Monday, February 1, 2010

Strategic Plans Lose Favor, Really?

Here is an article from Wall Street Journal proclaiming the death of strategic plans. Really? You can believe it only at your own peril. Unless of course, you never really knew what strategic planning was all about, which seems to be the case about WSJ.

Strategic plans are not about annual budget planning and it seems to me that is exactly what WSJ is talking about. Strategy is primarily about creating competitive benefits – if that is not what it is doing for you, sorry to say, but you don’t have a strategy. Strategy is also about assessing risks and having contingency plans. The competitive advantages don’t last forever, they erode over time. They can erode because they become commonplace (and everyone develops those capabilities), they can erode because the environment changes (what was a competitive advantage once is not any more), and they can erode because an expected situations arises (a risk for which the company has no contingency plans). It is the job of strategic planning to ensure that your business always has competitive advantages – creating new ones when the old ones erode.

Strategic plans are about positioning the business for growth and profitability; not about annual, quarterly, or monthly financial reviews to pore over the cost/revenues picture.

That said, the strategic plans are deployed through their attendant plans. Financial planning and budgeting is a prime example of one of those types of attendant plans. No less important, but they do not substitute the strategic planning. Almost all companies do have financial plans, but not all of them have strategic plans. Having a five year or three year financial plan does not equate to having a strategy. It only equates to having a broad understanding of revenues and expenses. It is an important tool towards realizing the business strategy, but it is not business strategy.

The WSJ article quotes, “a few even set up "situation rooms,'' where staffers glued to computer screens monitored developments affecting sales and finances” – this is a clear symptom of the argument above. They are worried about revenues (sales) and expenses (finances), not strategy. It also quotes Accenture saying, “Strategy, as we knew it, is dead. Corporate clients decided that increased flexibility and accelerated decision making are much more important than simply predicting the future”, and Boston Consulting Group as saying, “more business leaders will start to rely less on static five-year strategic plans and more on rough "adaptive" strategies that consider multiple scenarios”. The emphasis in italics is mine, but the point is simple: if your strategic plans did not have risk assessments and contingency plans for each identified risk, such as recession, decline in demand, low pricing power, supply failures, and so on, then all you were doing was financial planning as usual – there was nothing “strategic” about it other than, probably the long horizon.

As far as the frequency of reviewing plans is concerned, it has been shrinking for a long time now. For good reasons too – it is now possible to reduce the frequency of reviews and assess the plans more often. Where collecting and crunching the data from several thousand stores, divisions, regions, and factories used to take months, it is now a matter of minutes, sometimes a day or two, if you have the right infrastructure. Whether you have the right infrastructure or not is a matter of strategy – if your company believed that making decisions objectively and expediently was a competitive advantage, you would have invested in the right areas of infrastructure to make that type of objective decision-making possible, if not, you are probably going to have to set “situation rooms” and throw in a few bodies to monitor the “situation”. This is the typical fire-fighting mode for companies focused on next quarter’s analyst call more than developing any real business strategy!

These days, it is neither impossible, nor uncommon for corporations to establish real-time business intelligence systems that not only guide their financial plans but also provide valuable inputs to their business strategy. The financial reviews and controls also don’t have to be on a pre-defined frequency, in fact, it is entirely possible to simply set-up triggers for change in a set of pre-defined metrics that should initiate a review of financial plans whenever the triggers are tripped. Examples of such triggers can be demand, supplies, resource usage, inventories, payroll, overtime pay, or anything else that matters for the business and most of them can be computed much more frequently than a month.

But of course, setting up such infrastructure is completely a matter of strategic planning: mere long-term financial planning is not going to get you there, no matter how frequently it is reviewed.

© Vivek Sehgal, 2010, All Rights Reserved.

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