The Big Lie of Strategic Planning – III

This would be the last in the series of posts on article The Big Lie of Strategic Planning by Roger L. Martin.

Circumventing the Traps

Companies that have fallen into the trap are the ones that are typically comfortable with their planning process.  Their focus is on getting more profit from the existing revenue than generating more revenue. Even their metrics are focused on finance and capabilities, rather than on customer satisfaction and market share. This anomaly is because they are accustomed to their comfort zone, whereas they should have be on their toes.  Therefore, it is recommended, to avoid such a situation, they should follow these three basic rules.

Rule 1: Keep the strategy statement simple

The first rule would be to focus their energies on revenue generating activities, such as on their customers.  After all, it is customers who decide to spend on a company which offers a better value proposition. Against this background, two broad choices determine a company’s success: target customers and creation of compelling value propositions. It is understood that this approach will also simplify the whole planning process.

In my opinion, all the discussion should be focused on how customer choices and value propositions will be impacted by the changes in the external environment.

Rule 2: Recognize that strategy is not about perfection

Here the premise is that managers believe strategy needs to be perfect.  But, as strategy is about revenue, and not cost, it is impossible to bring about perfection. So, this is something they need to keep in mind throughout the process.  But, for that to happen, the realization has to come from the top.  Until there is a realization within the organization, there will always be a greater emphasis on inflexible strategy.

Rule 3: Make the logic explicit.

So, the best way to increase the chances of strategy being correct, is to test one’s logic behind the thinking.  For that to happen, one needs to find answers regarding what one needs to believe about customers, about the evolution of the industry concerned, about competition, and about company’s capabilities.

Finally, the author argues that planning, cost management, and focusing on capabilities are dangerous trap for strategy makers. Yet, it cannot be denied that these activities are essential, and no company can afford to neglect it. Though, it is strategy that convinces the customers to spend on the company, it is these very traps that ensure that maximum profits are generated out of the revenue. So, even though planning and other activities will remain an important part of the whole process, a conscious effort will ensure that they don’t play a dominant role.

The Big Lie of Strategic Planning – II

Comfort Trap 3: Self-Referential Strategy Frameworks

Carrying forward from article The Big Lie of Strategic Planning by Roger L. Martin.  The author believes that the third trap is the most insidious of all. Because the major frameworks for articulating a strategy can lead managers to devise one around something under their control. It has to be understood that strategy is not about having complete control, but about adapting to environmental factors not under our control.  The author, therefore, quotes Mintzberg theory in highlighting the need to distinguish between deliberate strategy, which is intentional, and emergent strategy, which is about company’s response to unexpected events. According to the theory, managers overestimate their ability to predict future. So, he suggested they should concentrate on fine tuning their deliberate strategy in context of emerging trends in the external environment.

However there is a contradiction in this approach. If the future is that unpredictable, then how can managers be assured that it will become any less? Further, how will the managers realize that their environment has become predictable enough to make strategic choices? This realization has given credence to the belief that the concept of emergent strategy has become an excuse for avoiding difficult choices and prompts them to follow what others are doing.  But, following the competitors will not deliver unique results or deliver any advantage.

Mintzberg concept was further carried forward by Wernerfelt’s article, “A Resource-Based View of the Firm”.  According to the Resource-Based View (RBV), key to a firm’s competitive advantage would be some something which is valuable, rare, inimitable, and non-substitutable capabilities. This concept became very popular among managers as it gave them the idea that building “core competencies” or “strategic capabilities” was key to building strategy. Also, this is something that is knowable and controllable, and within reason can assure some success.  But, this approach is not as simple as it looks. A company may build its core competencies, but there is no guarantee that it will appeal to the customers. And customers’ choices are unknowable and uncontrollable. To strike a balance, some managers strive to focus on competencies that can be built with a degree of certainty.

So, rather than planning in every bit detail by just following a framework, it it is better to spend greater time in knowing the customer. And, based on that knowledge, focus on core competencies that can be built within the budget.

The Big Lie of Strategic Planning – I

The article The Big Lie of Strategic Planning by Roger L. Martin elaborates the pitfalls of blindly following a strategic management methodology. The author believes that most managers find the process overwhelming. It prompts them to predict the future, which can only be guessed. Further, making strategic choices rules out other possible options. So, against this background, their natural reaction is to resort to tried and tested methods. He believes this approach is not the best way, as fear and discomfort are an essential part of the process. On the other hand, if one is comfortable with the strategy, chances are it isn’t very good. He concludes that a good strategy is not an outcome of careful research and planning, which delivers a desired outcome. Instead, it is a broad approach of achieving what they want, and analysing how realistic are the various approaches. Further, he elaborates on five major traps.

So far, the take away would be to follow the procedure broadly. Also, to make the participants aware right in the beginning that the process can be as good as the insight they provide. The idea should be to make broad choices to achieve various goals. In practical terms, facilitators should give sufficient time to the participants, particularly while doing external environmental analysis.

Comfort Trap 1: Strategic Planning

The author cautions against confusing strategy with planning. Typically, managers develop a tendency of paying greater emphasis on planning – as it has a framework and is a familiar territory. Further, the planning process becomes the basis for the budgeting process. But, it has to be understood that all this is not strategy. Further, author is right when he says that planning does not question the choices an organization chose not to make. It does not question the assumptions. And, as planning forms the basis of budget, the dominant theme is affordability. This approach leads to decisions based on short-term goals. Instead, a strategy is something long-term.

Therefore, it is necessary that facilitators pay greater attention to strategy part of the process. In practical terms, that would mean paying sufficient emphasis on identifying value creating strengths and value reducing weaknesses. Also, it involves giving sufficient time to the participants for creating a strategic thinking map. As well as identifying strategic implications of competitively relevant strengths and weaknesses.

Comfort Trap 2: Cost-Based Thinking

The next trap in the planning process is when managers are tempted towards cost-based thinking. This thinking in turn supports the planning process, as both of them are in the control of a company. To put in simple terms, a company decides how much and where to spend. But, this cannot be called a strategy, which is something long-term. This thinking also put managers into a comfortable position, as it can be planned with relative precision. Also, this is an important and useful exercise. However, problems start when the same approaches are applied to the revenue side. Treating revenue planning on the same scale as cost planning is a folly. When the planned revenue is not incurred, it can even be perceived as a failure of planning. The reason why revenue planning does not deliver the same results as cost planning, is because costs are in the hands of the company, while revenue is in the hands of the customers. As the author states, revenue is neither knowable nor controllable. Therefore, predicting cost is fundamentally different from revenue.

The takeaway from this is that companies should plan for revenue very differently from costs. Rather than making plans salesperson by salesperson, channel by channel, and region by region – they should spend more time on knowing their customers and creating value proposition.