While the preceding chapter was concerned with effective ‘pushing’ of a discontinuous change through the firm and assuring its effectiveness and stability; in this chapter, we turn attention to converting the firm into a habitual strategic actor .
Introduction
In the early days of concern with strategy, the need for a discontinuous repositioning of the firm in the environment was seen as a ‘one time’ exercise. The firm had a spectacular fifty years of success, thanks to the initial positioning by the entrepreneurs of the nineteenth century. Therefore, it seemed in the 1950s that a major re-adaptation would serve the firm’s needs for another fifty years. Since the 1990s, and the increasing effect on industry by technology, it has become increasingly clear that for many firms, periodic, or even continual, strategic repositioning must become a way of life. These are firms which operate in environments on turbulence levels 4 and above.
Previously, we identified the characteristics of the management capability profile which the firm needs to become a habitual strategic actor . The characteristics of this profile are compared to the profile of operating profit-making capability. A comparison of the two profiles shows that the two capabilities are not only different, but inimical to each other.
As discussed on several earlier occasions, the introduction of strategic responsiveness is not a process of replacing operating responsiveness . If this were done, the firm would become a devoted generator of future profit potential without any means of converting the potential into current profits. Thus, the problem, expressed in the language of Lawrence and Lorsch, is to assure a balance of differentiation and integration between the strategic and operating activities within the firm. The remainder of this chapter is devoted to concrete measures for solving this problem.
Why Strategic Planning Does Not Work
Since many firms which seek to institutionalize strategic responsiveness depart from a disappointing experience with strategic planning, it is helpful to start with a summary of the reasons why strategic planning does not work, and then proceed to a discussion of remedial measures.
Why strategic planning does not work
Reason | Symptoms | Solutions |
|---|---|---|
1. Strategic planning is not a complete system | –Paralysis by analysis –Frustration through inaction | –Dual management system –Strategic control –Rewards |
2. Strategic activity competes with operations | –Tomorrow we will organize and plan | –Strategic budget –More general management –Dual management structure |
3. MIS does not provide strategic information | –Garbage in/garbage out GIGO | –Environmental forecasting analysis system |
4. Managers lack strategic management skills | –Strategic form-filling for corporate benefit | –Trainig in strategic decision-making/implementation |
5. Threat to power structure/culture/mentality | –Resistance to change –Let’s get back to real work | –Pro-change power structure –Pro-change mentality/culture –Participative planning –Resistance management |
The first three are systemic reasons: the lack of strategic implementation and control mechanism, the capacity and priority conflict between strategic and profit-making work, and the lack of a strategic database.
Reason four is both behavioral and systemic, since the lack of understanding and skills leads managers both to resist planning and to perform it ineffectively. The fifth reason is the behavioral resistance to a change in the order of things.
Listed in the right-hand column is a series of measures which can eliminate the deficiencies indicated in the first column. In the light of our earlier discussion, some of the solutions are already well explored: training of managers, environmental forecasting , need for more general managers, and participative planning. The remaining measures deserve further exploration.
Dual Management System
Earlier , we explored a dual system of responsibility which becomes necessary whenever strategic activity is an important user of investment funds. Responsibilities for profit making are assigned to the operating units, and responsibilities for strategic development to strategic business units.
Dual system
The strategic planning process produces two sets of goals and objectives: operating, for the near-term profit making, and strategic for development of future profit potential. As Fig. 25.1 shows, in the dual system the goals, objectives, and strategies are next used to generate two sets of action plans and supporting budgets. The profit goals are converted into operations plans , and the profit potential goals into innovation (sometimes called development) plans.
The operations plan is a set of operating programs and budgets which are prepared for each operating unit in marketing, production, etc. A distinctive characteristic of these programs/budgets is that they have the same and repetitive time horizon, usually one year in detail and, frequently, three to five years specified in less detail.
- 1.
They have different time horizons and different durations.
- 2.
As shown in the figure, they are not launched all at once but are spread throughout the year.
- 3.
Most importantly, the projects are problem, and not unit, focused.
- 4.
Unlike the operating units, the projects are impermanent. They are launched when needed, and disbanded when their strategic goal is achieved.
As discussed earlier, experience has shown that the operations control system , which is used for managing implementation of operating programs and budgets, is ineffective and even inimical to managing strategic projects and is, in fact, one of the major causes of paralysis by analysis . Therefore, the dual system uses a separate project management and control system.
As shown at the bottom of Fig. 25.1, in addition to managing projects generated through strategic planning, the project management and strategic control system provides a natural home for projects generated by the issue management process (see Chapter 19).
Strategic Control and Strategic Rewards
Control of strategic projects
The process starts with planning and is followed by product-technology development, market research , market testing , building production, marketing and distribution capabilities. The project terminates after a full-scale market entry has been made.
The part of the solid curve, which lies below the horizontal axis in Fig. 25.2, traces the negative cash flow which is generated by all of these strategic activities.
Roughly around the point where cash flow turns positive, the exploitation of the new entry is turned over to an operating unit, which makes profits and cash from the potential generated by the strategic project.
The original decision to launch the project is based on the ratio of the area under the solid curve, above the horizontal axis, to the area below. This ratio is a measure of the return on the firm’s investment over the lifetime of the entry.
In most cases, when the strategic project is launched, many uncertainties surround its probable outcome. Therefore, the solid cash flow line is highly conjectural and probability is very high that the actual course of events will not follow the line.
Suppose that the actual evolution follows the lower dotted line in the figure, and that a major review of the project is about to take place at the control point, say, three years after the project was started.
If the operating control philosophy decisions that are based on a comparison of past accomplishments with the plan are followed, the project is clearly in deep trouble because of the 100% cost overrun.
But from the strategic point of view, the historical performance is much less relevant than the future prospects, which can now be assessed better than was possible three years ago, when the project was started.
If the new assessment of the future follows the lower dotted line in the figure, the project is indeed a disaster. Not only did the project manager grossly overspend, but he also delayed transition to the operational status to a point where the firm will be late in the market and will, therefore, not be able to recover its investment.
On the other hand, if the best estimate at the control points follows the upper dotted line, the project promises to be a success in spite of the cost overruns and, possibly, precisely due to the fact that the larger early investment increased the size of the positive profit area.
- 1.
Because of uncertainties and imprecision of estimates, a strategic project can easily (and frequently does) become a ‘free-spending boondoggle.’ This must be prevented, and costs must be tracked against promised accomplishments. But unlike the typical practice in operating control, the focus must be on ultimate cost-benefits and not on tracking the budget. In fact, if early progress shows promise of very high benefits related to costs, it may be desirable to encourage overspending of the original budget.
- 2.
At each control point, an estimate should be made of the return on investment over the project lifetime. So long as the return remains above the cutoff rate of return, the project should be continued. When the return falls below the cutoff level, a comparison should be made with other opportunities and serious consideration given to discontinuing the project.
Unlike operations control, strategic control is based on uncertain and sometimes vague estimates and not on concrete results. Strategic control is as much an entrepreneurial decision process as the original decision to launch the project. Therefore, a manager who belongs to the controller archetype will not have either the risk-taking propensity, or the requisite skills for the job. The role of the strategic controller must be played by an entrepreneur who will not only encourage but also participate in the entrepreneurial risk-taking.
The strategic controller must also be a tough-minded change manager. He must continuously be aware that members of the project are frequently driven by excitement of discovery, fun of the game, allegiance to the project team, and they are quite likely to be indifferent to the ultimate profitability of the strategic move, particularly since they are unlikely to bear the responsibility for the ultimate profit making. Therefore, the strategic controller must be prepared to be ruthless in terminating the project once he has convinced himself that the project will not be profitable.
- 1.
Entrepreneurial risk-taking must be encouraged. This means, in part, that project failure must not be indiscriminately penalized. On the contrary, failure to fail periodically should be punished, as a sign of a lack of entrepreneurial spirit.
- 2.
In part, entrepreneurship can be encouraged and rewarded through freedom to undertake projects without bureaucratic and lengthy approval procedures. Firms which have succeeded in encouraging entrepreneurship have set up budget pools on which entrepreneurs can draw freely, provided they do not exceed a set limit for a project. Once the limit has been reached, the project is either approved by higher management or it is written off.
- 3.
Private entrepreneurs frequently take the risk because they expect to get rich. There is no reason why the same incentive cannot be offered in large companies. In some firms, inventors participate in the royalties on their inventions. Similarly, entrepreneurs can be made participants in the ultimate success or failure of their projects.
- 4.
As discussed repeatedly in this book, strategic activity is stifled and demotivated by the necessarily bureaucratic rules of the profit-making activities. Some firms have solved this conflict by setting up strategic ‘skunk works,’ isolated from the bureaucracy and free to engage in creative strategic work.
- 5.
Finally, for entrepreneurially minded managers who are frustrated by the overload of operating work provision, time to engage in strategic activity is a significant motivator.
Dual Budgeting
Returning to Table 25.l the second reason given for the ineffectiveness of strategic planning is the competition for capacity between strategic and operating work, which usually is resolved in favor of the latter.
Dual budget
- 1.
Support of continued profit making using the current capacity of the firm.
- 2.
The investment in capacity expansion.
- 3.
The investment in increasing profits through cost reduction.
- 1.
Investment in improvement of competitive posture in the present SBAs.
- 2.
Addition of related SBAs through geographic expansion.
- 3.
Addition of new SBAs (and divestment from undesirable ones).
- 1.
It effectively sets aside resources for strategic work and thus protects strategic work from operating encroachment.
- 2.
The subdivision into the major budgets helps balance the investment in near-term vs. long-term profitability.
- 3.
The particular graphic presentation is helpful in assessing the wisdom of allocation among the sub-activities. If the respective sub-budget categories are written into the figure, the sizes of the profit wedges can be instantly compared with the budgets assigned to them to produce the return on the respective investments. For example, if profit improvement through capacity expansion turns out to be a relatively narrow wedge, but will absorb a substantial percentage of the operating budget , the wisdom of capacity expansion immediately comes into question.
- 4.
Finally, the graphic presentation shows the comparative timing of the respective profit contributions.
Thus, dual budgeting emerges as a major tool for managing the future of a firm, whenever the size of the strategic budget becomes a significant portion of the total.
Dual Structure
Dual structure
- 1.
To assign all strategic activities to strategic development, including evolutionary R&D for the present SBAs. The operating group is limited to manufacturing, distribution, and marketing. This, in fact, is the model which has been used for many years in the Soviet Union with highly unsatisfactory results. The reason is that the strategic development becomes technology driven with little concern for either the producibility of the prototypes which is delivered to the factories, or for the needs of the market.
- 2.
A subtler approach is to leave the operating group in control of the new strategic development of the existing SBAs and to confine the strategic development group to development of new businesses.
The problem with the second arrangement is that, in Western firms, the transfer of the new businesses generated by the strategic development group to the operations is difficult for two reasons: the cultural NIH (not invented here) reaction by the operating managers, and their fear that the new businesses will depress profits in the short run, and will make it difficult to meet the near-term profit objectives.
As you may recall, one way to resolve the conflict is to introduce shared authority and responsibility into the strategic development decisions. Another solution is to require that the strategic development group offer the operating group ‘the right of first refusal ’ on all promising new business ventures. But, should the operating group refuse, the strategic development group is free to set up new operating divisions or companies. Experience shows that the fear of turning down attractive opportunities brings a strong pressure on the operators to consider the new businesses seriously.
Aside from providing dedicated capacity for strategic work, the dual structure solution has one other important advantage. It permits the company to build two independent and internally consistent management capability profiles which do not come into conflict during daily work.
Institutionalizing Strategic Culture and Power Structure
Changing resistance into support
Exemplary behavior by top management requires much more than the usual protestations of support for planning. In fact, if the protestations are not accompanied by strategic behavior by top management in its daily work, management will be discredited and the protestations demotivating. In a recent company seminar on strategic management, one highly respected and successful third level manager said: ‘I will believe all this only when I see them [top management group] practicing it in the next planning review.’
- 1.
Participation in the same strategic training that is given to the lower level managers. In practice, top managers are frequently reluctant ‘to go back to school.’
- 2.
Involvement in the strategic planning process. This includes defining mission scopes of the SBUs , issuing strategic guidelines, setting corporate objectives and goals, balancing corporate portfolio, and allocating strategic resources .
- 3.
During planning reviews, focusing attention on evaluation and review of strategies and strategic progress, and minimizing involvement in budgeting and programming problems.
- 4.
During performance reviews focusing attention on evolution of strategies and strategic projects .
- 5.
In daily contacts with lower level managers discussing all problems in the perspective of the strategies of the firm. This is not to say that operating problems are not discussed, but it does mean that such discussions are related to the strategic perspective.
- 6.
Giving verbal recognition to entrepreneurial and strategic behavior by lower level managers.
As Table 25.2 shows, exemplary behavior is a powerful tool for creating a strategic culture/mentality in the firm. By choosing people to whom it gives special assignments, top management can also significantly affect the de facto power structure.
The other four types of action shown in Table 25.2 have been discussed in the preceding pages. When they are brought together in the figure, it becomes apparent that each produces more than one result. It also becomes apparent that the firm’s culture is shaped by all of the action areas.
Managing the Institutionalization Process
If all the measures described in the right-hand column of Table 25.l are put in place, the firm’s strategic behavior will be institutionalized. This means that it will have the behavioral will and the systemic competence for strategic action, and that strategic activity is assured a coexistence alongside daily profit-making activities.
But it is clear from the preceding discussion that institutionalization is a massive and time-consuming process. If strategy development is delayed until institutionalization is completed, as much as ten years may elapse before the firm starts changing its strategy. In cases in which such delay is not acceptable, the adaptive, serial behavior systems strategy sequence must be replaced by a parallel sequence.
The managed resistance approach described in the last chapter, where it was discussed in the context of making a discrete continuous change, is easily adaptable to a major strategic posture transformation, which involves both a strategic repositioning in the environment and a comprehensive transformation of the capability.
All of the planning modules of Table 24.1 are relevant in this case. This means that the planning process becomes lengthy. In one early application in a medium sized high technology company, the first complete pass at planning was organized into five modules and conducted over a period of a year (see Ten Dam and Siffert, in Ansoff et al. 1982-D).
The sequencing of the modules is arranged so as to start both strategy and capability projects after early planning modules. Thus, institutionalization occurs in parallel with strategy change.
The resulting projects are numerous, and conflicts will easily result, unless they are coordinated and arranged in a motivating change sequence.
Master plan for strategy development
It is, therefore, necessary to exercise strategic control over the program. In the illustration, major milestone events should be identified at the top as the principal control points.
The body of the master plan is presented in the form of a Gantt chart : Each line represents a project, and the length of the line spans the life of the project.
How Far to Institutionalize
As Fig. 25.5 illustrates, a complete institutionalization of a strategic behavior is a massive and a costly process. Therefore, it should be undertaken only in cases in which management intends to devote major resources to continuous strategic activity.
In cases in which the strategic change needs of the firm are less extensive, partial institutionalization is the cost-effective approach. This may range from developing strategic mentality in key managers, which will assure timely perception of strategic discontinuities, to developing an ad hoc response capability, to strategic issues , to a systematic comprehensive strategic posture management capability.
Choice of institutionalization
Summary
- 1.
Introducing a dual management system under which management and control of strategic projects is separated from the operations control systems .
- 2.
Basing strategic control on the future prospects and not on past performance.
- 3.
Basing rewards for strategic activity on encouragement of entrepreneurship and risk-taking.
- 4.
Subdividing the firm’s total budget into strategic operating budgets .
- 5.
Subdividing the firm into an operating group, charged with optimizing profitability, and a strategic development group charged with generation of new businesses.
- 6.
Focusing behavior of top management on the strategic development of the firm.
- 7.
Involving in strategic planning all managers who will be responsible for implementation. Informing others who will participate in the implementation.
- 8.
Training managers in strategic management, developing a ‘strategic language ’ and a shared strategic model of reality.
- 9.
Putting in positions of power managers with strategic mentality and drive.
*Checklist for Managing Change
- 1.Building the launching platform
Perform strategic diagnosis .
Prepare political/cultural resistance map.
Mobilize political support for change.
Identify and mobilize relevant talent.
Inform and reassure individuals/groups.
Select an approach appropriate to the realities of timing, resistance, and power.
Get external help for diagnosis.
- 2.Designing the change process
Focus process design on resolving strategic challenges.
Design the process for implementability.
Use modular design .
Build in strategic decision making at the end of each module.
Provide for early implementation .
- 3.Protecting process from conflict with operations
Assign clear responsibilities.
Budget the change.
Provide managerial capacity for strategic activity.
Reward strategic activity.
- 4.Designing implementability into process
Train individuals in strategic decision making and implementation at the beginning of each module.
Involve responsible managers and relevant experts in the decision process.
Progressively inform all affected individuals.
Let managers work on problems which are relevant to their jobs.
Control complexity of analysis to be compatible with manager’s knowledge and skills.
Provide relevant strategic information.
- 5.Managing the ongoing process
Conduct planning and implementation as parallel activities.
Control the planning process to assure balanced progress on making of decisions and on their acceptance.
Launch implementation projects as early as circumstances permit.
- 6.Institutionalizing the new strategy
Use a strategy development master plan to manage the process.
After strategy is in place, continue climate-building until the new culture and the power structure naturally support the strategy.
Continue capability-building until all the elements of capability are balanced and effectively support the strategy.
- 7.
Institutionalizing strategic responsiveness
A dual management system .
Strategic control .
Strategic rewards .
Strategic budget .
Dual structure .
Exemplary strategic behavior by top management.
Key managers with strategic mentality and entrepreneurial skills.
Exercises
- 1.
1n operations, it is usual to have different people charged with management of operations and with operations control. What should be the case in strategic management? Give your reasons.
- 2.
Describe the database which is necessary for effective strategic control .
- 3.
How should this database be generated?
- 4.
Develop a checklist for strategic control of projects.
- 5.
Describe in detail a strategic reward and incentive system for a firm in which strategic projects are costly and typically have long duration.
- 6.
What problems will be encountered in introducing strategic budgeting into a firm? How can they be solved?
- 7.
Discuss in detail the advantages and disadvantages of a dual structure .
- 8.
Prepare a list of conditions under which a dual structure should be adopted.
You are given an assignment by top management to prepare a plan for converting the firm’s culture from production oriented to the strategic. The firm is a large internationalized producer of farm machinery.
- 1.
Develop a strategy for the cultural change.
- 2.
Prepare a plan consisting of phased programs and major milestones.
- 3.
Prepare a list of major problems which will be encountered and suggest solutions.
- 4.
Defend the timing which you suggest for completing the cultural change.