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Strategy in the new economy
Do the current methods for making a strategy remain valid?
Hans Oosterhuis


Introduction

The strategy process is a territory, which goes back a long time. Starting in the ancient warfare with a famous Chinese writer as Sun Tzu, writing about it became very popular in the modern business of today. The budget process is maybe less old than the strategy process, still it is in use a very long time. Although there are a number of definitions and schools for strategy (1), I follow Wright (2) in his definition: the plans of the top management which should lead to the results which are in line with the mission and goals of the organisation.

With budgeting, a lot of people think first about the financial side of the budget process, or more precise: the spending budget, the amount of money allowed to spend for marketing (and sales) efforts.

My definition for budgeting is: the process of setting the (sales) target and the plans how to reach this sales target with activities .

The recent developments of the so-called new economy give reason to overthink the content and organisation of the strategy ánd budget process.

Strategy and budgeting in the 'old economy'

An interesting example of how companies organise those processes comes from Kaplan and Norton (3): 'The problem is that most organisations have separate procedures... for strategic planning... and budgeting. To formulate their strategic plans, senior executives go off-site annually and engage for several days in active discussions... The outcome of the exercise is a strategic plan articulating where the company expects (or hopes or prays) to be in three, five and ten years. Typically, such plans then sit on executives' bookshelves for the next 12 months.'

This quotation is interesting because of the time frame, which can last even ten years, and also the fact that most organisations have separate procedures for strategic planning and budgeting. In this article, the authors also gave an interesting link to the budget process: 'Meanwhile, a separate resource-allocation and budgeting process run by the finance staff sets financial targets for revenues, expenses, profits, and investments for the next fiscal year. The budget it produces consists almost entirely of financial numbers that generally bear little relation to the targets in the strategic plan (bold by HO) .

Kaplan and Norton argue that there is no relation between the strategic plan and the budget for the next (fiscal) year. To overcome this problem, Kaplan and Norton developed an instrument: the Balanced Scorecard. They also argue that the budget it produces consists almost entirely of financial numbers.

This is in most organisations another link that is missing. Instead of a budget with only financial numbers, there should be a direct link between the budget (the sales target) and the activities how to reach this target . How can a company otherwise be sure that its activities will lead to reaching the target? It is obvious that such a plan with this link will nót sit on executives' bookshelves for the next 12 months.'!(see quotation above).

Looking to both processes it is interesting to see that while for the budget process, most companies have a sales target, but not a (direct!) relation with activities. With strategy it is the other way round: most companies have a plan, but often no (direct) relation with the targets!

Giving this point, a synthesis seems logical.

Consequences for the strategy process in the 'new economy'

The new economy will have a major impact on organisations, although the impact and speed will differ from industry to industry. One aspect, that is relevant in this respect, is the turbulence of the business environment in which organisations operate. Although not everybody agrees with all the presumptions from DAveni (4) it is obvious that the turbulence is bigger than ever. The further going globalisation and the fact that information is much more easily available for everybody in the new economy also causes this. The consequence of this all is that the old time frames for strategy are too long. If we go back to the article from Kaplan and Norton, we see a time frame of even10 years for strategy. Maybe this was working in the 80. In that time the markets where more or less predictable, a time frame of 10 years for strategy seemed reasonable. In the current new economy we have web years. It is said (and maybe sad ) that this stands for three months. Although this can be discussed, if this would be correct, the time frame for the strategy process comes from 10 years in the 80, to 2,5 years in the new economy.

But I think this goes further. Companies have difficulties with the lengths of the time frame for their strategy: looking further away than one year is for most companies too difficult.

It is my hypothesis that the time frame of which organisations can look in the future, or at least are used to work with in practise, is already one year . And why not? But if this would be accepted, what would be the consequence?

Two cases: Shell and Forbo-Krommenie

Before I will work this out, I will give two examples of companies, which organise their strategy processes very differently. The first company has a strategy process with a time frame of many years, a procedure which involves (almost) all the departments and which procedure takes a lot of time. The second company has a simple procedure.

Shell is the company that has the first variant. Their scenario thinking is famous and goes further that many companies do. Basic idea is that the strategy for the future can be managed by taking various scenarios into consideration. Doing so, the company should be better prepared than without the scenarios. Looking to the results, Shell seems to benefits from this approach (a record profit in the first half of 2000).

Forbo-Krommenie, world market leader in linoleum floor coverings, is a company which uses the second variant. A simple procedure where the management team in one or two sessions reconsiders the basic strategic outlines and if necessary change it. Forbo-Krommenie is one of the most profitable industrial companies in Holland.

Conclusion? Although these are only two examples, it is too easy to say that a company needs a thorough, long-lasting strategic procedure to be successful. In my opinion, the examples underline another reason for reconsidering the strategy process.

Budgeting: an interesting alternative?

The advantages of the budget process over the strategy process can be made clear with three elements: time frame, procedure, and content. In all of these aspects, the budgeting process has an advantage over the strategy process.

1. Time frame

As argued above, one of the consequences of the developments in the new economy is the shortening of the time frame for strategy.

For budgeting this is obvious: one year. In almost every company, whether they use a calendar year or a broken year, this is the time frame.

2. Procedure

For strategy the procedure differs from company to company. As Mintzberg (1) wrote, 10 schools can be distinguished with more ore less different views and processes. Some organisations have an annual strategy session, e.g. a workshop consisting of brainstorming with top management. But a lot dont. Some do write down their strategy, but this is not the situation in every company. One of the reasons this happens is because a lot of organisations consider strategy not as such an important item. Consequences are a lack of communication internally (which causes less commitment to the people on the work floor). But also a chance of misunderstanding among top management (and even more on the work floor).

The budget process is in almost all organisations the same (see the example of Kaplan and Norton above). They almost all have an annual procedure (not to be mixed up with the time frame!). Also, they almost all write it down in figures and communicate it properly. In short, the procedure will be that marketing and sales do their homework. Marketing uses as a basis for the estimation of the target often analyses of the environment, the market. The sales use the information they have of the clients. Often, the financial department assembles all the figures of the different departments and regions, and cumulates it. It will present, sometimes after a discussion in a meeting with marketing and sales, these outcomes to the board. Then the board comes with a decision, sometimes deviating from the results that come from marketing and sales. The exact details of this procedure will differ from company to company, but most elements are the same.

3. Content

The content of the strategy process differs also from organisation to organisation. If you ask a company executive what the strategy of the organisation is, he or she will most likely come up with phrases like: to invest in growing markets with our most promising brands, or being the market leader in beer. Or he or she will come with only the goals of the organisation instead of a plan how to reach these goals. The content might be making SWOT analysis, reformulating the 4 or more Ps, reformulating the mission, or a combination of them, but this is in no organisation the same. This is because there is no equal protocol what the content should be in the strategy process.

This all leads to my conclusion that the strategy process is not very well developed in organisations.

For budgeting this is clear. Finally, the financial department comes with the financial numbers, aggregated for the whole organisation and with a split up for every department and product. However, it is in most organisations not according to the definition I made in my introduction: producing a (sales) target and a budget for activities how to reach this target.

Conclusion

The budget process has an interesting procedure that needs more attention.

The timeframe is more in line with the current turbulent times we live in. The content and procedures are familiar with people who work in organisations. If the content should be adapted towards the definition I made of budgeting, and so being an upgrade of the traditional budget process, organisations have a useful tool to reach their goals with a plan how to reach these goals. If you look to the definition of strategy I followed above and compare this with my definition of budgeting, they both mean a plan (activities) to reach the goals (target) of an organisation .

The only difference than is the time frame. Given the above mentioned arguments for a shorter time frame, an upgraded version of the budgeting process could be an interesting alternative for the strategy process. In a next article I will explain more in-depth on the basis of a specific tool what a budget method should consist of, as well as how to implement it.

Propositions

1: Given the web years, the budget procedure should take place in most industry every web year, so 4 times per calendar year.

2: The BSC is an instrument, which has a short ánd a long-term perspective. One of the developments in the new economy is an unpredictability of the next coming future. Because of this long perspective ánd the difficulties most companies have with a time frame longer than one year, the BSC is an instrument, which is in this respect less suitable in the new economy.

References

  1. See for examples Strategy Safari of Mintzberg et al, 1999
  2. See (1), p. 18
  3. Kaplan and Norton, HBR, 1996
  4. DAveni, Hypercompetition: Managing the Dynamics of Strategic Maneuvering, 1994

Hans Oosterhuis is consultant with Mercuri International and is preparing a dissertation at Nyenrode University.


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