For the past couple of months, thousands of major corporations have been engaged in the yearly rite of planning strategy. When done well, strategic planning provides a center of gravity and a common language that energizes employees.
Unfortunately, most companies will spend an enormous amount of energy doing it not very well. Their managers dread this effort for good reason. Strategic planning too often oscillates between blue-sky envisioning, done without rigorous homework or details about how to execute the vision, and a sterile budgeting exercise focused on financial minutiae rather than on the shifting market landscape.
Managers persevere with strategic planning because there is no substitute. Without a clear sense of direction, initiatives proliferate, employees get exhausted and companies drift. But strategic planning won't lead to tangible success if the process and execution are flawed.
Consider the recent history of Ford Motor Co. Under CEO Jacques Nasser and his senior management team, Ford fell into a three-year spiral and Nasser was fired in 2001. Ford's major strategic thrust, "getting closer to the customer," failed to drive capital allocation decisions; the company continued to fund major projects that had nothing to do with its strategy, such as partnering with Yahoo! Inc. on e-commerce and investing in unrelated businesses such as junkyards. The company, meanwhile, neglected to refresh vehicle designs, alienating customers and eroding profit. Ford's culture, particularly its ruthless management evaluation system, stifled debate that might have challenged these moves.
As at Ford, strategy failures can usually be traced to flaws in process as much as in content. Only by erasing the distinction between strategy and execution can companies reliably craft and execute winning strategies, built on three foundations of successful planning:
Debate assumptions, not targets. Strategy processes often devolve into bickering about targets, as business units try to game the budgeting system or otherwise increase the odds that they'll fulfill their annual goals.
It's more useful to promote robust debate on the company's assumptions about customers, costs and competition. Companies typically fall shortest in assembling facts about customers; examples range from Motorola Inc.'s failed Iridium satellite phone venture, which assumed that lots of people wanted to be reached anywhere on earth through a large, high-priced handset, to dozens of failed B2B online exchanges. Time spent delving into the facts about customer behavior can help identify the drivers of success and enable a company to change course effectively when customer priorities shift.
Aggressively challenging assumptions can lead to much more robust strategies. One wireless phone company we worked with gained an edge over competitors by questioning the prevailing assumptions about growth markets. Traditionally, executives who traveled a lot and could afford to pay high per-minute rates had been the demographic segment that drove profits. As digital technology lowered rates, many telecom strategists came to believe that another customer segment would spur future growth - college students and recent graduates who were already mobile and technically savvy.
But when the wireless company's managers examined the underlying market assumptions, they saw that an overlooked segment - mobile blue-collar workers such as construction foremen - would likely generate strong growth. These customers' priorities were, moreover, very different from those of college students and white-collar executives; they valued reliable coverage throughout their local area far more than national coverage. They were also price-sensitive, and most of their calls went to a relatively small circle of people, so they valued "friends and family" discount offers. The wireless company targeted this segment well before its competitors did and gained a dominant share of the business as a result.
The debate about assumptions should involve people on the front lines who are executing in their markets every day. Bombardier Inc., the Canadian aircraft and train manufacturer, ensures that there is a dialogue between the business units and parent company managers around strategy, with business units challenged not just on financial targets but also on the strategy and its execution.
Stress money over message. Even though many companies have become adept at communicating a broad strategic vision, there's often a disconnect between the message and the organization's actions. Money speaks louder than words. As former IBM Corp. CEO Lou Gerstner has said, "Making sure that resources are applied to the most important elements of the strategy is perhaps the hardest thing for companies to do."
That's because large companies tend to have hundreds of initiatives running at any given time. Many overlap, some conflict and no one keeps track of all of them. The way clear of this mess is to combine strategy development with capital allocation. A strategy should cascade downward into a few campaigns - the streams of work required to fulfill the strategy. These campaigns, and only these campaigns, should receive funding (see exhibit).
Halliburton Energy Services Group (the oil field services business, not the government contracting business) employed this approach in revamping its strategy process. The company now has the head of strategic planning overseeing capital allocation as well; he chairs a capital committee that includes the CFO. Only initiatives linked to a short list of strategic priorities can be funded. This ensures a balance of long-term strategic goals with short-term financial constraints, even in the highly cyclical oil field services industry.
Break the calendar templates. When strategy-making becomes a matter of filling out annual or quarterly forecasting templates, managers grow cynical about the entire process. But strategy leaders such as General Electric Co. and IBM have broken free of the annual planning cycle. They have simplified strategy making and extended it across a multiyear process of strategy renewal, staggered for different business units.
At any given time, some units should be reviewing the strategy they developed a year ago and making minor midcourse corrections. Others should be refreshing strategies in the second or third year of implementation and incorporating new information. Another set of units should be completely reinventing themselves. Staggering the process this way ensures that a company is always transforming some parts of itself, taking fresh looks at the market and competitors.
There is hope for strategic planning yet. By turning the process into a real capability rather than an esoteric annual exercise, senior managers can gain a clear view of where they are going and why, how to evaluate their progress and what the payoff will be. - Phyllis Rothschild and Richard Balaban
Phyllis Rothschild is a director and Richard Balaban is a managing director of Mercer Management Consulting. A longer account of Mercer's thinking on strategic planning is available at www.mercermc.com.
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