Foundation for the success of strategic planning

The basic goal of any strategy is to win the customer's preference and create a sustainable competitive advantage, while maximizing shareholders wealth. It defines a business's direction and positions it to move in that direction. Why, then, do so many strategies fail?

Few understand that a good strategic planning process also requires the utmost attention to the how of executing the strategy. A robust strategy is not a compilation of numbers or what amounts to an astrological forecast when companies extrapolate numbers year by year for the next ten years. Its substance and detail must come from the minds of the people who are closest to the action and who understand their markets, their resources, and their strengths and weaknesses.

A contemporary strategic plan must be an action plan that business leaders can rely on to reach their business objectives.

Developing such a plan starts with identifying and defining the critical issues behind the strategy. How is the business positioned in the context of its business environment, including its market opportunities and threats, and its competitive advantages and disadvantages? Once the plan has been developed, the question needs to be asked: How good are the assumptions upon which the plan hinges? What are the pluses and minuses of the alternatives? Is there organizational capability to execute the plan? What needs to be done in the near and medium terms to make the plan work in the long run? Can the plan be adapted to rapid changes in the business environment?

To have realism in the strategy it needs to be linked to the people process: Do the company have the right people in place to execute the strategy? If not, how is the company going to get them? It is important link the strategic plan's specifics to the operating plan, so that the moving multiple parts of the organization are aligned to get the company where it wants to go.

The substance of any strategy is summed up by its building blocks: the half-dozen or fewer key concepts and actions that define it. Pinpointing the building blocks forces leaders to be clear as they debate and discuss the strategy. It helps them judge whether the strategy is good or bad and why. It provides a basis for exploring alternatives if needed.

If the building blocks are clearly defined, the essence of even the most complex strategy can be expressed on one page. For example, in 1991 a $500 million business unit of an industrial company, a supplier to major auto manufacturers, was barely breaking even. Its product was considered a commodity and was under continued pricing pressure from its customers. The unit developed a new strategy based on three building blocks. The first was to lower costs by moving production out of the United States to a network of plants well positioned to serve both global customers and local markets. The second was to continually redesign the product to achieve technological differentiation, which would add value and command higher prices. The third was to create a new organizational structure staffed with carefully selected management teams. Marketing remained localized, but product development, technology, manufacturing, and finance were made into global organizations. The unit executed all three of these building blocks simultaneously, and it achieved excellent margins and returns. Today it is the supplier of choice for the world's top ten automotive customers. Throughout the process, the unit's leaders kept in touch with reality. For example, the original plan called for moving the technology program from the United States to a lower-cost country. But when American engineers balked at making the move, it abandoned this idea. The leaders also kept the strategy up to date, reviewing the plan three times a year and refining it as conditions changed.

The focus of this part is on business unit strategy, but it's important to understand the distinction between strategy at the business unit level and strategy at the corporate level. Corporate-level strategy is the vehicle for allocating resources among all of the business units. But it should not be simply the sum of those parts. If it is, then the business units could do just as well standing on their own (or better, since they wouldn't bear the burden of corporate overhead). Corporate leaders must add value to strategies created at the business unit level. At GE, for example, the boundarylessness that Jack Welch introduced assures a constant exchange of ideas and best practices among diverse business managers, significantly multiplying the company's intellectual capital.

Corporate-level strategy analyzes the mix of businesses and makes decisions about whether the mix should change in order to earn the best sustainable return on the company's capital. For example, GE exited the aerospace business when the Reagan presidency ended, anticipating the relative decline in defense expenditures and a fast consolidation of the industry. Jack Welch thought that financial and managerial resources would earn greater returns elsewhere. Strategic value is also added by initiatives to improve performance throughout the company, such as Six Sigma, digitization, and implementation of a good people process. GE's celebrated people process started as a Jack Welch initiative for human resources to produce a systematic way of assessing talent that would help develop future leaders. More recently, GE has formalized the search for GE "diamonds in the rough," people of substance who may not have the polish of some of their peers and who might get overlooked at other companies. They may be struggling in their current jobs because of circumstances they cannot control, such as working for a bad boss. The initiative will help move these people to better environments where they can grow and be ready to take on more responsibility in the future.

When a business unit creates its strategy, it clearly lays out in specific terms the direction of the unit: where it is now, where it will be going it in the future, and how it will get there. It looks at the cost of the strategic results it wants to achieve in terms of the capital resources it needs, analyzes the risks that are involved, and instills flexibility in case new opportunities arise or the plan fails. The strategy statement elucidates the positioning of the business in the context of its market segment map and analyzes the strengths and weaknesses of competitors. A business unit strategy should be less than fifty pages long and should be easy to understand. Its essence should be describable in one page in terms of its building blocks. If the strategy can not be described in twenty minutes, simply and in plain language, you haven't got a plan. "But," people may say, "I've got a complex strategy. It can't be reduced to a page." That's nonsense. That's not a complex strategy. It's a complex thought about the strategy. The strategy itself isn't complex. Every strategy ultimately boils down to a few simple building blocks.

A good strategic plan is a set of directions you want to take. It's a roadmap, lightly filled in, so that it gives plenty of room to maneuver. It gets specific when deciding the action part of the plan, where it gets linked with people and operations.

To be effective, a strategy has to be constructed and owned by those who will execute it, namely the line people. Staff people can help by collecting data and using analytical tools, but the business leaders must be in charge of developing the substance of the strategic plan.

They know the business environment and the organization's capabilities because they live with them. They are in the best position to introduce ideas; to know which ideas will work in their marketplace and which ones will not; to understand what new organizational capabilities may be needed; to weigh risks; to evaluate alternatives; and to resolve critical issues that planning should address but too often does not. Not everyone can learn to be a good strategic thinker, of course. But by working in a group, guided by a leader who has a comprehensive understanding of the business and its environment, and by using the robust dialogue that's central to the execution culture, they all can contribute something—and all will benefit from being part of the dialogue.

A good strategy process is one of the best devices to teach people about execution. It makes the mind better at detecting change; pieces of paper do not do that. People learn about the business and the external environment— not just data and facts, but how to analyze it and use judgment. How is the plan put together? How is it synchronized? They discover insights, and develop their judgments and intuition. They learn from mistakes: "Why, when we made our assumptions, did we not see the changes that overtook us?" Discussing these things creates excitement and alignment. In turn, the energy that these discussions build strengthens the process. The leader of a business has to own the strategy development. He does not have a strategic planner do all the work, then come in and introduce himself to the subject the day it is being presented. He takes responsibility for the construction of the plan and gets some help, and then—once everyone agrees with the strategy—he takes responsibility for developing action plans.

To start the planning process at Honeywell, the CEO calls the head of each unit, along with the strategic planner in his place and maybe one of the corporate staffers, and then they get agreement on the critical issues confronting the plan. After the plan has been constructed, but before the CEO reviews it at the corporate level, each leader will have reviewed that plan with his subordinates and gotten their input on it. After all, these are the people who will have to implement the plan.

An astonishing number of strategies fail because leaders do not make a realistic assessment of whether the organization can execute the plan. This was one of the problems at Xerox, Lucent, and AT&T.

How do you make such an assessment in your business? In a sense, this should not even be a question. If the CEO is doing his as a leader—if the leader is intimately involved in the three core processes, running the robust dialogues that permit candid assessments—the leader cannot help but have an idea of capabilities. But it is wrong to stop there. Listen to the customers and suppliers. Get all the leaders to do the same, and ask them to report what they have heard, and it should not be forgotten the security analysts, who look at the leader sharply from the outside. Some are good, some are not, but after a while the leader will know which ones he/she can learn from.

The leader measures organizational capability by asking the right questions. If the strategy requires a worldwide manufacturing capacity, for example, the leader needs to ask: "Do we have people with global experience? Do we have people who know how to source? Do we have people who can run a supply chain that extends worldwide?" On a scale of one to ten, if the answers come up a six, the company does not have enough capability.

The goals bring reality to a strategic plan. If the business does not meet goals as it executes the plan, leaders have to reconsider whether they have got the right strategy after all. In the Honeywell automotive business mentioned earlier, the short-term and medium-term milestones were to develop programs to move to low-cost manufacturing locations, as well as to create and execute a technology map to differentiate the product and increase margins. The long-term (five-year-plus) mission was to position the business so that it could break out of the auto industry and adapt the technology to serve customers in other markets.

A good strategic plan is adaptable. Once-a-year planning can be dangerous, especially in short-cycle businesses where markets will not wait on the planning schedule. Periodic interim reviews can help to understand what is happening and what turns in the road are going to be necessary. This is another reason the business leaders have been in on the plan from the beginning. Because they helped build it and they own it, they carry it around in their heads all the time—unlike a staff-driven planning book, which will spend a year on shelves before being discarded. So they can regularly test it against reality. And because the leader has crystallized the essence, it does not take too long to implement changes.

Strategy planning needs to be conducted in real time, connected to shifts in the competitive environment and the business's own changing strengths and weaknesses. This means defining the mission in the short to medium term as well as in the long term. Breaking the mission down into these chunks will help bring reality to the plan—thinking about what will deliver results in the short and medium term will give an anchor to build for the future.

Anything, from customer preferences to cash flows, can change in mere moments. Businesses have to prepare themselves to adapt to an economy of constant change. In developing the plan, the company needs to look ahead to landscapes that are more likely than not to change before the plan can come to completion.

Let’s say the CEO decides to move some of the plants to low-cost countries, it is not necessary to decide on which plants too far in advance. Opening a plant in, say, Russia may be attractive now, but a year from today it may not be the best alternative. The point is first to get the principle across—in this case, the need to reduce costs by moving some part of the operation to a new locale. Then make a concrete decision as the company move closer to the date.

Balancing the short run with the long run is thus a critical part of a strategic plan. Most plans do not address what a company has to do between the time the plan is drawn up and the time it is supposed to yield peak results. A plan that does not deal with the near-term issues of costs, productivity, and people makes getting from here to there unacceptably risky—and often impossible.

Intel mastered the art of balancing the short term and the long term from the time it was a $200 million company. They understood that to win in their game, they must invest in improving manufacturing processes and equipment ahead of the new-generation technology, so that it can be tested. That way they are ready for the next generation, thus meeting short-term goals and also building for the longer run.

Achieving this balance requires creativity and idea generation, finding resources outside the corporation if necessary for the long term. That is common now in the pharmaceutical industry. Warner-Lambert, in developing the cholesterol-lowering drug Lipitor, needed resources as well as more extensive sales coverage globally. It negotiated with Pfizer to co fund development and launch the molecule underlying Lipitor. Warner-Lambert got a $250 million check from Pfizer, thus gaining resources from outside and, at the same time, improving its market position with more sales coverage.

Every year companies such as Colgate-Palmolive and Emerson Electric generate resources that build for the future through productivity-improvement programs. Colgate is one of the very best examples of a company that delivers short-term results quarter after quarter. It has an enviable record of increasing margins every year and out competing its major competitors in earnings growth, sales, and cash generation. Not only does its total toothpaste product line make it number one in sales and market share, but its consistent practices every year to develop and execute productivity programs funds the growth projects of the future. Unique among consumer goods companies, Colgate now has a global group working on ideas for growth and productivity.

It is important to write about the critical issues facing the business.

Every business has half a dozen or so critical issues—the ones that can badly hurt it or prevent it from capitalizing on new opportunities or reaching its objectives. Addressing these usually requires research and thought. Outlining the critical issues in the strategic plan helps focus the preparation and dialogue when it comes time to review the strategy.

The highly indebted company's huge consumption of cash and its loss of market share brought it to a financial crisis in the year 2000 because management failed in the execution of its plans to reorganize the sales force by industry and to consolidate its administrative centers. Critical issues such as this need to be the subject of robust dialogue during the building of the plan. If problems arise, they should be placed on the table for discussion by including them in the plan. "Why did the company lose market share last year in this business for a key product? Why the company cannot achieve higher productivity? Why the company cannot grow more rapidly in China? Why does the company continue to have quality problems? How can the company continue to grow the market?" The five or six issues need to be reviewed to provide data and make recommendations and debate, and ultimately you achieve a resolution. That is part of a productive strategic planning exercise.

Many strategies fall apart because the right critical issues are not raised. AT&T's critical issues included the decline in long-distance revenues and the organizational capability to execute a major shift in strategy. The Iridium consortium—the joint effort of Motorola and TRW to develop a satellite telecommunications system able to link phones worldwide—confronted two critical issues. One was how to create enough demand to bring prices down enough to build a sizable market; the other (related to the first) was to develop handheld units’ small enough that consumers would be able to conveniently carry them around. The strategy failed on both counts.

In 2001 Dell Computer was beginning to face its critical issue—the dim long-term outlook for PCs. No matter how much market share Dell stood to gain, the market had no foreseeable heady growth. An initial step in the right direction was to form an alliance with EMC to market EMC's storage equipment. A stronger option was to expand into the adjacent segment, servers, where the growth potential is far higher than for PCs. But can Dell's low-margin, high-velocity model, which works so well for PCs, be effective with more technologically sophisticated servers?

Every strategy must lay out clearly the specifics of the anatomy of the business, how it will make money now and in the future. That means understanding the following foundations, the mix of which is unique for every business: the drivers of cash, margin, velocity, revenue growth, market share, and competitive advantage. For example, the division manager we discussed earlier who was proposing a $300 million investment for a new product would need to present the following information to answer the question about how his strategy for the product would make money and provide adequate return on investment:

- Pricing at different levels of demand. Will the customer pay a premium for what you claim is a differentiation?

- Cost and cost structure now and in the future.

- Cash required for working capital.

- Actions required to ramp up revenue growth.

- The investment required to market the product.

- Continued investments in technologies to prepare for the next generation of product.

- Competitors' pricing reactions.

By now it is hoped the reader can see that a strategic plan contains ideas that are specific and clear. It is not a numbers exercise. Numbers are obviously needed, but those that are detailed line by line and are mechanically extrapolated over five years offer little in the way of insight. The numbers the company needs are those that add to the robustness of the ideas in the strategic plan.

The questions are not mechanical, either. The ones that are important will vary from situation to situation and from year to year. So will the answers—what is right for one business today may not be right for another business, or for the same business. A plan prepared according to the guidelines and questions outlined in this publication provide the foundation for the success of the strategic plan.

REFERENCES

1. “Execution: Discipline of getting thing done”. 2002 by Larry Bossidy and Ram Charan.

2. “Management”, 1992 by Michael H. Mescon, Michael Albert and Franklin Khedouri.