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New Strategies Around Strategy

The financial crisis turned traditional budgeting and strategic planning on its head. Now companies allow for more flexibility in drafting their plans.

Along with the traditional annual budget, the five-year strategic plan is a staple of business, a rou­tine exercise with scant thought given its continu­ing utility. Most every company performs the ritual, consuming count­less hours of management time in the process, as if predicting the tortuous turns of markets, tech­nologies, political machi­nations and consumer preferences were a simple affair.

The financial crisis and subsequent recession turned these efforts on their head, rendering almost every five-year plan into worthless scraps of paper. Doubtless no strategic plan, other than those put forth by a few hedge fund prognostica­tors, allowed for such eco­nomic upheaval. “For most of us, the financial crisis and its aftermath was a truly dynamic event that we had not experienced in our lifetimes before,” explains Ken Esch, partner in PwC’s private company service practice.

“We’d never seen such change happen with such velocity, and we’d never realized just how connect­ed we were to the global economy,” he adds. “It tested our ability to plan for the future.”

Yet, as Steve Player, North America program director for the Beyond Budget­ing Roundtable, points out, despite the constant winds of change, all organizations still must develop and act upon a strategic plan. “You have to have some idea of where you’re going,” Player asserts. “You need to establish what markets you’re going to compete in, which products you will produce, which services you will provide, and then posit out your strategy for winning.”

Both planning experts agree that the key to plan­ning is keeping the plan flexible, nimbly adjust­ing it based on dynamic forecasts that suggest changes ahead, if not already afoot. As Player puts it, “You plan for what you think will happen, but then constantly subject the plan to scenario tests based on your changing assumptions.”

These assumptions might be the price of a bar­rel of oil, the risk of an extreme weather event, the impact of potential currency fluctuations or the shifting economic conditions in Italy. In each case, a contingency plan is developed and kept at hand—just in case. The organizations that best assess these possibilities and expeditiously address them arguably are in a better competitive posi­tion than their peers.

Not all companies are tak­ing such actions, however. “Businesses seem to be diverging on their ap­proach to planning,” Esch says. “One camp continues to be uncertain as to what they ought to do in light of all these events occurring around the globe, and how they will impact their companies. They seem to be afraid to make com­mitments and big bets.”

The other camp has accepted that these dynamic events and changing times are the new normal. “They’re constantly figuring out how they’re go­ing to operate in this new environment, placing bets on a different market or new product,” he adds. “Their planning is agile.”

As always, information is vital to the planning exercise. In many cases, such business intelligence is not hard to come by. “Companies that have been around for awhile already have a repository of historical data indicat­ing what happened to the business the last time the economic cycle shifted or some unforeseen event occurred,” Esch notes. “Perhaps one part of the business suffered, but another part performed even better. That tells you something about where to allocate resources.”

Like Player, Esch does not advocate gutting the strategic five-year plan. Rather, he agrees that companies must write these plans not in ink, but in pencil. Keep an eraser handy.

3 thoughts on “New Strategies Around Strategy

  1. Any strategy must be tested, and to do that you have to test the assumption against reality. Reality are actuals and to do this requires employing a reverse regression (modified) and maintain equilibrium with all “C’s”. Your plan must be within a perfect Nash Equilibrium to be correlated with reality –and “plans” are never in equilibrium. But, there is a way to do this and I can demonstrate it to you. A strategy is not a strategy unless it is in equilibrium both within and without.

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