Strategic planning in large organisations: from annual round to continuous process

Strategic planning in large organisations usually follows the calendar. Each business unit fills in its templates, finance consolidates the numbers and the board approves the plan. The result is a thorough budget and few decisions. The big calls, such as an acquisition or leaving a market, are often made outside the cycle, when an opportunity or a crisis forces them.

Roger Martin argues that planning produces more thorough budgets but should never be mistaken for strategy. Costs can be planned because the company controls them; revenue cannot, because customers decide. The planning cycle still has a use, as long as it is built around choices rather than forms.

Three stubborn problems in strategic planning

From an annual round to a continuous strategy process

Chris Bradley, Lowell Bryan and Sven Smit suggest the top team meets on strategy for two to four hours, weekly or every two weeks, throughout the year (source: McKinsey, July 2012). The agenda is a short list of strategic issues, each with an owner, and strategy is formally linked to financial planning through rolling forecasts. They also note that it can easily take 18 months or longer for a raw idea to reach the budget (source: McKinsey, July 2012). A separate exploration budget shortens that path.

Group strategy and business unit strategy

Large organisations make strategy at two levels, each with its own questions. Mix them, and the group debate becomes a budget negotiation.

Big moves instead of small steps

The same research found five big moves that lift companies: programmatic acquisitions, active reallocation of resources, strong capital expenditure, a strong productivity programme and improvements in differentiation. For reallocation, the bar is moving at least 50% of capital expenditure between business units over a decade, and making three big moves raised a mid-table company's odds of reaching the top fifth to 47% (source: McKinsey, February 2018). A planning cycle in which every unit gets last year's budget plus a little cannot produce such moves.

Consider a group with three business units and €60 million of capital expenditure a year.

Fictitious Firmfocus example. Amounts in euro; the logic works in any currency.

In the incremental round every unit keeps its share. With reallocation, €8 million moves out of packaging and €2 million out of industrial services, so digital monitoring doubles to €20 million. A sixth of the group's capital, €10 million of €60 million, changes direction in one year. Packaging is then run for cash, a choice the board should make openly rather than by accident in budget talks.

The role of the board, the supervisory board and non-executive directors

Everywhere, executives develop and carry out the strategy. The body that supervises them is involved early, challenges and approves the choices, and oversees implementation and risk. In a one-tier board, executive and non-executive directors sit on one board. In a two-tier structure, a management board runs the company and a separate supervisory board oversees it.

Codes are revised regularly and apply mainly to listed companies. Check your own situation:

• Board model: which structure does your legal form or listing allow?
• Code: does a governance code apply, and on what basis?
• Approvals: which decisions, such as large investments, need board or shareholder approval?
• Challenge: who on the board brings the outside view and questions the forecasts?

Whatever the model, hold the board's strategy session while the main choices are still open, so directors shape them instead of only approving them.

Thinking errors in the planning process

Dan Lovallo and Olivier Sibony studied 1,048 major decisions and found that the quality of the decision process mattered more than the quality of the analysis, by a factor of six (source: McKinsey, March 2010). Familiar errors return every round: last year's numbers anchor the budget, business cases are written by the people who want the money, and the most senior voice settles the debate. The remedies: an outside view on every forecast, an independent review of large investments and fixed meeting rules, such as letting the most senior person speak last.

Dealing with uncertainty

Hugh Courtney, Jane Kirkland and Patrick Viguerie distinguish four levels of uncertainty: a clear-enough future, alternative futures, a range of futures and true ambiguity. At the second and third level a single forecast is false precision; use scenario planning and choose moves that hold up in more than one future.

An annual strategy calendar that works

Indicative Firmfocus calendar; adapt it to your financial year and meeting cycle.

Mid-sized company vs listed group

Common pitfalls

• The plan is the budget: if the budget is the starting point, resources stay where they were last year.
• Unchallenged hockey sticks: every forecast that bends upwards needs an outside view.
• The board sees it at the end: directors who only approve a finished plan cannot add their experience.

This article is part of Put your strategy in writing in the Strategy theme. To turn choices into results, continue with strategy implementation and the Balanced Scorecard.