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Strategic management: the key to profitability in small companies
24
Long Range Planning, Vol. 26, No. 2, pp. 24 to 30, 1993 Printed in Great Britain
0
00246301/93 $6.00 + .OO 1993 Pergamon Press Ltd
Strategic Management: the Key to Profitability in Small Companies Philip
Waalewijn
and Peter Segaar
Strategic Management is often not made explicit within organizations. Although there are numerous strategy analysis techniques, real decisions are made without any consideration of the alternative models and formal processes. This report gives an assessment of the practice of Strategic Management in Dutch medium sized companies. The conclusions are drawn from extensive research via interviews, desk research and a large scale mailed questionnaire. They are conclusive and not very encouraging. The majority of medium-sized companies are still in the early phase of Strategic Management. They experience many obstacles to improving themselves. On the other hand the education system is not geared towards solving the problems of medium-sized companies. It places too much emphasis on the more advanced techniques applicable in the phase of Integrative Strategic Management.
Theoretical
Framework
Strategy is defined as an integrated set of actions geared towards the long term continuity and strength of any organization, both in absolute terms as well as relative to their competitors. Strategic Management is the coming together of planning, decisions, actions and strategic thinking. Strategic Planning is one of the key supports in building a strategy and in making it explicit. Strategic Planning is defined as the extrapolation of the goals of an organization, as a means through which these goals can be realized. Figure 1 does not show a direct relationship between Strategic Planning and the success of an organization. There are companies without an explicit strategy which are still very profitable. In addition a good strategy is not a prerequisite of success. The effectiveness of Strategic Planning on the other hand The research on which this article is based was conducted by the Dutch Society for Strategic Management. Dr Philip Waalewijn is Associate Professor of Marketing at Erasmus University, Rotterdam and Chairman of the Research and Development Committee of the Dutch Society for Strategic Management. Dr Peter Segaar is a Group Corporate Planner at Aegon N.V. insurance company and President of the Dutch Society for Strategic Management.
depends on the level of Strategic Management. In business practice Strategic Management is often not given much attention. Companies limit themselves to setting a budget for the next year. Those firms which practice Strategic Management take into account different trends and adopt a long term view. They systematically consider several possible directions in which their company could grow and prosper. There are various stages between those two extremes. Glueck, Kaufmann and Walleck (1982) have proposed a scheme to identify four phases in the evolution of Strategic Management (Figure 2). The first phase is based on lfinancial planning. The organization limits itself to setting budgets on which forecasts of costs and profits are based. These budgets highlight those activities which are more profitable. Sometimes these budgets set targets: they give responsibility to departments and people and they limit the expenditures for certain activities. This type of planning is internally orientated and is, regardless of its scope, considered very useful. The basis for the planning process are previous financial results and sometimes extrapolations of these results. They are rarely based on future activities and plans. A McKinsey study in 1978 showed that over 50 per cent of the researched companies used this type of planning. Some of them were highly successful. The question is still open whether or not these companies do ‘the right thing’. The ‘strategy’ is most often based on the views and perceptions of a few people at the top of the organization. They may possess the natural instinct and intuition for Strategic Management, but this approach assumes that the people at the top have good knowledge of products, markets, competitors, cost structures, etc. Many companies have grown too complex to make their strategic decisions in this way. For this reason some have developed a
Strategic
Management:
Strategic management
the Key to Profitability
Companies
25
Strategy
L
I
in Small
I
I
L
Strategic planning
Figure
1. The relationship
between
strategic
management,
strategy
and strategic
Effective strategic management
Financial planning
Phase I
Figure
2. The four phases of Strategic
Forecast based planning
Phase II
Environmental planning
Phase III
planning
Integrative strategic mangement
Phase IV
Planning
planning methodology which leads them to the next phase. In the second phase financial planning is supplemented with long term planning. Financial results are forecast for several years ahead. To arrive at this prognosis statistical techniques are used. Sometimes these techniques are highly sophisticated but in most cases only simple forms of extrapolation are employed. The relationships which are established based on previous developments are assumed to hold true for the years to come. A frequent criticism is that this system gives a false sense of security in that it supposes the future can be extrapolated from the past. Therefore it is essential to highlight the critical circumstances or activities which may influence the outcome of these budgeted results. The possible effects of these circumstances should be assessed. If awareness grows that this assessment gives greater reliability than extrapolation, strategic planning then emerges. The sensitivity analysis points to the strengths and weaknesses of the organization.
The information from these planning activities is usually translated into financial terms. This leads to activities in the areas of productivity improvement, and financial control. The capacity utilization, major objection to this type ofplanning is the lack of attention to the really strategically relevant topics. These tend to get lost in the ‘number crunching’. In the worst cases ‘paralysis by analysis’ can occur. Planning is adjusted only when budgets are not met. Evaluation of Strategic Planning in companies with experience of long term planning inevitably leads to the incorporation of external developments into their formal planning process. The company moves towards the third phase: environmental planning. Contrary to the earlier phases special attention is given to macro-economic, socio-demographic, and technological trends which influence the organization as well as the industry, and to the competitive forces in the marketplace. Market share becomes a dominant variable. In-depth studies of possible improvements in the company’s strategic position
26
Long
Range
Planning
Vol.
26
April
1993
become the first priority. Examples would include analysis of research activities, the price-quality relationship, or the incorporation of new production technologies. There are no standard solutions on how to include this into the strategy process. The ability to formulate alternative but comparable options becomes crucial. Nowadays the political arena has a greater impact. Larger companies are more dependent on governmental actions or politics in many of their activities. Examples arc large scale investments in infrastructure, environmental protection plans, and social security. Opportunities in public-private joint ventures arise, while subsidies in technology research are growing rapidly. To embrace all these factors leads towards the fourth phase : Integrative Strategic Management. This not only covers long term planning and environmental planning but also thinking and actions which lead to a sustainable competitive advantage. Specific questions and problems are addressed through scenario analysis. Strategic thinking is spread into all levels of the organization. At the top direction is given to the planning process, but ideas and suggestions are sought from everywhere. Coping with this broad form of participation in the planning process is the most difficult but also the most challenging aspect of integrative strategic management. Clearly this shows that strategic planning is not just a rational financial
Figure
activity. This brings a dilemma: if the figures show an unacceptable result and the company is unable to quantify the risk, it may be deemed to be too great. An entrepreneurial mode, with a culture ‘to create the future’ must be established. In this phase the strategically important questions are known to all relevant participants. The integration of the decision making process with Strategic Planning becomes essential. Strategy development becomes important. Keeping track of important issues is much more relevant than formal fixed planning schedules and their outcomes. Figure 3 gives an overview of the most important factors. A company’s strategic planning process can be assessed against the definitions above. Knowledge of a company’s position is very important for the internal discussion of strategic planning.
Research
Results
The research was based on a questionnaire mailed to medium-sized companies with a staff of more than 100 people. Two hundred completed questionnaires were returned. The questionnaire was used to assess which phase of strategic planning each company was in. The results are staggering. Over 80 per cent of the companies reported that no long(er) term plans are made. Most of them have a financial planning system based on budgets. In many com-
Factors
Financial Planning
Long Term Planning
Environmental Planning
integrative Strategic Management
Strategic Framework
budget
long term plan
environment
strategic issues
Strategic Thinking
business as usual
key factor unchanged
competition
integrated daily act.
Planning Process
top down
extrapopolation
interactive with planners
iterative several levels
Organization Structure
historical
planning in staff
market orientated
intergrated strategic framework
Control Process
budget reviews
‘gapanalysis’
market factors
strategic success factors
Reward System
no differentiation
subjective
management development
based on strategy
Leadership Style and Culture
make budget
keep it rolling
deal with issues
change the future
3. The phases of Strategic
Planning
Strategic
the Key to Profitability
Management:
in Small Companies
arc in phase four: integrative strategic management. Figure 4 shows the results of the classification.
panies this is a very simple budget and no activities are undertaken which could be called strategic planning. Several companies have budgets for different departments. Because the size of this group was much larger than anticipated the companies in phase one are divided into two parts. The first group (I-A) use only a simple budget system, the second group (I-B) a more elaborate budget system. Very few companies could be classified as being in phase two and three, long term planning and environmental planning. Eleven per cent of the companies
These results necessitate further analysis. It could be that the size of a company is a significant factor. But as Figure 5 shows size has no relationship with a company’s classification in one of the four phases of Strategic Planning. Also, the interesting question ‘does planning pay?’ is addressed. Figure 6 shows the relationship between
56
, Phase 1A Simple budget
Phase II Long term planning
Phase 1-B Elaborate budget
Phases of strategic
Figure 4. Classification
of companies
Phaw III Environmental planning
Phase IV Integrative rtrateglc management
planning
in phases of Strategic
Planning
Size (No. of employed)
Figure
Phase
loo-124
I-A
32%
I-B
30%
II + III
33%
56%
IV
33%
43%
N
125-199
>=200
49%
I
46%
I
I
5. Size of companies
in relation
to phase of Strategic
I
19%
113
24%
57
11%
9
24%
21
Planning
Profitability Phase I-A I-B
High
4
II + III IV
Figure
6. Strategic
Planning
Healthy
Marginal
65% 11%
9%
33% 57%
(ROI)
10% 22%
56%
19%
and profitability
Loss
32%
49%
5%
27
19%
5%
28
Long
Range
Planning
Vol.
26
April
the phases of Strategic Planning and profitability. Profitability was measured by average Return on Investment in the last 3 years relative to their industry average. Figure 6 also shows that at the time of the research (1987) many companies were only marginally profitable. Although ROI on average has improved considerably, great differences between companies do exist. A Chi-Square test shows that there is a statistical association between ROI and the Strategic Planning Phase (x2 5% = 3.325). Many other variables like growth, quality of personnel, market reputation, etc. were not explicitly taken into account. Via interviews, it is our impression that companies in the later stages of Strategic Planning have advantages in the form of a higher self-confidence at the management level, more effectiveness and efficiency in their activities and a higher involvement of all personnel. The experience of ‘creating the future’ by formal and informal activities in Integrative Strategic Management are self-fulfilling. The results of the study are surprising, especially if you take into account the turbulence of the environment. But the surprise is a negative one. Dutch businesses on average do not take into account external developments in an explicit way. Many companies have not developed techniques and instruments to cope with this turbulence in a systematic way. Therefore only a few companies can be classified in phase four: Integrative Strategic Management. This phase is deemed necessary to take into account many of the strategically important developments which are happening nowadays.
Causes of Poor Strategic
Planning
The above conclusions, that only few explicit planning activities are undertaken, were recognized by the interviewees themselves. Over two-thirds of the respondents admit that they experience problems with using Strategic Planning. Many of the problems stem from organizational issues. In many instances financial experts dominate the planning They consolidate the information and process. direct attention to financial problems in the medium term. But rigid financial planning only restricts creative thinking and precludes focusing on the really important strategic questions. Strategic Planning becomes merely a manoeuvre to make the financial figures acceptable for top management. Actions as a response to changing environmental market conditions and the emergence of new competitors or technologies are-due to the emphasis on financial figures-regarded as an afterthought instead of a primary issue. Sixty-seven per cent of the responding companies experience difficulties with the planning and control processes employed. This keeps them from attaining their objectives.
1993 Another barrier to effective Strategic Management is the style of leadership, or in a broader sense corporate culture. Management tends not to tolerate diversions from previous working methods. In discussions about plans it limits itself to minor details. Sixty-two per cent of the respondents recognize this barrier and complain about the company culture where anything out of the ordinary is not allowed. Half of the respondents agree that ‘free thinkers’ are not appreciated in either financial or non-financial disciplines. Realizing short term targets is regarded as much more important. These barriers are the ones mentioned most often. Other obstacles frequently cited are the organizational structure and the strategic framework. A third of the respondents feel that these are important. The organizational structure is not regarded as flexible and this makes it impossible to have a creative atmosphere or informal thinking on strategic issues. When referring to the strategic framework, interviewees complain about insufficent identification, formulation and detailed analysis. The goals of the firm cannot easily be put into a strategic perspective. Therefore major issues cannot be touched. Lastly, 23 per cent of the respondents think that their strategic thinking ability is below par. Management has divergent views on strategy and competitive moves are not followed up closely. These obstructions can be classified according to the four phases of Strategic Planning (Figure 7).
Learning
Strategic
Planning
Assessment of poor Strategic Planning practices in the Netherlands is not enough. Remedies to raise the level of strategic thinking and planning are necessary. One remedy is education. Many respondents have been exposed to education in the field of Strategic Planning. There is a positive relationship between exposure to education, mostly through formal training (courses and seminars), and the phases of Strategic Planning. This does not imply a causal relationship. It could well be that those exposed have a more positive attitude to education in this field. Figure 8 shows the correlation of training to strategic planning thinking. The respondents express a great need for education. This is especially true for senior management. Figure 9 gives a breakdown of the answers. A separate part of the research project was geared towards the supply side of management development possibilities. In total 284 training programmes, courses and seminars were analysed by content. Both shorter courses (less than 4 days) as well as
Strategic
Management:
the Key to Profitability
in Small
Companies
29
Phase of strategic planning Barriers
Figure
l
Planning
l
Leadership
l
Human
l
Organization
l
Strategic
framework
l
Strategic
thinking
7. Barriers
system style
resource
mgmt.
structure
to Strategic
Planning
Phase
Executive
I-A I-B II + III IV
Figure
8. Experience
MBA
Courses
Seminars
Conference
23% 40% 44% 47%
27% 38% 44% 38%
38% 46% 44% 52%
13% 19% 40% 41%
of training
in Strategic
Planning
Useful
Necessary Vice presidents 18%
Staff
17%
Middle
9. Need
integrated account.
for education
longer
programmes
were
17% 24%
59% 37% 45%
9%
in Strategic
9%
65%
10%
management
Head of departments
Figure
49%
31%
Presidents
Redundant
53% 52%
Planning taken
into
Both university programmes and those by institutions working for profit were researched. Incompany training and programmes developed by management consulting firms were also taken into account. This supply side of education is classified according to the types of barriers encountered earlier. Figure 10 shows the result of this crossing. The confrontation of supply and demand of education in Strategic Planning leads to the conclusion that education is not geared towards the needs
of companies. Most barriers are about planning, control and decision making processes. Companies in phase one in particular report this. Supply therefore has not adjusted to demand. In addition, topics such as style of leadership and corporate culture are not sufficiently covered in most courses. The supply side focuses more on topics relevant for companies in phase 4 of the evolution process. The number of specific training programmes targeted at phase 1 is very low. Figure 11 shows the ‘gap’ between supply and demand. The questionnaire shows that courses and training in the area of Strategic Planning and Executive MBA
30
Long
Range
Planning
Vol.
26
April
1993
Phase Barriers
I-A
. Planning
Figure
II + III
IV
system
l
Leadership
l
Human
l
Organization
l
Strategic
framework
l
Strategic
thinking
10. Number
I-B
style
resource
mgmt.
structure
of training
_
++++++++
++++++++
l”“““i”’
courses
for the different
types of barriers
in Strategic
Planning
Training
Companies __ _ __________ Phase IV 5% T-l
41%
Phase II + III
u 84%
Phase I
Figure
11. Classification
of companies
and education
programmes are deemed very useful. There is a preference for tailor-made programmes run incompany. This need is frequently not fulfilled.
Conclusions (1) From the last section we can conclude that there is a need for new initiatives for the upgrading of training and courses in the area of strategic management. This may improve the performance of Dutch companies. Strategic management is a useful tool. Companies would be justified in paying more attention to it and allocating resources for this purpose.
(4
The second conclusion from this study is that the most frequent barrier to effective strategic planning is the organizational structure of the firm. It is essential to find a solution to surmount this barrier.
by phase is addressed to the ques(3) The third conclusion tion: ‘does planning pay?’ The Chi-Square test shows that there is an association between the phase in strategic management and profitability. concerns the supply and (4) The fourth conclusion demand of education in strategic management. There are at least three initiatives that could be undertaken : To give more publicity strategic planning.
to the concepts
of
To modify the courses and training in the management given to area of strategic managers. The content should be more geared towards the needs of the companies. To employ people who can help managers develop the strategic planning process their company.
to in
Long Range Planning, Vol. 26, No. 2, pp. 24 to 30, 1993 Printed in Great Britain
0
00246301/93 $6.00 + .OO 1993 Pergamon Press Ltd
Strategic Management: the Key to Profitability in Small Companies Philip
Waalewijn
and Peter Segaar
Strategic Management is often not made explicit within organizations. Although there are numerous strategy analysis techniques, real decisions are made without any consideration of the alternative models and formal processes. This report gives an assessment of the practice of Strategic Management in Dutch medium sized companies. The conclusions are drawn from extensive research via interviews, desk research and a large scale mailed questionnaire. They are conclusive and not very encouraging. The majority of medium-sized companies are still in the early phase of Strategic Management. They experience many obstacles to improving themselves. On the other hand the education system is not geared towards solving the problems of medium-sized companies. It places too much emphasis on the more advanced techniques applicable in the phase of Integrative Strategic Management.
Theoretical
Framework
Strategy is defined as an integrated set of actions geared towards the long term continuity and strength of any organization, both in absolute terms as well as relative to their competitors. Strategic Management is the coming together of planning, decisions, actions and strategic thinking. Strategic Planning is one of the key supports in building a strategy and in making it explicit. Strategic Planning is defined as the extrapolation of the goals of an organization, as a means through which these goals can be realized. Figure 1 does not show a direct relationship between Strategic Planning and the success of an organization. There are companies without an explicit strategy which are still very profitable. In addition a good strategy is not a prerequisite of success. The effectiveness of Strategic Planning on the other hand The research on which this article is based was conducted by the Dutch Society for Strategic Management. Dr Philip Waalewijn is Associate Professor of Marketing at Erasmus University, Rotterdam and Chairman of the Research and Development Committee of the Dutch Society for Strategic Management. Dr Peter Segaar is a Group Corporate Planner at Aegon N.V. insurance company and President of the Dutch Society for Strategic Management.
depends on the level of Strategic Management. In business practice Strategic Management is often not given much attention. Companies limit themselves to setting a budget for the next year. Those firms which practice Strategic Management take into account different trends and adopt a long term view. They systematically consider several possible directions in which their company could grow and prosper. There are various stages between those two extremes. Glueck, Kaufmann and Walleck (1982) have proposed a scheme to identify four phases in the evolution of Strategic Management (Figure 2). The first phase is based on lfinancial planning. The organization limits itself to setting budgets on which forecasts of costs and profits are based. These budgets highlight those activities which are more profitable. Sometimes these budgets set targets: they give responsibility to departments and people and they limit the expenditures for certain activities. This type of planning is internally orientated and is, regardless of its scope, considered very useful. The basis for the planning process are previous financial results and sometimes extrapolations of these results. They are rarely based on future activities and plans. A McKinsey study in 1978 showed that over 50 per cent of the researched companies used this type of planning. Some of them were highly successful. The question is still open whether or not these companies do ‘the right thing’. The ‘strategy’ is most often based on the views and perceptions of a few people at the top of the organization. They may possess the natural instinct and intuition for Strategic Management, but this approach assumes that the people at the top have good knowledge of products, markets, competitors, cost structures, etc. Many companies have grown too complex to make their strategic decisions in this way. For this reason some have developed a
Strategic
Management:
Strategic management
the Key to Profitability
Companies
25
Strategy
L
I
in Small
I
I
L
Strategic planning
Figure
1. The relationship
between
strategic
management,
strategy
and strategic
Effective strategic management
Financial planning
Phase I
Figure
2. The four phases of Strategic
Forecast based planning
Phase II
Environmental planning
Phase III
planning
Integrative strategic mangement
Phase IV
Planning
planning methodology which leads them to the next phase. In the second phase financial planning is supplemented with long term planning. Financial results are forecast for several years ahead. To arrive at this prognosis statistical techniques are used. Sometimes these techniques are highly sophisticated but in most cases only simple forms of extrapolation are employed. The relationships which are established based on previous developments are assumed to hold true for the years to come. A frequent criticism is that this system gives a false sense of security in that it supposes the future can be extrapolated from the past. Therefore it is essential to highlight the critical circumstances or activities which may influence the outcome of these budgeted results. The possible effects of these circumstances should be assessed. If awareness grows that this assessment gives greater reliability than extrapolation, strategic planning then emerges. The sensitivity analysis points to the strengths and weaknesses of the organization.
The information from these planning activities is usually translated into financial terms. This leads to activities in the areas of productivity improvement, and financial control. The capacity utilization, major objection to this type ofplanning is the lack of attention to the really strategically relevant topics. These tend to get lost in the ‘number crunching’. In the worst cases ‘paralysis by analysis’ can occur. Planning is adjusted only when budgets are not met. Evaluation of Strategic Planning in companies with experience of long term planning inevitably leads to the incorporation of external developments into their formal planning process. The company moves towards the third phase: environmental planning. Contrary to the earlier phases special attention is given to macro-economic, socio-demographic, and technological trends which influence the organization as well as the industry, and to the competitive forces in the marketplace. Market share becomes a dominant variable. In-depth studies of possible improvements in the company’s strategic position
26
Long
Range
Planning
Vol.
26
April
1993
become the first priority. Examples would include analysis of research activities, the price-quality relationship, or the incorporation of new production technologies. There are no standard solutions on how to include this into the strategy process. The ability to formulate alternative but comparable options becomes crucial. Nowadays the political arena has a greater impact. Larger companies are more dependent on governmental actions or politics in many of their activities. Examples arc large scale investments in infrastructure, environmental protection plans, and social security. Opportunities in public-private joint ventures arise, while subsidies in technology research are growing rapidly. To embrace all these factors leads towards the fourth phase : Integrative Strategic Management. This not only covers long term planning and environmental planning but also thinking and actions which lead to a sustainable competitive advantage. Specific questions and problems are addressed through scenario analysis. Strategic thinking is spread into all levels of the organization. At the top direction is given to the planning process, but ideas and suggestions are sought from everywhere. Coping with this broad form of participation in the planning process is the most difficult but also the most challenging aspect of integrative strategic management. Clearly this shows that strategic planning is not just a rational financial
Figure
activity. This brings a dilemma: if the figures show an unacceptable result and the company is unable to quantify the risk, it may be deemed to be too great. An entrepreneurial mode, with a culture ‘to create the future’ must be established. In this phase the strategically important questions are known to all relevant participants. The integration of the decision making process with Strategic Planning becomes essential. Strategy development becomes important. Keeping track of important issues is much more relevant than formal fixed planning schedules and their outcomes. Figure 3 gives an overview of the most important factors. A company’s strategic planning process can be assessed against the definitions above. Knowledge of a company’s position is very important for the internal discussion of strategic planning.
Research
Results
The research was based on a questionnaire mailed to medium-sized companies with a staff of more than 100 people. Two hundred completed questionnaires were returned. The questionnaire was used to assess which phase of strategic planning each company was in. The results are staggering. Over 80 per cent of the companies reported that no long(er) term plans are made. Most of them have a financial planning system based on budgets. In many com-
Factors
Financial Planning
Long Term Planning
Environmental Planning
integrative Strategic Management
Strategic Framework
budget
long term plan
environment
strategic issues
Strategic Thinking
business as usual
key factor unchanged
competition
integrated daily act.
Planning Process
top down
extrapopolation
interactive with planners
iterative several levels
Organization Structure
historical
planning in staff
market orientated
intergrated strategic framework
Control Process
budget reviews
‘gapanalysis’
market factors
strategic success factors
Reward System
no differentiation
subjective
management development
based on strategy
Leadership Style and Culture
make budget
keep it rolling
deal with issues
change the future
3. The phases of Strategic
Planning
Strategic
the Key to Profitability
Management:
in Small Companies
arc in phase four: integrative strategic management. Figure 4 shows the results of the classification.
panies this is a very simple budget and no activities are undertaken which could be called strategic planning. Several companies have budgets for different departments. Because the size of this group was much larger than anticipated the companies in phase one are divided into two parts. The first group (I-A) use only a simple budget system, the second group (I-B) a more elaborate budget system. Very few companies could be classified as being in phase two and three, long term planning and environmental planning. Eleven per cent of the companies
These results necessitate further analysis. It could be that the size of a company is a significant factor. But as Figure 5 shows size has no relationship with a company’s classification in one of the four phases of Strategic Planning. Also, the interesting question ‘does planning pay?’ is addressed. Figure 6 shows the relationship between
56
, Phase 1A Simple budget
Phase II Long term planning
Phase 1-B Elaborate budget
Phases of strategic
Figure 4. Classification
of companies
Phaw III Environmental planning
Phase IV Integrative rtrateglc management
planning
in phases of Strategic
Planning
Size (No. of employed)
Figure
Phase
loo-124
I-A
32%
I-B
30%
II + III
33%
56%
IV
33%
43%
N
125-199
>=200
49%
I
46%
I
I
5. Size of companies
in relation
to phase of Strategic
I
19%
113
24%
57
11%
9
24%
21
Planning
Profitability Phase I-A I-B
High
4
II + III IV
Figure
6. Strategic
Planning
Healthy
Marginal
65% 11%
9%
33% 57%
(ROI)
10% 22%
56%
19%
and profitability
Loss
32%
49%
5%
27
19%
5%
28
Long
Range
Planning
Vol.
26
April
the phases of Strategic Planning and profitability. Profitability was measured by average Return on Investment in the last 3 years relative to their industry average. Figure 6 also shows that at the time of the research (1987) many companies were only marginally profitable. Although ROI on average has improved considerably, great differences between companies do exist. A Chi-Square test shows that there is a statistical association between ROI and the Strategic Planning Phase (x2 5% = 3.325). Many other variables like growth, quality of personnel, market reputation, etc. were not explicitly taken into account. Via interviews, it is our impression that companies in the later stages of Strategic Planning have advantages in the form of a higher self-confidence at the management level, more effectiveness and efficiency in their activities and a higher involvement of all personnel. The experience of ‘creating the future’ by formal and informal activities in Integrative Strategic Management are self-fulfilling. The results of the study are surprising, especially if you take into account the turbulence of the environment. But the surprise is a negative one. Dutch businesses on average do not take into account external developments in an explicit way. Many companies have not developed techniques and instruments to cope with this turbulence in a systematic way. Therefore only a few companies can be classified in phase four: Integrative Strategic Management. This phase is deemed necessary to take into account many of the strategically important developments which are happening nowadays.
Causes of Poor Strategic
Planning
The above conclusions, that only few explicit planning activities are undertaken, were recognized by the interviewees themselves. Over two-thirds of the respondents admit that they experience problems with using Strategic Planning. Many of the problems stem from organizational issues. In many instances financial experts dominate the planning They consolidate the information and process. direct attention to financial problems in the medium term. But rigid financial planning only restricts creative thinking and precludes focusing on the really important strategic questions. Strategic Planning becomes merely a manoeuvre to make the financial figures acceptable for top management. Actions as a response to changing environmental market conditions and the emergence of new competitors or technologies are-due to the emphasis on financial figures-regarded as an afterthought instead of a primary issue. Sixty-seven per cent of the responding companies experience difficulties with the planning and control processes employed. This keeps them from attaining their objectives.
1993 Another barrier to effective Strategic Management is the style of leadership, or in a broader sense corporate culture. Management tends not to tolerate diversions from previous working methods. In discussions about plans it limits itself to minor details. Sixty-two per cent of the respondents recognize this barrier and complain about the company culture where anything out of the ordinary is not allowed. Half of the respondents agree that ‘free thinkers’ are not appreciated in either financial or non-financial disciplines. Realizing short term targets is regarded as much more important. These barriers are the ones mentioned most often. Other obstacles frequently cited are the organizational structure and the strategic framework. A third of the respondents feel that these are important. The organizational structure is not regarded as flexible and this makes it impossible to have a creative atmosphere or informal thinking on strategic issues. When referring to the strategic framework, interviewees complain about insufficent identification, formulation and detailed analysis. The goals of the firm cannot easily be put into a strategic perspective. Therefore major issues cannot be touched. Lastly, 23 per cent of the respondents think that their strategic thinking ability is below par. Management has divergent views on strategy and competitive moves are not followed up closely. These obstructions can be classified according to the four phases of Strategic Planning (Figure 7).
Learning
Strategic
Planning
Assessment of poor Strategic Planning practices in the Netherlands is not enough. Remedies to raise the level of strategic thinking and planning are necessary. One remedy is education. Many respondents have been exposed to education in the field of Strategic Planning. There is a positive relationship between exposure to education, mostly through formal training (courses and seminars), and the phases of Strategic Planning. This does not imply a causal relationship. It could well be that those exposed have a more positive attitude to education in this field. Figure 8 shows the correlation of training to strategic planning thinking. The respondents express a great need for education. This is especially true for senior management. Figure 9 gives a breakdown of the answers. A separate part of the research project was geared towards the supply side of management development possibilities. In total 284 training programmes, courses and seminars were analysed by content. Both shorter courses (less than 4 days) as well as
Strategic
Management:
the Key to Profitability
in Small
Companies
29
Phase of strategic planning Barriers
Figure
l
Planning
l
Leadership
l
Human
l
Organization
l
Strategic
framework
l
Strategic
thinking
7. Barriers
system style
resource
mgmt.
structure
to Strategic
Planning
Phase
Executive
I-A I-B II + III IV
Figure
8. Experience
MBA
Courses
Seminars
Conference
23% 40% 44% 47%
27% 38% 44% 38%
38% 46% 44% 52%
13% 19% 40% 41%
of training
in Strategic
Planning
Useful
Necessary Vice presidents 18%
Staff
17%
Middle
9. Need
integrated account.
for education
longer
programmes
were
17% 24%
59% 37% 45%
9%
in Strategic
9%
65%
10%
management
Head of departments
Figure
49%
31%
Presidents
Redundant
53% 52%
Planning taken
into
Both university programmes and those by institutions working for profit were researched. Incompany training and programmes developed by management consulting firms were also taken into account. This supply side of education is classified according to the types of barriers encountered earlier. Figure 10 shows the result of this crossing. The confrontation of supply and demand of education in Strategic Planning leads to the conclusion that education is not geared towards the needs
of companies. Most barriers are about planning, control and decision making processes. Companies in phase one in particular report this. Supply therefore has not adjusted to demand. In addition, topics such as style of leadership and corporate culture are not sufficiently covered in most courses. The supply side focuses more on topics relevant for companies in phase 4 of the evolution process. The number of specific training programmes targeted at phase 1 is very low. Figure 11 shows the ‘gap’ between supply and demand. The questionnaire shows that courses and training in the area of Strategic Planning and Executive MBA
30
Long
Range
Planning
Vol.
26
April
1993
Phase Barriers
I-A
. Planning
Figure
II + III
IV
system
l
Leadership
l
Human
l
Organization
l
Strategic
framework
l
Strategic
thinking
10. Number
I-B
style
resource
mgmt.
structure
of training
_
++++++++
++++++++
l”“““i”’
courses
for the different
types of barriers
in Strategic
Planning
Training
Companies __ _ __________ Phase IV 5% T-l
41%
Phase II + III
u 84%
Phase I
Figure
11. Classification
of companies
and education
programmes are deemed very useful. There is a preference for tailor-made programmes run incompany. This need is frequently not fulfilled.
Conclusions (1) From the last section we can conclude that there is a need for new initiatives for the upgrading of training and courses in the area of strategic management. This may improve the performance of Dutch companies. Strategic management is a useful tool. Companies would be justified in paying more attention to it and allocating resources for this purpose.
(4
The second conclusion from this study is that the most frequent barrier to effective strategic planning is the organizational structure of the firm. It is essential to find a solution to surmount this barrier.
by phase is addressed to the ques(3) The third conclusion tion: ‘does planning pay?’ The Chi-Square test shows that there is an association between the phase in strategic management and profitability. concerns the supply and (4) The fourth conclusion demand of education in strategic management. There are at least three initiatives that could be undertaken : To give more publicity strategic planning.
to the concepts
of
To modify the courses and training in the management given to area of strategic managers. The content should be more geared towards the needs of the companies. To employ people who can help managers develop the strategic planning process their company.
to in