Wednesday, November 2, 2011

Shortcomings in Governance Post-Economic Crisis

The Kaplan and Beinhocker article titled “ The Real Value of Strategic Planning,” builds upon the idea that strategic planning needs to be made in real time, and therefore, the goal of the strategic planning process is not, in fact, to create strategy, but to prepare all those involved in the company’s highest echelon ( usually no more than 12 people) to make sound strategic decisions when opportunities arise. Companies that use their strategic planning efforts to focus on expansion and new growth areas, for example, will focus on identifying the areas of the market that will become increasingly important, analyzing both benefits and risks and prepared to make a decision before other firms. According to the article, the main benefit of strategic planning is acquiring complete information and opinions on topics of relevant concern to the company in preempting future situations where that information will be crucial to make strategy “ in real time.”

Looking through the McKinsey Quarterly, I came across an article on the growing importance of strategy in the wake of the economic crisis. In a 2008 survey, more respondents ( CEOS worldwide) wanted to increase the amount of time that boards spent on strategy development rather than quotidian topics like execution, compliance, and performance management. The survey is an excellent complement to the Kaplan and Beinhocker article because it provides thorough quantitative data about the shortcomings of current strategy development which builds upon the theory that Kaplan and Beinhocker present.

Most of the respondents also established that insufficient time devoted to strategy planning is also the main reasons that their boards have a passive role in deciding where the company stands vis-a-vis many issues. The importance of strategy lies in having a board that is proactive rather than reactive, and thus prepared to manipulate resources effectively in conditions that are every-changing and filled with uncertainty. The weaknesses cited in the survey by over 625 CEOs lie under the umbrella of strategy development, and should it be carried out as delineated in the Kaplan and Beinhocker article where only a small group of relevant players meets with the CEO and the business-unit head and have a conversation based on copious presentations, and rather than focusing on short term financial targets, the conversation should focus on long-term trends in specific industries, opportunities and challenges.

The core of strategy development is extensive research, and the McKinsey survey found that only 21 percent of the CEOs surveyed claim a thorough understanding of their own company’s current strategy, and 12 percent claimed complete understanding of new trends in the industry at large. 50 percent of all those surveyed complain that the information used is too short-term. These alarming statistics are in line with the exhortation that boards ought to spend more time and resources in strategy development. Most companies are spending 28 days’ worth of work on strategy development where ideally they ought to be spending 38 days. Whatever the criticisms of strategy development, various deficiencies that firms currently face could be rectified were it done correctly.

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