Does strategic planning really have a positive impact on business performance?
Is strategic planning worth the effort? There is no doubt some controversy on how much impact strategy has on business performance. Proponents point to many examples of where effective strategy has lead to superior performance in organizations. But critics argue that it may be too rigid. So which is true?
In their meta-study of 26 previous published studies, C. Chet Miller and Laura B. Cardinal demonstrated that strategic planning has a positive impact on business performance (Strategic Planning and Firm Performance: A synthesis of more than two decades of Research, published in Academy of Management Journal, 1994, Vol. 37, No. 6, pp 1659-1665).
From my own observations and discussions with other managers, I believe the reasons that strategic planning fails or is less effective than expected are due to:
- An ineffective planning process
- Failure to execute
I have written previously about what defines an effective strategic planning process, and the pitfalls that cause them to be ineffective. But if you still have doubts as to whether strategic planning is worth the effort, I want to explain some of the ways it improves business performance.
Is strategic planning needed for all types and sizes of business?
The short answer is YES. Strategic planning is not just for large companies. Business of all sizes – from single owner/operator to multi-national enterprises, need a strategy. But obviously there can be some differences depending on the nature of your industry.
Business performance can mean different things to different types of businesses. In the private sector, financial performance is usually a key driver. But there are often other important drivers in addition to a healthy bottom line. For example, to a small business owner, things like respect in the community and “employer of choice” might also be key measures of success.
Similarly, non-profit and public service organizations are going to have their own definitions of business success. So perhaps the first thing to recognize is that strategic planning can (and should!) be designed around the vision and values of the organization.
As to the size of the business – strategic planning is essential for small business too. Obviously, there will be differences in the scope and approach as compared to a larger company, but the key components of strategic planning need to be there to achieve superior business performance.
In fact, smaller businesses can have some advantages in strategic planning, as there is often less complexity. And when it comes time to execute, this can often happen quickly and efficiently due to less hierarchy.
3 ways Strategic Planning leads to superior business performance
Do you every feel like you are going in many directions, but not making any progress? It’s a common situation. We are constantly bombarded with demands from customers, employees, stakeholders and community. But when we try to be all things to everyone – we almost never succeed! We usually end up burning ourselves out and using up our resources without seeing significant return.
By having the clear direction of a strategy, we know the exact actions and sequencing that we need to follow to achieve our goals. We can focus our limited resources on these actions. And often, the more we focus on specific actions, the better we become at it. That is, we get more efficient. Thus, there is an additive performance improvement over time.
It also sends a clear message to our customers, employees and stakeholders that “this is what we specialize in”. Once again, successful companies are ones that set themselves up as providing a unique value that is distinctly different from competitors.
And when you have a clear direction for your business, you can create alignment between different parts of your operations. You can make sure that different departments are coordinating their efforts, rather than (as often happens) working out of sync and causing friction. You may even find efficiencies that you hadn’t considered once everyone is on the same page.
An effective strategic plan involves extensive research and analysis on both your internal strengths and weaknesses, and external opportunities and threats. Knowing the possibilities, you can now be prepared by either mitigating risks or having processes in place to minimize the impact. While it’s not realistic to assume we can avoid every risk, a strategic plan will provide you with the knowledge you need to manage risk effectively.
One of the biggest risks that is often over looked is one of allowing your core competencies to erode. Often, businesses don’t have a clear understanding of their true strengths. And so they focus on the wrong things. For example – trying to copy your competitors rather than leveraging your unique strengths. And we can waste resources doing that. For example – investing in new technology at the expense of training, developing and retaining key employees. Often the first thing to go in budget reductions are training and research and development. So if these were actually your core competencies (and it often does lie in unique knowledge..), you trade a short term gain but eventually lose your competitive edge.
Guides decision making and operations
When the strategy is effectively communicated, everyone knows the end goal. Thus, we can evaluate day-to-day decisions based on our strategic direction. When you are faced with numerous demands, it’s essential to know what you can say NO to. So consider, if doing X doesn’t support our strategy – why would we do it? Or can we somehow adapt it to fit our strategy?
By communicating this down through all levels of the organization, employees can be empowered to find new and better ways of achieving your goals. They may find efficiencies, or innovative new approaches. And it can help them in communicating with customers and other stakeholders when they understand the focus and the value of your strategy. By knowing their direction, it can help reduce the inefficiencies of reacting to different interest groups.
I know it can be tough for businesses to say “we do X, we don’t do Y”. It can be tempting to grasp at all the suggestions of what others think you should do (and there’s no shortage of opinions!). But once you start finding the superior results from focus, you won’t want to go back! So be sure to frequently measure improvements in business performance and celebrate small successes to build momentum and support.
Strategic Plans need to be IMPLEMENTED!
While strategic planning is a very important exercise, it doesn’t just end there. You need to develop strategic management and strategic thinking skills within your organization to implement the strategy, lead positive change and adapt to changing conditions. And don’t forget that strategic plans need to be re-done, generally every 2 to 3 years. Now this can vary depending on the industry (some are more dynamic than others, requiring more frequent updates), but it’s important to always be looking down the road for things that can influence your business performance.
So how do you really know if strategic planning is worth the effort for you? Be sure to set some specific performance measures and review them regularly. Some strategies take longer than others to reach their potential, so be sure to set measures that are realistic. And make sure that you find the time to do what you said you would do! This is where performance planning and management comes in.
Learn more about strategic planning, strategic management and strategic thinking for managers