Your Tricky New Role In Strategic Planning
from
March/April 2006
by Rob Norton
Of all New Year’s resolutions made for 2006, one of
the most likely to be still on your list is the determination to “get
more involved in my company’s strategic planning.” Polls show that
board members want to take a far more active role in shaping the
direction of the business. In the 2005 survey of 1,100 directors done
by
Corporate Board Member
and PricewaterhouseCoopers, for example, 59% said their boards should spend more time on strategy.
Many
boards are beefing up their involvement and even codifying their new
role. And for a few, it’s already familiar territory. At Becton
Dickinson & Co., a medical-supplies company headquartered in
Franklin Lakes, New Jersey, an annual strategic review was mandated in
the 2001 statement of corporate governance principles. The meeting is
an important part of the board’s three-step strategic-planning process.
“It’s not just some mega-PowerPoint presentation that the board looks
at and signs off on,” says chairman and CEO Edward J. Ludwig. At the
annual all-day board meeting, held in Short Hills, New Jersey, in 2005,
members of top management provide Ludwig and other directors with an
in-depth look at the strategy for each of the company’s three
businesses: biosciences, medical devices, and diagnostics. “It’s where
we do our deep dive,” Ludwig says.
Preparation and
participation are the keys. Becton Dickinson’s 11 board members get
reading material in advance, and substantial time at the meeting is
allocated to directors so they can ask questions. In each subsequent
board meeting, the directors focus on the strategy of one of the
business units. These two steps set the stage for step No. 3, a
rigorous debate about specific strategic moves that are proposed
throughout the year, such as making an acquisition or entering into a
licensing agreement.
According to Ludwig, this
formalized strategic-review process has helped the company avoid
missteps that might have been costly for shareholders. Recently, for
example, management was planning a significant acquisition. The target
company held a leading position in diagnostics for a particular disease
that Ludwig opts not to identify. BD, as Becton Dickinson likes to be
called, had done an enormous amount of research and planning, and the
board and top management were enthusiastic about the deal. As senior
executives and the directors discussed the acquisition, however,
concerns surfaced. Although no vaccine for the disease existed, if one
were to be developed the ground rules of the entire business would
change—and the value of a company able to diagnose the disease would
tumble. Ludwig draws a parallel to polio and its virtual disappearance
thanks to vaccines. “There are not a lot of medical diagnostics for
polio anymore,” he says.
One BD director seems to
have been far less sure of the wisdom of the acquisition than his peers
on the board. As a result, the company dug deeply into what was
happening among researchers. The final conclusion: A vaccine was likely
to be developed in the near future, and the acquisition made no sense.
BD dropped the plan. “People asked me whether I was disappointed, since
we had been so excited about it,” says Ludwig. “On the contrary, I told
them I thought it was the best decision we made that year.” Events
proved that the board was right; a number of vaccines are now available.
Not
all boards can boast such a well-oiled strategic-planning machine. If
you’re looking to start the process, it’s best to begin with a
realistic overview, which can be prompted by three basic questions:
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Are management’s and the board’s roles and responsibilities well defined and understood?
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Is a clear process in place that provides time and opportunity to review the strategic plan?
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Does the board have the right mix of members to oversee strategy effectively?
The
board’s job is not to devise strategy, of course, but rather to
comprehend management’s strategy, suggest changes, sign off on the
plan, and then make sure it is effectively implemented. “There should
be an understanding of what the milestones are, what kind of
information the board is going to get, and how corrections will be made
as circumstances change,” says Warren Batts, 73, the retired CEO of
Tupperware Brands Corp. and non-executive chairman of Methode
Electronics Inc., an auto-components manufacturer based in Chicago.
Batts is a former board member at the National Association of Corporate
Directors and was co-chair of its blue-ribbon commission on the role of
the board in corporate strategy, which has drawn up extensive
guidelines for the best strategic practices.
Richard
M. Steinberg, president of Steinberg Governance Advisors, a Westport,
Connecticut, consulting firm, also emphasizes early and persistent
involvement in strategic planning. “Many boards fall into the trap of
receiving the strategic plan from management, perhaps having an
opportunity to discuss and ask for some refinements, and then advising
management to move forward,” he says. “The best approach involves the
board understanding the competitive environments and other external
factors that were considered, and why the strategy that’s being put
forth was selected.” Steinberg feels it’s useful for directors to know
the alternative strategies that management considered and discarded.
“It’s like buying a house,” he says. “If the realtor is only showing
you a single property and expecting you to make a decision, it’s
reasonable to want to know what the alternatives were, what their pros
and cons were, and why they were considered or rejected. It’s hard to
make a decision without knowing the context.”
David
A. Nadler, chairman of Mercer Delta Consulting, says that boardroom
involvement in designing the strategic plan strengthens management’s
hand as well. “When directors have gone through an educational process
and understand the choices, they have a much deeper understanding of
what management is trying to do,” he says. “If questions or challenges
are later raised about the strategy, the board is more likely to stand
with management.”
Follow-up is crucial. The board
needs to remain involved and to let the CEO know when it thinks the
company has drifted away from its strategic plan, says Robert B.
Stobaugh, an emeritus professor at Harvard Business School who is
currently teaching at Rice University. Stobaugh has served on 11
different boards, ranging from start-ups to an outfit with $14 billion
in annual sales, which he declines to name.
At one of
those companies, he recalls, the stated strategic plan was twofold: to
grow internally, and to grow by strategic acquisitions close to the
core manufacturing business. The CEO, who had served for many years,
had delegated a large number of the day-to-day operations to the chief
operating officer and spent more time on M&A. “Then the CEO began
to deviate from the strategy by looking at acquisitions that didn’t fit
with the company’s business,” says Stobaugh.
The CEO
mentioned the acquisitions at board meetings, but the board did not
debate them to any great extent, even though some directors were uneasy
about the new direction in which they’d be taking the company. Those
concerns, however, finally crystallized at a one-and-a-half-day offsite
board meeting. The independent directors, a majority on the board, were
able to talk informally with other members of senior management, and
they found that these executives disagreed with the CEO’s proposed
change in strategic direction. When the CEO brought up a possible new
acquisition on the second day of the offsite, Stobaugh recalls, “it
became clear that a consensus of board members felt it shouldn’t go
ahead. We decided that we had to place this into a larger overall view
of the company, and that it didn’t involve going out and buying
companies in other businesses.”
The story has a happy
ending in that the board’s challenge to the CEO “wound up being
positive,” says Stobaugh. “He now knew what the board expected, and
after that the board spent more time getting reports on the operations
and performance of the core business.” This in turn encouraged
management to focus more on operations, and the company’s performance
improved, as did its stock-market showing. “The company went from being
an average performer to being above average,” Stobaugh says.
That
it took an offsite meeting attended by a variety of executives to bring
matters to a head doesn’t surprise Colin Carter, a senior adviser at
Boston Consulting Group. “It’s very difficult to have a real discussion
about strategy at a regular board meeting,” he says. “Board members
rarely get to have discussions with managers below the CEO.” Typically,
says Carter, business-unit and line managers will be allotted 40
minutes or so to make a presentation to the board, and often wind up
getting less time as the agenda becomes crowded. For this reason,
Carter also is a fan of special strategy meetings, where managers get
together with directors outside the boardroom for longer periods of
time. “You have a much different conversation with someone around a
table with a glass of wine,” he says, “than when they’re making a
20-minute PowerPoint presentation in the boardroom.”
The
director mix is another key element for boards wishing to get more
involved in strategic planning. At least some of the outsiders need to
know the company’s businesses and operations well enough to question
management, both about the strategy itself and about its
implementation. Many boards, though, lack members with such knowledge,
Carter says. The Sarbanes-Oxley Act’s requirements for director
independence may in fact be exacerbating the problem. “The
Sarbanes-Oxley definition of the perfectly independent director is
someone who knows nothing about the business,” says Carter only
half-jokingly, because, he maintains, superficial knowledge of the
business is insufficient. “It’s not enough to ask the intelligent
question,” he says. “The challenge a board member faces in contributing
to strategy is to have the capacity to form a point of view as to
whether what you’re hearing is believable.”
Chuck
Lucier, a Princeton, New Jersey, strategic consultant, faults reforms
from a different point of view. In his opinion, the shallow
understanding some directors have of their company’s business reflects
the fact that “they spend too much time working on things like
Sarbanes-Oxley and too little focusing on the business itself.” Lucier
argues that board members must take the time to ask themselves whether
each of the company’s business units is creating more shareholder
value:
“Is the strategy going to make the company
much more valuable for shareholders over the next three to five years?
That’s a very high standard to hold management to, but that’s the core
issue for the shareholders. The market already anticipates what the
businesses are doing today. The way investors get returns is how it
becomes more valuable tomorrow.”
At Becton Dickinson,
CEO Ed Ludwig feels that the diverse composition of the board has been
a key element in making the company’s strategic-planning process
effective. In addition to directors with backgrounds in science and
health services, the board includes senior executives from consumer
packaged-goods companies, heavy industry, insurance, office products,
and Wall Street. “They have different perspectives and come at
strategic questions from different angles, and that’s a benefit,” says
Ludwig. But specific expertise in BD’s business is also important.
Ludwig is currently recruiting directors and is eager to add another
board member with a scientific background.
For all
the defensive concentration on regulatory requirements and the
penalties that noncompliance may incur, there is evidence that
strategic mistakes are far more costly. A study by Booz Allen Hamilton
analyzed the performance of 1,200 companies with market capitalizations
over $1 billion from 1999 through 2003. Among the 360 whose performance
trailed the S&P 500 for those years, only 13% of the shareholder
value destroyed was identified as the result of compliance problems
such as ethical failures, fraud, and legal violations, and 27% was
attributable to operational shortcomings such as cost overruns. The
majority of the losses—60%—were caused by strategic blunders.
Read All About It
If you really want to get your nose into heavy thinking about strategy, here are some of the best books on the subject:
Competitive
Strategy: Techniques for Analyzing Industries and Competitors, by
Michael E. Porter (Free Press, 1980), is a pioneering book that created
the framework of modern strategy. The first of its three parts,
“General Analytical Techniques,” looks at three generic strategies—cost
leadership, focus, and differentiation. Next comes competitive strategy
in varying industry environments, and finally strategic decision-making
inside the company. Porter extended his framework further in
Competitive Advantage: Creating and Sustaining Superior Performance
(Free Press, 1998), which introduced the term “value chain” to business
literature. Oriented more toward practical managers, Competitive
Advantage begins with a summary of the earlier volume. The Financial
Times called Competitive Advantage “the most influential management
book of the past quarter century.”
The Innovator’s Dilemma:
When New Technologies Cause Great Firms to Fail, by Clayton M.
Christensen (Harvard Business School Press, 1997), introduced managers
to the term “disruptive technology” and offers a comprehensive theory
of how companies deal with technological change and business-model
innovation. Christensen’s ideas are coherent and comprehensive, and the
book has been influential. The author has continued to develop his
thinking in a pair of subsequent works—The Innovator’s Solution:
Creating and Sustaining Successful Growth, by Clayton M. Christensen
and Michael E. Raynor (Harvard Business School Press, 2003), and Seeing
What’s Next: Using the Theories of Innovation to Predict Industry
Change, by Clayton M. Christensen, Scott D. Anthony, and Erik A. Roth
(Harvard Business School Press, 2004).
Profit From the Core: Growth Strategy in an Era of Turbulence, by Chris
Zook with James Allen (Harvard Business School Press, 2001), grew out
of a 10-year study of 2,000 companies by the Boston management
consulting firm Bain & Co., where Zook leads the global strategy
practice. The main message is that most companies that are successful
over the long term have a strategy focused and built on one or two
well-defined core businesses. The follow-up, Beyond the Core: Expand
Your Market Without Abandoning Your Roots, by Chris Zook (Harvard
Business School Press, 2004), shows how companies can sustain growth
through carefully planned expansion into areas away from but related to
the core business.
Confronting Reality: Doing What Matters to Get Things Right, by Larry
Bossidy and Ram Charan (Crown Business, 2004), is an excellent account
of how real-world managers develop successful, integrated strategies,
written by Bossidy, the retired chairman and CEO of Honeywell
International, and author and consultant Charan. The book presents case
studies of Cisco, Home Depot, Sun Microsystems, and several other
companies.
Blue Ocean Strategy: How to Create Uncontested Market Space and Make
Competition Irrelevant, by W. Chan Kim and Renée Mauborgne (Harvard
Business School Press, 2005), is a recent addition that builds on
Michael Porter’s general methodology to show how companies can break
out of competitive markets and redefine their businesses. The authors,
both professors at the French business school INSEAD, use examples like
Southwest Airlines, which created a new and profitable market in the
brutally competitive airline industry, and the Australian winemaker
Casella, which has been successful using unorthodox marketing
techniques to sell its Yellow Tail wines in a tough market.
The Role of the Board in Corporate Strategy: Report of the NACD Blue
Ribbon Commission (National Association of Corporate Directors, 2000),
a comprehensive guide to reviewing the board’s role in strategy
development and oversight, includes detailed recommendations for how to
improve the strategy process. The book also offers 11 case studies
illustrating different aspects of board engagement.
Red Flags
How can you tell if your company’s strategy needs attention? Here are some warning signs:
Bad follow-through. “It’s important that the board make sure not only
that the senior managers are committed to the success of the strategic
implementation but also that they have the authority and resources to
do it,” says Richard Steinberg of Steinberg Governance Advisors.
“Budget planning and capital expenditures need to be aligned with the
strategy.”
A “no” from the market. Consultant Chuck Lucier recommends that board
members pay attention to the company’s stock-price performance. “For
most companies,” he says, “the stock market’s view of reality is at
least as good as management’s. If the market is flat, as it’s been
lately, and the company’s stock is down 10%, chances are something is
happening that the director needs to know about. It’s not enough if
management says, ‘The analysts don’t understand what we’re doing.’”
Not invented here. “As soon as you hear management saying, ‘We don’t do
it that way here,’ you know you have problems,” says Robert Stobaugh of
Rice University. “Directors come from different backgrounds and
industries and can be a source of new ideas. If the CEO is unwilling to
listen, it can be a sign that management has become ingrown.”
Clueless leaders. “If management doesn’t understand what’s going on
with the company’s competitors, you need to say ‘Whoa!’” says Warren
Batts, the retired CEO of Tupperware Brands Corp. One company on whose
board he served was a mall-based retailer that for many years refused
to acknowledge the market inroads being made by specialty “big box”
retailers. “The company atrophied before finally waking up,” he says,
“and by that time it had been taken over.”
Surprise products or competitors. If board members learn about a
breakthrough product or a new competitor from a newspaper or trade
journal, they need to find out why the information didn’t surface in
the strategic planning process, says Robert E. Mittelstaedt Jr., dean
of Arizona State University’s business school.
The control-freak CEO. “If the chief executive doesn’t want you talking
to the company’s business-unit managers, I would be concerned,” says
Boston Consulting Group senior adviser Colin Carter. “A lot of boards
don’t get good external data on things like market-share trends or the
reasons for the loss of key staff, and that’s one way to find answers.”
