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Strategic planning for the board
93
Long Range Planning, Vol. 74, No. 2, pp. 91 to 100, 1991 Printed in Great Britain
Strategic
002+-6301/91 s3.00 + .oo Pergamon Press plc
Planning for the Board
Adrian Davies
Although observers increasing the need importance. Directors
the planning operation is regarded by some as unrealistic in conditions of rapid change and competition, the discipline of strategic thinking and for strategic leadership continue to be of vital The author examines the purpose of the Board of and its role in the management of strategy.
the present century, followed by that of the U.S.A. in the second half of the 1900s reflects the poor relative performance of U.K. and U.S. businesses and of their Boards. It is significant that the search for excellence and for competitive advantage which has dominated recent thinking on corporate governance does not feature the Board even as a minor player.
(1) Strategy ‘Strategic Planning work and missions, key goals
and the Board
Planning’ is defined by the Strategic . Society as follows: ‘The organizational process through which purpose, vision, objectives, strategy, major policies and are developed in a systematic way’.
The Board oversees all organizational processes -\\-hy is strategic planning of particular relevance to its work? To understand this we have to examine the purpose of the Board of Directors. Prrryose In the words of Geoffrey Mills, ‘the Board is appointed to control the company, which means to direct and manage the management who in turn control the sum of its business operations. Its prime responsibilities are therefore:
(4
to evaluate, define and when necessary redefine, the businesses in which the company will operate, the resources which will be allocated to each, and the timing and rates of return which are required from each;
(b) to
select, monitor and hold responsible the managers to whom the daily control of these operations is entrusted, particularly, but not exclusively, the Chief Executive’.’
In his penetrating analysis of the causes of corporate decline, Stuart Slatter is critical of many company Boards: ‘an ineffective Board of directors means that planning, resource allocation and control decisions -key decisions affecting the “guts” of the business -are poorly made’.j
(2) The Strategic
If the Board has this strategic responsibility, what has been its performance in recent times? Peter Drucker is scathing: ‘The decline of the board is an universal phenomenon of this century’.” The decline of U.K. relative Gross Domestic Product through consultant
Task
The strategic task of the Board has been defined Bernard Taylor” as:
(4
Perforrnance
Adrian Davies is an independent
In the U.K. Boards tend to have a preponderance of executive directors, unlike the U.S.A. where the average Board has two-thirds non-executive directors. Significantly Pfeffer‘s: survey of U.S. corporations found that, the greater the proportion of outside directors on a Board, the better the relative financial performance within the relevant industry. Norburn’s’ survey of U.K. executive directors found that they tended to focus on short term results and had limited experience outside their present company and were likel>- to have a narrow functional training, usually in accounting or technical expertise. This made them ill-equipped for the function of strategy or even to evaluate it.
by
to improve the performance of the business for the benefit of the shareholders, the managers, the employees and other stakeholders (suppliers, customers, local community, etc.) ;
(b) to
provide a philosophy and a set of principles which will guide the actions of the people involved in the enterprise;
Cc)to
set the strategy
and direction
of the business
Strategic -usually for gro\v-th in producrs divestments and acquisitions;
(4
and markets,
to monitor and control the company> operations not just in the form of immediate financial results, but also in building for the future through improved productivity, quality, customer service, new products, the recruitment and training of staff,
(e) to
provide a set of policies which can be presented publicly in discussions with governments and other external bodies.
To carry out this task the Board needs to define the mission of the company (‘what businesses are we in?‘), establish long term objectives towards which the company should work, develop broad strategies to achieve the objectives over time and define ‘milestones’ to be reached in turn along the way to the objectives. The Board will also need to establish principles and policies which will create a culture xvhich will be recognized both inside and oucside the company and which Lvill provide consistency and quality in a way which will be valued by stakeholders and provide a ‘glue’ to hold operations together under pressure. ,\lisrion To establish a sustainable mission it is necessary to assess carefully the present and likely future operating environment of the company, differentiating between factors which are or are not relevant. Such an environment will include political, economic, societal, demographic, industry, technology, competition, market, supplier and local factors, and will require considerable work to build up and to adapt to the company’s needs. Government information, commercial databases, industry sources and data research will need to be supplemented by targeted research into areas where insight is crucial for success e.g. distrib u t’ion. This assessment will need to be supplemented by detailed competitive appraisal to assess internal and competitor strengths and weaknesses. From this picture a number of options will emerge for businesses in which the company might engage successfully. These will need to be evaluated rigorously and the risks and potential rewards carefully weighed. From this evaluation will emerge what Drucker names ‘the idea of the business’, which may well differ from the present business of the company, but will be more defensible and more profitable over time if the analysis has been thorough and unblinkered. The choice of businesses in which to engage is a crucial part of the Board’s role. This cannot be delegated and the choice. once made, will need to be subject to regular reassessment. It has become common practice to prepare and issue a ‘mission statement’ which defines the main areas in which a company operates and the philosophy underlining its activities. Such a statement can only realistically be prepared and issued with the involvement and
Planning
for the Board
93
approval of the Board and lvill need to evolve as change opens new opportunities and forecloses on older ones.
The long-term objectives of the company may be included in the mission statement but \vill require in their own right. These careful preparation objectives need to be as robust as possible since all shorter term results should be evaluated in terms of progress towards the long-term objectives. Like a ship buffeted by storms and subject to tides and currents, the company needs a constant destination in order to maintain morale and measure progress. Long-term objectives need to be ambitious not only to stimulate employees to set themselves and achieve higher targets, but also in order to match the aggression of current and potential competitors. It is now recognized that many companies need to target world markets in order to match their competitors either in major or even in niche market areas, particularly as fe\v national markets can now effectively be protected. Michael Porter’ has recently studied the pattern of national competitiveness in world trade and has found that too few British companies are positioned to compete on a world scale. Many still do not see the world as their market and are thus at risk to competitors w-ho pursue world scale strategies e.g. RoLvntrce’s takeover by Nestl6. Bvoad Strategies Strategies are the means of achieving both shorter term goals and long-term objectives. Strategies require people to do specific things e.g. open new factories, and are supported in the short-term by tactical action e.g. obtaining planning permission for a factory. Much of the action needed to deliver strategies has to be carried out by people who are not on the Board and those people \\-ork more effectively if the)- have been involved in the selection of the strategy they have to help deliver and have evaluated the alternatives. For [his reason Boards are usually involved in developing only broad strategies to achieve their companr_‘s objectives, and in ensuring that those strategies are underpinned by detailed strategies and tactics capable of achieving delivery. rather than detailing the full pattern of strategies themselves. Concentration on developing broad strategies also allows for flexibility to change the details and timing of specific strategies to meet unforeseen changes in operating conditions. This accommodates what Henry Minzburg calls ‘emergent strategies’, ones Lvhich are implicit in the broad strategies and are in tune Lvith the changed circumstances facing the company. Like the ship we spoke of earlier, it is nor helpful to lay down instructions to crolvd on all canvas if the wind drops. The sailors kno\v their objective and need to be given Lvide initiative on ho\v to get there.
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Long Range
Planning
Vol. 34
April
If the Board is to determine long-term objectives and only the broad strategies for achieving them, it is obviously critical to be able to monitor progress and to intervene in a timely fashion ifnecessary. The means of doing this is to negotiate ‘milestones’ for major strategies and projects, which enable progress to be demonstrated convincingly. Milestones can be timed to coincide with Board strategy reviews so that individual milestones can be seen in a wider context.
One of the key.. roles of the Board is to provide ‘leadership’. This is creating a common sense of purpose and a clear vision of what the company wishes to become. Through its policies and actions the Board shapes the style and standards of behaviour shared by all employees. This culture makes a company acceptable to its customers, suppliers and other outside stakeholders and makes it attractive to work forWhile culture involves ‘soft’ concepts like morality and respect for individuals, it should also encourage ‘harder’ values, such as striving for targets, controlled competitiveness, high rewards for success and sanctions for failure. It is important that a company’s culture is well disseminated and clearly understood.
(3) The Strategic
Process
How does a Board organize itself to carry out its strategic task and ensure effective implementation? This can only be achieved if the Board directs the process of strategic planning and involves itself in that process at certain key stages. Planning is too important to be left to corporate planners; the Board should drive the process and the planners should act in support of the Board and of the line managers whose task it is to plan and grow their individual businesses. The main stages of the Board’s involvement annual strategic planning process are:
(a) setting
(4
in the
the scene
launching
the planning
cycle
Cc)gap analysis (4 approving plans (4 strategic control (a) Settirl,f rhe Scerle The Board’s involvement in ‘setting the scene’ for the annual planning cycle is of fundamental importance. The quality of the analysis and guidance given in this part of the process will condition the tone of the whole strategic plan. If the Board’s guidelines are rigorous and realistic, the response should echo those qualities. To achieve such an input into the process requires careful work by the Board, often at special meetings axva); from the pressures of routine.
1991 It is becoming increasingly the practice for such ‘away days’ or ‘lost weekends’ to be facilitated by a respected academic or a trusted consultant. This arrangement ensures that there is an objective framework to the meeting and leaves the Chairman free to participate without losing his ability to steer the meeting down channels vvhich he believes to be relevant. The objectivity of such a meeting is found to bring out stronger contributions from nonexecutive directors who have in any case been chosen because of their wider experience of business. Out of this meeting there needs to emerge a consensus about the company’s strategic direction. Is its portfolio of businesses still valid? Should any be divested or are new acquisitions needed? Are the present strategies able to achieve the company objectives and shorter term goals? Are the present policies valid or should they be changed? Is the company’s competitive position secure or does new competitive advantage have to be won? From this consensus guidelines for the planning cycle can be drawn up. These will show where the company stands in relation to its objectives and to its environment. They will identify the issues facing the company and which the strategic plan will need to address, e.g. quality, weaknesses in Product A, a loss of competitive advantage in Market X, etc. (b) Lamching the Plannirzg Cycle It is important that the annual planning cycle is launched formally by the Board. This act gives the cycle the weight which it needs when the work of planning conflicts with day to day operations. Planning is few people’s favourite sport and Board authority ensures that it is not unnecessarily neglected or delayed and that planning instructions and guidelines are strictly followed. Plans will typically be called for over a period of 3 to 5 years; for young dynamic companies projections beyond 3 years may well have little meaning. (c) Guy Andysir When each of the strategic business units (SBUs) which is required to submit a strategic plan has done so, the various plans will be analysed carefully and the required framework of figures (sales, costs, margins, pretax profits, proposed capital investment, head count and cashflow) will be consolidated. This will produce a result which is certain to differ from the figures derived from the guidelines developed by the Board at the start of the cycle. The differences in each of the parameters mentioned above will need to be subjected to ‘gap analysis’. This process examines ho\v the shortfall of, for instance, pretax profit ma)- be made good. The implications of increasing sales, widening margins, explored and a cutting costs, etc. are carefully are finally distilled. These number of options options may include alliances, joint ventures, acquisitions or major new initiatives which will need
Strategic Board approval in any case. It is usually helpful to involve the Board in the final stages of this process since trade offs are certain to be needed to move the ‘bottom up’ plans of the SBUs nearer to the framework set by the Board, quite apart from any major new initiatives. This will require careful negotiation and may involve changes lvhich may delay certain strategies e.g. putting back investment. if cashflow forecasts cannot meet the Board’s framework. Board involvement in the culmination of this process strengthens Directors’ understanding of the dynamics of their business, which is easily weakened as a business grows and operations are decentralized, and gives authority to the changes to their plans which are required of the SBUs. (d) Approving Plans Once plans are stabilized they should be approved by the Board. Subsidiary plans should be approved by their own Boards and passed through for approval by the Group Board. Plans are contractual in nature since they involve the allocation of resources in exchange for the promise of specific profits and cashflow. Greater respect needs to be given to the contractual nature of plans-if they are made in order to be neglected they are an expensive waste of time. Nor should budgets be allowed to differ from the first year of the strategic plan from which they are derived without reason and reconciliation. The practice of preparing budgets in isolation from plans is still prevalent in too many British companies and should be firmly resisted by Boards. There is a growing unease about treating plans as ‘set in concrete’. In times of rapid change the assumptions on which plans are built may become invalid, new threats and opportunities may emerge and need response. If the planning process has been thorough the chances of surprise will be less, and contingency plans should have been prepared for the more probable eventualities. Reality must always take precedence over plans but the planning process helps determine the likely shape and implications of reality. (e) Strategic Control ‘Strategic Control’ is defined by the Strategic Planning Society as ‘the organizational process which assesses and measures progress along strategic paths. It will rely heavily on monitoring milestones and achievement of key goals and tasks’. The style and degree of control exercised will depend on the type of company involved. Michael Goold and Andrew Campbell* of the Ashridge Strategic Management centre have identified three ‘parenting’ styles in common use: (e.1) ‘Strategic Planning’ style. This style has the closest involvement of the Board in the strategy of subsidiaries. It is the style typical of businesses with
Planning
for the Board
97
one or few SBUs and it is driven by the strategic wish of the centre and seeks to develop synergy between its businesses. This is often the style of the strong central leader and it has the danger of taking responsibility away from SBUs and thus of tolerating inadequate performance. This is the style of companies such as BOC, Cadbury Schweppes, Lex, STC, BP, and United Biscuits. (e.2) ‘Strategic Controlling sryle. This style is typical of very large and more diverse companies. The planning initiative is expected from the subsidiaries and plans are carefully revie\ved by the centre. This style depends heavily on the perceptiveness and persistence of the centre, which has to retain enough contact with and understanding of the different businesses to add value to the process. Typical ‘strategic controllers’ include Courtaulds, Vickers and ICI. Two such companies, Imperial Group and Plessey have been taken over since Goold and Campbell did their research.
(e.3) ‘Firznrzcial Corltrollirlg’ style. This style repudiates the central review of strategy, leaving the practice of strategic planning to its subsidiaries. Control is exercised by a limited number of key ratios and by tight cash limits. This style suits very large groups (BTR has over 300 SBUs) and no attempt is made to seek synergy between them. ‘Financial controllers’ tend to own cash generating businesses and grow by acquiring more of the same. Long pay-back projects and research-orientated businesses are not normally part of their portfolio. (GECs research has largely been financed by the Government to date). Companies using this style include BTR, GEC, Hanson and Tarmac. Ferranti has been dismembered since the research was done.
Where companies have failed to define and work within the business area in which they have aboveaverage competence (as detailed in ‘The Strategic Task’ above), they have normally encountered difficulties. Most recently British and Commonwealth Group has collapsed following its inability to manage Atlantic Computers, a major IT hire firm. BAT Industries suffered a break-up attempt aimed at releasing the shareholder value locked within some of its businesses and has started to divest and restructure. Similar pressures have been put on Vickers and even GEC has had to restructure to cope with strategic challenge on a world scale. For most companies the need to esercise strategic control in detail or with varying degrees of ‘arm length’ remains. Having established long-term objectives and a strategic planning process to steer the company towards them, most Boards will need to ensure that the tasks laid down in their strategic plan and the milestones set for major projects and strategies are met fully and on time.
98
Long Range
(3) Wider
Planning
Strategic
Vol. 21
April 1991
Responsibilities
The Board’s role in strategy is wider than the strategic planning process, although that process is the key mechanism for integrating the Board’s strategic vision with the work done by all parts of the company to realize that vision. This lvider role includes the elements in the Institute of Directors’ ‘A New Agenda for Business’ ‘-better strategic thinking, professional development, leadership training and better business ethics. These may be subsumed in corporate self renewal which is the ultimate strategic responsibility. The process of corporate self-renewal includes all management development. aspects of innovation, training in leadership and strategic thinking and improving internal standards of business ethics, customer service and commitment. In the u:ords of Sir John Harvey-Jones: ‘The industrial problem is that a company has to renew itself. The world is littered \vith the remains of once private and poxverful companies that are now just names . . . they failed to make sure that they were continuously renewing themselves . . .‘.I” Corporate self-renewal is a painful process which must challenge the status quo and invite revolutionary ideas into the company for serious appraisal. It must be led by the Board and should be driven by the non-executive directors whose independence and breadth of knowledge and esperiencc should fit them ideally for this task. According to Peter Drucker: ‘The Board cannot do what the law says it should do, that is to “manage” . . . Board meetings rarely go beyond trivia’.” It is possible, as the new-style ICI Board has demonstrated, to organize the Board agenda so that what Sir John Harvey-Jones calls ‘boiler plate’ matters are given the minimum possible time leaving the Board with ample time to ‘manage’. Most Boards will have delegated many of the routine management tasks and should maximize the time available for strategic issues. Despite this effort it is certain that the strategic task of the Board Lvill exceed the time available, even allowing for ‘alvay days’ and ‘lost weekends’. In the same way as the Board delegates some ofits work to ‘executive committees’, ‘audit committees’, and others, there is a clear role for a ‘strategy committee’. According to Geoffrey Mills,‘? one in seven major U.K. companies has a ‘planning committee’ Lvhich is tasked xvith helping to make the strategic planning process work throughout the company, partly by exhortation and co-ordination and partly by acting as a ‘court of appeal’ for executives beset by corporate planners. This role is legitimate and important and should be subsumed in the wider role of the ‘strategy committee’. This body, composed of non-executive directors and the company secretary, and taking evidence from the Managing Director and his executive colleagues in the same
manner as the following:
(4
committee,
ensure that the Board’s wider fully and effectively covered
04 oversee (cl
audit
planning
and audit the Lvorking process
oversee required
specific assignments by the Board.
should strategic
do the task is
of the strategic and
research
The germ of this idea appears in ‘de Paula’s Auditing’ I3when the role of the audit committee is seen as extending to management audit. It is suggested, however, that the audit committee needs to concentrate on its links with statutory financial audit and that the major area of strategy merits a distinct Lvorking body. In rhe same way that the existence of an ‘audit committee’ reassures investors (it is mandatory for companies quoted on the New York Stock Exchange), the existence of a ‘strategy committee’ should give assurance that the Board is committed to carrying out its strategic task and has a mechanism independent of management for auditing the effectiveness of the process. Such wider involvement of non-esecutive directors, with a probable increase in their numbers to achieve fuller professional complementarity to the strengths of the executive directors, will require greater care in their selection, induction, and development, together with a greater use of their time. According to PRONED” in 1989 the average time spent on company business by non-executive directors leas 23 days; excluding part-time chairmen, most spent less than 20 days. While it would be unrealistic to expect that figure to double, the benefit to be gained by companies in terms of strategic performance by devoting even 10 more days a year to involving the Board effectively in strategic planning and demonstrating strategic leadership must be the ‘bargain of the century’.
(5) Conclusions and Recommendations and the example of best Despite exhortation evidence suggests that planning is a practice, discipline practised in the main by larger companies. The DTI Enterprise Initiative for Business Planning has been slow to develop and has been used mainly by medium-sized companies. Smaller companies often see planning as less urgent than improving manufacturing layout or quality control. Some voices are now being raised against strategic planning; in his book ‘Dynamic Strategic Management’ Ralph Stacey’j argues for the abandonment of long-range planning and the cultivation of shortinterval control based on rolling five-quarterly
Strategic
Planning
for the Board
99
budgets. Stacey believes that most change facing companies is open ended and that opportunism is the only effective way of dealing with such change. He suggests that companies do not use their longterm plans once they have been made. In his opinion strategies are about innovation and are built by multi disciplinary task forces; top management’s role is ‘strategic facilitation’. Long-term planning systems and procedures should be scrapped. Management development should concentrate on producing managers capable of dealing with ‘big issues’ in a decentralized mode.
capital target of 27 per cent, and the group 20/Z per cent return on equity and be able to sustain a high addeed value.
Stacey is right in emphasizing the importance of innovation and of reactiveness in the face of openended change. Strategies will have to be shaped by those who have to deliver them and reshaped as needed to win and retain competitive advantage. The Board does have a role of ‘strategic facilitation’ in training and tasking people throughout the company to contribute to strategic management. A key part of that training process is the strategic planning system; the purpose of strategic planning is not so much to make plans as to take people through the process of strategic thinking. Without developing and using that skill Stacey’s dynamic strategic management will lack its basic fuel. More importantly, the Board needs to set the strategic direction of the company, without which the dynamic action down the line will be anarchic and unsustainable.
Recornrnerdntions
Models for the future are emerging. The 3M organization is one which has a proven record of success and has a workable ‘loose-tight’ balance. The company operates at three basic levels, a corporate centre, four sector groupings by market (commerindustrial/electronic; information/ cial/consumer; imaging; life services) and 40 divisions. The centre sets the strategic direction and has a research facility; the sectors develop their markets and have their own R & D facilities fed from the centre and feeding the divisions; the divisions are set broad targets and operate freely within a limited number of policies. One of these is that R & D expenditure must be 6.5 per cent of sales (no more, no less); therefore extra funds put behind a bright idea must be taken from another project. Employees are free to propose anything and have the right to spend up to 15 per cent of their time on ‘blue sky’ projects of their choice. If a project is adopted it receives a budget and has resources put behind it. The staff involved grow with the project until it becomes a major SBU. The 3M model shows how innovation can be encouraged at the periphery of the company but is shaped by a strong culture derived and sustained from the centre and steered in a clear strategic direction. This does not mean that new businesses have to be directly related to the core coatings and bonding capability (out of the technology for making advertising signs has come a billboard leasing business) but they must be able to beat the new products hurdle rate of 25 per cent return on investment, contribute to the division’s return on
From this and other evidence it would appear that long range planning is indeed totally dead. ‘Incrementalism’ is unrealistic in conditions of rapid change and growing competition. This does not remove the need for disciplined strategic thinking, and for strategic leadership to turn strategic thinking into sustainable competitive advantage. Long range planning is dead-long live strategic planning!
(4
Boards should choose their members and organize themselves in such a way as to give ongoing strategic direction and leadership to their comPanY.
(b) As
boards are expected to control the management, including the Chief Executive, the roles of Chairman and Chief Executive should be separate. (The latest discussion paper of the Association of British Insurers’h makes the same point.)
Cc)Greater
care should be given to the selection, payment, time contracted, induction and effective use of non-executive directors with particular emphasis on the strategic process. The balance of executive and non-executive directors needs to be reviewed to ensure that nonexecutive directors can perform effectively.
(4
Boards should estabish ‘strategy committees’ to audit the strategic process in a manner similar to the independent financial audit committees now in general use.
(4
Greater emphasis should be placed on training and empowering managers ‘down the line’ to develop and deliver their own strategies aimed ultimately at delivering corporate objectives.
v-) The
need for scanning the outside environment. and interpreting signals which are meaningful for the company’s survival and prosperity, requires to be recognized by the Board and appropriate action taken.
k)
Boards should regularly review their style of strategic control. The Goold/Campbell styles referred to above can often be mixed effectively within the same group where appropriate.
04 Boards
should establish a systematic and sustained approach to corporate self-renewal, involving all parts of the company but taking the lead themselves. A key part of this task is to ensure that core competences are identified and nurtured in order to sustain competitive advantage.
6)
Efforts should be made to improve the penetration of the DTI Business Planning Initiative among smaller businesses. On the back of such penetration help should also be made available
Long Range
100
Planning
Vol. 3-I
April 1991
to improve the strategic thinking underlying such plans and to establish strategic management in the companies concerned.
(j)
The Institute of Directors and/or the Confederation of British Industry should organize a concerted campaign, involving relevant professional bodies such as the Strategic Planning Society, to improve the practice of strategic planning in British companies as a means of achieving sustainable improvement in the relative performance of the U.K. economy.
References (1)
Geoffrey Mills, On the Board, p. 2. Gower.
(2)
Quoted in Mills, On the Board, p. 5.
p. 31, June (1987).
(3)
Long Range Planning,
(4)
Quoted in Long Range Planning.
(5)
Stuart Slatter, Corporate
(6)
Strategic
p. 37 et seq., October (1984). p. 28, Penguin.
Recovery,
Planning-The
Chief Executive
and the Board.
p. 1,
Pergamon Press. (7)
Michael Porter, The Competitive Ian.
(8)
Long Range
p. 24, August
Planning,
(9) A New Agenda
Advantage
for Business,
ofNations.
(1988).
Institute of Directors.
(10)
Ronald Lessem, The Roofs Magazine).
(11)
Peter F. Drucker. The Bored Board, Heinemann.
(12)
Geoffrey Mills, On the Board, p. 190.
(13)
de Paula’s Auditing,
(14)
Non-Executive
of Excellence,
pp. 512-513,
Directors-A
McMil-
p. 56 (quoting
ICI
Pitman.
survey
of fees and related
facts,
PRONED (1989). (15)
Ralph Stacey, Dynamic
(15)
‘Role and Duties of Directors’. A discussion of British Insurers (1990).
Strategic
Management,
Kogan Page.
paper. Association
Long Range Planning, Vol. 74, No. 2, pp. 91 to 100, 1991 Printed in Great Britain
Strategic
002+-6301/91 s3.00 + .oo Pergamon Press plc
Planning for the Board
Adrian Davies
Although observers increasing the need importance. Directors
the planning operation is regarded by some as unrealistic in conditions of rapid change and competition, the discipline of strategic thinking and for strategic leadership continue to be of vital The author examines the purpose of the Board of and its role in the management of strategy.
the present century, followed by that of the U.S.A. in the second half of the 1900s reflects the poor relative performance of U.K. and U.S. businesses and of their Boards. It is significant that the search for excellence and for competitive advantage which has dominated recent thinking on corporate governance does not feature the Board even as a minor player.
(1) Strategy ‘Strategic Planning work and missions, key goals
and the Board
Planning’ is defined by the Strategic . Society as follows: ‘The organizational process through which purpose, vision, objectives, strategy, major policies and are developed in a systematic way’.
The Board oversees all organizational processes -\\-hy is strategic planning of particular relevance to its work? To understand this we have to examine the purpose of the Board of Directors. Prrryose In the words of Geoffrey Mills, ‘the Board is appointed to control the company, which means to direct and manage the management who in turn control the sum of its business operations. Its prime responsibilities are therefore:
(4
to evaluate, define and when necessary redefine, the businesses in which the company will operate, the resources which will be allocated to each, and the timing and rates of return which are required from each;
(b) to
select, monitor and hold responsible the managers to whom the daily control of these operations is entrusted, particularly, but not exclusively, the Chief Executive’.’
In his penetrating analysis of the causes of corporate decline, Stuart Slatter is critical of many company Boards: ‘an ineffective Board of directors means that planning, resource allocation and control decisions -key decisions affecting the “guts” of the business -are poorly made’.j
(2) The Strategic
If the Board has this strategic responsibility, what has been its performance in recent times? Peter Drucker is scathing: ‘The decline of the board is an universal phenomenon of this century’.” The decline of U.K. relative Gross Domestic Product through consultant
Task
The strategic task of the Board has been defined Bernard Taylor” as:
(4
Perforrnance
Adrian Davies is an independent
In the U.K. Boards tend to have a preponderance of executive directors, unlike the U.S.A. where the average Board has two-thirds non-executive directors. Significantly Pfeffer‘s: survey of U.S. corporations found that, the greater the proportion of outside directors on a Board, the better the relative financial performance within the relevant industry. Norburn’s’ survey of U.K. executive directors found that they tended to focus on short term results and had limited experience outside their present company and were likel>- to have a narrow functional training, usually in accounting or technical expertise. This made them ill-equipped for the function of strategy or even to evaluate it.
by
to improve the performance of the business for the benefit of the shareholders, the managers, the employees and other stakeholders (suppliers, customers, local community, etc.) ;
(b) to
provide a philosophy and a set of principles which will guide the actions of the people involved in the enterprise;
Cc)to
set the strategy
and direction
of the business
Strategic -usually for gro\v-th in producrs divestments and acquisitions;
(4
and markets,
to monitor and control the company> operations not just in the form of immediate financial results, but also in building for the future through improved productivity, quality, customer service, new products, the recruitment and training of staff,
(e) to
provide a set of policies which can be presented publicly in discussions with governments and other external bodies.
To carry out this task the Board needs to define the mission of the company (‘what businesses are we in?‘), establish long term objectives towards which the company should work, develop broad strategies to achieve the objectives over time and define ‘milestones’ to be reached in turn along the way to the objectives. The Board will also need to establish principles and policies which will create a culture xvhich will be recognized both inside and oucside the company and which Lvill provide consistency and quality in a way which will be valued by stakeholders and provide a ‘glue’ to hold operations together under pressure. ,\lisrion To establish a sustainable mission it is necessary to assess carefully the present and likely future operating environment of the company, differentiating between factors which are or are not relevant. Such an environment will include political, economic, societal, demographic, industry, technology, competition, market, supplier and local factors, and will require considerable work to build up and to adapt to the company’s needs. Government information, commercial databases, industry sources and data research will need to be supplemented by targeted research into areas where insight is crucial for success e.g. distrib u t’ion. This assessment will need to be supplemented by detailed competitive appraisal to assess internal and competitor strengths and weaknesses. From this picture a number of options will emerge for businesses in which the company might engage successfully. These will need to be evaluated rigorously and the risks and potential rewards carefully weighed. From this evaluation will emerge what Drucker names ‘the idea of the business’, which may well differ from the present business of the company, but will be more defensible and more profitable over time if the analysis has been thorough and unblinkered. The choice of businesses in which to engage is a crucial part of the Board’s role. This cannot be delegated and the choice. once made, will need to be subject to regular reassessment. It has become common practice to prepare and issue a ‘mission statement’ which defines the main areas in which a company operates and the philosophy underlining its activities. Such a statement can only realistically be prepared and issued with the involvement and
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93
approval of the Board and lvill need to evolve as change opens new opportunities and forecloses on older ones.
The long-term objectives of the company may be included in the mission statement but \vill require in their own right. These careful preparation objectives need to be as robust as possible since all shorter term results should be evaluated in terms of progress towards the long-term objectives. Like a ship buffeted by storms and subject to tides and currents, the company needs a constant destination in order to maintain morale and measure progress. Long-term objectives need to be ambitious not only to stimulate employees to set themselves and achieve higher targets, but also in order to match the aggression of current and potential competitors. It is now recognized that many companies need to target world markets in order to match their competitors either in major or even in niche market areas, particularly as fe\v national markets can now effectively be protected. Michael Porter’ has recently studied the pattern of national competitiveness in world trade and has found that too few British companies are positioned to compete on a world scale. Many still do not see the world as their market and are thus at risk to competitors w-ho pursue world scale strategies e.g. RoLvntrce’s takeover by Nestl6. Bvoad Strategies Strategies are the means of achieving both shorter term goals and long-term objectives. Strategies require people to do specific things e.g. open new factories, and are supported in the short-term by tactical action e.g. obtaining planning permission for a factory. Much of the action needed to deliver strategies has to be carried out by people who are not on the Board and those people \\-ork more effectively if the)- have been involved in the selection of the strategy they have to help deliver and have evaluated the alternatives. For [his reason Boards are usually involved in developing only broad strategies to achieve their companr_‘s objectives, and in ensuring that those strategies are underpinned by detailed strategies and tactics capable of achieving delivery. rather than detailing the full pattern of strategies themselves. Concentration on developing broad strategies also allows for flexibility to change the details and timing of specific strategies to meet unforeseen changes in operating conditions. This accommodates what Henry Minzburg calls ‘emergent strategies’, ones Lvhich are implicit in the broad strategies and are in tune Lvith the changed circumstances facing the company. Like the ship we spoke of earlier, it is nor helpful to lay down instructions to crolvd on all canvas if the wind drops. The sailors kno\v their objective and need to be given Lvide initiative on ho\v to get there.
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Long Range
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Vol. 34
April
If the Board is to determine long-term objectives and only the broad strategies for achieving them, it is obviously critical to be able to monitor progress and to intervene in a timely fashion ifnecessary. The means of doing this is to negotiate ‘milestones’ for major strategies and projects, which enable progress to be demonstrated convincingly. Milestones can be timed to coincide with Board strategy reviews so that individual milestones can be seen in a wider context.
One of the key.. roles of the Board is to provide ‘leadership’. This is creating a common sense of purpose and a clear vision of what the company wishes to become. Through its policies and actions the Board shapes the style and standards of behaviour shared by all employees. This culture makes a company acceptable to its customers, suppliers and other outside stakeholders and makes it attractive to work forWhile culture involves ‘soft’ concepts like morality and respect for individuals, it should also encourage ‘harder’ values, such as striving for targets, controlled competitiveness, high rewards for success and sanctions for failure. It is important that a company’s culture is well disseminated and clearly understood.
(3) The Strategic
Process
How does a Board organize itself to carry out its strategic task and ensure effective implementation? This can only be achieved if the Board directs the process of strategic planning and involves itself in that process at certain key stages. Planning is too important to be left to corporate planners; the Board should drive the process and the planners should act in support of the Board and of the line managers whose task it is to plan and grow their individual businesses. The main stages of the Board’s involvement annual strategic planning process are:
(a) setting
(4
in the
the scene
launching
the planning
cycle
Cc)gap analysis (4 approving plans (4 strategic control (a) Settirl,f rhe Scerle The Board’s involvement in ‘setting the scene’ for the annual planning cycle is of fundamental importance. The quality of the analysis and guidance given in this part of the process will condition the tone of the whole strategic plan. If the Board’s guidelines are rigorous and realistic, the response should echo those qualities. To achieve such an input into the process requires careful work by the Board, often at special meetings axva); from the pressures of routine.
1991 It is becoming increasingly the practice for such ‘away days’ or ‘lost weekends’ to be facilitated by a respected academic or a trusted consultant. This arrangement ensures that there is an objective framework to the meeting and leaves the Chairman free to participate without losing his ability to steer the meeting down channels vvhich he believes to be relevant. The objectivity of such a meeting is found to bring out stronger contributions from nonexecutive directors who have in any case been chosen because of their wider experience of business. Out of this meeting there needs to emerge a consensus about the company’s strategic direction. Is its portfolio of businesses still valid? Should any be divested or are new acquisitions needed? Are the present strategies able to achieve the company objectives and shorter term goals? Are the present policies valid or should they be changed? Is the company’s competitive position secure or does new competitive advantage have to be won? From this consensus guidelines for the planning cycle can be drawn up. These will show where the company stands in relation to its objectives and to its environment. They will identify the issues facing the company and which the strategic plan will need to address, e.g. quality, weaknesses in Product A, a loss of competitive advantage in Market X, etc. (b) Lamching the Plannirzg Cycle It is important that the annual planning cycle is launched formally by the Board. This act gives the cycle the weight which it needs when the work of planning conflicts with day to day operations. Planning is few people’s favourite sport and Board authority ensures that it is not unnecessarily neglected or delayed and that planning instructions and guidelines are strictly followed. Plans will typically be called for over a period of 3 to 5 years; for young dynamic companies projections beyond 3 years may well have little meaning. (c) Guy Andysir When each of the strategic business units (SBUs) which is required to submit a strategic plan has done so, the various plans will be analysed carefully and the required framework of figures (sales, costs, margins, pretax profits, proposed capital investment, head count and cashflow) will be consolidated. This will produce a result which is certain to differ from the figures derived from the guidelines developed by the Board at the start of the cycle. The differences in each of the parameters mentioned above will need to be subjected to ‘gap analysis’. This process examines ho\v the shortfall of, for instance, pretax profit ma)- be made good. The implications of increasing sales, widening margins, explored and a cutting costs, etc. are carefully are finally distilled. These number of options options may include alliances, joint ventures, acquisitions or major new initiatives which will need
Strategic Board approval in any case. It is usually helpful to involve the Board in the final stages of this process since trade offs are certain to be needed to move the ‘bottom up’ plans of the SBUs nearer to the framework set by the Board, quite apart from any major new initiatives. This will require careful negotiation and may involve changes lvhich may delay certain strategies e.g. putting back investment. if cashflow forecasts cannot meet the Board’s framework. Board involvement in the culmination of this process strengthens Directors’ understanding of the dynamics of their business, which is easily weakened as a business grows and operations are decentralized, and gives authority to the changes to their plans which are required of the SBUs. (d) Approving Plans Once plans are stabilized they should be approved by the Board. Subsidiary plans should be approved by their own Boards and passed through for approval by the Group Board. Plans are contractual in nature since they involve the allocation of resources in exchange for the promise of specific profits and cashflow. Greater respect needs to be given to the contractual nature of plans-if they are made in order to be neglected they are an expensive waste of time. Nor should budgets be allowed to differ from the first year of the strategic plan from which they are derived without reason and reconciliation. The practice of preparing budgets in isolation from plans is still prevalent in too many British companies and should be firmly resisted by Boards. There is a growing unease about treating plans as ‘set in concrete’. In times of rapid change the assumptions on which plans are built may become invalid, new threats and opportunities may emerge and need response. If the planning process has been thorough the chances of surprise will be less, and contingency plans should have been prepared for the more probable eventualities. Reality must always take precedence over plans but the planning process helps determine the likely shape and implications of reality. (e) Strategic Control ‘Strategic Control’ is defined by the Strategic Planning Society as ‘the organizational process which assesses and measures progress along strategic paths. It will rely heavily on monitoring milestones and achievement of key goals and tasks’. The style and degree of control exercised will depend on the type of company involved. Michael Goold and Andrew Campbell* of the Ashridge Strategic Management centre have identified three ‘parenting’ styles in common use: (e.1) ‘Strategic Planning’ style. This style has the closest involvement of the Board in the strategy of subsidiaries. It is the style typical of businesses with
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one or few SBUs and it is driven by the strategic wish of the centre and seeks to develop synergy between its businesses. This is often the style of the strong central leader and it has the danger of taking responsibility away from SBUs and thus of tolerating inadequate performance. This is the style of companies such as BOC, Cadbury Schweppes, Lex, STC, BP, and United Biscuits. (e.2) ‘Strategic Controlling sryle. This style is typical of very large and more diverse companies. The planning initiative is expected from the subsidiaries and plans are carefully revie\ved by the centre. This style depends heavily on the perceptiveness and persistence of the centre, which has to retain enough contact with and understanding of the different businesses to add value to the process. Typical ‘strategic controllers’ include Courtaulds, Vickers and ICI. Two such companies, Imperial Group and Plessey have been taken over since Goold and Campbell did their research.
(e.3) ‘Firznrzcial Corltrollirlg’ style. This style repudiates the central review of strategy, leaving the practice of strategic planning to its subsidiaries. Control is exercised by a limited number of key ratios and by tight cash limits. This style suits very large groups (BTR has over 300 SBUs) and no attempt is made to seek synergy between them. ‘Financial controllers’ tend to own cash generating businesses and grow by acquiring more of the same. Long pay-back projects and research-orientated businesses are not normally part of their portfolio. (GECs research has largely been financed by the Government to date). Companies using this style include BTR, GEC, Hanson and Tarmac. Ferranti has been dismembered since the research was done.
Where companies have failed to define and work within the business area in which they have aboveaverage competence (as detailed in ‘The Strategic Task’ above), they have normally encountered difficulties. Most recently British and Commonwealth Group has collapsed following its inability to manage Atlantic Computers, a major IT hire firm. BAT Industries suffered a break-up attempt aimed at releasing the shareholder value locked within some of its businesses and has started to divest and restructure. Similar pressures have been put on Vickers and even GEC has had to restructure to cope with strategic challenge on a world scale. For most companies the need to esercise strategic control in detail or with varying degrees of ‘arm length’ remains. Having established long-term objectives and a strategic planning process to steer the company towards them, most Boards will need to ensure that the tasks laid down in their strategic plan and the milestones set for major projects and strategies are met fully and on time.
98
Long Range
(3) Wider
Planning
Strategic
Vol. 21
April 1991
Responsibilities
The Board’s role in strategy is wider than the strategic planning process, although that process is the key mechanism for integrating the Board’s strategic vision with the work done by all parts of the company to realize that vision. This lvider role includes the elements in the Institute of Directors’ ‘A New Agenda for Business’ ‘-better strategic thinking, professional development, leadership training and better business ethics. These may be subsumed in corporate self renewal which is the ultimate strategic responsibility. The process of corporate self-renewal includes all management development. aspects of innovation, training in leadership and strategic thinking and improving internal standards of business ethics, customer service and commitment. In the u:ords of Sir John Harvey-Jones: ‘The industrial problem is that a company has to renew itself. The world is littered \vith the remains of once private and poxverful companies that are now just names . . . they failed to make sure that they were continuously renewing themselves . . .‘.I” Corporate self-renewal is a painful process which must challenge the status quo and invite revolutionary ideas into the company for serious appraisal. It must be led by the Board and should be driven by the non-executive directors whose independence and breadth of knowledge and esperiencc should fit them ideally for this task. According to Peter Drucker: ‘The Board cannot do what the law says it should do, that is to “manage” . . . Board meetings rarely go beyond trivia’.” It is possible, as the new-style ICI Board has demonstrated, to organize the Board agenda so that what Sir John Harvey-Jones calls ‘boiler plate’ matters are given the minimum possible time leaving the Board with ample time to ‘manage’. Most Boards will have delegated many of the routine management tasks and should maximize the time available for strategic issues. Despite this effort it is certain that the strategic task of the Board Lvill exceed the time available, even allowing for ‘alvay days’ and ‘lost weekends’. In the same way as the Board delegates some ofits work to ‘executive committees’, ‘audit committees’, and others, there is a clear role for a ‘strategy committee’. According to Geoffrey Mills,‘? one in seven major U.K. companies has a ‘planning committee’ Lvhich is tasked xvith helping to make the strategic planning process work throughout the company, partly by exhortation and co-ordination and partly by acting as a ‘court of appeal’ for executives beset by corporate planners. This role is legitimate and important and should be subsumed in the wider role of the ‘strategy committee’. This body, composed of non-executive directors and the company secretary, and taking evidence from the Managing Director and his executive colleagues in the same
manner as the following:
(4
committee,
ensure that the Board’s wider fully and effectively covered
04 oversee (cl
audit
planning
and audit the Lvorking process
oversee required
specific assignments by the Board.
should strategic
do the task is
of the strategic and
research
The germ of this idea appears in ‘de Paula’s Auditing’ I3when the role of the audit committee is seen as extending to management audit. It is suggested, however, that the audit committee needs to concentrate on its links with statutory financial audit and that the major area of strategy merits a distinct Lvorking body. In rhe same way that the existence of an ‘audit committee’ reassures investors (it is mandatory for companies quoted on the New York Stock Exchange), the existence of a ‘strategy committee’ should give assurance that the Board is committed to carrying out its strategic task and has a mechanism independent of management for auditing the effectiveness of the process. Such wider involvement of non-esecutive directors, with a probable increase in their numbers to achieve fuller professional complementarity to the strengths of the executive directors, will require greater care in their selection, induction, and development, together with a greater use of their time. According to PRONED” in 1989 the average time spent on company business by non-executive directors leas 23 days; excluding part-time chairmen, most spent less than 20 days. While it would be unrealistic to expect that figure to double, the benefit to be gained by companies in terms of strategic performance by devoting even 10 more days a year to involving the Board effectively in strategic planning and demonstrating strategic leadership must be the ‘bargain of the century’.
(5) Conclusions and Recommendations and the example of best Despite exhortation evidence suggests that planning is a practice, discipline practised in the main by larger companies. The DTI Enterprise Initiative for Business Planning has been slow to develop and has been used mainly by medium-sized companies. Smaller companies often see planning as less urgent than improving manufacturing layout or quality control. Some voices are now being raised against strategic planning; in his book ‘Dynamic Strategic Management’ Ralph Stacey’j argues for the abandonment of long-range planning and the cultivation of shortinterval control based on rolling five-quarterly
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99
budgets. Stacey believes that most change facing companies is open ended and that opportunism is the only effective way of dealing with such change. He suggests that companies do not use their longterm plans once they have been made. In his opinion strategies are about innovation and are built by multi disciplinary task forces; top management’s role is ‘strategic facilitation’. Long-term planning systems and procedures should be scrapped. Management development should concentrate on producing managers capable of dealing with ‘big issues’ in a decentralized mode.
capital target of 27 per cent, and the group 20/Z per cent return on equity and be able to sustain a high addeed value.
Stacey is right in emphasizing the importance of innovation and of reactiveness in the face of openended change. Strategies will have to be shaped by those who have to deliver them and reshaped as needed to win and retain competitive advantage. The Board does have a role of ‘strategic facilitation’ in training and tasking people throughout the company to contribute to strategic management. A key part of that training process is the strategic planning system; the purpose of strategic planning is not so much to make plans as to take people through the process of strategic thinking. Without developing and using that skill Stacey’s dynamic strategic management will lack its basic fuel. More importantly, the Board needs to set the strategic direction of the company, without which the dynamic action down the line will be anarchic and unsustainable.
Recornrnerdntions
Models for the future are emerging. The 3M organization is one which has a proven record of success and has a workable ‘loose-tight’ balance. The company operates at three basic levels, a corporate centre, four sector groupings by market (commerindustrial/electronic; information/ cial/consumer; imaging; life services) and 40 divisions. The centre sets the strategic direction and has a research facility; the sectors develop their markets and have their own R & D facilities fed from the centre and feeding the divisions; the divisions are set broad targets and operate freely within a limited number of policies. One of these is that R & D expenditure must be 6.5 per cent of sales (no more, no less); therefore extra funds put behind a bright idea must be taken from another project. Employees are free to propose anything and have the right to spend up to 15 per cent of their time on ‘blue sky’ projects of their choice. If a project is adopted it receives a budget and has resources put behind it. The staff involved grow with the project until it becomes a major SBU. The 3M model shows how innovation can be encouraged at the periphery of the company but is shaped by a strong culture derived and sustained from the centre and steered in a clear strategic direction. This does not mean that new businesses have to be directly related to the core coatings and bonding capability (out of the technology for making advertising signs has come a billboard leasing business) but they must be able to beat the new products hurdle rate of 25 per cent return on investment, contribute to the division’s return on
From this and other evidence it would appear that long range planning is indeed totally dead. ‘Incrementalism’ is unrealistic in conditions of rapid change and growing competition. This does not remove the need for disciplined strategic thinking, and for strategic leadership to turn strategic thinking into sustainable competitive advantage. Long range planning is dead-long live strategic planning!
(4
Boards should choose their members and organize themselves in such a way as to give ongoing strategic direction and leadership to their comPanY.
(b) As
boards are expected to control the management, including the Chief Executive, the roles of Chairman and Chief Executive should be separate. (The latest discussion paper of the Association of British Insurers’h makes the same point.)
Cc)Greater
care should be given to the selection, payment, time contracted, induction and effective use of non-executive directors with particular emphasis on the strategic process. The balance of executive and non-executive directors needs to be reviewed to ensure that nonexecutive directors can perform effectively.
(4
Boards should estabish ‘strategy committees’ to audit the strategic process in a manner similar to the independent financial audit committees now in general use.
(4
Greater emphasis should be placed on training and empowering managers ‘down the line’ to develop and deliver their own strategies aimed ultimately at delivering corporate objectives.
v-) The
need for scanning the outside environment. and interpreting signals which are meaningful for the company’s survival and prosperity, requires to be recognized by the Board and appropriate action taken.
k)
Boards should regularly review their style of strategic control. The Goold/Campbell styles referred to above can often be mixed effectively within the same group where appropriate.
04 Boards
should establish a systematic and sustained approach to corporate self-renewal, involving all parts of the company but taking the lead themselves. A key part of this task is to ensure that core competences are identified and nurtured in order to sustain competitive advantage.
6)
Efforts should be made to improve the penetration of the DTI Business Planning Initiative among smaller businesses. On the back of such penetration help should also be made available
Long Range
100
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April 1991
to improve the strategic thinking underlying such plans and to establish strategic management in the companies concerned.
(j)
The Institute of Directors and/or the Confederation of British Industry should organize a concerted campaign, involving relevant professional bodies such as the Strategic Planning Society, to improve the practice of strategic planning in British companies as a means of achieving sustainable improvement in the relative performance of the U.K. economy.
References (1)
Geoffrey Mills, On the Board, p. 2. Gower.
(2)
Quoted in Mills, On the Board, p. 5.
p. 31, June (1987).
(3)
Long Range Planning,
(4)
Quoted in Long Range Planning.
(5)
Stuart Slatter, Corporate
(6)
Strategic
p. 37 et seq., October (1984). p. 28, Penguin.
Recovery,
Planning-The
Chief Executive
and the Board.
p. 1,
Pergamon Press. (7)
Michael Porter, The Competitive Ian.
(8)
Long Range
p. 24, August
Planning,
(9) A New Agenda
Advantage
for Business,
ofNations.
(1988).
Institute of Directors.
(10)
Ronald Lessem, The Roofs Magazine).
(11)
Peter F. Drucker. The Bored Board, Heinemann.
(12)
Geoffrey Mills, On the Board, p. 190.
(13)
de Paula’s Auditing,
(14)
Non-Executive
of Excellence,
pp. 512-513,
Directors-A
McMil-
p. 56 (quoting
ICI
Pitman.
survey
of fees and related
facts,
PRONED (1989). (15)
Ralph Stacey, Dynamic
(15)
‘Role and Duties of Directors’. A discussion of British Insurers (1990).
Strategic
Management,
Kogan Page.
paper. Association