How to improve strategic planning
It can be a frustrating exercise, but there are ways to increase its value.
Renée Dye and Olivier Sibony
2007 Number 3
In conference rooms everywhere, corporate
planners are in the midst of the annual strategic-planning process. For
the better part of a year, they collect financial and operational data,
make forecasts, and prepare lengthy presentations with the CEO and
other senior managers about the future direction of the business. But
at the end of this expensive and time-consuming process, many
participants say they are frustrated by its lack of impact on either
their own actions or the strategic direction of the company.
This sense of disappointment was captured in a recent McKinsey Quarterly
survey of nearly 800 executives: just 45 percent of the respondents
said they were satisfied with the strategic-planning process.1
Moreover, only 23 percent indicated that major strategic decisions were
made within its confines. Given these results, managers might well be
tempted to jettison the planning process altogether.
But for those working in the overwhelming majority of corporations, the
annual planning process plays an essential role. In addition to
formulating at least some elements of a company’s strategy, the process
results in a budget, which establishes the resource allocation map for
the coming 12 to 18 months; sets financial and operating targets, often
used to determine compensation metrics and to provide guidance for
financial markets; and aligns the management team on its strategic
priorities. The operative question for chief executives is how to make
the planning process more effective—not whether it is the sole
mechanism used to design strategy. CEOs know that strategy is often
formulated through ad hoc meetings or brand reviews, or as a result of
decisions about mergers and acquisitions.
Our research shows that formal strategic-planning processes play an
important role in improving overall satisfaction with strategy
development. That role can be seen in the responses of the 79 percent
of managers who claimed that the formal planning process played a
significant role in developing strategies and were satisfied with the
approach of their companies, compared with only 21 percent of the
respondents who felt that the process did not play a significant role.
Looked at another way, 51 percent of the respondents whose companies
had no formal process were dissatisfied with their approach to the
development of strategy, against only 20 percent of those at companies
with a formal process.
So what can managers do to improve the process? There are many ways to
conduct strategic planning, but determining the ideal method goes
beyond the scope of this article. Instead we offer, from our research,
five emergent ideas that executives can employ immediately to make
existing processes run better. The changes we discuss here (such as a
focus on important strategic issues or a connection to core-management
processes) are the elements most linked with the satisfaction of
employees and their perceptions of the significance of the process.
These steps cannot guarantee that the right strategic decisions will be
made or that strategy will be better executed, but by enhancing the
planning process—and thus increasing satisfaction with the development
of strategy—they will improve the odds for success.
Start with the issues
Ask CEOs what they think strategic planning should involve and they
will talk about anticipating big challenges and spotting important
trends. At many companies, however, this noble purpose has taken a
backseat to rigid, data-driven processes dominated by the production of
budgets and financial forecasts. If the calendar-based process is to
play a more valuable role in a company’s overall strategy efforts, it
must complement budgeting with a focus on strategic issues. In our
experience, the first liberating change managers can make to improve
the quality of the planning process is to begin it by deliberately and
thoughtfully identifying and discussing the strategic issues that will
have the greatest impact on future business performance.
Granted, an approach based on issues will not necessarily yield better
strategic results. The music business, for instance, has discussed the
threat posed by digital-file sharing for years without finding an
effective way of dealing with the problem. But as a first step,
identifying the key issues will ensure that management does not waste
time and energy on less important topics.
We found a variety of practical ways in which companies can impose a
fresh strategic perspective. For instance, the CEO of one large health
care company asks the leaders of each business unit to imagine how a
set of specific economic, social, and business trends will affect their
businesses, as well as ways to capture the opportunities—or counter the
threats—that these trends pose. Only after such an analysis and
discussion do the leaders settle into the more typical planning
exercises of financial forecasting and identifying strategic
initiatives.
One consumer goods organization takes a more directed approach. The
CEO, supported by the corporate-strategy function, compiles a list of
three to six priorities for the coming year. Distributed to the
managers responsible for functions, geographies, and brands, the list
then becomes the basis for an offsite strategy-alignment meeting, where
managers debate the implications of the priorities for their particular
organizations. The corporate-strategy function summarizes the results,
adds appropriate corporate targets, and shares them with the
organization in the form of a strategy memo, which serves as the basis
for more detailed strategic planning at the division and business-unit
levels.
A packaged-goods company offers an even more tailored example. Every
December the corporate senior-management team produces a list of ten
strategic questions tailored to each of the three business units. The
leaders of these businesses have six months to explore and debate the
questions internally and to come up with answers. In June each unit
convenes with the senior-management team in a one-day meeting to
discuss proposed actions and reach decisions.
Some companies prefer to use a bottom-up rather than top-down process.
We recently worked with a sales company to design a strategic-planning
process that begins with in-depth interviews (involving all of the
senior managers and selected corporate and business executives) to
generate a list of the most important strategic issues facing the
company. The senior-management team prioritizes the list and assigns
managers to explore each issue and report back in four to six weeks.
Such an approach can be especially valuable in companies where internal
consensus building is an imperative.
Bring together the right people
An issues-based approach won’t do much good unless the most relevant
people are involved in the debate. We found that survey respondents who
were satisfied with the strategic-planning process rated it highly on
dimensions such as including the most knowledgeable and influential
participants, stimulating and challenging the participants’ thinking,
and having honest, open discussions about difficult issues. In
contrast, 27 percent of the dissatisfied respondents reported that
their company’s strategic planning had not a single one of these
virtues. Such results suggest that too many companies focus on the
data-gathering and packaging elements of strategic planning and neglect
the crucial interactive components.
Strategic conversations will have little impact if they involve only
strategic planners from both the business unit and the corporate
levels. One of our core beliefs is that those who carry out strategy
should also develop it. The key strategy conversation should take place
among corporate decision makers, business unit leaders, and people with
expertise essential to the discussion. In addition to leading the
corporate review, the CEO, aided by members of the executive team,
should as a rule lead the strategy review for business units as well.
The head of a business unit, supported by four to six people, should
direct the discussion from its side of the table (see sidebar, "Things to ask in any business unit review").
One pharmaceutical company invites business unit leaders to take part
in the strategy reviews of their peers in other units. This approach
can help build a better understanding of the entire company and,
especially, of the issues that span business units. The risk is that
such interactions might constrain the honesty and vigor of the dialogue
and put executives at the focus of the discussion on the defensive.
Corporate senior-management teams can dedicate only a few hours or at
most a few days to a business unit under review. So team members should
spend this time in challenging yet collaborative discussions with
business unit leaders rather than trying to absorb many facts during
the review itself. To provide some context for the discussion,
best-practice companies disseminate important operational and financial
information to the corporate review team well in advance of such
sessions. This reading material should also tee up the most important
issues facing the business and outline the proposed strategy, ensuring
that the review team is prepared with well-thought-out questions. In
our experience, the right 10 pages provide ample fuel to fire a
vigorous discussion, but more than 25 pages will likely douse the level
of energy or engagement in the room.
Adapt planning cycles to the needs of each business
Managers are justifiably concerned about the resources and time
required to implement an issues-based strategic-planning approach. One
easy—yet rarely adopted—solution is to free business units from the
need to conduct this rigorous process every single year. In all but the
most volatile, high-velocity industries, it is hard to imagine that a
major strategic redirection will be necessary every planning cycle. In
fact, forcing businesses to undertake this exercise annually is
distracting and may even be detrimental. Managers need to focus on
executing the last plan’s major initiatives, many of which can take 18
to 36 months to implement fully.
Some companies alternate the business units that undergo the complete
strategic-planning process (as opposed to abbreviated annual updates of
the existing plan). One media company, for example, requires individual
business units to undertake strategic planning only every two or three
years. This cadence enables the corporate senior-management team and
its strategy group to devote more energy to the business units that are
“at bat.” More important, it frees the corporate-strategy group to work
directly with the senior team on critical issues that affect the entire
company—issues such as developing an integrated digitization strategy
and addressing unforeseen changes in the fast-moving digital-media
landscape.
Other companies use trigger mechanisms to decide which business units
will undergo a full strategic-planning exercise in a given year. One
industrial company assigns each business unit a color-coded
grade—green, yellow, or red—based on the unit’s success in executing
the existing strategic plan. “Code red,” for example, would slate a
business unit for a strategy review. Although many of the metrics that
determine the grade are financial, some may be operational to provide a
more complete assessment of the unit’s performance.
Freeing business units from participating in the strategic-planning
process every year raises a caveat, however. When important changes in
the external environment occur, senior managers must be able to engage
with business units that are not under review and make major strategic
decisions on an ad hoc basis. For instance, a major merger in any
industry would prompt competitors in it to revisit their strategies.
Indeed, one advantage of a tailored planning cycle is that it builds
slack into the strategic-review system, enabling management to address
unforeseen but pressing strategic issues as they arise.
Implement a strategic-performance-management system
In the end, many companies fail to execute the chosen strategy. More
than a quarter of our survey respondents said that their companies had
plans but no execution path. Forty-five percent reported that planning
processes failed to track the execution of strategic initiatives. All
this suggests that putting in place a system to measure and monitor
their progress can greatly enhance the impact of the planning process.
Most companies believe that their existing control systems and
performance-management processes (including budgets and operating
reviews) are the sole way to monitor progress on strategy. As a result,
managers attempt to translate the decisions made during the planning
process into budget targets or other financial goals. Although this
practice is sensible and necessary, it is not enough. We estimate that
a significant portion of the strategic decisions we recommend to
companies can’t be tracked solely through financial targets. A company
undertaking a major strategic initiative to enhance its innovation and
product-development capabilities, for example, should measure a variety
of input metrics, such as the quality of available talent and the
number of ideas and projects at each stage in development, in addition
to pure output metrics such as revenues from new-product sales. One
information technology company, for instance, carefully tracks the
number and skill levels of people posted to important strategic
projects.
Strategic-performance-management systems, which should assign
accountability for initiatives and make their progress more
transparent, can take many forms. One industrial corporation tracks
major strategic initiatives that will have the greatest impact, across
a portfolio of a dozen businesses, on its financial and strategic
goals. Transparency is achieved through regular reviews and the use of
financial as well as nonfinancial metrics. The corporate-strategy team
assumes responsibility for reviews (chaired by the CEO and involving
the relevant business-unit leaders) that use an array of milestones and
metrics to assess the top ten initiatives. One to expand operations in
China and India, for example, would entail regular reviews of interim
metrics such as the quality and number of local employees recruited and
the pace at which alliances are formed with channel partners or
suppliers. Each business unit, in turn, is accountable for adopting the
same performance-management approach for its own, lower-tier top-ten
list of initiatives.
When designed well, strategic-performance-management systems can give
an early warning of problems with strategic initiatives, whereas
financial targets alone at best provide lagging indicators. An
effective system enables management to step in and correct, redirect,
or even abandon an initiative that is failing to perform as expected.
The strategy of a pharmaceutical company that embarked on a major
expansion of its sales force to drive revenue growth, for example,
presupposed that rapid growth in the number of sales representatives
would lead to a corresponding increase in revenues. The company also
recognized, however, that expansion was in turn contingent on several
factors, including the ability to recruit and train the right people.
It therefore put in place a regular review of the key strategic metrics
against its actual performance to alert managers to any emerging
problems.
Integrate human-resources systems into the strategic plan
Simply monitoring the execution of strategic initiatives is not
sufficient: their successful implementation also depends on how
managers are evaluated and compensated. Yet only 36 percent of the
executives we surveyed said that their companies’ strategic-planning
processes were integrated with HR processes. One way to create a more
valuable strategic-planning process would be to tie the evaluation and
compensation of managers to the progress of new initiatives.
More on strategic planning
In a Quarterly
interview, Richard Rumelt, a professor at UCLA’s Anderson School of
Management, discusses the misperceptions some executives have about
strategic planning:
“Most corporate ‘strategic plans’ have
little to do with strategy. They are simply three-year or five-year
rolling resource budgets and some sort of market share projection.
Calling it ‘strategic planning’ creates false expectations that the
exercise will somehow produce a coherent strategy.”
Read the full interview online available mid-August.
Although the development of strategy is ostensibly a long-term
endeavor, companies traditionally emphasize short-term, purely
financial targets—such as annual revenue growth or improved margins—as
the sole metrics to gauge the performance of managers and employees.
This approach is gradually changing. Deferred-compensation models for
boards, CEOs, and some senior managers are now widely used. What’s
more, several companies have added longer-term performance targets to
complement the short-term ones. A major pharmaceutical company, for
example, recently revamped its managerial-compensation structure to
include a basket of short-term financial and operating targets as well
as longer-term, innovation-based growth targets.
Although these changes help persuade managers to adopt both short- and
long-term approaches to the development of strategy, they don’t address
the need to link evaluation and compensation to specific strategic
initiatives. One way of doing so is to craft a mix of performance
targets that more appropriately reflect a company’s strategy. For
example, one North American services business that launched strategic
initiatives to improve its customer retention and increase sales also
adjusted the evaluation and compensation targets for its managers.
Rather than measuring senior managers only by revenue and margin
targets, as it had done before, it tied 20 percent of their
compensation to achieving its retention and cross-selling goals. By
introducing metrics for these specific initiatives and linking their
success closely to bonus packages, the company motivated managers to
make the strategy succeed.
An advantage of this approach is that it motivates managers to flag any
problems early in the implementation of a strategic initiative (which
determines the size of bonuses) so that the company can solve them.
Otherwise, managers all too often sweep the debris of a failing
strategy under the operating rug until the spring-cleaning ritual of
next year’s annual planning process.
Some business leaders have found ways to give strategic planning a more
valuable role in the formulation as well as the execution of strategy.
Companies that emulate their methods might find satisfaction instead of
frustration at the end of the annual process. 
About the Authors
Renée Dye is a consultant in McKinsey’s Atlanta office, and Olivier Sibony is a director in the Paris office.
Source: The McKinsey Quarterly, August 5, 2007, online edition.
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