Harvard Business Review How to Write a Stragegy
"The shoe that fits one person pinches another; there is no recipe for living that suits all cases," observed Carl Jung in Modern Man in Search of a Soul. Jung wasn't thinking nearly strategic direction when he wrote that passage. But he could have been.
Managing a multibusiness organization ways managing the relationship betwixt executives in the primal office and those who run the business concern units or divisions. And strategy gurus notwithstanding, there is no one best manner to do that. Rather, the all-time mode e'er depends on the nature and needs of the businesses in a company's portfolio, on the styles of the people in the corporate role, on the company's strategy and goals.
At British Petroleum, headquarters is involved in all the of import strategy decisions; information technology leaves the operating decisions to segmentation managers. And BP flourishes. BTR wears a different shoe. At BTR, strategy problems are determined by managers in close touch with their markets. Top direction concentrates on the operating ratios and financial controls. BTR likewise thrives.
In a study of 16 large, diversified British companies, we identified three successful styles of managing strategy, which we call "strategic planning," "financial command," and "strategic control." (See the sidebar, "Strategy and Mode," for details of the study.) Each is characterized by a particular mode of organizing the relationships between headquarters and the business units. The underground to choosing among them is to find the manner that suits the circumstances best. Then keep a precipitous eye out for its inevitable drawbacks.
Bolder Strategies, Slower Decisions
In many companies headquarters is deeply involved in strategy. Unit managers formulate proposals, but headquarters reserves the right to have the last say. The rationale is simple. As ane senior manager commented to usa, "In that location are two or three decisions each decade that make or interruption a business. Exercise y'all really want to leave the business manager alone to make them?" BP, the BOC Group, Cadbury Schweppes, Lex Service Group, STC, and United Biscuits (UB) are amid the companies that do not.
One strength of this "strategic planning" style is that information technology builds checks and balances into the procedure of determining each business unit of measurement'southward strategy. Responsibilities typically overlap, so business organisation unit of measurement managers and corporate staffers are forced to communicate. This exchange of ideas stretches the thinking and improves strategy proposals past the exposure to a multifariousness of views. Unit managers likewise have a stiff incentive to produce proficient proposals. They volition be challenged by managers from headquarters. Although the corporate leaders will ultimately rely on their own judgment, unit managers know that their views volition be carefully examined.
A second strength of this way is that information technology encourages strategies that are well integrated across business units. The shut involvement of key managers, potent staff functions, and overlapping responsibilities make information technology possible for the units to coordinate their plans. Doing so is specially important when concern areas are linked through shared resource, for example, or common distribution networks. As Dominic Cadbury, master executive of Cadbury Schweppes, noted: "I'yard trying to ensure that we maximize our opportunities for synergy in our cadre businesses, confectionery and soft drinks. We must make sure nosotros are transferring skills and product knowledge and sharing assets." Or as Sir Kenneth Corfield, one-time chairman of STC, remarked: "In businesses like electronics, the divisions have to help each other. Ane may have to forgo things so another tin can get on ameliorate."
Perhaps the greatest strength of the strategic planning manner is that it fosters the cosmos of ambitious business strategies. Strategic planning companies are most effective in helping business organisation units strive to gain advantage over competitors. Once headquarters establishes the direction in which the business should be going, unit managers are free to develop bold plans to accomplish whatsoever goal has been set. "We would never have been able to pursue such an aggressive strategy if we were an independent company," 1 business unit managing director in a strategic planning company told u.s.. And that statement characterizes the thinking of many similarly situated unit managers.
Moreover, because the strategic objectives come from the meridian, the units can back up those objectives without peachy business organization for the short-term fiscal touch on of their actions. They are, in a sense, buffered from capital market pressures. Finally, at its all-time, the agreement between the corporate office and the business unit creates a shared purpose that helps motivate those who must carry out the plan.
Proof of these strengths is evident in the records of the strategic planning companies, which experience more than expansion of their existing businesses than the strategic control or financial control companies (see Exhibit I). They likewise make more investments with long paybacks. Every bit Sir Kenneth Corfield of STC commented, "Sometimes you demand to go along with a development for five to seven years before getting whatever business concern." As Sir Hector Laing, chairman of UB, explained: "In my feel, it takes about seven years to build a viable business in today'southward competitive surround."
Exhibit I Which management mode is best for growth? Notation: Percent change is boilerplate annual growth of fixed assets, 1981–1985. Growth through acquisition is net of divestments. Growth through existing businesses is total growth less acquisition growth. Sources: Datastream international Ltd., company records, and authors' estimates.
The strategic planning style is most effective, then, in organizations that are searching for a broad, integrated strategy for developing the business organization units, where the focus is on long-term competitive reward. BP, for example, has invested heavily in minerals, coal, nutrition, electronics, and a number of other areas that yield low firsthand returns. BOC has plowed resources into strengthening its worldwide position in gases. It has also directed large amounts of majuscule to its health-care and carbon-graphite electrode businesses. Cadbury's, Lex, STC, and UB have all made important investments in the United States. Each company believes that a U.Southward. presence is essential to the long-term strength of its core businesses, even though it knows that returns may be temporarily low or volatile.
In a given business, strategic planning companies are more likely to choose an ambitious, expansive pick than a cautious one. For example, STC, the Plessey Visitor, and General Electric Company (GEC) have all competed in manufacturing electronic components for defense force and telecommunications systems. But only STC (the strategic planning visitor) made the decision to compete in the international market by building businesses in Europe and the United states and moving into the production of integrated circuits. Plessey chose to specialize rather than aggrandize, while GEC essentially turned its back on the concern because the profit returns in the manufacture were cyclical and low overall.
Practiced as this management style may sound, even so, it is not without drawbacks. Primary among them are the motivation problems that oft plague line managers. Because so many people are involved in planning, with each trying to postage his or her own view on the consequence, the procedure can exist cumbersome, frustrating, and costly. Line managers may become demoralized when their strategy choices are rejected or changed. They may possess trivial ownership of the decisions being made about the business ostensibly in their accuse, and they may resent superiors for existence snobby. The annotate of a sectionalisation manager in one strategic planning visitor is typical: "In this arrangement, if you lot inquire the CEO for advice, y'all'll get instruction." In response, concern managers oft become protective of their decisions and endeavor to avert situations in which they have to defend their policies and methods.
The loss of autonomy at the business-unit level is particularly troublesome when the distance between headquarters and the market is swell. If central managers misunderstand the environment or lose touch with the business organization, bold investments can become risky ventures that impose harsh consequences on the company. Cadbury, Lex, and STC take all experienced setbacks in their expansion strategies, and each visitor saw its aggregate earnings refuse as a upshot. BP, BOC, and UB have suffered heavy losses from some of their unsuccessful ventures.
Diminished flexibility is another characteristic weakness of the strategic planning mode. The extensive conclusion-making process inhibits the visitor's ability to answer quickly to changing market place needs or environmental conditions. Concern units practise not easily jump into emerging markets or shut unprofitable operations.
Companies that utilize this style support losing strategies for too long. Headquarters tin be deadening to alter its mind considering it is invested in a item plan or doesn't fully understand the factors involved. Nosotros encountered businesses or divisions that accept performed poorly for five or even ten years and yet are still asking headquarters for one more chance to become the long-term strategy right. This problem is particularly acute in highly diversified corporations, because it's so hard to fully understand each business. For this reason, successful strategic planning companies tend to focus on a few core businesses, divesting those that don't fit into their principal areas.
Better Financials, Less Innovation
The "fiscal command" style is almost a reverse prototype of the strategic planning fashion (come across the sidebar, "The Styles Matrix"). Responsibility for strategy development rests squarely on the shoulders of business organization unit managers. Headquarters does not formally review strategic plans. Instead, information technology exerts influence through brusk-term budgetary control. The objective is to go the business units to put forward tough merely achievable profit targets that will provide both a loftier return on capital and year-to-yr growth.
The strategic planning, strategic control, and fiscal command styles form part of a continuum of ways headquarters tin can influence business units. The continuum has two dimensions: (1) planning influence, which expresses the caste to which strategy is centralized, and (2) command influence, which shows the importance companies attach to brusk-term financial targets.
Companies that fall in the bottom left-hand corner tin can be labeled property companies. In such organizations the center has footling influence over the subsidiaries. Our research establish that successful companies moved away from the property company style to ane of the 3 alternatives.
The top right-hand corner of the matrix is blank considering this style appears to be infeasible. Some companies in our research tried to combine a high caste of planning influence with tight short-term controls, but they accept moved away from it. Either business-unit managers became demotivated by a seemingly oppressive corporate centre or headquarters failed to maintain sufficient objectivity to keep the controls tight.
Strategic management styles
The greatest value of the financial control style is the motivation it gives managers to improve financial performance immediately. Targets are clear and unequivocal. Investment paybacks are brusk. Performance is monitored carefully. Variances against plan invoke penetrating questions from the tiptop and speedy action from the lesser. Companies set upwardly this way don't buffer managers from financial pressures. Rather, they impose a more enervating and penetrating discipline than the capital letter market place itself. All of this leads to strong profit performance, at least in the short term.
The results of our written report support this assertion. As Showroom II shows, the financial command companies—BTR, Ferranti, GEC, Hanson Trust, Tarmac—accept, on boilerplate, higher profitability ratios (render on sales, return on capital) than the other companies. They are also better at rationalizing poor performing businesses quickly and turning around new acquisitions.
Exhibit II Which style is well-nigh assisting? Note: Pct is average annual per centum, 1981–1985. Sources: Datastream International Ltd. and visitor records.
Other stiff points of the fiscal control style are less obvious. First, it has a manner of shaking managers loose from ineffective strategies. By setting demanding targets and strictly enforcing them, corporate direction constantly challenges plans that are producing poor results. Corporate doesn't go and then far equally to suggest alternatives, but it provides the impetus for business managers to intermission away from strategies that aren't working.
2d, the financial control mode is proficient for developing executives. Assigning profit responsibility to the lowest possible level gives potential high fliers general management experience early in their careers. Those who succeed have years of experience and results to call on past the fourth dimension they reach the top. Those less suited to full general management tasks are identified early and weeded out earlier they practice damage to the company.
Survivors in the financial control organisation know they accept been tested confronting the toughest benchmarks of performance. This knowledge gives them a not bad sense of achievement and self-confidence to push button their businesses forward as they see fit. This "winner's psychology" creates decisive, ambitious leadership. As Graeme Odgers, former group managing manager at Tarmac, commented, "Pure logic would argue that managers will set a low budget, to make life easy. But if they exercise, we make them feel that they've permit the team down, that they're not ambitious enough to be function of the grouping. For the most role, our trouble lies in the other management. The managers have and so much faith in themselves that they think they tin can practice annihilation."
This winner's psychology improves the quality of the dialogue between headquarters and the business full general managers. Business organization managers with a track tape of delivering will fence their views more forcefully and with less business well-nigh pleasing the dominate. They empathise that their progress in the company depends on the results they achieve, not on their eloquence in meetings. "Information technology'southward their business concern, their upkeep—and their heads that are on the cake," explained one director.
1 final strength of the financial control style is its effectiveness with highly diversified portfolios. Corporate executives need non accept an intimate knowledge of each unit's competitors and marketplace. Because the business units develop their ain strategies, headquarters can manage through the relevant ratios by comparing performance among different businesses. "Nosotros peer at the businesses through the numbers," explained a director at GEC.
1 shortcoming of this system is its bias against strategies and investments with long lead times and paybacks. At a minimum, this makes financial control companies vulnerable to aggressive, committed competitors that can tolerate a long-term view. In essence, that's what happened to BTR, which gave up a stiff position in the belting business organisation considering it was reluctant to invest aggressively in new technology. Rather than follow the trend to plastic belting (which captured more than 50% of the market), BTR chose to develop a niche position in steel cord belting and thus forfeited its market share to competitors.
Similarly, Hanson Trust passed up a proposal from one concern unit of measurement to produce a promising generation of new products because corporate decision makers found the vii-to eight-twelvemonth payback too difficult to deal with. (Indeed, they sold the business organization presently thereafter.) Pushed to extremes, therefore, the financial control style tin can lead to milking businesses for purely brusque-term gains and to excessive take a chance aversion that prevents healthy business development. When we asked managers from Hanson and BTR how they answer to Japanese competitors, they replied virtually in unison, "They are good competitors to avert."
The failure to back ambitious strategies ways that growth in financial control companies comes more than from conquering than from internal evolution (see Showroom I). Despite the highly successful record of companies like Hanson and BTR, there are limits to how far acquisition-based growth tin can be taken. Given Hanson'due south current size, for instance, few potential targets would make much impact on the company's overall fiscal performance.
Another drawback to this system is the difficulty decentralized strategy has in exploiting potential synergies between business units. In theory, of course, this problem tin can be solved by redefining the business organization units so that two linked businesses are viewed as one. But in fact, information technology'southward much more mutual for financial control companies to tear businesses apart in the quest to weed out depression-turn a profit activities. Moreover, few units in fiscal control companies try to build coordinated global positions. More than often, they focus on segments or niches and avoid integrated strategies across a wide business area.
Finally, rigorous control systems limit the flexibility of fiscal control organizations. Blind adherence to concluding year's budget targets can foreclose adaptive strategies and advantageous moves. Particularly in businesses where circumstances change speedily, controls tin can go a straitjacket, and opportunities tin can be missed.
More Residual, Less Clarity
Companies that follow a "strategic control" style aim to capture the advantages of the other ii while fugitive their weaknesses. In do, however, the tensions involved in balancing command and decentralization make this fashion of management the hardest to execute considering it creates ambiguity.
At best, a strategic control system accommodates both the need to build a business and the need to maximize financial operation. Responsibility for strategy rests with the business and segmentation managers. Simply strategies must be canonical by headquarters. For this purpose, there is an elaborate planning process. Corporate executives use the planning reviews to examination logic, to pinpoint weak arguments, and to encourage businesses to raise the quality of their strategic thinking. They also approximate whether or non the advisable residue is being struck betwixt investing to build a business and pushing for curt-term financial performance, ofttimes with the use of portfolio planning systems.
Financial targets are set in a split budgeting process. The strategic programme and the budget sometimes pull in opposite directions, and one or the other may have to give. One manager commented, "Information technology'due south normal for risky investments to driblet out of the program as information technology gets turned into the budget." It is this tension between the plan and the budget that helps to maintain a balance between new development ideas and cash generation.
Once headquarters has approved a program and a upkeep, information technology attempts to monitor businesses confronting strategic milestones, such as market share, as well as budgeted performance. The tension between strategic milestones and financial ratios, along with that between the planning and budgeting systems, creates uncertainty and ambiguity. Every business organisation in the portfolio wants to exist viewed as a growth prospect. Nevertheless some must exist cash cows. As a result, objectives can become confused and the planning process can exist a political platform.
The performance of the strategic control companies nosotros studied—Courtaulds, Imperial Chemic Industries (ICI), Imperial Group, Plessey, Vickers—shows the results of this counterbalanced arroyo. As Exhibits I and Three display, these companies had, in general, less internal growth than strategic planning companies, just they achieved substantial improvement in their profitability ratios. Long-term evolution is traded for short-term fiscal gains.
Exhibit III Which style has the about improved profits? Note: Percentage is average pct change in ratio, 1981–1985. Sources: Datastream International Ltd. and company records.
Some business units do, of course, pursue long-term strategies aimed at building major positions. The pharmaceutical division of ICI and the international paints division of Courtaulds made systematic, long-term investments and are amid the greatest success stories in British industry. For the almost office, however, the strategic control companies are focused on cleaning up the portfolio. Large investments and acquisitions, so important to the business-building strategies of strategic planning companies, are rare, ICI'southward recent acquisition of Stauffer being an exception. These companies take investigated many acquisitions, but few have come to fruition.
Farther, although headquarters cares near financial results, information technology is less ruthless than with financial control in driving to raise performance. Equally with strategic planning companies, "strategic" arguments (or excuses) have allowed less profitable businesses to operate at unsatisfactory levels of return for too long. For case, Imperial Grouping took more than five years to bite the bullet and dispose of the Howard Johnson chain, which severely depressed corporate earnings during the early 1980s.
Ane of the benefits of the style is that business organisation unit managers are motivated past the freedom and responsibility they are given. The chairman of a Vickers partition explained: "Giving freedom like this is a bit nerve-racking at times considering you feel you're not in control. Only if you always ask questions and monitor things at the eye, the unit of measurement managers act as though they're not really responsible for the decisions. If something goes wrong it'due south equally much your fault equally theirs."
Another advantage of the style is that information technology can cope with diversity. Considering headquarters decentralizes strategy and tailors the controls to the needs of the business, it can manage a broad range of businesses in different circumstances. Only doing so is not like shooting fish in a barrel. And managed badly, diversity can pb to superficial planning. I manager echoed many others when he complained that in his company in that location are "a whole series of rakings-over at different levels—all of them likewise shallow." In these circumstances managers lower downwards are likely to lose the benefits of freedom and responsibleness and go demotivated.
The main disadvantage of the style is that the strategic and financial objectives, the long-and short-term goals, brand accountability less articulate-cutting and create ambivalence. Business unit managers can be uncertain whether they should be putting frontward aggressive growth plans or tight performance plans. They can be too cautious nigh high-growth businesses and also soft on mature lines.
This ambiguity is compounded by the difficulty of establishing strategic goals. If strategic goals are not hands measured, excuses for poor performance can't be tested and managers go confused about how they will be evaluated. The just real measures of functioning then go fiscal. At its worst, the style becomes an ineffective form of financial control in which time is spent on planning without any tangible benefits and in which achieving planned objectives takes second identify to impressing the boss.
The Correct Fit
As we've seen, there are at to the lowest degree three means to dissever responsibility between corporate executives and business organisation unit managers. We believe these unlike styles exist considering of certain tensions implicit in the role of corporate management. Virtually all executives want strong leadership from the center, coordinated strategies that build in a variety of viewpoints, careful analysis of decisions, long-term thinking, and flexibility. Only they also want autonomy for unit managers, clear accountability, the freedom to reply entrepreneurially to opportunities, superior short-term results, and tight controls.
The two sets of wishes are contradictory. Central leadership, if it has whatever teeth, inhibits business autonomy. Coordinated strategies detract from personal accountability. Thorough reviews preclude quick entrepreneurial responses. Long-term plans compromise curt-term performance. Flexibility is at odds with precise adherence to planned objectives.
Successful corporations make trade-offs betwixt these choices and draw on the combination that best fits the businesses in their portfolios. Is it worth sacrificing tight control and individual responsibility to build upwardly core businesses? Do the benefits of articulate goals and devolved responsibility outweigh the dangers of risk disfavor and short-term thinking? Can managers cope with the ambivalence needed to attain a balanced approach across a various portfolio? The answers depend on the very things top management knows best—the characteristics of its businesses and the people who make them piece of work.
A version of this article appeared in the Nov 1987 issue of Harvard Business Review.
Source: https://hbr.org/1987/11/many-best-ways-to-make-strategy
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