Despite all the time and energy companies put into strategic planning, traditional planning processes produce very few worthwhile decisions because they fly in the face of how decisions are actually made.
According to a new survey by management consulting firm Marakon Associates, and the Economist Intelligence Unit (EIU), companies following the traditional planning model - which is annual and focused on individual business units - make an average of only 2.5 major strategic decisions (those with the potential to increase annual company profits by 10% or more) a year.
In contrast, companies that develop strategy continuously and focus on individual issues make more than twice as many strategic decisions per year (6.1), on average.
The survey's findings indicate that traditional planning fails to influence most companies' strategies because the process clashes with the way executives actually make important strategy decisions, which are neither constrained by the calendar nor defined by business unit boundaries.
For example, two-thirds of the executives surveyed described strategic planning at their companies as a periodic event, often conducted as a precursor to the yearly budgeting and capital-approval processes.
A similar proportion said that planning at their companies was conducted business by business (i.e., focused on units or groups of units). Yet seven out of 10 said they make strategic decisions issue by issue - be it entering China, outsourcing or acquiring a distributor.
"Because traditional planning obstructs good decision-making, executives routinely sidestep the process and determine their company's strategy and future haphazardly, without rigorous analysis or productive debate," say Marakon's Michael Mankins and Richard Steele, who co-authored the research.
"To significantly improve performance, many should make their strategy development process continuous and issues-focused so they can make more, better and faster decisions."
The survey was based on interviews with 156 senior executives at large companies worldwide, all with sales of $1 billion or more. Four out of 10 of these companies had revenues over $10 billion.
Another startling insight from the survey, whose findings are summarised in the January 2006 issue of Harvard Business Review, is that only one in 10 (11 per cent) of senior executives believe strongly that strategic planning is worth the effort and only 13 per cent feel that top managers are effectively engaged in all aspects of strategy development at their companies.
It also emerged that companies that follow an annual planning calendar devote less than nine weeks a year to strategy development. That's barely two months to collect relevant facts, set strategic priorities, weigh competing alternatives and make important strategic choices.
"Many issues - particularly those spanning multiple businesses and crossing geographic boundaries - cannot be resolved effectively in such a short time," note Mankins and Steele.
But a small number of forward-looking companies have thrown out the traditional planning model and replaced it with a continuous, issues-focused approach.
Mankins and Steele cite as examples Boeing, Microsoft, Diageo, Textron, Cardinal Health and Cadbury Schweppes.
They also describe five practices that companies can follow to improve their strategic decision-making, such as focusing top management time on a limited number of key issues or themes and structuring strategy reviews to produce real decisions.