Strategic thinking is essential to the success of any business. But many executives do their best to avoid it by engaging in activities that look like strategy but are anything but.
The predisposition to avoid strategic planning is understandable, given the complexity of genuine strategic thinking. ‘Strategy’ involves trying to predict an unpredictable future - an exercise that may put an executive's job on the line.
Planning instead of strategizing
Due to the complexity of strategic planning, it's not uncommon to find executives converting it into a manageable process that involves employing proven methods. This often means creating a comprehensive plan for using existing resources to achieve a specific target, such as increasing market share or opening new divisions. The plan is often complemented with detailed cost projections and short-term revenue estimates.
While such processes leave executives content with their plans, they can hardly be called strategic planning. True strategic planning involves confronting your fears and getting out of your comfort zone. Good strategies involve sound reasoning to develop a plan of what you want to achieve and using various tools to determine if it’s realistic. If executives employ this approach, they will be operating outside their comfort zone and avoiding the pitfalls discussed below.
All too often, organisations fall into cost-based thinking because costs are the aspect of planning they can control best. Cost-based planning is attractive because firms can predict costs with much precision.
While managing costs is a critical process for any organisation, the problem starts when firms try the same approach to revenue.
It’s hard to predict revenue due to the myriad factors that affect customer behavior. For most organisations, revenue is an unknown and uncontrollable item that often defies budgeting and forecasting. Even for firms that have contracts with customers, long-term revenue is very unpredictable and beyond the control of the organisation.
Strategic planning is an approach to strategizing where planning is the dominant feature. Executives fall into planning instead of strategy because planning is a much more feasible and comfortable undertaking.
Most strategic plans have three components. The first one is the mission or vision, which outlines the aspiration of the organisation. The second one is a list of projects or initiatives that the organisation will undertake in the pursuit of the vision. The third component involves translating the initiatives into financial figures that align with the annual budget.
This approach turns strategic planning into a budgeting affair that should not be mistaken for strategy.
Unfortunately, even senior executives and board members fall for this trap.
The corruption of emergent strategy
Most executives follow the two frameworks of emergent and planned strategy when performing their strategic planning. Planned strategy is intentional, while emergent strategy often involves responding to unanticipated events. The aim of emergent planning is to encourage managers to be more responsive to changes in the environment and make the necessary changes to their deliberate strategy. It also aims to encourage managers to be agile in their planning by avoiding sticking to fixed strategies in the face of a very dynamic competitive environment.
Unfortunately, most executives do not subscribe to the vision of emergent planning but instead use it to justify avoiding planning for a volatile and unpredictable future. They choose to follow their competitors' plans, an approach that cannot produce unique results or a tangible competitive advantage. Most managers of this inclination often resort to the resource-based view (RBV) approach to strategic management. Such managers attempt to build their strategy around core competencies or superior capabilities.
The problem with this approach is that customers do not buy on the basis of a firm's capabilities. They are only attracted to firms that provide a superior value proposition to that of their competitors.
However, customer behavior is unpredictable and uncontrollable. Managers who fail while using this approach often blame the failure on fickle customers or unorthodox behaviors by competitors.
How to avoid mistakes
Firms that fall into the above traps often focus most of their strategic planning on extracting more profit from their existing revenue instead of creating more revenue streams. They overlook questions about improving customer satisfaction or increasing market share. The best way of overcoming the fear of discomfort and unpredictability is to embrace a risk-taking culture within the organisation. Risk-taking involves ensuring that strategic planning conforms to three principles of simplicity, imperfection, and logical thinking.
Simplicity entails focusing decision making on the customers. Customers will only buy your products if you offer superior value to your competitors. Success in getting the right customers depends on targeting the right segment and offering a compelling value proposition to these customers. A strategy that is based on those two decisions can be summarised in a few pages with a few concepts and actions. Managers who are focused on the two choices will be grounded and focused on facing the challenges the firm faces instead of retreating to their comfort zone.
Managers at all levels should realise that strategy is about revenue rather than costs, and as such, it is bound to have some level of unpredictability. Executives should view it as an attempt at reducing the firm's odds of achieving its objectives. Company boards and regulators should give executives and managers space to take risks as strategic planning involves accepting that the future is unknowable and uncontrollable.
Managers should ensure that the logic of their strategies is sound by making sensible decisions about customer behavior, industry changes, competitor behavior, and the company's capabilities. Managers should outline these questions and their answers as a way of keeping a record of the strategic bets the company has made. This approach is very consistent with the original objective of emergent planning, which is to identify changes quickly and make the necessary adjustments to the strategic plan.
Control your strategy in an uncontrollable world
All too often, managers engage in planning instead of strategizing. Applying the three principles will make it easier for managers to make strategic choices without worrying too much about an unpredictable and uncontrollable future. At the same time, they will keep on monitoring changes in the business environment and take the necessary steps to address them.
Ultimately, the company will end up with a strategy that enables it to make realistic revenue projections based on its ability to generate revenue rather than control costs.
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