Even in these tumultuous times, strategic planning doesn’t have to be an exercise in anxiety—or futility.

APRIL 2010 • Renée Dye, Olivier Sibony, and S. Patrick Viguerie

Source: Strategy Practice & McKinsey Quarterly

 

Strategic-planning season has arrived for many companies, and it couldn’t be more different than it has been in years past. Gone are the days of linear trend-extrapolation exercises that produce base, upside, and downside cases. Strategists, now facing the most profoundly uncertain times in their careers, are creating disaster scenarios that would have been unthinkable until recently and making the preservation of cash integral to their strategies.

Most strategists we know are avoiding the obvious mistakes, such as planning as usual or, conversely, eliminating essential strategy-development activities or even strategic planning itself. Nonetheless, strategists remain deeply—and understandably—concerned that the priorities emerging from the annual planning rituals won’t address the demands of today’s tumultuous environment.

These are uncharted waters, and no one has a clear map for sailing through them. It’s clear that scenario planning, a well-established technique for coping with uncertainty, should play a critical role this year, but executing successfully has never been as challenging as it is now. Most companies will have to consider more variables and involve more decision makers than they have in the past. Strategists will also need to place a greater emphasis on measurement—the only way to recognize when changing conditions merit quick strategic adjustments. Finally, the focus on new or surprising scenarios shouldn’t obscure relevant long-term trends or devalue important existing strategies.

Be realistic about scenario planning

In a highly uncertain environment, the advantages of scenario planning are clear: since no one base case can be regarded as probable, it’s necessary to develop plans on the assumption that several different futures are possible and to focus attention on the underlying drivers of uncertainty.

Today’s pervasive uncertainty complicates scenario-planning efforts: the number of variables at play—and the range of plausible outcomes—have exploded in the past year. Consider, for example, the predicament of an industrial supplier that is not only heavily exposed to commercial and residential real estate but also has many government customers. For this company, the critical uncertainties include the direction of the commercial-credit and mortgage markets, housing prices, tax revenues, and government stimulus spending. Different outcomes for each of these uncertainties produce vastly different paths for the business. Since the heart of scenario planning—crafting a number of strategies for different outcomes—has become significantly more complex,¹ strategists should prepare for a more demanding process of gathering information, exploring possibilities, and plain old hard thinking.

Senior executives outside the strategic-planning group—even those accustomed to developing scenarios—may find the diversity and complexity of this year’s scenarios bewildering. It’s critical to bring such executives into the process early: for example, by kicking off the planning process with a scenario-development exercise involving the full senior team. Similarly, as the process of reviewing business units gets under way, a company can inculcate an appreciation of the threats it faces and of its collective strategic response by inviting executives from a number of divisions to participate in the proceedings—rather than hold one-off events between the senior team and the leader of each individual unit.

Intensify monitoring

Depending on how events unfold, the industrial supplier mentioned above could make radically different moves. If the commercial and residential real-estate markets stabilized, it could expect reduced sales within those channels until the economy rebounded, but its business model would remain fundamentally the same. If those markets softened further, the bulk of the company’s market opportunity, for the foreseeable future, would lie in infrastructure investments underwritten by government stimulus spending. In that case, the company would need to redeploy its sales resources to government-oriented business and focus on maximizing sales there.

The company’s strategy, in short, must account for many more contingencies than it has until recently. Since the effectiveness of such a strategy depends on an organization’s ability to adjust rapidly as the fog starts to lift, managers must identify and intensively monitor key indicators suggesting which scenario might unfold. For the industrial supplier, some of the most important indicators are sales of new and existing homes, foreclosure rates, mortgage interest rates, new building starts, and announcements of “shovel ready” government projects. Of course, the company’s managers always followed such indicators, but the strategic-planning process typically collapsed their potential variations into average market growth forecasts. Given the present heightened uncertainty, however, the strategy group decomposed the average forecast into its individual elements to make the possible outcome for each of the indicators more transparent and to monitor them in greater detail.

There’s no occasion like the strategic-planning process to get a fix on such indicators—a fix that should also help companies make ongoing budget decisions in real time. That’s critical, because it makes no sense to set each operating unit’s budget allocation at the start of the fiscal year if cash is tight and corporate executives expect to dole it out carefully as plans become less uncertain. What companies need now is a dynamic “pay as you go” resource allocation process that conserves cash and encourages adherence to the strategic road map laid out in scenario planning.

This year’s planning process should also generate unusually specific plans to monitor the performance of suppliers, customers, and competitors. As we’ve seen in the past six months, the most entrenched incumbents can plunge into financial distress with dizzying speed. Early intelligence helps companies to recognize when they should negotiate more favorable supply terms, line up alternatives to risky suppliers, offer kinder credit terms to critical customers, accelerate collections from faltering ones, or scoop up all or part of vulnerable competitors. Leading indicators of distress include such familiar signals as delinquent accounts payable, downgraded debt ratings, large share price declines, late inventory deliveries, or lower-quality goods or materials. These signs, though all too familiar to operating managers, are typically addressed in an ad hoc way, not in the strategic-planning process. This year is different.

Look beyond the crisis

Given the vastness of the economic change now under way, the temptation for many planners will be to gaze, mesmerized, at the unfolding crisis. That’s a mistake, for at least two reasons.

First, devastating as the current downturn may be, it cannot roll back fundamental market trends—such as the aging of consumers in Europe and North America or the continued economic development of Brazil, China, India, and Russia—which will continue to create strategic opportunities and threats. Managers must focus their eyes—and resources—on these trends no matter what happens.

Second, planners who become fixated on current economic events run the risk of overlooking a core responsibility: evaluating the effectiveness of current strategies. Although the crisis may force companies to suspend or redirect some of them, others will remain relevant even in the changed environment. This year’s strategic-planning process is a time to encourage managers to sort out which current strategies the crisis has helped, hurt, or failed to affect and to ensure that a system and metrics are in place to track their performance. While all this may sound like common sense, extreme uncertainty makes it easy to overlook.

One company that’s staying the course is McDonald’s, which has profited in the downturn from its low-cost menu items and is enjoying its most robust same-store sales growth in years. Meanwhile, senior management has remained focused on longer-term strategies involving expensive store renovations, operational overhauls, high-end coffee products, and healthful menu options. Managers elsewhere can learn valuable lessons from the company’s efforts to benefit from the current circumstances while sticking to longer-term strategies and the underlying trends (such as healthier lifestyles) that they reflect.

Despite the challenging times, this year’s strategic-planning process need not be an exercise in anxiety or futility. Developing scenarios in greater depth, monitoring strategies more rigorously, and remaining focused on the long term will all help strategists boost the odds of creating plans that can lead their companies through the turbulence.

Executives are concerned that a new focus on near-term challenges may cause this year’s planning process to overlook long-term trends or preexisting strategies, according to the results of a McKinsey Quarterly survey on strategic planning.²

More than 80 percent of executives say their strategic-planning processes look different this year compared with last. The change executives say has been most significant is the adoption of a more rigorous approach to approving projects and capital spending, presumably with an eye toward managing cash carefully. Other significant changes include the creation of strategies that are more dynamic, focus on the short term, and that include more analyses.

Scenario planning is becoming a leading part of the process. Over 50 percent of respondents say scenario planning either is playing a bigger role in their companies’ strategic planning this year or has been newly added to the process. And when asked to write in the element of their planning processes that has been most valuable in helping them cope with this year’s uncertain environment, more executives mention scenario planning than anything else. Nearly 60 percent of the respondents say their companies are monitoring progress against their strategic plans more frequently this year. Over 80 percent of respondents are assessing the progress of their strategic plans at least quarterly, with 50 percent doing so at least once a month.

In short, many strategists seem to be rapidly adjusting their planning processes to cope with the changed economic environment. Important as these adjustments may be, their nature also raise a major question in the minds of many strategists: is the crisis atmosphere undermining focus on all but the immediate future? More than 50 percent of executives, in fact, express worry about not striking the right balance between near-term challenges and long-term strategic priorities. The perennial challenge of striking this balance has become particularly acute this year.

Source: McKinsey

 

Executive Summary:

Deciding how to allocate marketing resources is particularly difficult because decisions need to be made at many different levels—across countries, products, marketing mix elements, and different vehicles within elements of the mix (e.g., television versus the Internet for advertising). With the increasing availability of data and sophistication in methods, it is now possible to more judiciously allocate marketing resources. In this paper, HBS professors Gupta and Steenburgh discuss a two-stage process where a model of demand is estimated in stage-one and its estimates are used as inputs in an optimization model in stage-two. The researchers propose a matrix with three approaches for each of these two stages, and discuss the pros and cons of these methods. They highlight each method with applications and case studies to present rigorous yet practical approaches to making marketing resource allocation decisions. Key concepts include:

• This paper lays out a framework for managers who are responsible for allocating marketing resources for their products and services.
• Scores of studies in the area of allocating marketing resources now make it possible to form empirical generalizations about the impact of marketing actions on sales and profits.
• In practical terms, information about marketing resource allocation makes a significant impact at all levels of an organization.

Abstract

Marketing is essential for the organic growth of a company. Not surprisingly, firms spend billions of dollars on marketing. Given these large investments, marketing managers have the responsibility to optimally allocate these resources and demonstrate that these investments generate appropriate returns for the firm. In this chapter we highlight a two-stage process for marketing resource allocation. In stage one, a model of demand is estimated. This model empirically assesses the impact of marketing actions on consumer demand of a company's product. In stage two, estimates from the demand model are used as input in an optimization model that attempts to maximize profits. This stage takes into account costs as well as firm's objectives and constraints (e.g., minimum market share requirement). Over the last several decades, marketing researchers and practitioners have adopted various methods and approaches that explicitly or implicitly follow these two stages. We have categorized these approaches into a 3x3 matrix, which suggests three different approaches for stage-one demand estimation (decision calculus, experiments and econometric methods), and three different methods for stage-two economic impact analysis (descriptive, what-if and formal optimization approach). We discuss pros and cons of these approaches and illustrate them through applications and case studies.

Paper Information

• Full Working Paper Text

Executive Summary:

Coordination, and the communication it implies, is central to the very existence of organizations. Despite their fundamental role in the purpose of organizations, scholars have little understanding of actual interaction patterns in modern, complex, multiunit firms. To open the proverbial "black box" and begin to reveal the internal wiring of the firm, this paper presents a detailed, descriptive analysis of the network of communications among members of a large, structurally, functionally, geographically, and strategically diverse firm. The full data set comprises more than 100 million electronic mail messages and over 60 million electronic calendar entries for a sample of more 30,000 employees over a three-month period in 2006. Key concepts include:

• Communication is heavily constrained by formal organizational structure: the vast majority of communication occurs within business unit and functional boundaries, not across them. This points to the importance of drawing the right organizational boundaries.
• Women, mid- to high-level executives, and members of the executive management, sales, and marketing functions are most likely to participate in cross-group communications.
• These individuals provide a bridge for distant groups in a company's social structure.

  Abstract

  This is a descriptive study of the structure of communications in a modern organization. We analyze a dataset with millions of electronic mail messages, calendar meetings and teleconferences for many thousands of employees of a single, multidivisional firm during a three-month period in calendar 2006. The basic question we explore asks, what is the role of observable (to us) boundaries between individuals in structuring communications inside the firm? We measure three general types of boundaries: organizational boundaries (strategic business unit and function memberships), spatial boundaries (office locations and inter-office distances), and social categories (gender, tenure within the firm). In dyad-level models of the probability that pairs of individuals communicate, we find very large effects of formal organization structure and spatial collocation on the rate of communication. Homophily effects based on sociodemographic categories are much weaker. In individual-level regressions of engagement in category-spanning communication patterns, we find that women, mid- to high-level executives, and members of the executive management, sales and marketing functions are most likely to participate in cross-group communications. In effect, these individuals bridge the lacunae between distant groups in the company's social structure.

  Email Adam Kleinbaum and Toby Stuart.

  Paper Information

  • Full Working Paper Text

Editor's Note: Harvard Business School professor John Quelch writes a
blog on marketing issues, called Marketing Know: How, for Harvard
Business Online. It is reprinted on HBS Working Knowledge.

When driving these days, do you look at the prices every time you pass
a gas station? Do you notice yourself paying more attention to the
prices of everything you buy? You are not alone. Consumers everywhere
are more price aware. People who've been indifferent to price
increases for years are suddenly amazed at what things now cost. How
can marketers cope not just with inflation but with consumer sticker
shock?

1. Understand Your Customers. There are at least four ways in which
customers can respond to higher gas prices: downgrade from premium to
regular; take fewer trips by car, consolidate errands, switch to
public transportation; take the same number of trips but reduce the
miles driven per trip by, for example, vacationing closer to home;
drive more economically and less aggressively to improve miles per
gallon; and buy a specific dollar amount of gas rather than filling up
every time, even though this may mean more visits to the pump. Some
consumers may even trade in (at a loss) the SUV for a hybrid, an
example of how price inflation on one product can cause demand shifts
in a second, related, category.

More customers than usual will be looking out for price
promotions, but don't give away the store to those who don't need the
discount.

2. Invest in Market Research. You must discard your existing customer
segmentation assumptions and segment consumers around product usage
behavior and price sensitivity. You must get out into the marketplace
yourself and talk to consumers directly to understand their pain
points and how they are changing attitudes and behaviors in response
to price inflation. You must then quantify these shifts and develop
product and pricing strategies that balance the need to maintain both
profitability and market share.

3. Redefine Value. Customers buying soft drinks can think about price
in three ways: the absolute cost per can or bottle, the cost per
ounce, and, less common in this category, the monthly consumption
cost. Customers short on cash will focus much more on the absolute
price. They'll go for the 99 cent soft drink rather than the $1.29
container with 50 percent more volume. To motivate cash-poor
consumers, marketers must reverse engineer products and packaging to
hit key retail price points. This may mean downsizing package sizes,
something the candy industry always does in response to inflation.

4. Use Promotions. If you've always passed through raw material price
increases to the end consumer, you don't necessarily need to change
that policy. However, lagging competitors in passing on price
increases can have the same effect as a temporary price promotion.
More customers than usual will be looking out for price promotions,
but don't give away the store to those who don't need the discount,
and cut prices not across the board but only on items selected as your
inflation-busters. For cash poor consumers, these promotions should
hit the key price points on small pack sizes. For cash rich consumers,
encourage multi-unit purchases ahead of the inevitable next price
increase.

Strong brands can hold consumer loyalty while increasing retail
price points.

5. Unbundle. Customers who previously welcomed the convenience of
buying product, options, and services rolled into one may now ask for
a detailed price breakdown. Make it easy for your more price-sensitive
customers to better cherry-pick the options and services that they
truly need by giving them an unbundled menu of options.

6. Monitor Trade Terms. Beware of powerful distributors paying you
more slowly than they turn the inventory they buy from you. In an
inflationary environment, they're making money on the float by
stretching their payables. Manage your inventory on a last-in,
first-out basis to insure that increases in your realized selling
prices do not trail the increases in your input costs.

7. Increase Relevance. You need to persuade customers to cut back
their expenditures on other products, not on yours. In tough times,
consumers more than ever need and deserve the occasional treat. So, if
you are Haagen Dazs, tell the consumer to substitute private label
peas for the name brand but to not forego the comfort of curling up on
the sofa with a tub of her favorite ice cream. Strong brands can hold
consumer loyalty while increasing retail price points. Weaker brands
risk private label and generic substitution.

Clearly, not all marketers are equally affected by price inflation.
Commodities like gasoline, where the manufacturer adds little value
before the product reaches the end consumer, are more vulnerable,
while sales of the most exclusive global luxury brands hold up pretty
well regardless of price. Especially challenged are marketers of goods
and services for which consumers don't necessarily understand the
input costs: decorative candles, for example, are highly sensitive to
oil prices and the purchases are discretionary. The key here is to
educate the consumer, apologize for the uncontrollable price
increases, give price-sensitive consumers some promotional options,
and reemphasize product benefits.

Companies often manage strategy in fits and starts. Though executives
may formulate an excellent strategy, it easily fades from memory as
the organization tackles day-to-day operations issues, doing what HBS
professor Robert S. Kaplan calls "fighting fires."

A new book by Kaplan and David P. Norton aims to make strategy a
continual process. The Execution Premium: Linking Strategy to
Operations for Competitive Advantage shows managers how to weave
organizational principles into a more effective management system that
respects the differences between strategy and operations yet
integrates them in a powerful way. Kaplan and Norton introduced the
Balanced Scorecard, a performance measurement system, in 1992. The
Execution Premium is their fifth book as coauthors.

Kaplan recently explained the ideas behind The Execution Premium and
how they bridge the common divide between strategy and operations.

Martha Lagace: What particular issues around execution need to be
better addressed in business?

Robert Kaplan: There are two key issues. First is leadership. Without
strong visionary leadership, no strategy will be executed effectively.

The second key issue is to recognize that strategy and operations (or
tactics) are both important but they are different. The normal course
of events is for companies to focus on day-to-day operations and
short-term problem solving. Management meetings focus on fighting
fires and fixing problems. Often little time and few resources get
committed to strategic issues.

We don't advocate abandoning an intense focus on operations and their
improvement. But we do advocate planning strategy, not just describing
it as important. The senior management team needs to have regular,
probably monthly, meetings that focus only on strategy. We describe in
the book the different roles, frequencies, participants, and agendas
for operational review meetings and strategy review meetings. We open
the book with a great quote often but perhaps inaccurately attributed
to Sun Tzu in The Art of War: "Strategy without tactics is the long
road to victory; tactics without strategy is the noise before defeat."
This quote highlights the importance of integrating strategy and
operations, a central theme in our strategy execution system.

Q: What are typical challenges and pitfalls when linking strategy with
operations? Why is a formal strategy execution system valuable?

A: One challenge or pitfall is that few companies align their
operational improvement activities to strategic priorities. Many
companies today are practicing Total Quality Management, Six Sigma, or
other continuous improvement activities. But these are done across the
organization with no sense of priorities or impact from process
improvements. Consequently, much effort does not show up in tangible
results. Companies need a formal process for using strategic
objectives to set priorities for where operational improvements can
have the largest impact on strategy execution. We note that quality
and process improvement programs are like teaching people how to fish.
Strategy maps and scorecards teach people where to fish.

Another pitfall occurs when budgeting and financial planning are done
separately from strategic planning. We advocate that the operational
plan and budget be driven from the revenue targets in the strategic
plan. In The Execution Premium, we describe how a time-driven
activity-based cost model provides the previously missing link between
the revenue growth targets in a strategic plan and the authorization
for spending to supply the quantities of resource capacity that are
necessary to fulfill the sales and production needs of the strategic
plan. Without this coupling, operational plans either provide too
little or too much capacity for the strategic plan.

A third challenge is that most management meetings get consumed with
discussions about short-term operational and tactical issues. It is
important to meet to discuss and solve operational problems. But
companies err when they devote all their time together for
fire-fighting and coping with near-term issues. The formal strategy
execution system schedules strategy review meetings at a different
time from operational review meetings. In that way, each meeting has
its own frequency, agenda, information system, and participation, as
best meets the goals for that meeting.

Q: Given the proliferation of tools, how should management choose the
right one to formulate strategy and improve operations?

A: We don't have a preferred position on strategy formulation
methodologies. We have seen each approach lead to success in different
circumstances. If, for example, the company has low capital
utilization, then some use of a value-based management approach would
help to define a financial strategy. If the company does not have a
distinctive brand or market presence, a focus on identifying an
attractive customer segment, such as through Harvard University
professor Michael Porter's positioning framework, W. Chan Kim and
Renee Mauborgne's Blue Ocean approach, or C. K. Prahalad and V.
Ramaswany's customer co-creation process might prove most relevant.

If the company has distinctive capabilities in important business
processes— operations management, customer data mining, or product
features and innovation—that are superior to or not possessed by
competitors, then the resource-based view and identification of core
competencies are effective frameworks for strategy formulation. If the
company has a great human capital base, with skilled, experienced, and
highly motivated employees, then striving to create a learning
organization and encouraging emergent strategies to be proposed can
identify promising new strategic approaches.

While we are agnostic with respect to which strategy methodology a
company uses to arrive at its strategy, we do believe that creating a
strategy map and scorecard for that strategy is the logical and proven
next step for putting the strategy into action. That is why we have
placed strategy analysis and formulation as Stage 1 of our management
system, with planning and translating the strategy as Stage 2.

We take the same position with the various operational improvement
methodologies. We don't want to be caught debating the relative merits
and shortcomings of TQM, Six Sigma, lean management, and
reengineering. We do believe, however, that these methodologies are
most effectively applied to the strategic processes identified in a
company's strategy map and scorecard. That is why we place planning
operations in Stage 4 of the management system, downstream from the
Stage 2 processes of translating and planning the strategy. You can't
focus on the critical processes for improvement until they have been
identified in the strategic planning and translation stage.

Q: What is an Office of Strategy Management, and why is it necessary
in a company?

A: The OSM is analogous to a military general's chief of staff. The
general is responsible and accountable for developing the strategy to
win wars and battles. But a general almost always has a
chief-of-staff, often several ranks junior, who leverages the
general's time and attention. The chief-of-staff does not create
strategy or operational tactics and has no authority or accountability
for its execution. A chief-of-staff schedules the general's meetings,
ensures that the appropriate people show up at the meeting, attends
and takes notes at the meeting, and follows up after the meeting to
ensure that the actions decided upon are carried out. The
chief-of-staff leverages the general's time by making sure that all
the information, people, and follow-up are in place for the general's
strategy and tactics to be effectively executed. We recommend that a
similar, but expanded, set of tasks be carried out by a small cadre of
professionals to orchestrate the various strategy management processes
for the executive team.

The Office of Strategy Management has multiple roles and
responsibilities. First, as an architect, the OSM designs and embeds
any missing strategy and operational management processes into the
six-stage strategy execution system. The OSM ensures that all the
planning, execution, and feedback processes are in place, and that
they are linked together in a closed loop system.

The OSM also serves as the process owner for several strategy and
operational management processes, such as those to develop the
strategy, translate the strategy, and orchestrate the senior
management strategy review meetings. Many of these processes are new
to the organization. Since they cross existing business and functional
organizational lines, it is natural for the OSM to be their owner.
Assigning responsibilities for their execution to the OSM fills a gap
in management practice without infringing on the current
responsibilities of any existing department or function.

Finally, the OSM is the integrator of many existing activities. This
aspect is challenging because organizational and functional units
already have primary responsibility for processes such as budgeting,
communications, human resources planning and performance management,
IT planning, initiative management, and best practice sharing. The OSM
must work with the existing owners of these processes to ensure they
become aligned to the strategy.

Q: What is the role of leadership in sound execution?

A: While not an explicit part of any of the six strategy execution
stages (described below), executive leadership pervades every stage of
the management system. Throughout The Execution Premium, we describe
organizations that have successfully implemented their strategies.
They operate in varied regions and industries, including
manufacturing, financial services, consumer services, nonprofit,
educational, and public sector. Their strategies differ; some produce
low-cost commodity products and services, others deliver complete
solutions to their customer, and still others innovate with
high-technology products. About the only common element all these
diverse successful strategy implementers have in common is exceptional
and visionary leadership. In every example, the unit's CEO led the
case for change and understood the importance of communicating the
vision and strategy to every employee. Without such strong leadership
at the top, even the comprehensive management system we introduce in
this book cannot deliver breakthrough performance.

In fact, leadership is so important to the strategy management system
that we make a rather bold claim that leadership is both necessary and
sufficient for successful strategy execution. The necessary condition
comes from our experience with the more than one hundred enterprises
around the world who have become members of the Balanced Scorecard
Hall of Fame. In every instance, the CEO of the organizational unit
implementing the new strategy management system led the processes to
develop the strategy and oversee its implementation. No organization
reporting success with the strategy management system had an unengaged
or passive leader.

For Stage 1, the CEO leads the change agenda and drives it from the
top to reinforce the mission, values and vision. Leadership sets the
ambitious vision and stretch targets. In Stage 2, the executive leader
validates the strategy map as an expression of the strategy
articulated in Stage 1 and challenges the organization with stretch
targets that take all employees outside their comfort zones. In Stage
3, leadership drives alignment of organizational units and is
essential for communicating vision, values, and strategy to all
employees. Leadership, in Stage 4, supports the cross-organizational
unit process improvements. In Stage 5, the leader's openness and skill
in running the strategy management review meeting determines its
effectiveness for fine-tuning the strategy throughout the year. And in
Stage 6 the leader must allow even a well-formulated and executed
strategy to be challenged in light of new external circumstances, data
collected about the performance of the existing strategy, and new
suggestions from employees throughout the organization. Being willing
to welcome and subject existing business strategies to fact-based
challenges is one of the hallmarks of effective leadership.

Our sufficiency claim, however, is even bolder. The management
processes we describe in The Execution Premium give an effective
leader a framework for effective strategy execution. None of the six
stages in the management system is simple or brief. But collectively,
the management processes in the six stages provide leaders with a
comprehensive, proven system for managing the development, planning,
implementation, review, and adaptation of their strategies.

We believe that our 18 years of observation and work with enterprises
in all sectors and regions of the world has led to an emerging science
of strategy execution. Each of the six stages in the strategy
management system is doable, especially when guided by a senior
strategy management office. The one component we cannot provide a
blueprint for is visionary and effective leadership. That is why we
have come to believe that executive leadership is now both necessary
and sufficient for successful strategy implementation.

Q: You have written four other books touching on the Balanced
Scorecard (BSC). How has your thinking and your work with this
innovation evolved along the way?

A: Our thinking has really evolved from performance measurement, the
focus of our first Harvard Business Review article and the first half
of the original Balanced Scorecard book, to using the BSC as the
cornerstone of a comprehensive management system to help enterprises
execute their strategies. We learned early that the BSC was much more
than just a better performance measurement system; it can become the
basis for a new strategy management system.

Our second book, The Strategy-Focused Organization, identified the
five principles we saw successful companies using with the BSC for
strategy management: Mobilize, Translate, Align, Motivate, and Govern.
In the next three books, including our most recent book, The Execution
Premium, we went into more depth in these principles. Strategy Maps
focused on principle #2, translate. We described and illustrated how
strategy maps and scorecards could be customized to many different
strategies. The fourth book, Alignment, described principle #3, how to
create and capture corporate synergies through vertical and horizontal
alignment of business and support units. The fourth book also
contained material on principle #4, aligning and motivating employees
for strategy execution in their business or support units.

Our most recent book started out as an in-depth articulation of
principle #5, governing to make strategy a continual process." But
along the way, my coauthor Dave Norton and I realized that this book
was really a synthesis of all our prior work. It encapsulates the
latest development in the other four strategy-focused organization
principles and integrates them into a comprehensive closed-loop
management system that links strategy and operations. Beyond
integrating all our prior work, the new book also integrates a wide
range of other proven management tools, including mission and vision
statements, strategy formulation, target-setting, dynamic budgeting
and resource allocation, process improvement, quality methodologies
(Six Sigma, lean management, catchball), dashboards, the learning
organization, analytics, and emergent strategies.

Q: What's next for you?

A: I have recently become sensitive to a gap in our strategy map/BSC
framework by not paying sufficient attention to enterprise risk
management (ERM). Obviously, many large financial institutions,
despite having risk management departments, have suffered massive
losses from failure to understand the risks they took on. All
companies, not just financial ones, need to have better methods to
assess and monitor their risks. Quantifying financial, operating,
technological, and strategic risk is far from trivial, and much needs
to be learned to make enterprise risk management more effective. Risk
management also requires effective systems for internal control,
management control, and governance.

ERM objectives and metrics could certainly have a home in the
financial BSC perspective for increasing and sustain shareholder
value, along with the traditional objectives of revenue growth and
productivity improvements. And companies should have objectives in the
process perspective to manage and mitigate the risks associated with
their strategies. I am persuaded that embedding risk management
objectives in strategy maps and scorecards should be a high priority
for where increases in knowledge and professional expertise could add
substantial value to an organization. And reviews of a company's risk
position should be part of the monthly strategy review meetings. I
plan to spend some time in the next few years exploring this issue and
hoping to make some progress.

Q&A with: William A. Sahlman
Published: October 6, 2008
Author: Sean Silverthorne
Sean Silverthorne: "How to Write a Great Business Plan" has been one
of the most downloaded articles on Harvard Business Publishing since
you wrote it in 1997. Why do you think you hit a nerve?

Bill Sahlman: Writing a business plan is a seminal moment in the life
of a new venture. Doing so entails committing to paper a vision of the
factors that will affect the success or failure of the enterprise.
People take the exercise very seriously and get emotionally invested
in what they produce.

In that context, the article was written to give insights into how to
think about the role of a business plan and its relation to new
venture formation. I tried to explain that a business plan can't be a
tightly crafted prediction of the future but rather a depiction of how
events might unfold and a road map for change. I emphasized the notion
that successful entrepreneurs constantly seek the right mixture of
people, opportunity, context, and deal. They anticipate what can go
wrong, what can go right, and they try to balance risk and reward.

Over the years, I have received many e-mails from folks trying to
craft a business plan. They want feedback. Actually, they really want
me to say that they are on the right track. I explain that I would
need to get to know them and their opportunity much better than what
is possible in an e-mail and that the written document is not as
important as the people writing it. It's not science—it's art and
craft.

Q: In the decade since the original article came out, business
conditions have changed. If you were writing this piece today, would
you change it much?

A: I don't think the world has changed materially. Successful ventures
still have competent people pursuing sensible opportunities, using
resources that help, in a favorable context. Yes, the context is very
challenging today. But challenges create opportunities.

If gaining access to capital is hard, sometimes that means there will
be fewer competitors. This period is almost the antithesis of the
Internet bubble when everyone could raise money and start a company
regardless of how lamebrained the idea. Also, we have difficult factor
markets like energy, but that simply means that there are great
opportunities for people with ideas for alternative energy.

Were I rewriting the article today, I might emphasize the importance
of controlling your destiny by being conservative about access to
capital. Many great ventures in the Internet era (pre-1999) ended up
failing because they assumed they would have continued access to cheap
capital. Many of those businesses failed, though the underlying idea
was sensible. Similarly, we have seen a period when capital markets
got ugly, which has a negative effect on all ventures, sensible and
nonsensical.

I would also reinforce the idea that entrepreneurship is critical
around the world. We are confronted with many crises from health care
to the environment to global poverty. Solutions are likely to come
from talented private sector and social entrepreneurs.

Q: You wrote in the original article that most business plans "waste
too much ink on numbers and devote too little to the information that
really matters to intelligent investors." Still true today? What
really matters to investors?

A: When there is great uncertainty in the market, investors become
quite risk averse. They will only back proven entrepreneurs with truly
compelling ideas. People make the numbers, not conversely. So, I still
think the people making the forecasts are more important than the
numbers themselves.

Q: More and more entrepreneurial ventures are "born global": They seek
to address a global market and attract funding from global investors.
Should a business plan be tailored in some way for a global audience?

A: We live in a world of democratized access to ideas, human capital,
and money. There are fabulous global ventures being started in every
corner of the globe. These ventures can raise money locally or
globally. They can disperse talent in many countries.

Take a company like Skype. When I visited Skype several years ago, it
had 125 employees from 23 countries. The development team was in
Estonia, and its headquarters in Europe. Skype had raised seed capital
in Europe and in the United States. That's the new model.

Q: On the technology front, software applications such as Microsoft
Word, Excel, and PowerPoint have added many charting, graphing, and
visualizing capabilities. Some business plans are even written as Web
pages. Should entrepreneurs avail themselves of these tools for
business plans, or do they clutter the message too much?

A: On the first floor of the Rock Center at HBS there is a copy of the
original business plan that Arthur Rock wrote for Intel some 40 years
ago. It's only a few pages long, but it describes an outstanding team
pursuing a new technology. I have seen compelling business plans in
the form of a few PowerPoint slides, a couple of scribbled pages, and
a brief video. What matters is having all the required ingredients (or
a road map for getting them), not the exact form of communication.

Q: If you were to update your "Glossary of Business Plan Terms" and
what they really mean ("We seek a value-added investor" really means
"We are looking for a passive, dumb-as-rocks investor"), what current
terms would you include?

A: The glossary holds today. I think entrepreneurs, investors, and
employees need to be suitably skeptical about what they read in
business plans. I have read perhaps 5,000 plans and have only seen
three companies really meet their plan. That sounds like a pattern to
me. If anyone makes a bet based on the company doing exactly as
written, he or she will be sadly disappointed.

At the same time, every player has to be somewhat optimistic about the
possibility of overcoming inevitable setbacks. I think of ventures as
roller coasters, not rocket ships.

Q: Any general advice to entrepreneurs seeking funding in the
uncertain capital markets of today?

A: The best money comes from customers, not external investors. I
think entrepreneurs need ideas that are so compelling they can get
early money from customers. I also believe that great teams with great
ideas can continue to access capital on quite attractive terms from
outstanding investors. If the short term looks unsettled, that often
means that focusing on the long term has a big potential payoff.