docDoes Your Strategy Need Stretching?
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Does Your Strategy Need Stretching?
p g Does Your Strategy Need Stretching? R Does Your Strategy Need Stretching? Adapting Your Strategy-Development Approach to Fit Today’s Rapidly Changing Competitive Environment Abu Dhabi Amsterdam Athens Atlanta Auckland Bangkok Barcelona Beijing Berlin Boston Brussels Budapest Buenos Aires Chicago Stretching Oct 08_Covs.indd OCVR Cologne Copenhagen Dallas Detroit Dubai Düsseldorf Frankfurt Hamburg Helsinki Hong Kong Houston Jakarta Kiev Kuala Lumpur Lisbon London Los Angeles Madrid Melbourne Mexico City Miami Milan Minneapolis Monterrey Moscow Mumbai Munich Nagoya New Delhi New Jersey New York Oslo Paris Philadelphia Prague Rome San Francisco Santiago São Paulo Seoul Shanghai Singapore Stockholm Stuttgart Sydney Taipei Tokyo Toronto Vienna Warsaw Washington Zurich bcg.com 10/11/08 5:11:17 AM The Boston Consulting Group (BCG) is a global management consulting firm and the world’s leading advisor on business strategy. We partner with clients in all sectors and regions to identify their highest-value opportunities, address their most critical challenges, and transform their businesses. Our customized approach combines deep insight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable competitive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with 66 offices in 38 countries. For more information, please visit www.bcg.com. For a complete list of BCG publications and information about how to obtain copies, please visit our Web site at www.bcg.com/publications. To receive future publications in electronic form about this topic or others, please visit our subscription Web site at www.bcg.com/subscribe. 10/08 Stretching Oct 08_Covs.indd ICVR 10/14/08 9:46:28 AM Does Your Strategy Need Stretching? Adapting Your Strategy-Development Approach to Fit Today’s Rapidly Changing Competitive Environment Nicolas Kachaner Michael S. Deimler Camille Saussois October 2008 bcg.com Stretching Oct 08.indd 1 10/11/08 2:09:45 AM © The Boston Consulting Group, Inc. 2008. All rights reserved. For information or permission to reprint, please contact BCG at: E-mail: [email protected] Fax: +1 617 850 3901, attention BCG/Permissions Mail: BCG/Permissions The Boston Consulting Group, Inc. One Beacon Street Boston, MA 02108 USA Stretching Oct 08.indd 2 10/11/08 2:09:45 AM Contents Note to the Reader 5 Introduction 6 Stretching Time Horizons 8 The Long Term: Visioning 9 The Medium Term: Business Planning 10 The Short Term: Annual Planning 11 Coordinating Across Horizons 13 Stretching the Thinking 14 Investing in the Art of Questioning 14 Multiplying Perspectives 15 Building Scenarios 16 Stretching the Engagement Model 17 Changing the Tone 17 Changing the Rhythm 18 Expanding Strategy Forums 18 Exploring New Roles 19 Implementing Stretching 21 Communication 21 Incentives 22 Training 22 Epilogue 23 D Y S N S? Stretching Oct 08.indd 3 10/11/08 2:09:46 AM Stretching Oct 08.indd 4 T B C G 10/11/08 2:09:46 AM Note to the Reader This report is the culmination of a research effort sponsored by The Boston Consulting Group’s Strategy practice. Through a combination of in-depth interviews with executives at leading companies, secondary research, and the mining of the collective experience of many BCG partners, the team sought to understand how companies are adapting their strategic-planning processes to fit today’s competitive reality. This report elaborates on ideas in a previously published BCG Perspective by the same name. About the Authors Nicolas Kachaner is a senior partner and managing director in the Paris office of The Boston Consulting Group. He leads the firm’s Strategy practice in Europe and is the global topic leader for strategic planning processes and approaches. Michael S. Deimler is a senior partner and managing director in BCG’s Atlanta office and the global leader of the Strategy practice. Camille Saussois is a principal in the firm’s Budapest office. D Y S N S? Stretching Oct 08.indd 5 If you would like to discuss our observations and conclusions, please contact one of the authors: Nicolas Kachaner BCG Paris +33 1 40 17 10 10 [email protected] Michael S. Deimler BCG Atlanta +1 404 877 5200 [email protected] Camille Saussois BCG Budapest +36 1 235 9000 [email protected] Acknowledgments First and foremost, we would like to thank the 20 companies that consented to participate in the research for this report: American Express AstraZeneca BASF BNP Paribas Codelco E.ON ING Groep Lafarge Merck & Co. Nokia Orange Renault S. C. Johnson & Son SAP Shell Textron TNT Toyota Motor Corporation UBS United Parcel Service (UPS) Drawing on the results of nearly 100 in-depth interviews with executives of those companies, we formed and focused our conclusions. We are also grateful to the BCG partners, too numerous to name here, who shared their perspectives—and those of their clients— with us on this important topic. In addition, we would like to thank the members of the research team, including Alex Bartolini, Vivian Browning, Eric Dusseux, Audélia Krief, Agnes Sauvage, and Olivier Wierzba. Finally, we thank Matthew Clark for his contribution to the shaping and writing of this report and Gary Callahan, Angela DiBattista, Elyse Friedman, and Gina Goldstein for their contributions to its editing, design, and production. 10/11/08 2:09:46 AM Introduction A s the future becomes less and less predictable, some argue that we’ve come to the end of strategy. Aer all, if prediction is too difficult, won’t management’s focus inevitably shi from insight to speed? Isn’t time spent on strategy time wasted? A recent study by The Boston Consulting Group of the strategy development practices of leading companies found little support for that view. Although many executives described their processes as ossified and bureaucratic rather than insightful, and as focused on extrapolating historical trends instead of capturing future competitive advantage, they still believed strongly in the power of strategy. Aer all, when visibility is reduced, the reward for foresight increases. Competing on responsiveness alone implies a neck-and-neck race with lower returns and little differentiation among players. Strategy—because it can offer a head start and even define a new course—remains essential to advantage, and we found that leading companies are adapting their strategy-development processes to match the global competitive reality. Although these new processes still aspire to create good strategies, they focus just as much—or more—on developing good strategists: strategists who are prepared enough to spot shis in competitive conditions early and agile enough to do what it takes to seize or retain leadership. So what are companies doing to renew their strategies, preparedness, and agility? Our study, which included interviews with nearly 100 executives at 20 leading companies, indicates (as shown in Exhibit 1) that they are stretching in three mutually reinforcing dimensions: Stretching Oct 08.indd 6 ◊ Stretching their time horizons to give the short, medium, and long term each its due ◊ Stretching their thinking with new techniques that boost creativity and insight ◊ Stretching their engagement model to foster dialogue, capabilities, and alignment across the organization In the first section of this report, we explain the most common stretching practices at each time horizon (visioning for the long term, business planning for the medium term, and annual planning for the short term) and describe the key integration mechanisms. Exhibit 1. Organizations Are Stretching Their Strategy-Development Processes to Increase Insight, Engagement, and Agility Stretching their time horizons ◊ Strategizing for the long, medium, and short terms through visioning, business planning, and annual planning ◊ Ensuring alignment and value creation by coordinating across time horizons ◊ Asking the right questions Stretching their thinking ◊ Using multiple lenses to broaden perspectives and avoid blind spots ◊ Exploring the strategic implications of future scenarios ◊ Engaging broadly Stretching ◊ Turning strategic planning into their engagement strategic dialogue model ◊ Redefining the role of the corporate center Source: BCG analysis. T B C G 10/11/08 2:09:46 AM In the second section, we describe a wide array of techniques—such as the use of deconstruction, analogy, metaphor, alternative points of view, and scenario development—that are helping companies broaden their perspectives and complement traditional modes of strategic thinking. logue and expanding the forums for their strategy discussions, by changing the tone and rhythm of those discussions, and by developing new roles for the corporate center. Finally, in the fourth section, we describe ways to implement these stretching techniques through communication, incentive systems, and training. In the third section, we discuss how companies become “strategy enabled” by extending opportunities for dia- D Y S N S? Stretching Oct 08.indd 7 10/11/08 2:09:46 AM Stretching Time Horizons W hen asked about their strategy-development processes, some executives in our study talked about a vision exercise they had done several years before. Others cited strategic reviews linked to their annual budgeting process. It is interesting to note that only a few described processes that considered business strategy over the long, medium, and short terms. (See Exhibit 2.) Yet addressing each of these time horizons can be critical in eliciting the superior strategic insights on which exceptional performance depends. The goal is to see, before others do, how the future competitive environment is likely to change and—through well-crafted strategic moves and compelling business models—to shape the future to the company’s advantage. Dell saw, before others did, how to leverage direct sales and lean manufacturing to create a compelling value proposition in selling high-quality customized personal computers to a large audience. Unilever was among the first to recognize and seize the business opportunity in serving low-income populations in developing countries. It launched specific product lines tailored to those consumers’ financial constraints and specific needs, using low-cost distribution and small-size packages. Clear vision enabled both Dell and Unilever to secure an advantaged Exhibit 2. Strategy Needs to Be Considered and Created Along Three Distinct Time Horizons Visioning ◊ Analyzing megatrends and developing scenarios ◊ Anticipating and preparing for likely developments Long term (more than five years) ◊ Shaping the future by influencing the competitive environment Business planning ◊ Addressing critical questions and challenges ◊ Exploring sources of competitive advantage Medium term (three to five years) ◊ Identifying the highest-priority initiatives and defining the path to value creation Annual planning ◊ Prioritizing business initiatives Short term (one to three years) ◊ Aligning plans and metrics with the business strategy to drive value creation ◊ Making tradeoffs between long-term competitiveness and short-term results Source: BCG analysis. Stretching Oct 08.indd 8 T B C G 10/11/08 2:09:46 AM position and to maximize the period of growth and above-average profitability that comes with it. If a company’s strategy process focuses only on shortterm imperatives, there’s a danger of myopia. When you can’t make out the signs in the distance, there’s a greater risk that you’ll miss a key strategic turn. Companies without a clear long-term outlook can miss the weak signals that suggest how the future competitive environment will evolve. Consequently, such companies frequently find themselves surprised by important developments and are forced to follow rather than lead. Other companies suffer from hyperopia, or farsightedness. They can see the finish line clearly, but they trip over their own feet trying to get there. In these situations, the disconnect is between aspirations and the wellaligned short- and medium-term activities and resources needed to realize them. Although the distinction between long-, medium-, and short-term horizons may seem obvious, our executive interviews indicated that it is not broadly recognized. For example, few of the companies we studied had performed long-term visioning exercises. For many, short-term business planning was still mingled with the annual budgeting process. And even among those that considered different time horizons separately, few did it in a coordinated fashion. Those companies that did, however, reinforced their advantage. (See the sidebar “The Three Horizons at Nokia.”) The Long Term: Visioning The purpose of visioning is to increase a company’s ability to recognize and benefit from shis and disruptions in the business environment by creating a shared vision of the future and the company’s desired position within it. The process typically involves exploring possible “futures” and, for each one, determining the current business model’s relevance and potency, as well as the moves that would be required to retain and enhance advantage. Visioning demands imagination but is based on reality. It eschews rose-colored glasses, exploring positive and negative developments in the competitive environment with equal intensity. It is not purely aspirational—describing the world as the company wishes it were—but is instead a level-headed consideration of how things are likely to develop. Unlike some corporate mission statements, it is specific enough about the conditions of rivalry to distinguish between good and bad strategic moves. (See the sidebar “Realizing the Strategic Vision at UPS.”) Visioning looks not only outside at conditions on the playing field but also inside at the organization’s own capabilities. Ideally, the result is a strategic vision that can foster preparedness and alignment across locations and business models—a shared mental map comprising possible competitive environments, the company’s ideal position within each, and the macro moves the company needs to make to capture (or retain) that position. The Three Horizons at Nokia In 2005, Nokia became convinced that its planning process was too detailed and time consuming. Interdependencies among its business units were growing, and the company wanted the corporate center to play a more active role. So it redesigned its strategy-development process from the ground up. Now Nokia is one of the few companies that explicitly stretch their business strategy across all three time horizons. In light of the business environment outlook, Nokia reviews and adapts the medium- and short-term plans as appropriate. Business unit strategies are not necessarily recraed every year but rather are updated on the basis of performance and environmental changes. Each business-unit plan is translated into a three-year business plan with financials, as well as into a detailed short-term plan for the next six months. Nokia starts every year with an exercise called the business environment outlook, which focuses on the impact of major long-term trends on the company’s business model. It is complemented by “wildcard” exercises in which a range of potential disruptions challenge that model. Executives report that the approach has helped business unit leaders see new opportunities and be better prepared for long-term challenges. D Y S N S? Stretching Oct 08.indd 9 10/11/08 2:09:46 AM The outside view can be developed by exploring the impact of key megatrends on the economics and priorities of customers, on the universe of choices that customers are likely to have, and on the potential for market disruptions. This exercise inevitably yields a set of plausible futures. Rarely are all these futures equally attractive to a company, so considering each through the lens of organizational capabilities and resources—the inside view—can help refine a practical strategic vision. Visioning doesn’t need to be done annually but, depending on industry conditions and developments, should typically be reconsidered and possibly repeated every three to five years. A clear strategic vision of potential futures produces three main advantages: ◊ Readiness. A company that understands what potentially lies ahead will be ready to respond as conditions change. A classic example of the power of visioning is Shell’s pioneering use of scenario planning, which allowed it to predict and be prepared for the oil crisis of 1973. ◊ A Head Start. Preparedness confers sufficient lead-time to shape the competitive environment to a company’s advantage. For instance, Codelco, the world’s leader in copper production, saw that copper could become one of the world’s key materials, but this scenario was by no means a certainty. To increase the likelihood that it would come to pass, the company teamed with other copper companies to promote the substitution of copper for other materials, to encourage favorable regulatory changes, and to invest in critical enabling technologies. ◊ Alignment. A shared vision of the future can be a powerful tool for aligning a company’s efforts and investments with its business strategy. Some companies publish their main scenarios to inform decision making throughout the organization. Others lay out a set of guiding principles that emerge from those scenarios. Toyota, for example, has seven pillars for growth that reflect its sense of what will drive future advantage— and all the company’s investment decisions. The Medium Term: Business Planning If the purpose of visioning is to establish a strategic vision, the purpose of business planning is to decide how to realize and create value from that vision. In this phase, the focus is on securing and strengthening competitive advantage and leveraging that advantage to achieve superior returns. One surprising insight gained from our study was that although most executives felt that their company had a business plan, few mentioned “competitive advantage” when discussing their plan or its formulation. This omission is intriguing because a shared appreciation of the sources of advantage is a powerful Realizing the Strategic Vision at UPS United Parcel Service maintains separate, though integrated, processes to develop a long-term view and a medium-to-short-term plan. The company conducted its first formal long-term visioning exercise in 2002 and has since repeated it to explore potential changes in its strategic vision. The visioning process yields distinct scenarios that inform strategic decisions. UPS has also established a sensing process to detect weak signals and new trends that could challenge the company’s assumptions. The medium-term plan is updated annually, has a fiveyear horizon, and is grounded in a detailed one-year business plan that covers all parts of the enterprise. Both are discussed as part of the annual planning process. UPS executives are constantly promoting alignment of strategy Stretching Oct 08.indd 10 and vision. The Enterprise Strategy, a formal description of the company’s strategy, is owned by the management committee, which guides all of UPS’s change initiatives and ensures execution and accountability by integrating the strategy into both the business plan and the mediumterm plan. The company’s stretching has yielded real results. As one executive told us, “No change in the industry or in market conditions has surprised UPS over the past years—apart from calamities. For example, both the consolidation of the industry and the effect of Internet purchases were anticipated and prepared for. The only surprise has been the velocity of change.” T B C G 10/11/08 2:09:46 AM mechanism for both alignment around a strategy and self-preservation. Competitive advantage is naturally unstable and evanescent, evolving along with changing consumer priorities, shiing technologies, and the actions of competitors. Keeping it front and center helps ensure that changes in these underlying conditions are noticed while there’s sufficient time to respond. strategy second. Only numbers matter. Strategy becomes the qualitative introduction of the quantitative plan.” While that view is not widespread, many of the executives we spoke with felt that their annual planning processes were too focused on financials and le too little room for addressing critical strategic issues. But the annual planning process has a cruBusiness planning requires a company to cial role to play in aligning day-to-day acBudgeting should address different questions and challenges tivities with the necessarily higher-level depending on its particular circumstances. business plan at the heart of the business reflect strategy, If its strategic vision has recently shied strategy. Done right, annual planning not substitute significantly, the critical questions will retransforms strategy into the concrete busivolve around developing a detailed business initiatives and metrics that focus the for it. ness plan to achieve the new vision. How organization on fulfilling the chosen stratshould investments be redeployed? What egy’s value-creation potential. And it foprinciples should guide action? How does the business cuses management on a critical question: How do we model need to change? Which current initiatives should make the right tradeoffs between short-term results and continue, accelerate, or be shut down? What new investlong-term competitive advantage? ments in assets and capabilities are needed to strengthen competitive advantage? What year-by-year programs will Companies that do try to inject more strategy into the be required to realize the new vision? What high-level annual planning process seem to be taking one of two targets need to be achieved? What metrics should be approaches. tracked? And how should responsibility be apportioned? The Three-Layer Cake. The CEO of a large consumerIf the company’s strategic vision has remained consistent, goods company described the “planning process” he inherited as follows: “It was always the same. I would fly in however, the questions will likely focus on opportunities that morning. A car would take me to the business unit, to optimize medium-term value creation. A retailer or where I would have a tour of the offices and factory. hotel chain might consider whether to replicate a format Shortly aer a nice lunch—while we were sleepy from in a new region—and, if so, whether to adapt it to the digestion—there would be two hours of rosy PowerPoint new market. Other companies might explore the wisdom presentations (growth, success story of the new product of a corporate acquisition or outsourcing parts of the launch, et cetera). There would be no time for the hard value chain. questions. At the end of the day, I would go back to the airport, and that would be it.” Although the business plans that result can vary significantly, they have a few common elements: a statement of The CEO replaced this routine with what we call a threethe drivers of advantage, a description of the key guiding layer-cake process. The first layer addresses the key numstrategic assumptions and management principles at the bers and spans a broad range of issues, including growth, core of the strategy, a discussion of the highest-priority asset utilization, new-product introductions, and producinitiatives for the coming years that will bring the plan to tion bottlenecks. The second layer addresses key queslife, and a translation of the plan into numbers, including tions sent from the corporate center—typically, about medium-term financial objectives. two months in advance. In the third layer, the business units present one or more out-of-the-box ideas. This apThe Short Term: Annual Planning proach forces the business heads to think beyond the Budgeting should reflect strategy, not substitute for it. Yet next quarter and pay closer attention to weak signals. in many companies, budgeting and the next quarter’s results dominate. In extreme cases, as one executive we Essilor International, a leader in ophthalmic optical prodinterviewed put it, “the accepted rule is numbers first, ucts, approaches each of the three layers at a different D Y S N S? Stretching Oct 08.indd 11 10/11/08 2:09:46 AM time of year. In the fall, the focus is on the financials— both a detailed review of the previous year’s achievements and the business rationale for the next year’s budget. In March, the focus is on progress against the plan, in particular, key performance indicators and operational issues. Finally, in July, the meeting concentrates on strategy, signs of shiing advantage, and business model innovation—whether large scale or incremental. W approach starts later in the year, when market conditions are closer to those that will prevail when the plan is executed. Second, the two rounds of interaction between the corporate center and the business units make it possible to agree on strategy first and budget second. Like the traditional planning process, the W approach starts with a top-down communication of targets to the business units. But the W’s two-round structure enables an entirely different type of response: a free-ranging strategic dialogue about the business, with the targets serving as critical reference points. Together, the corporate center and business unit managers address such critical questions as, What strategic considerations will support or impede a particular unit’s ability to meet the targets? What strategic moves might enable a unit to deliver results well above the targets? Is the unit well positioned for the long term? The outcome of this dialogue is con- The W Approach. At many companies, two of the main drawbacks of the traditional planning process are that it starts too early and it provides too little opportunity for iteration and dialogue. The top half of Exhibit 3 illustrates a typical process. Around the start of the second quarter, the board establishes the targets that will inform the following year’s business-unit planning; in the fourth quarter, the business unit plans are reviewed. Because this single review meeting takes place close to the end of the year, it is almost inevitably dominated by budgetary concerns. 1. The approach gets its name from the two cycles of interaction between the corporate center and the business units. Each cycle starts with direction from the top and ends with a bottom-up response, graphically forming the shape of the letter W. By contrast, the W approach, illustrated in the bottom half of Exhibit 3, offers several improvements.1 First, the Exhibit 3. The W Approach Injects Strategic Considerations into the Annual Planning Process Traditional 1 2 3 Board meeting 4 5 Month 6 7 8 Target setting 9 10 11 Plan review 12 Final plan Corporate center (executive committee and strategy department) Detailed planning Business unit management The W Shorter process Target setting Strategy dialogue Final plan Corporate center (executive committee and strategy department) Business unit management Plan review Detailed planning More timely plans Round one Round two Source: BCG analysis. Stretching Oct 08.indd 12 T B C G 10/11/08 2:09:46 AM sensus on the strategic scenario (or scenarios) for which detailed operating plans and budgets should be developed. In the second round, the business unit leaders present those detailed plans and, in a series of meetings with the center, agree to a short-term plan fully grounded in long-term strategic realities. By decoupling strategy from the numbers, this approach breaks the cycle of financially driven incrementalism. It frequently yields a shorter process with higher-quality results and heightened buy-in from the business unit leadership. Coordinating Across Horizons Definition of the long and medium terms depends on industry investment horizons and business model life cycles. For a mining company, the long term extends much further into the future than it does for a mobilephone maker. That said, long-term visioning typically looks five to ten years into the future; a typical mediumterm business plan looks three to five years out. How frequently should a company reconsider a vision or a business plan? A typical company needs to review and renew its business plan every three years or so, whereas the period between visioning exercises is rarely less than five years. Clearly the insights and decisions produced by addressing the three time horizons need to be coordinat- D Y S N S? Stretching Oct 08.indd 13 ed to drive value creation. Our interviews pointed to three primary mechanisms for achieving alignment: ◊ The Executive Committee. Because of its deep involvement in all three phases of the strategy development process, the executive committee in some companies plays the central role in ensuring consistency among the long-term vision, the medium-term business plan, and the annual plan. ◊ The Strategy Department. In other companies, the strategy department plays this critical role by orchestrating a large-scale effort across the three time horizons, serving as a thought partner to the executive committee and as a sounding board to business unit leaders, and addressing daily issues as they arise. ◊ Metrics. Some other companies use metrics as the common thread that runs through all three time frames. For example, at Procter & Gamble, all strategic initiatives are linked to a shareholder return metric that reflects the value creation ambitions inherent in the medium-term business plan. At Renault, metrics are defined at the top level and cascade down to the level of individual incentives so that everyone has specific objectives linked to the overall business strategy. 10/11/08 2:09:46 AM Stretching the Thinking M any of the executives we interviewed stressed how difficult it was to keep the thinking fresh in a process that had become rote. One complained, saying, “Our formal frameworks and processes have become mental straitjackets.” Tools and processes frame a company’s thinking. Using the same ones year aer year increases the probability of getting the same answers. And the resulting strategies are more likely to be incremental and blind to emerging opportunities or changing competitive patterns. The traditional approach to strategy development—combining an external perspective (analysis of markets, competitors, channels, and economics) with an internal assessment of resources—remains useful, but it is no longer sufficient. The companies we studied saw a need for new methods that would foster lateral thinking and out-of-thebox ideas. Stretching the thinking is about multiplying the lenses through which a company considers its business. It is about going beyond classical strategy tools to enhance strategic creativity. Our research suggests that through permanent additions or one-time experiments, companies are expanding their thinking repertoire in three distinct ways: investing in the art of questioning, multiplying perspectives, and building scenarios. Investing in the Art of Questioning This approach is based on the Socratic belief that asking the right questions stimulates productive dialogue. Few of the executives we interviewed felt that their companies did a sufficient job of articulating the core questions Stretching Oct 08.indd 14 that their strategies should address. Those executives who were satisfied with their performance on this dimension reported greater confidence in their strategies and greater organizational alignment in pursuing them. There is an art to asking questions. They should be neither too broad (What are our competitors’ strengths and weaknesses?) nor too narrow (Will product X launch on time?). Good questions frequently focus on actions and reactions: If we lower prices in category A, is competitor B positioned to wage a successful price war? Moreover, questions that are overly focused on the current business model risk missing a looming disruption. Formulating the right questions demands significant up-front investment by both senior management and the strategy department in isolating the key strategic issues. The chairman and CEO of Essilor International, Xavier Fontanet, has been harnessing the art of questioning for many years. When he discusses business issues with his teams, he avoids advocacy. Rather, he asks questions that stimulate thinking and inspire further investigation of issues. In answering these questions, his teams develop the ability to refine their strategies on their own, and, in so doing, they enhance their strategic skills. In fact, the company has redesigned its strategic-planning process in Europe to emphasize high-quality strategic questions. Sometimes the best questions are subversive. Instead of asking how to grow a business, ask how to kill it. A wellknown example is Jack Welch’s destroy-your-business.com initiative to prepare General Electric to prosper in a digital world. Welch asked his business heads to imagine how an insurgent could destroy their businesses, instructing them not merely to sketch out possibilities but also to develop a full-fledged business plan. T B C G 10/11/08 2:09:46 AM Instead of asking businesses to justify their requests for more resources, ask them how they would operate without them. Instead of renegotiating contractual terms with your key suppliers, ask how to redesign your product without their components. Multiplying Perspectives comparing it with a completely unrelated field (the source domain). By exploring both the similarities and differences, participants are forced to question long-held assumptions about the target domain and to shake things up with fresh ideas borrowed from the source domain. The goal is not a one-to-one correspondence, such as “business is war,” but a fruitful exploration of the gray area between the two domains that reveals where true commonality exists and Extra lenses mean where it doesn’t.2 This friction can ignite new perspectives on the familiar. fewer blind spots The fundamental job of a strategy development process is to see change coming— and to find ways to benefit by adapting to it. Yet all too oen, even great companies and better Deconstruct the business. Break down are blind-sided by developments that oththe business into slices along the value ers see clearly. Why? In many cases, comperipheral vision. chain and determine which slices confer a panies fall into a competence trap. They superior competitive position, which miss the emergence of a powerful new should be outsourced, and which must be defended threat by continuing to do what made them successful in against capture by external players. This exercise forces a the past. They become the victim of “experience bias” by company to understand where in the chain the profit poinsisting on looking at things from their own perspective tential is highest—and to make conscious decisions about rather than that of an upstart. where and how to play. Zara’s business model and competitive advantage demand an integrated approach. Nike Increasingly, companies are trying to build alternative prospers by owning marketing and design but outsourcperspectives into the strategic dialogue. With these ading production and most distribution. Intel largely focusditional lenses, they hope to avoid potential blind spots es on a single slice of the personal-computer value and enhance both their long-range and their peripheral chain. vision. The following are six approaches. Explore industry analogies. Does the experience of other industries offer perspectives on how yours may evolve? For example, the pharmaceutical and motion picture industries are in many ways fundamentally different, yet both have benefited from a blockbuster model. Does the more “deconstructed” entertainment value chain offer guidance on how pharmaceutical companies can prosper through distributed innovation? There’s some art to selecting such analogies, but the resulting insights can be powerful. Another example is the inspiration some organizations have found in Rolls-Royce’s power by the hour model of selling flight hours rather than aircra engines. These companies have moved beyond the sale of price-competitive capital equipment to performance guarantees priced on a variable-cost basis. Use metaphors. Consider strategic issues through the lens of an alternative discipline, such as biology, physics, or sports. The idea is to enhance your understanding of your business (what linguists call the target domain) by D Y S N S? Stretching Oct 08.indd 15 Consider the impact of megatrends. Identify how megatrends (sociological, economic, political, technological, legal, and environmental) singly and in combination will affect your business—both positively and negatively. This lens can reveal important long-term growth opportunities, as well as help you prepare for potential disruptions to business model economics. One industrial company convened a team of up-and-comers under the leadership of a respected senior executive and charged it with identifying significant long-term growth opportunities adjacent to the core business. The team brainstormed relevant opportunities at the intersections of critical megatrends and then winnowed them down through an interactive process. Experiential “learning journeys” were used to pressure-test the potential opportunities with real customers, and classic economic analysis was used to assess the attractiveness of the opportunities. Ultimately this process enabled the company to settle on a manageable number of high-impact investments while 2. Tihamer von Ghyczy, “The Fruitful Flaws of Strategy Metaphors,” Harvard Business Review, September 2003. 10/11/08 2:09:46 AM creating enthusiasm and alignment around the new opportunities. Explore different points of view. Put yourself in the shoes of a stakeholder, either internal (for example, the head of an employees’ union or another business or functional unit) or external (a competitor, supplier, government body, consumer, or investor) and consider your business from that perspective. This approach is common in marketing but much less so in strategy development. We’ve seen pharmaceutical companies that play war games—with each team taking on the role of a different stakeholder—to anticipate market, regulatory, and competitive responses for a new drug launch. S. C. Johnson and Toyota both involve key suppliers in strategic discussions. And Codelco holds sessions with employee unions at the start of its long-term strategy process. The aim of those sessions is to reach agreement on goals, values, and mission. As paradoxical as it might seem, some companies even involve competitors in their strategic-planning process. Usually this happens through industry associations that seek to influence market factors—for example, demand and regulatory regimes—to the advantage of all members. Sometimes taking the perspective of an owner—rather than a manager—can be helpful. Using a model of the key drivers of stock price can reveal important differences among investors that other approaches would miss. Aer all, just as there are different customer segments, there are also various types of owners, and companies can significantly increase their valuations by adapting their strategies to the priorities of key investors—and by shaping their “portfolio” of investors to better match their strategies. Build on undervalued assets. Catalog your assets—core and noncore, tangible and intangible—and ask whether they are fully leveraged and whether additional businesses could be built around them. For example, many major oil companies have opened convenience stores at their gas stations, and many hypermarkets have built gas stations in their parking lots. Both are leveraging the same asset: real estate along high-traffic roads. Michelin, one of the world’s leading tire manufacturers, launched ViaMichelin, a route-planning Web site, to leverage its extensive travel-related content, including maps and information on sightseeing, hotels, and restaurants. Another example is a parcel-shipping company that improved Stretching Oct 08.indd 16 its customer service by offering online parcel tracking, a feature that already existed in its logistics system but had hitherto been used only internally. Building Scenarios Building scenarios is about envisioning possible futures and figuring out how best to prosper in each. In contrast to forecasting, which assumes that there is one “right” answer, scenarios need only be plausible and mutually exclusive to be useful. They enhance preparedness by forcing executives to rehearse and evaluate their actions in a variety of possible strategic environments. The difficulty is to create scenarios that are sufficiently broad to encompass major potential changes but sufficiently concrete to facilitate a rich discussion about business decisions. Typically, a company considers only a small number of scenarios, perhaps three to five. Scenarios are particularly useful in long-term visioning, but they can also be built into medium-term business planning by establishing scenario-driven “triggers” for certain moves. UPS has made extensive use of scenarios, which it updates regularly when reviewing the effectiveness of its business strategy. Shell, the father of scenario planning, has been using the approach since the 1970s and recently released its three scenarios for 2025. C ompanies have found that stretching their thinking enhances both insight and creativity. To some degree, this is a result of the approaches themselves, but some of the benefits can be attributed solely to novelty. So a final recommendation is to mix things up. Run a traditional process every other year, perhaps, alternating with something novel. Or add a fresh perspective every year. But whatever you do, don’t let the process become rote: routine is the enemy of creativity and insight. T B C G 10/11/08 2:09:46 AM Stretching the Engagement Model O f all the complaints lodged by the executives we interviewed regarding their strategy-development processes, some of the most passionate centered on the broad theme of engagement. Instead of being a mechanism for generating enthusiasm, ownership, and alignment around a strategy, those processes were described by many as a chore. The goal, they explained, is data collection rather than decision making, and the process discourages productive dialogue by making an implicit distinction between corporate “thinkers” and business unit “doers.” All too oen, the process devolves into a negotiation that adds little real value. Companies are recognizing that the most effective strategies are the result of cocreation at multiple levels: between staff and line workers, and among line managers, senior management, and the strategy department. And companies are adjusting their processes to foster cocreation. The goal is not just to create strategies but to create strategists as well—people at all levels of the organization who can think and act strategically, recognize and react to weak signals, and initiate and conduct strategy debates with their teams and superiors. Aer all, most great strategists are mentored, not born or book taught. Organizations are developing their traditional processes along four dimensions to drive deeper engagement. ◊ Tone. They are moving away from formal presentations toward a more freewheeling, collegial dialogue on strategy. ◊ Rhythm. They are speeding things up with more frequent and focused strategic reviews. Given the pace of change today, once a year is no longer enough. D Y S N S? Stretching Oct 08.indd 17 ◊ Forums. They are expanding both the contexts for strategic dialogue and its participants. ◊ Roles. They are redefining the primary roles of the corporate center as agenda setting, coaching, and orchestration of the strategy development process. Changing the Tone Innovators on this dimension aspire to replace reams of PowerPoint slides and templates with real, no-holdsbarred strategic dialogue. They want formality to give way to informality and passive listening to give way to the active back-and-forth of ideas and collaborative brainstorming. Analysis is, aer all, only a complement to thought, not a substitute for it. As Jack Welch once said, “Our planning system was dynamite when we first put it in. The thinking was fresh; the form mattered little—the format got no points. It was idea-oriented. We then hired a head of planning and he hired two vice presidents and then he hired a planner, and the books got thicker and the printing got more sophisticated, and the covers got harder and the drawings got better. The meetings kept getting larger. Nobody can say anything with 16 or 18 people there.”3 Our research found that companies are expanding dialogue in three ways. First, they’re going deeper on fewer topics. The idea is to have fruitful debates about hard questions: What competitive moves do we most fear? Can our current business model extend profitably into region X? The topics can be business specific or of general corporate relevance, but it is crucial that they touch on the key drivers of current and future advantage and 3. Richard G. Hamermesh. “Making Planning Strategic,” Harvard Business Review, July 1986. 10/11/08 2:09:46 AM give participants a chance to think through moves and countermoves as a team. and how close it is to resolution. For example, at E.ON, top executives meet monthly to consider key issues. And at UPS, a corporate-strategy group staffed with top manSecond, they’re requiring more preparation to enable a agers meets for half a day each month with the CEO and richer discussion. The communication and consideration the executive team to discuss important issues. The manof basic facts and metrics take place before the strategy agers may keep an issue on the agenda for as long as it session, leaving more time for debate. To further facilitate takes to arrive at a decision and a course of action— an effective discussion, some companies reviewing critical facts, working toward cap the number of slides permitted—or new insights, or developing and refining The trend is even forbid them entirely. This approach options. One major benefit of such ongoputs extra demands on both senior maning discussions is the maturity of the toward broader agement to invest time up-front and busiresulting decisions, a quality that cannot organizational ness unit leaders to move beyond descripbe achieved at off-site meetings, where tion to advocacy—and to be prepared for decisions have to be made in two to debate on strategy. a discussion that goes well beyond the three days. slide deck. Some companies are also matching the frequency, depth, Third, they’re extending the conversation beyond the and focus of their strategy discussions to the requireusual suspects. As we discussed in the previous section, ments of the business. At Textron, a large U.S. conglomermore and more companies are seeking the input of outate, the duration of annual strategic reviews varies desiders on strategic issues. In addition, they are reaching pending on the value at stake within each business unit. further down in the organization. This approach is valuAnd regularly scheduled strategic dialogues throughout able training for young up-and-comers—and it can also the year concentrate on the issues with the greatest pogenerate fresh ideas. At L’Oréal, for example, there was tential impact across the enterprise. for many years a special place at headquarters called the confrontation room, where even junior managers from Tailored reviews are particularly useful for companies around the world were invited to discuss their strategies with business units in diverse industries, at different stagwith the executive committee. es of the business model life cycle, or of significantly different sizes. The approach enables top management to spend more time on the strategic issues that are most Changing the Rhythm likely to further or impair value creation. Few executives would disagree that talking about strategy more than once a year is valuable—or that high-growth Expanding Strategy Forums and troubled units merit deeper and more frequent straCompanies are also broadening the reach of their strattegic dialogue—yet, in many companies, that’s not what egy discussions and the number of venues in which the happens. discussions take place. Those who believe that strategy is the exclusive preserve of a corporate brain trust are inIn our study, however, we saw a clear trend at companies creasingly in the minority. that had recently reviewed their strategic-planning processes: an acceleration of the organization’s metabolism, Instead, the trend is toward broader organizational dewith more frequent discussions of strategy focused on bate on strategy—up to the point when decisions are nurturing strategists, pinpointing unexpected challenges, made and the focus shis to execution. The broader reach and working through critical strategic uncertainties. of the strategy forums and the multiplication of venues Some companies have established committees that deal help in three ways. with strategic issues throughout the year. In others, the executive committee itself holds regular strategy discusFirst, they bind strategic thinking more tightly to the acsions. Discussions are organized on a rolling agenda that tual work of the enterprise and the minds of employees, changes according to how critical the strategic issue is leading to stronger alignment with the chosen course of Stretching Oct 08.indd 18 T B C G 10/11/08 2:09:46 AM action. Second, they enhance the quality of the dialogue by creating more opportunities for mentoring, for tapping a broader experience base, and for accessing better and timelier market information. Aer all, no single individual has all the pieces needed to complete the strategic jigsaw puzzle. Third, by giving key people at all levels of the organization the chance to help shape strategy, these expanded discussions enhance loyalty amid the current war for talent. embraced by the business units. This risk can be mitigated by carefully maintaining a balance between staff and line workers to facilitate buy-in by the affected business units. Greenfield Incubators. Some companies create greenfield units to smooth the transition from opportunity assessment and business model design to actual implementation. When it appears The role of the that a new business model will be at variance and possibly competitive with the The executives with whom we spoke recenter becomes less company’s dominant model, the best ported that while the main vehicle for directive and more course is to insulate the effort from the strategic dialogue was still the traditional core business. Nespresso was born in this strategy-development process, they were facilitative. way. Once a small entrepreneurial project also chartering specific, purpose-built within Nestlé, it became a worldwide forums. These are of four common types. success—but only aer it was set up as an independent unit. High-Profile Strategy Committees. Typically staffed with a small group of top executives, including the chief strategy officer, these committees meet regularly (monthSimilarly, ING Direct, now a key contributor to ING’s ly, quarterly, or biannually) to explore a shortlist of key growth and profits, grew out of a team that was specially issues—generally topics, challenges, or opportunities that chartered to explore new territories. Of course, the finanare relevant across business units. Depending on the iscial risk of greenfield projects needs to be addressed. Adsue, the committee either resolves it directly or shapes ditionally, they require a different governance model, the critical questions and then delegates them to a spewith sponsors behaving more like a board of directors cial project team or business-level forum. Such strategy than a boss, and a different compensation model, with committees are particularly useful in multiunit compathe potential for team rewards proportionate to the value nies because they can cut through silos and address isthat the teams ultimately create. sues that might otherwise fall through the cracks. Business Unit Strategy Forums. Some organizations have one or more strategists at the business unit level who act as sounding boards, coaches, and facilitators of strategic dialogue. These strategists play an important role in the overall strategy-development process and also lead or support key ad hoc strategy forums for the business units. In particular, these forums bring energy and urgency to the discussion of strategy within each unit. Project Teams. Some issues are of such fundamental strategic importance that they need focused attention and careful monitoring by top management. In these circumstances, companies deploy specially chartered project teams. These internal groups come together for a specified period of time to address a specific strategic question. The primary benefit of project teams is their ability to focus deeply on an issue; their primary risk is that the resulting insights and conclusions will not be D Y S N S? Stretching Oct 08.indd 19 Exploring New Roles As the strategy development process shis toward more dialogue, the role of the corporate center—the executive leadership and the strategy department—will, in the process, inevitably evolve toward a more facilitative one. The objective will shi from providing answers to setting the broad agenda of critical strategic issues and managing a productive strategic dialogue about them. In this new environment, coaching and mentoring skills become centrally important—and so does the ability to orchestrate and make linkages among the organization’s disparate strategy-related activities. Companies that make this transition successfully find that the quality of strategic thinking across the organization is enhanced. Coaching can take a number of forms. It can start out simply as good training in classic analytical tools, strategic frameworks, creativity, and lateral thinking for all par 10/11/08 2:09:46 AM ticipants in the development process. But its essence is the rough-and-tumble of strategic dialogue—the challenge and defense of assertions through the posing of pointed questions. connections spells the difference between success and failure. Coaching is a collective obligation. Of course, the chief strategy officer and the strategy department have an important role, but no less important is the responsibility of senior management and the executive committee to ensure that all managers are “strategy enabled.” Top management should also share the responsibility for orchestration. When strategy processes are stretched—with new time frames, new forums, and new participants—the center’s ability to see the big picture and make critical y expanding the dialogue, changing the rhythm, expanding the venues, and developing new roles, companies are increasing the business relevance and thus the perceived value of the strategy development process. Enhanced engagement in both the development process and the strategy itself is the happy result—along with better-prepared strategists throughout the organization whose commitment will drive better performance. Stretching Oct 08.indd 20 B T B C G 10/11/08 2:09:46 AM Implementing Stretching A lthough few of the companies we studied were stretching aggressively on all three dimensions—time horizons, thinking, and engagement model—many have sought and reaped the benefits of critical shis in one or two. The drivers of the decision to stretch were varied, but management change oen played a role. And the degree of change also varied. All, however, realized that achieving the benefits of a stretched strategy process could demand a real cultural shi . People need to believe that there is real interest in knowing what they think before they’ll engage in a true dialogue. This takes clear and consistent communication. People need to be recognized and rewarded for making critical strategic contributions. This takes aligned incentives. And people need to be familiar with the classic tools of the strategy trade (such as business analogies and other common analytical and strategy frameworks) to be able to test, present, and support their strategic hypotheses. This takes training and mentoring. The companies we studied are investing in communication, incentives, and training to ensure that their organizations make the most of the new processes and the strategies that they produce. Communication The most effective kind of communication is two-way communication. Unless a message is acknowledged, there’s no way to know whether it has been understood, let alone internalized. Speeches, no matter how well delivered, can only play a part in rallying the organization around a strategy. People need to believe the speeches. A critical goal of communication should be to win over D Y S N S? Stretching Oct 08.indd 21 middle managers who, by redeploying the assets they control in support of the new processes and strategy, can play a central role in aligning the organization around a new strategic approach. There are many ways to communicate effectively, but in the companies we studied, we saw two main approaches, sometimes in combination. Signature Initiatives. At Textron, each business head must propose his or her 10 or so priority initiatives to drive growth and advantage. From this universe of projects, the CEO selects those that represent the most value to Textron as a whole. (Typically, the CEO selects 8 to 12.) These initiatives are broadly and clearly communicated and are at the core of the company’s agenda for the coming year. Cascading. In order to facilitate strategic communication, GlaxoSmithKline Biologicals uses a strategy map to illustrate the key strategic initiatives for a three-year period, the value levers that each one addresses, and the target (such as customers or processes) that each one is intended to affect. The company cascades this map down through the organization. Each department is required to develop its own version, highlighting those initiatives in which it will play a role—and what specifically it plans to do to ensure success. At other companies, each department refracts the strategy through its own lens by means of cascading memos. The process starts at the top with a strategy memo from the CEO to his or her direct reports, who then tailor and adapt the message to their specific areas of responsibility and communicate it to their direct reports, and so on throughout the organization. But regardless of what is 10/11/08 2:09:46 AM cascaded, the effect is the same. The process of thinking about the strategy and making it concretely relevant across the organization allows for the identification and resolution of disagreements and the enhancement of buy-in—particularly among middle managers whose support is essential to mobilizing the organization around new approaches and new strategies. integrated into the organization’s talent-management programs. Or it may be a series of workshops to facilitate experience sharing among executives and middle managers. Many companies have developed portfolios of strategic tools and templates that leverage the experience of the strategy department and senior executives and help managers learn on the spot. Incentives Incentives are another way to build commitment to the process and the strategy. Yet many companies fail to include the consideration of strategic factors in their incentive systems. Although these factors are soer and more subjective than financial metrics, they can and, in most cases, should be considered. Aer all, if compensation is based only on immediately measurable results, managers will work to achieve those results in any way they can— whether or not it’s consistent with the company’s strategy and whether or not it furthers the company’s long-term competitiveness. Instead, some companies are incorporating criteria linked to key strategy initiatives—and linked even to the strategy development process itself—into managers’ objectives. By doing so, they increase the time spent on strategy and, in many cases, improve the relationship between the business units and the corporate-strategy department, which comes to be recognized as a valuable partner in helping managers achieve their goals. This objective-setting process has a further benefit: it forces employees and their superiors to agree on the most important contributions that each employee can make to the company’s long-term competitiveness. C ommunication, incentives, and training are clearly important to stretching a company’s strategicdevelopment process. But employees gauge the importance of initiatives by the level of resources—financial and nonfinancial—dedicated to them. So walking the walk is essential to success. This means making time for strategy dialogue within the senior executive team, between the CEO and the board of directors, and between the corporate center and business units. It’s also critical to support the dialogue with investments in good data, which means that standing and chartered strategy-project teams need to be staffed with the best people and given the resources needed to achieve their objectives. Business managers are rarely promoted because of the quality of their strategic thinking; rather, they are promoted because of their ability to deliver results, manage teams, and win contracts. Yet as managers move up in the organization, strategy skills inevitably become more important. Including strategic objectives in the compensation system encourages the development of those skills over time. Training While many strategic skills are learned through mentorship and experience, there is also a role for more structured training. It may take the form of a formal course Stretching Oct 08.indd 22 T B C G 10/11/08 2:09:46 AM Epilogue S tretching is about pushing the boundaries of traditional strategy making. It is about increasing competitive advantage and the creativity of strategies. It empowers the organization to shape its destiny through shared strategic aspirations, to enhance preparedness and agility, and—by developing and engaging people—to foster affiliation and enthusiasm. So where should a company start stretching? Some companies have opted for a “light” approach, incorporating focused but critical changes into their traditional strategydevelopment processes. For example, they introduce a long-term perspective, turning their business reviews into strategic conversations, using lateral-thinking methods, or introducing issue-based strategic committees. Other companies have gone for a “heavyweight” approach, redesigning their process from the ground up and stretching on multiple dimensions simultaneously. D Y S N S? Stretching Oct 08.indd 23 And the stretching must not stop. Otherwise, what is today’s revolution will inevitably become tomorrow’s routine. And routine is the enemy of the kind of fresh perspectives from which strategic insight springs. Just as athletes cannot predict how a match or a race will turn out, companies in today’s markets cannot fully anticipate the outcome of the competitive battle. But those that are better trained to capture and shape the opportunities that come their way have a decisive advantage. Does your strategy need stretching? 10/11/08 2:09:46 AM The Boston Consulting Group (BCG) is a global management consulting firm and the world’s leading advisor on business strategy. We partner with clients in all sectors and regions to identify their highest-value opportunities, address their most critical challenges, and transform their businesses. Our customized approach combines deep insight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable competitive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with 66 offices in 38 countries. For more information, please visit www.bcg.com. For a complete list of BCG publications and information about how to obtain copies, please visit our Web site at www.bcg.com/publications. To receive future publications in electronic form about this topic or others, please visit our subscription Web site at www.bcg.com/subscribe. 10/08 Stretching Oct 08_Covs.indd ICVR 10/14/08 9:46:28 AM p g Does Your Strategy Need Stretching? R Does Your Strategy Need Stretching? 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