The effectiveness of planned strategy


Introduction

This essay evaluates the often held sentiment that ‘strategy is the outcome of a formal strategic planning process from top management’, often followed by ‘therefore, it has limited value in providing the organisation with a competitive advantage.’ To this end, the essay first examines formal strategic planning processes of top management as source of strategic direction for the organisation. The extent to which this connection exists, the essay examines the effectiveness the chosen strategy will contribute to providing the organisation with a competitive advantage.

In the discussion two sources of strategy are identified and contrasted: top-down, planned strategy and the emergent strategies. By doing this the plurality of sources of strategy is established and contradicts the first statement being evaluated. The second statement is discussed at much more length. Evidence that links strategic planning and increased organisational performance exists, but as the same time, powerful voices also urge businesses to employ strategic management that emphasises emergent strategies more, and strategic planning less. These opinions can be reconciled by recognising that various underlying (firm- and industry-specific) factors strongly influence the effectiveness of the planning process. The essay discusses some human limitations that can render planned strategy less valuable, and the rise of the arguably flawed idea that holds shareholder’s value in highest importance is noted. The essay contends that this idea, coupled with short-term performance pay, attributes to excessive share-price volatility and overall lower long-term profitability.  Finally, it is noted that the value derived from planned strategies also depends on the monitoring and feedback processes.

Discussion

Strategic leadership aims to manage the strategy-making processes, aiming for the creation of strategies that result in higher performance and competitive advantage (Hill & Jones, 2010). One activity that aims to achieve this is the top-down strategic planning process the results of which, if realised, can be called deliberate strategy. Despite careful planning some planned strategies can get derailed by unpredictable change and thus stay unrealised.  At the same time, agents outside top management can contribute to a separate class of strategies called emergent strategies (Hill & Jones, 2010), meaning that while the formal processes of strategic leadership are all about strategy, the relationship doesn’t hold vice versa. The link between top-down strategic planning and actual organisational strategy realised is therefore more tenuous than stated in the statement being evaluated.

Top-down planned strategy formulation is a structured process aimed at finding the best, or (in absence of a clear picture of the counterfactual) at least satisficing strategies, and correcting them as situation changes or as feedback dictates. While the process itself is well-defined, opinions on the effectiveness of the resulting strategies vary. Poister and Streib (2005) have found that strategic planning efforts in municipal governments are credited with bringing about improvements in both organizational capacity and performance.  Song, Im, Hans van der & Song (2011) find that in smaller organisations that spend more on R&D strategic planning does improve organisational performance. Mintzberg on the other hand is critical of strategic planning and would rather emphasise decentralised decision making, informal learning and personal vision (Mintzberg, 1994). These seemingly opposing views can be reconciled if we recognise that the situations studied are far from exhaustive, i.e. the researchers have significantly limited the population of organisations researched, and therefore the conclusions are limited to this population also. The study by Poister and Streib included municipal governments only and doesn’t claim optimum solutions, only a positive contribution. The study of Song et al stipulate conditions of size and R&D spend. How much to plan is a nuanced question, and the answer to that will depend on a large number of firm-specific factors.

Mintzberg’s criticism of strategic planning, despite being a generalisation requiring exceptions, is important to note because having considered the general business environment, its findings are relevant to so many of today’s organisations. It is hard to argue when Mintzberg contends that the predominant commercial environment (of globalisation and rapid changes in the macroenvironment) businesses operate in today create an unfavourable climate for the slower rational, planned approach. Bovaird confirms this with a more theoretical approach, which notes that in this global changing environment most organisations of today evolved to be complex, adaptive open systems with at least somewhat decentralised decision-making, and in such circumstances behaviours and strategies owed at least as much to emergent complex interactions within the policy system as to the cognitive processes occurring in any one agency (Bovaird, 2008). This environment places significant limits on the well-defined, rational top-down approach, in danger of appearing as narrow, over-elaborate and out-of-touch analysis into strategy within a complex systems whose interactions are only partially understood.  In such situations top level management should swap their strategic planning to “strategic shaping” and “meta-planning” role (Bovaird, 2008). Mintzberg and Bovaird make it clear that apart from firm-specific factors, the bigger situation in which strategic planning is applied in is an important factor in determining the effectiveness of that planning. While top-down approach is well suited to quantitative data and well-structured problems, businesses often face uncertain or unpredictable situations, where the complexities involved mean that individual insight and serendipity (resulting in the emergent strategy) play a much larger part.

Other criticisms that center on the limitations of humans engaged in strategic planning include the potentially powerful effect of cognitive biases such as the availability error and the prior hypothesis bias (Hill & Jones, 2010). As well as distorting reasoning, human limitations can also seriously limit the range of strategies considered. Ruth Benedict wrote in her seminal book that cultures “might change far more radically than any human authority has ever had the will or imagination to change them, and be still completely workable” (Benedict, 2005 p.36). In other words, she is warning that humans can fall into fixed mental modes when dealing with complex ideas. This observation about culture can be directly applied to the area of strategy planning as well. Despite techniques aiming to counter weaknesses in the strategic planning process such as the outside view and devil’s advocacy, these limitations together can greatly reduce the effectiveness of rational strategic processes.

In any principal-agent relationship the difficulty in lining up interests is another subtle factor that can affect the effectiveness of top-down strategy aimed at the long-term. Peter Drucker’s original insight concentrated on the basics and encouraged a holistic approach when stating that the only valid purpose of a firm is to create a customer (meaning that the shareholder value will take care of itself) (Drucker, 1954), but by 1970 Milton Friedman argued that the only responsibility is to increase profits (Friedman, 1970). A few years later finance professors Jensen and Meckling justified the principal-agent abstraction and argued with more theoretical foundation for the idea that the singular goal of a company should be to maximize the return to shareholders (Jensen & Meckling, 1976). This to Drucker seemed strange, or as he put it,The emphasis is on the hammer rather than on driving in the nail, let alone on building the house(Drucker, 1973 p.23), but the latter idea gathered enthusiastic supporters and took hold, and as in any system controlled with narrow and explicit targets (in this case, numbers such as the share price and ROIC), has resulted in a large increase of efforts aimed at gaming the system. Incentives (limited in time frame by the duration of personal tenure of executive positions) are prescribed by Jensen and Meckling to limit divergence of interest between principals and their agent. Accent on share price and linked short-term incentives meant that executive pay, stock options and cash bonuses began to rise, together with accounting scandals and volatility (Denning, 2011). Enron, Tyco, Worldcom have all become well-known examples of this dynamic, but of the many illustrations available, Jack Welch (CEO of GE, great believer in the primacy of shareholder’s value and executive bonuses, Fortune’s “Manager of the Century” in 1999) stands out because of the recognition afforded to him despite the sheer size of the induced volatility; he grew his company’s market value reliably and impressively, only for 60% of that value to evaporate after his retirement in 2001. Important strategic decisions like the balance between size, profitability, profit growth or market share will always be influenced by bonuses rewarding a certain (usually short-term) target, to the detriment of  long term profitability. Governance fixes such as outside directors, outside chairman and government legislation such as the Sarbanes-Oxley Act certainly help, but others such as stock-based compensation can be as much part of the problem as the cure.

Despite the weaknesses of the strategic planning process, strategy will continue to come from this, as well as emergent sources. The production of emergent strategies is by their nature unpredictable and rational planning is well suited for certain capital intensive industries, investments that involve long amortisation, or businesses that enjoy stable, well-defined requirements and predictable environment.  But today there are few industries that experience stable environments like this, and when looking at the overall picture, Mintzberg’s claim that planned strategies tend to be less effective than emergent ones receives increased academic support. Poister (2010) argues that making strategy more meaningful in the future will require transitioning from the narrow focus on strategic planning to the broader process of strategic management, which involves managing the agency’s overall strategic agenda on an ongoing rather than an episodic basis, as well as ensuring that strategies are implemented effectively.

No matter what the source of the strategy is, steps at the monitoring and feedback stages can be taken to maximise their value in creating competitive advantage. In ensuring effectiveness of strategy, Drucker warns of placing primary emphasis on the shareholder’s value, and Poister goes even further by warning companies about reliance on any narrowly defined goals such as various management KPIs. Complementing the move away from strategic planning to more holistic strategic management, the performance movement must shift its emphasis from a principal concern with measurement to the more encompassing process of performance management (Poister, 2010). Another recommendation states that the link between strategy formulation and feedback needs to be made closer. This means that agencies will need to link their strategic management and ongoing performance management processes more closely in a reciprocating relationship in which strategizing is aimed largely at defining and strengthening overall performance while performance monitoring helps to inform strategy along the way (Poister, 2010). If planned strategy doesn’t provide the organisation with the expected value, the problem may lie not in the planning process itself, but the evaluation and feedback employed.

 

Conclusion

It is easy to show that strategy doesn’t just come from top-down, planned sources, but evaluating the effectiveness of strategies that do come from this source is a much more nuanced task. Research performed in certain sectors, or on otherwise limited population (small organisations with high R&D spend) found planning under those parameters to be beneficial, but research dealing with the general picture (such as Mintzberg’s, Bovaird’s or some of Poister’s) do recommend greater emphasis on emergent strategies and/or less weight on strategic planning.  Critics point out that planning runs into human limitations and in addition, and the complexity of today’s typical global organisations and the quickly changing environment further reduces the effectiveness of the slow, rational approach to planning. Difficulties in agent-principal relationships, the currently fashionable primacy of short-term shareholder’s value and preoccupation with evaluating performance through narrow goals and sets of numbers can further reduce the effectiveness of top-down planned strategies. Having said all that, even if emergent strategies are encouraged more, the planning process, despite being far from ideal, will continue to be one of the important sources of strategy. For that reason it is important to become familiar with techniques, legislation and organisational structure designs that allow the organisation to extract the best outcome from the planning process, and once the resulting strategies are put in place, better monitor and adjust them.

 

References

Benedict, R. (2005). Patterns of culture, New York: Mariner Books ISBN-13:978-0-618-61955-9

Bovaird, T. (2008). Emergent Strategic Management and Planning Mechanisms in Complex Adaptive Systems. Public Management Review  10(3), 319 – 340 DOI: 10.1080/14719030802002741

Denning, S. (2011 November 28). The Dumbest idea in the world: maximising shareholder value. Forbes. Retrieved from http://www.forbes.com/sites/stevedenning/2011/11/28/maximizing-shareholder-value-the-dumbest-idea-in-the-world/

Drucker, F.P. (1973). The practice of management. New York: HarperCollins Publishers.

Drucker, F.P. (1973). The performance gap in management science: Reasons and remedies. Organizational Dynamics 73(2), 19-29

Friedman, M. (1970 September 13) The Social Responsibility of Business is to Increase its Profits. The New York Times Magazine. Retrieved from http://www.ethicsinbusiness.net/case-studies/the-social-responsibility-of-business-is-to-increase-its-profits/

Hill, W.L.C., Jones, R.G. (2010). Strategic Management: An integrated approach (9th ed.). Mason, Ohio: South-Western Cengage Learning

Jensen, C.M., Meckling, H.W. (1976). Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure. Journal of Financial Economics 3(4), 305-360

Mintzberg, H. (1994) The Rise and Fall of Strategic Planning. London: Prentice Hall.

Poister, H.T., Streib, D.G. (2005). Elements of Strategic Planning and Management in Municipal Government. Public Administration Review 65(1), 45–56

Poister, H.T. (2010). The Future of Strategic Planning in the Public Sector: Linking Strategic Management and Performance. Public Administration Review 70(Dec 2010 supplement), 246-254 DOI:10.1111/j.1540-6210.2010.02284.x

Song, M., Im, S., Hans van der B., Song, Z.L. (2011) Does Strategic Planning Enhance or Impede Innovation and Firm Performance? Journal of Product Innovation Management (28)4, 503-520, DOI:10.1111/j.1540-5885.2011.00822.x

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