We’ve been doing it in business for quite some time and it’s quite possible that your organization has just gone through it recently in the run up to the end of the fiscal year and the beginning of the next. You know what I’m talking about – the annual planning event. That yearly ritual senior executives and their organizations go through, often over the summer months, to re-define the business strategy moving forward for the next three years or so.
However, while we have settled into this approach to “doing strategy”, we’ve become blind to, or have just decided to tolerate, the problems associated with it. For example, many people will point to the fact that strategic plans created this way are often stale when the time comes around to finally execute them. This is a fair comment because many annual strategic planning exercises can take as long as 6 months to get through – it’s no wonder that the plans they produce feel a little behind the times when you finally get around to putting them into action.
Another problem is that this approach can suck up significant organizational resources for an extended period of time getting in the way of the work that keeps your company operating, satisfying your customers or stakeholders, and producing the business performance results you want. In fact, what gets started is this weird effect where companies and their key resources (i.e. senior executives, business unit heads, and department leaders) spend 6 months of the year overly focused on strategy with the remaining 6 months spent focusing on the “doing” part of the business. Have you noticed this in organizations that take the annual approach to strategic planning? I think that if you were honest, you’d agree that this isn’t too far from the truth. All I know is that when I worked in the corporate world, everyone was relieved when strategic planning was finished so that they could get back to the backlog of everyday work that sat on the backburner while the focus was on strategy. The impact of this is that strategy rarely gets discussed through those 6 “off” months and, when it does, it’s usually because some KPI has gone off the rails and an element of the business is in crisis mode.
Basically, the annual approach to strategic planning has a real risk of producing a business strategy that has increasingly lower levels of relevancy to the external and internal business environment over time, and it breeds an organizational culture that sees strategy making as a project that gets in the way of business operations and an activity/event that is disconnected from strategy execution. This is a recipe for strategy and business performance sub-optimization, which leads to business results that are uneven and often underwhelming over the long-term.
While the drivers of these outcomes are related to the problems I outlined above, they are not, in my opinion, the true root cause problem. The real foundational problem is that the annual approach to strategic planning turns a process that needs to operate like a continuous feedback loop into an event-based linear process – one that has minimal opportunities for input and almost zero potential for fine tuning along the way.
The reality is that the annual approach to strategy demands that the strategic plan that gets created once a year must be virtually perfect in its design so that it can hold up over the upcoming year. I believe that this need for perfection is just one of the reasons why so much time is spent during the annual strategic planning “event”. However, seeking perfection in anything that includes as many moving parts as a business does is impractical and virtually impossible.
So here’s the thinking behind my assertion that strategic planning (and strategy management) needs to work like a feedback loop:
The external business environment changes (the economy and technology are just two areas we seem to be acutely aware of right now), as do your customers/stakeholders and their needs and expectations, and your competitors, other players, and partners in your marketplace. Your internal environment is changing as well. Your employees, their skills, your organizational culture, and the capability of your processes and equipment change over time, often at different rates, and not always in a way that positively impacts your organization.
The truth is that your company is a living system existing in a changeable environment. Nothing is static – the entire ecosystem that your business operates in is dynamic. As a result, your business strategy must be adaptable if it’s going to stay relevant as a roadmap for moving forward and making the progress you want to achieve.
The solution? Break free from the sub-optimal annual planning event and embrace the “thermostat approach” to managing your strategy!
The Thermostat Approach to Strategy
With this new approach to strategy you don’t do away with strategic planning – you simply move from a mindset where you talk about strategy on an annual basis to one where you focus on strategy making and execution (aka. strategy managment) when required and/or, at minimum, on a quarterly basis. Essentially, any time a change occurs in either the internal or external environment, an organizational discussion occurs to assimilate and analyze the change, explore its impact on strategy and/or the best response, and determine what changes to the strategy are required (if necessary). Sources of this feedback can include your business performance metrics or balanced scorecard, customer/stakeholder feedback, competitive intelligence, and economic trends and projections (just to name a few).
However, even without the stimulus of a change, this new approach to strategy requires a quarterly check on actual conditions and performance versus the conditions and performance outlined in your business strategy. Doing this regular maintenance on your strategy gives you the opportunity to apply strategic learnings and improve your strategic plan in a responsive (or even pro-active) way that will almost certainly enhance the quality and value of your strategic plan as a roadmap for your company’s ongoing success.
The objective of the quarterly strategy execution/strategic plan review meeting is to ask and answer six critical questions: How have our strategic objectives been performing over the past quarter?; What have we learned?; What are the implications for strategy execution?; Are we moving forward/Are we moving in the right direction?; What are our key strategic issues?; and Are any changes in direction/strategy required?. Basically, over, at minimum, four 2 -3 hour discussions held during the course of the year, you keep your company’s strategy current and relevant in an evolving business and operating environment.
It actually turns out that companies that change to the thermostat approach to strategy management often spend less time on strategy formulation/refinement AND considerably more time on strategy execution and management than those that take the annual approach to strategic planning. In fact, the overall time spent on strategy often decreases with this new approach, however, the time that is spent on strategy is higher in quality and of greater value because it translates more reliably into the achievement of consistently better business results.
It is important to note that if you are going to make a successful change to the thermostat approach to strategy management, you must also make similar changes in the business management processes that support the execution of your strategy. These include your budgeting, KPI target setting, individual performance goal setting and management, and human capital management processes. You will only be able to achieve the maximum benefits of this new approach to strategy formulation, execution, and management once you make these additional process changes.
The biggest benefit of changing to the thermostat approach to strategy is the creation of a strategy-focused culture in your organization – one where everyone is so engaged with your business strategy that they are making day to day work decisions that work with, not against, where you are trying to go and the business performance results you are trying to achieve. You reach this goal with this approach because strategy making, execution, and management combine to become an ongoing business process and feedback loop rather than an event. You also get there because more people from across your company get involved with your strategy through their contributions in the various feedback loops and discussion opportunities that exist.
But the biggest reason why the thermostat approach to strategy works is because it makes your business strategy a relevant roadmap and decision-making tool that employees at all levels of your organization can use to achieve success in their own work that contributes to the success of the overall company.
Though current business conditions demand that your organization becomes more agile if it is going to survive and thrive over the long-term, this isn’t the most compelling reason for retiring the annual approach to strategic planning. The benefits of changing from a strategy event to a continuous strategy process will be transformational for your organization, giving it the ability to actually achieve the strategic goals for your company. This should be the REAL motivator that prompts you to take the leap to this new approach to strategic planning and strategy management for your organization.