DIRECTORS AS STRATEGISTS -- HOUSTON, WE HAVE A PROBLEM
By Deborah E. Wallace
It should come as no surprise that greater involvement in company strategy is currently the number one priority for directors. What may come as a surprise, though, is just how little time directors spend actually working on strategy. According to McKinsey’s 2008 Global Survey, Making the Board More Strategic (1), directors report that on average they spend only 24% of their meeting time discussing strategy. The numbers are even more troubling when we look at two specific elements of strategy work -- developing long-term-strategy and challenging existing strategy. Directors report that in each of these two crucial areas they spend only 13% of their time.
So why the disconnect between what boards overwhelmingly say is their top priority and what they say they actually spend their time doing? One explanation frequently offered by governance experts and by directors themselves is that directors are not adequately skilled in strategic thinking. This manifests in a variety of ways as boards execute their responsibilities. A lack of skill in strategic thinking is apparent when, for instance, directors sign off on a compartmentalized approach to strategy development and planning. The rationale supporting this approach in which each functional area creates its own strategic plan is that they are eventually “rolled up” to create a comprehensive company-wide plan.
The problem is that rolling up really means that all individual plans are organized in a document thereafter referred to as the company’s COMPREHENSIVE STRATEGIC PLAN. The problem with this is that the collective plan is neither comprehensive nor strategic. For the majority of plans that are developed this way, the impact and consequences of the interdependencies among the functional areas are rarely taken into account. The underlying assumption, seldom recognized or made explicit, is that each plan can stand on its own and still add maximum value to achieving the strategic intent of the company. This is rarely the case, and from a systems perspective, virtually impossible.
The absence of strategic thinking is also evident in a strategic planning process that is rigid and linear and in which time and budget targets do not take into account the inevitable need for mid-course corrections. While linear thinking and rigid constructs may play a useful role at certain points during the planning process, it is highly unlikely that they will lead to relevant and sustainable strategy.
Understanding the historical context of strategic planning provides some useful backdrop. Strategic planning originated in the military and was later borrowed by business primarily as a way of bringing structure and discipline to a complex environment But the command and control model that has been so effective in executing enemy attacks (at least in traditional warfare) proves to be not only ineffective but counter productive in a business environment characterized by instability and uncertainty. A recent McKinsey Quarterly article elaborates on the mismatch.
How do traditional models for developing corporate strategy hold up in the face of rapidly changing markets, conflicting information, and shifting business relationships? Often, not very well. Yet up to half of an executive's strategic decisions must be made under such conditions. A broader view of strategy can help executives cope with ambiguity and change. By matching corporate strategy to the level of uncertainty, understanding the sources of competitive advantage, and building on a series of large and small bets and strategic options, companies can tailor more effective strategies, with less risk of being locked into one position when conditions change.
SO WHAT’S A BOARD TO DO?
While the explanation that inadequate skill in strategic thinking among directors may account for the disconnect between what they say and what they do is not incorrect, it provides little guidance on how to improve a board’s collective strategic capacity. What is it that directors need to do in order to shift from compartmentalized thinking to more systemic thinking or to give up their command-and-control approach to strategic planning in favor of a more fluid one?
Here are some recommendations to consider.
DO WHATEVER IT TAKES TO UNDERSTAND THAT THE COMPANY IS A SYSTEM. A company is like any other system and it operates according to the most fundamental principle of systems dynamics. Change in one part of the system always results in change to another. That means that new manager in shipping will have somehow impact the manager of procurement.
RESIST THE TENDENCY TO VIEW THE BOARD AS A BODY DISCONNECTED FROM THE REST OF THE ORGANIZATION. It’s not and you’re not. Questioning some aspect of the strategy that no one else is willing to question (“Can Hal really handle all this?”) could avoid a crisis down the road.
RELY ON YOUR WELL-HONED INSTINCTS. Your instincts have served you very well in the past in assessing the strategy for your own business. Be as tough a critic as you would want someone to be for you.
USE SCENARIO PLANNING OFTEN. The process will lead you to be better prepared should you have to revise your strategy in the event of interruptions, flaws that become apparent during implementation or market forces that require you to position the company differently.
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