that are on a stable linear path without any major technological, demographic, or competitive disruptions, the SPP is probably all you need. The same is true when you are a monopolist or part of a close-knit oligopoly. There’s not much to do here except to watch out for disruptive dangers like a collapse of your oligopoly.
The SPP also works in two other situations. One of them is in cases when the annual SPP happens just a few months after a major strategic review of all business units and key strategic decisions have been made by senior management already. In that case the SPP just solidifies and fine-tunes elements that have already been thoroughly investigated and decided. It’s more of a confirmation with financial plan numbers than it is something new. And that’s a perfect outcome.
It is also possible for the SPP to capture the best strategy by chance. Since most SPPs do not radically alter strategies, sometimes the best thing you can do is rely on inertia — purely linear extrapolation of goals and numbers, with only gradual strategy adjustments (or none at all). Senior executives, especially when new to the company, want to leave their mark, for better or worse. An SPP that acts as an anchor of stability based on the past can serve as a counterweight to hasty and potentially ill-advised changes, even it was never intended to be that way.
Strategic Acceleration Renders the SPP Less Effective
Lately, there has been a lot of discussion about strategic acceleration. The rate at which companies enter and leave the S&P 500 is increasing, and industries are being disrupted by technology (e.g., robots, Web 2.0), globalization, and demographic changes around the globe. Whether you call it the Third Industrial Revolution or not, executives’ perception seems to be that the world is turning faster. In turn, this means corporate agility commands a premium.
Agility is the antithesis to any multi-year plan you encounter in large organizations. Being agile would mean capturing multi-stage decision making, thinking in options and scenarios, and viewing your strategic decisions as part of an overall portfolio where some bets win and others fail. The typical multi-year plan, however, is deterministic, assuming one future, one outcome, one set of numbers. It’s not stochastic and contingent on the outcome of future external and internal events. As such, any necessary future deviations from the plan are more likely to be seen negatively by senior management instead of a natural way of how things are, leading to longer reaction times by the company compared to a situation where no or a more flexible plan were in place.
How Strategic Can You Be When Pressed for Time During the Planning Cycle?
The second challenge to developing a strategy during the SPP is an inherent nature of the beast: An annual cycle follows a clear timeline, and the end goal of getting to plan numbers might limit true innovation or major new strategic directions. Strategic discovery might happen, but it is not guaranteed.
Employees usually don’t have the time, tools, or incentives to create or contemplate an alternative innovative winning strategy during the SPP, notwithstanding the occasional new product or distribution idea. PowerPoint and Excel templates used during the SPP implicitly require those who work on the plan to confirm their business unit’s or functional strategy. Typical templates ask for information on competitors, market share, product development, financial trends, major projects, etc., not for revolutionary change. Financial goals are often just linear extrapolations of trends (revenue plus or cost minus compared to actuals), with the sum of all unit’s goals adding up the desired overall company’s financial goals. Sometimes management uses the infamous BHAG (big hairy audacious goal) in order to force everybody to plan aggressively— like getting to $1 billion of earnings in five years; in my experience, BHAGs squash innovative thinking during the SPP rather than elicit it as making BHAG number in the plan becomes the one and only goal
Having looked at the strategic limits of the typical SPP, in the next installment of this series I will share with you some tools that can help a company have it both ways: keep the various benefits of having a multi-year plan while getting better at strategy development, both during and outside the SPP.
– See more at: http://www.texasenterprise.utexas.edu/2014/04/25/leadership/good-bad-and-exciting-future-strategic-planning-part-3#sthash.xzfDXc3x.dpuf
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