Tuesday, December 15, 2015

Why Strategic Planning is Not

Business school professors miss the Soviet Union. The nemesis of old used to provide us with a stream of wonderful examples that we could contrast to the market.

Take nails, for instance. Socialist economist Alec Nove wrote of this example: In an effort to increase the production of nails, the Soviet planning authorities created production incentives based on numbers of nails produced. In response, the Soviets enjoyed the following year a plentiful supply of many many very small nails. To correct the problem, the authorities cleverly switched to incentives based on weight, and the producers responded by manufacturing very large nails. The travesty was parodied in this cartoon from the satiric magazine Krokodil. Ah yes, better to use the market.

But the real lesson of the Soviet experiment has been lost on us, and the corporations of the world should take note: Planning doesn't work.

Corporations must and do plan, of course. Their leaders call these plans "strategic" to give them gravitas. But typically strategic plans are just budgets and goals. Budgets and goals are important, but they are not "strategy" if by strategy we mean the logic that drives action.

The problem is that we don't have all the information we need when we make the plan. If we did, we might be able to make planning strategic, and then leadership would just be planning + execution. But we live in a world of great uncertainty, and so stuff comes up that soon renders our plans obsolete. You do this enough times, and you laugh at planning approaches like the one pictured here.

The better option to "strategic planning," in my view, is strategic thinking

Let me illustrate. I recall during the late 1990s when Dan Warmenhoven, then the CEO of NetApp, challenged his leadership team to move the company beyond its customer base - which at the time was mostly high-tech companies needing NetApp file servers. Warmenhoven had a compelling logic - that information technology (IT) was spreading to all sectors of the world economy and NetApp needed to be selling into the IT buyers within large companies of all sectors.

Today we know that this vision would turn out to be spot on, but at the time the strategy was controversial. After all, the company was doing just fine selling into high-tech. But Warmenhoven changed the company's direction nonetheless, setting a brave course that was clear in its logic, even if it was debatable. There was no lengthy "plan" to do this. Warmenhoven established a way of thinking about the company's strategy, and they commenced action (tracked at weekly business updates). So commenced a process of learning and updating, giving shape and substance to Warmenhoven's initial strategic logic. Such is the power of strategic thinking.

The lesson: Plan if you must, but don't let the budget-and-goal cycle substitute for strategy. Help your people think strategically, so they share a common logic that guides their actions.

A great book on this idea is by Professor Richard Rumelt.