Linking strategic planning to funding and execution

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Strategy & Leadership

ISSN: 1087-8572

Article publication date: 1 June 2004



Rothschild, P., Balaban, R. and Duggal, J. (2004), "Linking strategic planning to funding and execution", Strategy & Leadership, Vol. 32 No. 3.



Emerald Group Publishing Limited

Copyright © 2004, Emerald Group Publishing Limited

Linking strategic planning to funding and execution

Phyllis Rothschild a Director (

Richard Balaban a Managing Director (

Jag Duggal Principal (, all of Mercer Management Consulting. Rothschild and Duggal are based in Boston, and Balaban is based in London.

Today, senior executives at most major companies have good intentions and significant resources committed to strategic planning efforts. Yet many consider the process to be overly burdensome, bureaucratic, vague, and divorced from reality. A handful of best-practice companies including GE, IBM, Bombardier, Nationwide Mutual Insurance, and Royal Dutch/Shell have moved beyond old-fashioned strategic planning to strategic managing, which links strategy to both execution and funding. These leading companies are creating value by connecting strategy to the front lines of the battle for emerging market opportunities.

Strategic managing is more flexible and more rigorous than the typical planning process, allowing the organization to chart a course to seize market opportunities as they unfold.

Back to first principles

Our research indicates that while there are many approaches to strategic planning, four consistent underlying principles characterize best-practice companies: start with the customer; connect strategy with capital allocation and execution; embrace debate; and keep the process evergreen. It is the effective application of these principles, rather than any specific processes or tools, which drive success.

1. Start with the customer

Successful strategies require an outside-in mindset, built on a thorough understanding of customers and how their priorities are changing. This requires strategic customer research.

Strategic customer research goes beyond customers' stated needs, which are useful for incremental improvements, to explore the unstated priorities that customers sense but can't fully articulate. In doing so, it raises fundamental questions about the structure of the market and queries not just current customers, but also future-defining customers who might be found in obscure places. For example, in the 1960s, the working class of rural Arkansas were the future-defining customers of retailing, around which Wal-Mart would ultimately build a global $250 billion business. Their priorities proved to be a window into the purchase behavior of American consumers as the nation's suburbs spread out.

Just as there are well-developed methods for market research, strategic customer research has a discipline to anticipate shifts in customer priorities without guesswork, luck, or genius. Customer science techniques help executives understand how customers make decisions, even for a product or service that's truly revolutionary. Mercer Management Consulting's particular adaptation of these techniques is called Strategic Choice Analysis® , or SCA.

Consider how a wireless phone service company made the shift from analog to digital technology a few years ago by employing SCA. Previously, mobile executives who could afford to pay high per-minute rates had been the demographic segment that drove profits. As digital technology lowered rates, the industry continued to focus on this customer set by emphasizing national plans and roaming rates. But their purchase behavior defined the profit zones of the past, not necessarily of the future. Some executives hypothesized that another customer segment would define the future – college students and recent graduates who were already mobile and technically savvy. We used qualitative and quantitative research techniques to determine who the future-defining customers actually would be and what they wanted but could not yet articulate.

An SCA approach helped the company understand customer priorities and tradeoffs, not just preferences. We studied behavior in analogous real-world situations, such as the use of pagers and calling cards, and delved into what features delight or annoy customers.

It turned out that the future-defining customer segment for much of wireless telephony were mobile blue-collar workers such as construction foremen. They could not afford the high cost of service at the time, but as the price dropped their usage rose quickly. Their priorities were very different from those of college students and white-collar executives, as they valued reliable coverage throughout their local area far more than national coverage. This was a key future-defining priority that most wireless companies had ignored. They were price-sensitive and most of their calls went to a relatively small circle of people, so they valued "friends and family" discount offers. Mobile blue-collar workers thus became a key channel for the spread of wireless telephony, and the wireless company targeted this segment well before its competitors did.

2. Connect strategy with capital allocation and execution

Strategy is what you fund and what you do. As Lou Gerstner, former CEO of IBM and a champion of effective strategic planning, noted, "Making sure that resources are applied to the most important elements of the strategy is perhaps the hardest thing for companies to do".

One way is to combine strategy development with capital allocation. When Halliburton Energy Services Group, a leading oil field services company, revamped its strategic planning process, senior managers decided that these two processes were in fact one and they designed their strategic planning accordingly. Halliburton now has just one owner of strategy and capital allocation, with clear accountability for ensuring alignment between the two. This senior manager owns the corporate-wide strategic managing process and chairs a "capital committee" composed of a handful of the most senior executives who decide how to fund strategies approved earlier in the year by the CEO and business unit heads. Only initiatives linked to a short list of strategic priorities can be funded. This ensures a balance of long-term strategic goals with short-term financial constraints, even in the highly cyclical oil field services industry (see Exhibit 1 ).

Exhibit 1 Linking strategy with capital allocation and execution

"We want to invest in those activities where there will be maximum sustainable growth, but at the same time satisfy shareholders this year", says Lew Watts, senior vice president of strategy and marketing of Halliburton Energy Services. "This means moving from a P&L-based company to a balance sheet company".

Marrying strategy with execution is hardly straightforward. Senior managers have to be able to enforce implementation without getting caught up in the details. Several best-practice companies have developed a system to ensure that balance. In this process, approved strategies are translated into what we call "strategic campaigns". Winnowing a huge number of initiatives to a handful of strategic campaigns keeps everyone focused on the important strategic goals, encourages every employee to contribute to the success of the strategy, and builds institutional memory to help people learn from mistakes. Exhibit 2 highlights the interplay between two strategies and the resulting campaigns for a wireless service provider.

Exhibit 2 Strategic campaigns at a wireless service provider

Executives can monitor this handful of work streams without getting overwhelmed in detailed Gantt charts and other management technology. By setting milestones and metrics for each work stream, managing the allocation of capital, and tracking the sequencing and results of these campaigns, executives stay engaged with execution and communicate the appropriate urgency.

3. Embrace debate

A company can put into place a seemingly flawless strategic planning process using the latest tools and still not achieve exceptional performance. That's because process and tools have to work in the context of a firm's culture.

Yet senior managers rarely devote enough attention to the cultural change required when introducing a new strategic planning process. That should start with instilling a spirit of debate and productive challenge among middle and senior managers, one that gives people permission to raise uncomfortable truths and question the assumptions on which strategies are built.

Returning to the Halliburton example, senior management there devoted as much time to the cultural change required in implementing a new process as they did to designing the tools involved. Managers borrowed a phrase from plain-speaking investor Warren Buffett – being "in the barrel" – to describe an environment where peers, especially at senior levels, could feel safe to ask tough questions, seek out bad news, and skeptically assess strategic plans.

To complement these sessions, Halliburton designed discussion guides that allow participants to debate assumptions embedded in the plans, not just the predicted outcomes. Previously, if the predicted outcomes matched the financial planning budget or Wall Street's projections, then little debate took place in the boardroom. Now, once the conversation turns to assumptions instead of end games, senior managers can look across the enterprise and uncover where assumptions are misaligned or even contradictory. In-the-barrel sessions can resolve which scenario is most likely to occur and what decisions the organization should make.

Of course, creating a culture that embraces fruitful debates and tolerates mistakes does not happen overnight, particularly in companies where challenging an executive in a public forum is deemed disrespectful. The cultural change thus must come from the top and may require changes in personnel as well.

4. Keep the process evergreen

Companies such as GE and IBM that have been most successful at strategic managing realized that in order to encourage creative thinking, the process must be both simple and a multi-year effort.

In a large company at any given point in time, some business units or divisions should be reviewing the strategy they developed a year ago and making minor mid-course corrections. Other units should be refreshing strategies that are in the second or third year of implementation and incorporating new information. And still other units should be completely reinventing themselves because their five- to seven-year-old strategy has reached maturity and future growth requires a new strategy.

Effective strategic managing recognizes these life-cycle distinctions and tailors the research, goals, and conversations for the appropriate dimension of time (see Exhibit 3). This is especially useful for companies that operate across multiple products, value chains, and geographies.

Exhibit 3 Scanning horizons

GE's strategic planning process since the late 1980s has consisted of a simple template of five questions, illuminating each of the three strategy horizons.

The five questions focus on the market, the future, and the progress on implementation of the current strategy. GE ensures accountability and continuous learning by devoting the first part of the process to reviewing results from the previous year and linking these results to performance-based compensation and talent management.

IBM and Philips have developed additional processes, which we call "strategic conversations", to identify strategic issues via occurrences in the market rather than by time of year. At IBM, for example, managers have assessed Linux, open source software, and the future of online learning, producing specific action-oriented recommendations. Strategic managing should build in explicit times to look back and assess how a strategy developed several years ago has played out. Managers can determine where they came up short, what mistakes they made, and how they can learn from the mistakes (see Exhibit 4).

Exhibit 4 An evergreen year

Expanding the question set

Most strategic planning processes focus primarily on answering the question, "What should we do?". The answer, while important, is insufficient for creating value. Putting into practice the four principles that are key to strategic managing will help companies answer a more comprehensive and powerful set of questions:

  • Why should we do it? What are the assumptions, the risks, and the tradeoffs? How should we react if one of the assumptions changes or turns out to be flawed?

  • How do we do it? What is the execution plan, and who should be accountable for which parts of the process?

  • What will it cost? How will we fund the strategy, and what is the expected return?

By turning the process into a real capability building exercise, senior managers can gain a clear view of where they are going and why, how to evaluate their progress, and what the payoff will be. Strategic managing also serves as an early warning system by monitoring market and operational data against the plan assumptions. Ultimately, it can influence other critical corporate processes in addition to capital allocation and budgeting, including marketing, manufacturing, human resource planning, performance assessment, and communications.

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