Business Strategy vs. Business Planning

Strategic Planning – A Critical Activity

It is conventional wisdom in business circles that Strategic Planning is a time-honored business exercise that is instrumental in developing and articulating a strategy, and translating the strategy into a series of initiatives and /activities such that every activity is motivated by some aspect of the strategy. The dogma of strategic planning is so deeply embedded that we rarely realize that Strategy and Planning are two fundamentally different activities with very different objectives.

Definitions: Strategy and Planning what they are and are not

Strategy formulation is a critical and fundamentally risky activity because it requires us to make bets on the future behavior of the market.  The best one can do is to make educated guesses based on incomplete information.  The fact is, uncertainty and risk are ever-present in the strategy formulation activity.  Planning, on the other hand, is characterized by a high degree of certainty and lots of information in order to express the details of the plan – information about demand, revenue, costs, available resources etc.

Planning should serve Strategy and not vice versa

A typical strategic planning effort begins with the articulation of some long-term objective such as Increasing increasing market share, increasing profitability, competing on the basis of product quality, variety, or low cost, etc. This is followed by a long laundry-list of initiatives and projects, compiled over several months, that support the strategic objectives. Finally, the process culminates with the development of financial metrics for the various initiatives, that will ultimately feed into the budget and budgeting process.

The process described above seems logical, legitimate and valid.  However, it masks an insidious problem.  The process of identifying projects and developing financial plans invariably focuses attention on cost and affordability.  Not surprisingly, this focus biases choices in favor of projects whose cost can be better ascertained and controlled.  This is a slippery slope because projects that support potentially valuable strategic initiatives may be jettisoned because of uncertainty in costs associated in implementing these projects.  Soon enough, the financial and business planning process begins to dominate and drive strategy – an outcome that could be disastrous for the business.

The insidiousness of the problem described above is due to our human tendency to mitigate, or worse, to shy away from, uncertainty.  We know that innovative strategies, products, and services have high potential payoffs but they are also, often, the riskiest bets.  Force fitting these into the conventional planning requirements usually results in the exclusion of these strategic options.  Even if innovative strategic options do end up being included in financial plans, the volatility and uncertainty of the estimates used in the plan are not well understood, and unrealistic expectations of success begin to take hold.  When the expected success does not materialize, there is widespread panic, layoffs and loss of morale in the organization.

The Remedy

A necessary and critical first step in preventing the conflation of business planning with strategy is understanding the fundamental differences in the two activities.  Strategy has a long-term perspective (multiple years), is driven by revenue considerations, is focused on customers, and has high degrees of uncertainty and risk because of incomplete information about demand, market size, customer behavior etc.  Business planning, however, has a short-term perspective (typically a quarterly focus), is driven by cost considerations, is focused on internal controllable resources, and by its nature, requires a high degree of certainty and low risk. Marrying these two distinct activities should be conducted with care and diligence.

Instead of lofty aspirational statements and abstract objectives, strategy articulations should be tangible and simple. Focus on identifying target market segments and strategies for winning/persuading customers in those market segments.

While the business and financial planning process is necessary to operationalize activities in pursuit of the strategy, the uncertainties inherent in the strategy should be explicitly recognized.  It should be understood that the financial plans are probabilistic in nature rather than deterministic.  Therefore, the planning process should employ tools such as simulations and/or model estimates using probability distributions.

Finally, the business logic and rationale behind the strategy should be well documented. If expected results do not materialize, they can be analyzed and understood in terms of the deficiencies or errors in the business logic. When the shortcomings of the business logic are rectified, the strategy can be appropriately revised.