How to avoid the ‘comfort trap’ in strategic planning

How to avoid the ‘comfort trap’ in strategic planning

Published 30 January 2014 10:45, Updated 30 January 2014 11:22

Roger Martin

The unknowns of strategic planning will always be a little scary, but knowing how to avoid ‘comfort traps’ will make it less daunting in the long term.

All executives know that strategy is important. But almost all also find it scary, because it forces them to confront a future they can only guess at.

The natural reaction is to make the challenge less daunting by turning it into a problem that can be solved with tried and tested tools. That nearly always means spending weeks or even months preparing a comprehensive plan for how the company will invest in existing and new assets and capabilities in order to achieve a target.

This is a terrible way to make strategy. If you are entirely comfortable with your strategy, there’s a strong chance it isn’t very good. You’re probably stuck in one or more of the traps I’ll discuss in this article. True strategy is about placing bets and making hard choices.

COMFORT TRAP 1: STRATEGIC PLANNING

Strategic plans all tend to look pretty much the same. They usually have three major parts. The first is a vision or mission statement that sets out a relatively lofty goal. The second is a list of initiatives that the organization will carry out in pursuit of the goal. The third element is the conversion of the initiatives into financials. In this way, the plan dovetails nicely with the annual budget.

This exercise arguably makes for more thoughtful budgets. However, it must not be confused with strategy. Planning typically isn’t explicit about what the organization chooses not to do and why. Its dominant logic is affordability; the plan consists of whichever initiatives fit the company’s resources.

COMFORT TRAP 2: COST-BASED THINKING

The focus on planning leads seamlessly to cost-based thinking. Costs lend themselves wonderfully to planning, because by and large they are under the control of the company. For the vast majority of costs, the company plays the role of customer. It decides how many employees to hire, how many machines to procure, how much advertising to air and so on.

Costs are comfortable because they can be planned for with relative precision. The trouble is that planning-oriented managers tend to apply familiar cost-side approaches to the revenue side as well, treating revenue planning as virtually identical to cost planning and as an equal component of the overall plan and budget.

But when the planned revenue doesn’t show up, managers feel confused and even aggrieved. “What more could we have done?” they wonder. “We spent thousands upon thousands of hours planning.”

There’s a simple reason why revenue planning doesn’t have the same desired result as cost planning. For costs, the company makes the decisions. But for revenue, customers are in charge.

COMFORT TRAP 3: SELF-REFERENTIAL STRATEGY FRAMEWORKS

In identifying a strategy, most executives adopt one of a number of standard frameworks. Unfortunately, two of the most popular ones can lead the unwary user to design a strategy entirely around what the company can control.

In 1978 Henry Mintzberg published an influential article in Management Science that introduced “emergent strategy.” Mintzberg distinguished between “deliberate strategy,” which is intentional, and emergent strategy, which is not based on an original intention but instead consists of the company’s responses to a variety of unanticipated events.

Mintzberg’s thinking was informed by his observation that managers overestimate their ability to predict the future and to plan for it in a precise way. By drawing a distinction between deliberate and emergent strategy, he wanted to encourage managers to watch carefully for changes in their environment and make course corrections in their deliberate strategy accordingly. In addition, he warned against the dangers of sticking to a fixed strategy in the face of substantial changes in the competitive environment.

All of this is eminently sensible advice that every manager would be wise to follow. However, most managers do not. Instead, most use the idea that a strategy emerges as events unfold as a justification for declaring the future to be so volatile that it doesn’t make sense to make strategy choices until the future becomes sufficiently clear.

A little digging into the logic reveals some dangerous flaws with this interpretation. If the future is too unpredictable to make strategic choices, what would lead a manager to believe that it will become significantly less so? And how would that manager recognize the point when predictability is high enough and volatility is low enough to start making choices?

In 1984, Birger Wernerfelt wrote “A Resource-Based View of the Firm,” which put forth another enthusiastically embraced concept in strategy. The resource-based view holds that the key to a firm’s competitive advantage is the possession of rare, inimitable and nonsubstitutable capabilities. This concept became extraordinarily appealing to executives, because it seemed to suggest that strategy was the identification and building of “core competencies,” or “strategic capabilities.”

The problem, of course, is that capabilities themselves don’t compel a customer to buy. Only those that produce a superior value equation for a particular set of customers can do that.

ESCAPING THE TRAPS

How can a company escape these traps? By ensuring that the strategy-making process conforms to four basic rules.

RULE 1: KEEP THE STRATEGY STATEMENT SIMPLE. Two choices determine success: which specific customers to target and how to create a compelling value proposition for those customers. If a strategy is about just those two decisions, it won’t need to involve the production of long and tedious planning documents.

RULE 2: RECOGNISE THAT STRATEGY IS NOT ABOUT PERFECTION.Managers must internalize that fact if they are not to be intimidated by the strategy-making process. For that to happen, boards and regulators need to reinforce rather than undermine the notion that strategy involves a bet.

RULE 3: MAKE THE LOGIC EXPLICIT. The only sure way to improve the hit rate of your strategic choices is to test the logic of your thinking: For your choices to make sense, what do you need to believe about customers, about competition, about your capabilities? If the logic is recorded and then compared to real events, managers will be able to see quickly when and how the strategy is not producing the desired outcome and will be able to make necessary adjustments.

I have argued that planning, cost management and focusing on capabilities are dangerous traps for the strategy-maker. Yet those activities are essential; no company can neglect them. For if it’s strategy that compels customers to give the company its revenue, then planning, cost control and capabilities determine whether the revenue can be obtained at a price that is profitable for the company. Human nature being what it is, though, planning and the other activities will always dominate strategy rather than serve it – unless a conscious effort is made to prevent that.

RULE 4: GIANT OPPORTUNITIES ENCOURAGE BAD STRATEGY.Companies in many industries prefer a small slice of a huge market to a large slice of a small one. The thinking is, of course, that the former promises unlimited growth potential. And there’s a certain amount of truth to that. But all too often, the size of the opportunity encourages sloppy strategy-making. Why choose where to play or how to win when there’s a huge market to conquer? Anybody is a potential customer, so just go out and sell stuff.

But when anyone could be a customer, it is impossible to figure out whom to target and what those people actually want. The results tend to be an offering that is not captivating to anybody and a sales force that doesn’t know where to spend its time. This is when crisp strategy-making and clear thinking about opportunities are most important.

When you’re facing a huge growth opportunity, it is smarter to think sequentially: Determine what piece of the overall market to tackle first and target it precisely and relentlessly. Once you’ve achieved a dominant position in that segment, expand from there into the next, and so on.

ARE YOU STUCK IN THE COMFORT ZONE?

PROBABLY: You have a large corporate strategic planning group.

PROBABLY NOT: If you have a corporate strategy group, it is tiny.

PROBABLY: In addition to profit, your most important performance metrics are cost- and capabilities-based.

PROBABLY NOT: In addition to profit, your most important performance metrics are customer satisfaction and market share.

PROBABLY: Strategy is presented to the board by your strategic planning staff.

PROBABLY NOT: Strategy is presented to the board primarily by line executives.

PROBABLY: Board members insist on proof that the strategy will succeed before approving it.

PROBABLY NOT: Board members ask for a thorough description of the risks involved in a strategy before approving it.

(Roger L. Martin is a professor and the former dean at the University of Toronto’s Rotman School of Management. He is a co-author of “Playing to Win: How Strategy Really Works.”)