Tired of strategic planning?

Article|McKinsey Quarterly

June 2002 | byEric D. Beinhocker and Sarah Kaplan

' . . . chance favors only the prepared mind.' —Louis Pasteur

Senior executives generally agree that crafting strategy is one of the most important parts of their job. As a result, most companies invest significant time and effort in a formal, annual strategic-planning process that typically culminates in a series of business unit and corporate strategy reviews with the CEO and the top management team. Yet the extraordinary reality is that few executives think this time-consuming process pays off, and many CEOs complain that their strategic-planning process yields few new ideas and is often fraught with politics.

Why the mismatch between effort and result? Evidence we culled from research on the planning processes at 30 companies (see sidebar, "About the research") and work with more than 50 additional companies points to a common dispiriting explanation: the annual strategy review frequently amounts to little more than a stage on which business unit leaders present warmed-over updates of last year's presentations, take few risks in broaching new ideas, and strive above all to avoid embarrassment. Rather than preparing executives to face the strategic uncertainties ahead or serving as the focal point for creative thinking about a company's vision and direction, the planning process "is like some primitive tribal ritual," one executive told us. "There is a lot of dancing, waving of feathers, and beating of drums. No one is exactly sure why we do it, but there is an almost mystical hope that something good will come out of it."

About the research

But something good ought to come out of it. In a business environment of heightened risk and uncertainty, developing effective strategies is crucial. But how can companies reform the process in order to get the payoff they need?

New goals for strategic planning

Part of the answer lies in taking a fresh look at the substance of business unit and corporate strategy. But a more important—andoften overlooked—element is to rethink the process by which strategy is made. It can even be argued that without a strong process, it is unlikely that the substance will come out right.

A key starting point is the acceptance of the counterintuitive notion that the strategic-planning process should not be designed to make strategy. Henry Mintzberg, a professor of management at McGill University, calls the phrase "strategic planning" an oxymoron.1He argues that real strategies are rarely made in paneled conference rooms but are more likely to be cooked up informally and often in real time—in hallway conversations, casual working groups, or quiet moments of reflection on long airplane flights.

What then is the purpose, if any, of a formal planning process? Our research persuades us that the exercise can add value if it has two overarching goals. The first is to build "prepared minds"—that is, to make sure that decision makers have a solid understanding of the business, its strategy, and the assumptions behind that strategy, thereby making it possible for executives to respond swiftly to challenges and opportunities as they occur in real time. GE Capital, for instance, has consistently proved quicker to react and better able to value acquisition opportunities than have its competitors. Part of this success is due to a strategy process ensuring that GE Capital's executives have a strong grasp of the strategic context they operate in before the unpredictable but inevitable twists and turns of their business push them to make M&A and other critical decisions in real time.

The second goal is to increase the innovativeness of a company's strategies. No strategy process can guarantee brilliant flashes of creative insight, but much can be done to increase the odds that they will occur. In addition to formal planning at the business unit level, for example, Johnson & Johnson uses crosscutting initiatives on major issues such as biotechnology, the restructuring of the health care industry, and globalization in order to challenge assumptions and open up the organization to new thinking.

In our research, we didn't find a single company that was best at achieving both of these goals, although GE came closest. Instead, companies tended to be better either at the formal process of creating prepared minds or at the more informal process of driving strategic creativity. In addition, we found that some practices of companies in the sample were very specific to their industry or culture. What we will describe is thus not a single company's best-practice process but a composite picture, drawing ideas from a number of companies and focusing on what we have found to be the most transferable ideas.

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