August 29, 2007

Improving Strategic Planning

Strategic planning is critical to the continued success of any organization, yet fewer than half of the executives who responded to a survey conducted by The McKinsey Quarterly say that they are satisfied with their company’s approach to planning strategy. Further, although more than three-quarters of the respondents report that their company has a formal strategic-planning process, fewer than a quarter say that the process is key to making their most important decisions; senior executives—most important, the CEO—drive decision making. The executives also raise significant concerns about the way their company executes the strategy, communicates it, aligns the organization with it, and measures performance against it.

Who decides?

More than half of all respondents say that at their company the important strategic decisions are made by a small group of senior managers, including the CEO. Perspectives vary on who leads this decision making. Thirty-nine percent of those with a strategic-planning process in place say that the CEO leads their company’s process. However, in one of many notable differences between C-level executives and other survey respondents, 46 percent of the C-level respondents say that the CEO (or the person holding an equivalent position) leads the process. Only 34 percent of other executives concur; they are much more likely to attribute leadership to a chief strategy officer or a strategy group that exists at the corporate or business unit level.

Greater satisfaction

No matter who leads the decision making, executives at companies that make good use of a formal process seem to be more satisfied with strategic planning. Among respondents whose companies have a formal process, more than half say it plays a significant role in developing corporate strategy. That percentage is far higher—79 percent—among those who also say they are satisfied with their company’s approach to strategy development. There is additional support for the conclusion that using a formal process leads to greater satisfaction: compared with only 16 percent of respondents who report dissatisfaction with their company’s approach, 55 percent of those who are satisfied say that their strategic-planning group is among the most influential groups in making strategic decisions.

Failure to launch

A significant number of respondents express concern about executing strategy. Some 28 percent say that their company produces a strategic plan that reflects the company’s goals and challenges but is not effective. Another 14 percent say the strategy and plans for executing it are not necessarily aligned with each other. The experiences of executives whose companies have formal planning processes and who are satisfied with the results may explain how their companies have avoided these pitfalls. Among these respondents, 67 percent say aligning management with the strategy is an element of the strategic-planning process; only 40 percent of dissatisfied executives say so. Similarly, 78 percent of those who are satisfied, compared with only 26 percent of those who are dissatisfied, say their process leads to explicit objectives that are communicated well throughout the company.

These concerns are reflected in respondents’ suggestions for improving their company’s approach to strategy development. Their top two suggestions are improving the company’s alignment with the strategic plan and developing a method to monitor progress against the plan.

Room for improvement

Monitoring progress is an area where many executives see room for improvement. Only 56 percent of respondents say that their company currently tracks the execution of its strategic initiatives. Whether or not respondents are in a strategic-planning group, they agree that a top priority for such groups is spending more time developing these metrics.

Executives’ concerns about executing and aligning strategy are likely exacerbated by a perceived lack of integration between the company’s strategic-planning group and its human-resources group. When asked to consider strategic planning’s integration with several major corporate functions, respondents rank HR as second-to-last in terms of degree of integration. Respondents who are dissatisfied with their company’s strategic planning see the least integration. Of these, only 14 percent say planning is completely or mostly integrated with HR, and 59 percent say the two groups are integrated slightly or not at all.

Companies don’t particularly focus their strategic planning on new opportunities for growth. Fewer than half of all respondents say that their company’s approach includes identifying growth opportunities outside the core business. Among those who use a formal planning process, just 57 percent say that this process is substantially integrated with their company’s business-development function. In addition, respondents don’t see business development as a top priority for strategic decision makers to spend more time on.

With and without a seat at the table

Just as executives of different ranks have different perspectives on the formal process, the survey respondents have remarkably different views on what strategic-planning groups do, depending on whether or not they participate in one themselves. This disparity appears to underline the problems with communication about strategy that executives note elsewhere. The biggest disagreement concerns whether strategy groups perform internal consulting: two-thirds of respondents who are in a strategy group, compared with 29 percent of others, report spending time on this activity.

In addition, C-level respondents are less likely than others are to say their strategy group spends its time on internal consulting and far more likely to say that’s what the group should be spending time on. For them, internal consulting is the second-highest priority, while for non-C-level respondents, it falls to number eight.