Thursday, May 26, 2011

Proof That Strategic Planning Works

It is hard enough to do great strategic planning work when everyone is committed to the idea. Trying to do it in a place where the idea of strategic planning is not well respected is virtually impossible. Yes, we’ve talked in the past about stealth strategy, a way to get people talking about strategy in place where the concept of “strategy” is not well accepted (look here, here, here, and here). But the best results come from strong commitment to the strategic process.

If you want proof, look to Caterpillar. There was a great article about Caterpillar in the 2011 edition of the Fortune 500 issue of Fortune magazine. Please read the article, which can be found by clicking here.

Caterpillar has been one of the best performing companies in the entire world over the past couple of years. This article explains why. The reason for their success can be explained in three words: great strategic planning.

In October of 2009, Caterpillar announced that CEO Jim Owens would retire in April of the following year and that he would be replaced by Doug Oberhelman. In those six months between being announced as the replacement and taking over as CEO, Oberhelmen spent virtually 100% of that time on strategy. He even enlisted 16 others to help him on this six month strategic journey. They dug deep and fully dissected the company until they had a clear picture of who they were and what worked.

According to Oberhelman, “We put everything on the table—good, bad, and ugly. We've gone into a lot of different businesses over the last 20 years. We said, ‘What really is our business model, and how do we want to make money?’”

This clarity allowed Caterpillar to know what to focus on, where to invest, and how to operate.

How many CEOs do you know who have dedicated 6 consecutive months to strategy? How many CEOs have a deep, deep understanding of their business model and which triggers are most critical to success? If you don’t do the preparation homework in advance like Caterpillar, then you will not have the foundation to allow you to act quickly as opportunities and events arise.

This is similar to an example in the late 1950s when Harry Cunningham found out he was going to be running the S.S. Kresge variety store chain in about a year. He spent nearly all of that time prior to taking over thinking about strategy. His conclusion was that Kresge needed to abandon its old variety store business model and invent an entirely new one—the discount department store model. As a result, he converted Kresge into Kmart, which became one of the most successful companies of his era.

Before jumping into action, take the time to gain a deep understanding. This provides two benefits—a knowledge of what actions to take, and the ability to act quickly when opportunities arise, since you already know which action do and don’t fit with success.

Back in 2005, the economy was pretty strong and Caterpillar was doing fairly well. Although things were going pretty well, Caterpillar thought this to be the perfect time to prepare for the absolute worst. They called this the “trough strategy”—what do you do if suddenly 80% of your sales go away?

Every division needed to create a strategic plan to maintain cash flow and protect the balance sheet under such a dire scenario.

Guess what? At the end of 2008, such a crisis scenario came to pass. Because the hard work of developing a trough strategy had already been done, Caterpillar could quickly execute the strategy, which allowed them to come out of the great recession with strong cash flow and a strong balance sheet.

How prepared is your company for various scenarios? If an unexpected scenario came to pass, how long would it take your company to react and adjust? How much valuable time would be wasted because you were not prepared?

Having a strategy for various scenarios is not of much use if you do not know when to use them. Therefore, Caterpillar searched for leading indicator triggers of change. They then monitored these leading indicators to make sure they had as much advance notice as necessary of impending change.

These leading indicators warned Caterpillar of the coming great recession as early as the fall of 2007. This early awareness made it easier to shift strategic gears when the crisis came a year later.

How aware is your company of impending change?

Having plans is one thing. Executing them is another. Not only did Caterpillar devote the necessary time and energy to implementing the trough strategy well during the recession, they also executed well on the post-recession strategy. Because of what Oberhelman learned in his six months of strategic preparedness, he knew exactly what needed to be done after the recession. Coming out of the recession, Caterpillar quickly made a number of key acquisitions which just made their strengths even stronger.

They acted quickly and aggressively because they had the confidence which comes from a deep understanding of what needs to be done to succeed under their business model.

How confident is your team about knowing the types of actions which will improve your strategic position?

If you want proof of the importance of Strategic Planning to corporate success, look to the example of Caterpillar. They are one of the most successful companies on the planet today because of their strong commitment to strategic planning. This commitment gave the company the understanding, preparation, awareness and execution necessary to produce this success. If you want a similar level of success, consider having a similar level of commitment to strategic planning.

1 comment:

  1. Gerald Nannjnga,

    The idea that moved most is the length of pondering period given to strategy. Six months and more are needed to come up with working strategies. As we live in a fast-moving world and people are immersed in quick successes I doubt how many managers would learn the lesson offered by this super post?