Many Best Ways to Make Strategy

“The shoe that fits one person pinches another; there is no recipe for living that suits all cases,” observed Carl Jung in Modern Man in Search of a Soul. Jung wasn’t thinking about strategic management when he wrote that passage. But he could have been. Managing a multibusiness organization means managing the relationship between executives in the central office and those who run the business units or divisions. And strategy gurus notwithstanding, there is no one best way to do that. Rather, the best way always depends on the nature and needs of the businesses in a company’s portfolio, on the styles of the people in the corporate office, on the company’s strategy and goals. At British Petroleum, headquarters is involved in all the important strategy decisions; it leaves the operating decisions to division managers. And BP flourishes. BTR wears a different shoe. At BTR, strategy issues are determined by managers in close touch with their markets. Top management concentrates on the operating ratios and financial controls. BTR also thrives. In a study of 16 large, diversified British companies, we identified three successful styles of managing strategy, which we call “strategic planning,” “financial control,” and “strategic control.” (See the sidebar, “Strategy and Style,” for details of the study.) Each is characterized by a particular way of organizing the relationships between headquarters and the business units. The secret to choosing among them is to find the style that suits the circumstances best. Then keep a sharp eye out for its inevitable drawbacks. Strategy and Style We studied 16 leading British companies to determine current practices, to identify important issues as perceived at different levels, and to relate strategic decision-making processes to the companies’ results. To that end, we conducted open-ended interviews with 5 to 20 corporate, divisional, and business managers in each company, including in almost all cases the chief executive. We also gathered internal data, usually from the head of planning, about formal aspects of the company’s strategic decision-making process. Finally, we drew on published reports. The companies we studied are all publicly quoted, with headquarters in the United Kingdom. They cover a range of manufacturing and service sectors (none of the companies was in financial services or retailing). Their common characteristics are size, diversity, and success. The companies that took part in the study are British Petroleum, Imperial Chemical Industries, General Electric Company, Imperial Group. BTR, Hanson Trust, Courtaulds, STC, BOC, Cadbury Schweppes, United Biscuits, Tarmac, Plessey, Lex Service Group, Vickers, and Ferranti. Bolder Strategies, Slower Decisions In many companies headquarters is deeply involved in strategy. Unit managers formulate proposals, but headquarters reserves the right to have the final say. The rationale is simple. As one senior manager commented to us, “There are two or three decisions each decade that make or break a business. Do you really want to leave the business manager alone to make them?” BP, the BOC Group, Cadbury Schweppes, Lex Service Group, STC, and United Biscuits (UB) are among the companies that do not. One strength of this “strategic planning” style is that it builds checks and balances into the process of determining each business unit’s strategy. Responsibilities typically overlap, so business unit managers and corporate staffers are forced to communicate. This exchange of ideas stretches the thinking and improves strategy proposals by the exposure to a variety of views. Unit managers also have a strong incentive to produce good proposals. They will be challenged by managers from headquarters. Although the corporate leaders will ultimately rely on their own judgment, unit managers know that their views will be carefully examined. A second strength of this style is that it encourages strategies that are well integrated across business units. The close involvement of central managers, strong staff functions, and overlapping responsibilities make it possible for the units to coordinate their plans. Doing so is especially important when business areas are linked through shared resources, for instance, or common distribution networks. As Dominic Cadbury, chief executive of Cadbury Schweppes, noted: “I’m trying to ensure that we maximize our opportunities for synergy in our core businesses, confectionery and soft drinks. We must make sure we are transferring skills and product knowledge and sharing assets.” Or as Sir Kenneth Corfield, former chairman of STC, remarked: “In businesses like electronics, the divisions have to help each other. One may have to forgo things so another can get on better.” Perhaps the greatest strength of the strategic planning style is that it fosters the creation of ambitious business strategies. Strategic planning companies are most effective in helping business units strive to gain advantage over competitors. Once headquarters establishes the direction in which the business should be going, unit managers are free to develop bold plans to achieve whatever goal has been set. “We would never have been able to pursue such an ambitious strategy if we were an independent company,” one business unit manager in a strategic planning company told us. And that statement characterizes the thinking of many similarly situated unit managers. Moreover, because the strategic objectives come from the top, the units can support those objectives without great concern for the short-term financial impact of their actions. They are, in a sense, buffered from capital market pressures. Finally, at its best, the agreement between the corporate office and the business unit creates a shared purpose that helps motivate those who must carry out the plan. Proof of these strengths is evident in the records of the strategic planning companies, which experience more expansion of their existing businesses than the strategic control or financial control companies (see Exhibit I). They also make more investments with long paybacks. As Sir Kenneth Corfield of STC commented, “Sometimes you need to go along with a development for five to seven years before getting any business.” As Sir Hector Laing, chairman of UB, explained: “In my experience, it takes about seven years to build a viable business in today’s competitive environment.” Exhibit I Which management style is best for growth? Note: Percent change is average annual growth of fixed assets, 1981–1985. Growth through acquisition is net of divestments. Growth through existing businesses is total growth less acquisition growth. Sources: Datastream international Ltd., company records, and authors’ estimates. The strategic planning style is most effective, then, in organizations that are searching for a broad, integrated strategy for developing the business units, where the focus is on long-term competitive advantage. BP, for example, has invested heavily in minerals, coal, nutrition, electronics, and a number of other areas that yield low immediate returns. BOC has plowed resources into strengthening its worldwide position in gases. It has also directed large amounts of capital to its health-care and carbon-graphite electrode businesses. Cadbury’s, Lex, STC, and UB have all made important investments in the United States. Each company believes that a U.S. presence is essential to the long-term strength of its core businesses, even though it knows that returns may be temporarily low or volatile. In a given business, strategic planning companies are more likely to choose an ambitious, expansive option than a cautious one. For example, STC, the Plessey Company, and General Electric Company (GEC) have all competed in manufacturing electronic components for defense and telecommunications systems. But only STC (the strategic planning company) made the decision to compete in the international market by building businesses in Europe and the United States and moving into the production of integrated circuits. Plessey chose to specialize rather than expand, while GEC essentially turned its back on the business because the profit returns in the industry were cyclical and low overall. Good as this management style may sound, however, it is not without drawbacks. Chief among them are the motivation problems that often plague line managers. Because so many people are involved in planning, with each trying to stamp his or her own view on the outcome, the process can be cumbersome, frustrating, and costly. Line managers may become demoralized when their strategy choices are rejected or changed. They may possess little ownership of the decisions being made about the business ostensibly in their charge, and they may resent superiors for being bossy. The comment of a division manager in one strategic planning company is typical: “In this organization, if you ask the CEO for advice, you’ll get instruction.” In response, business managers often become protective of their decisions and try to avoid situations in which they have to defend their policies and methods. The loss of autonomy at the business-unit level is particularly troublesome when the distance between headquarters and the market is great. If central managers misunderstand the environment or lose touch with the business, bold investments can become risky ventures that impose harsh consequences on the company. Cadbury, Lex, and STC have all experienced setbacks in their expansion strategies, and each company saw its aggregate earnings decline as a result. BP, BOC, and UB have suffered heavy losses from some of their unsuccessful ventures. Diminished flexibility is another characteristic weakness of the strategic planning style. The extensive decision-making process inhibits the company’s ability to respond quickly to changing market needs or environmental conditions. Business units do not easily jump into emerging markets or close unprofitable operations. Companies that use this style support losing strategies for too long. Headquarters can be slow to change its mind because it is invested in a particular plan or doesn’t fully understand the factors involved. We encountered businesses or divisions that have performed poorly for five or even ten years and yet are still asking headquarters for one more chance to get the long-term strategy right. This problem is particularly acute in highly diversified corporations, because it’s so hard to fully understand each business. For this reason, successful strategic planning companies tend to focus on a few core businesses, divesting those that don’t fit into their main areas. Better Financials, Less Innovation The “financial control” style is almost a reverse image of the strategic planning style (see the sidebar, “The Styles Matrix”). Responsibility for strategy development rests squarely on the shoulders of business unit managers. Headquarters does not formally review strategic plans. Instead, it exerts influence through short-term budgetary control. The objective is to get the business units to put forward tough but achievable profit targets that will provide both a high return on capital and year-to-year growth. The Styles Matrix The strategic planning, strategic control, and financial control styles form part of a continuum of ways headquarters can influence business units. The continuum has two dimensions: (1) planning influence, which expresses the degree to which strategy is centralized, and (2) control influence, which shows the importance companies attach to short-term financial targets. Companies that fall in the bottom left-hand corner can be labeled holding companies. In such organizations the center has little influence over the subsidiaries. Our research found that successful companies moved away from the holding company style to one of the three alternatives. The top right-hand corner of the matrix is blank because this style appears to be infeasible. Some companies in our research tried to combine a high degree of planning influence with tight short-term controls, but they have moved away from it. Either business-unit managers became demotivated by a seemingly oppressive corporate center or headquarters failed to maintain sufficient objectivity to keep the controls tight. Strategic management styles The greatest value of the financial control style is the motivation it gives managers to improve financial performance immediately. Targets are clear and unequivocal. Investment paybacks are short. Performance is monitored carefully. Variances against plan invoke penetrating questions from the top and speedy action from the bottom. Companies set up this way don’t buffer managers from financial pressures. Rather, they impose a more demanding and penetrating discipline than the capital market itself. All of this leads to strong profit performance, at least in the short term. The results of our study support this assertion. As Exhibit II shows, the financial control companies—BTR, Ferranti, GEC, Hanson Trust, Tarmac—have, on average, higher profitability ratios (return on sales, return on capital) than the other companies. They are also better at rationalizing poor performing businesses quickly and turning around new acquisitions. Exhibit II Which style is most profitable? Note: Percentage is average annual percentage, 1981–1985. Sources: Datastream International Ltd. and company records. Other strong points of the financial control style are less obvious. First, it has a way of shaking managers loose from ineffective strategies. By setting demanding targets and strictly enforcing them, corporate management constantly challenges plans that are producing poor results. Corporate doesn’t go so far as to suggest alternatives, but it provides the impetus for business managers to break away from strategies that aren’t working. Second, the financial control style is good for developing executives. Assigning profit responsibility to the lowest possible level gives potential high fliers general management experience early in their careers. Those who succeed have years of experience and results to call on by the time they reach the top. Those less suited to general management tasks are identified early and weeded out before they do damage to the company. Survivors in the financial control system know they have been tested against the toughest benchmarks of performance. This knowledge gives them a great sense of achievement and self-confidence to push their businesses forward as they see fit. This “winner’s psychology” creates decisive, ambitious leadership. As Graeme Odgers, former group managing director at Tarmac, commented, “Pure logic would argue that managers will set a low budget, to make life easy. But if they do, we make them feel that they’ve let the team down, that they’re not ambitious enough to be part of the group. For the most part, our problem lies in the other direction. The managers have so much faith in themselves that they think they can do anything.” This winner’s psychology improves the quality of the dialogue between headquarters and the business general managers. Business managers with a track record of delivering will argue their views more forcefully and with less concern about pleasing the boss. They understand that their progress in the company depends on the results they achieve, not on their eloquence in meetings. “It’s their business, their budget—and their heads that are on the block,” explained one manager. One final strength of the financial control style is its effectiveness with highly diversified portfolios. Corporate executives need not have an intimate knowledge of each unit’s competitors and marketplace. Because the business units develop their own strategies, headquarters can manage through the relevant ratios by comparing performance among different businesses. “We peer at the businesses through the numbers,” explained a manager at GEC. One shortcoming of this system is its bias against strategies and investments with long lead times and paybacks. At a minimum, this makes financial control companies vulnerable to aggressive, committed competitors that can tolerate a long-term view. In essence, that’s what happened to BTR, which gave up a strong position in the belting business because it was reluctant to invest aggressively in new technology. Rather than follow the trend to plastic belting (which captured more than 50 % of the market), BTR chose to develop a niche position in steel cord belting and thus forfeited its market share to competitors. Similarly, Hanson Trust passed up a proposal from one business unit to produce a promising generation of new products because corporate decision makers found the seven-to eight-year payback too hard to deal with. (Indeed, they sold the business shortly thereafter.) Pushed to extremes, therefore, the financial control style can lead to milking businesses for purely short-term gains and to excessive risk aversion that prevents healthy business development. When we asked managers from Hanson and BTR how they respond to Japanese competitors, they replied almost in unison, “They are good competitors to avoid.” The failure to back aggressive strategies means that growth in financial control companies comes more from acquisition than from internal development (see Exhibit I). Despite the highly successful record of companies like Hanson and BTR, there are limits to how far acquisition-based growth can be taken. Given Hanson’s current size, for instance, few potential targets would make much impact on the company’s overall financial performance. Another drawback to this system is the difficulty decentralized strategy has in exploiting potential synergies between business units. In theory, of course, this problem can be solved by redefining the business units so that two linked businesses are viewed as one. But in fact, it’s much more common for financial control companies to tear businesses apart in the quest to weed out low-profit activities. Moreover, few units in financial control companies try to build coordinated global positions. More often, they focus on segments or niches and avoid integrated strategies across a broad business area. Finally, rigorous control systems limit the flexibility of financial control organizations. Blind adherence to last year’s budget targets can preclude adaptive strategies and advantageous moves. Particularly in businesses where circumstances change rapidly, controls can become a straitjacket, and opportunities can be missed. More Balance, Less Clarity Companies that follow a “strategic control” style aim to capture the advantages of the other two while avoiding their weaknesses. In practice, however, the tensions involved in balancing control and decentralization make this style of management the hardest to execute because it creates ambiguity. At best, a strategic control system accommodates both the need to build a business and the need to maximize financial performance. Responsibility for strategy rests with the business and division managers. But strategies must be approved by headquarters. For this purpose, there is an elaborate planning process. Corporate executives use the planning reviews to test logic, to pinpoint weak arguments, and to encourage businesses to raise the quality of their strategic thinking. They also judge whether or not the appropriate balance is being struck between investing to build a business and pushing for short-term financial performance, often with the use of portfolio planning systems. Financial targets are set in a separate budgeting process. The strategic plan and the budget sometimes pull in opposite directions, and one or the other may have to give. One manager commented, “It’s normal for risky investments to drop out of the plan as it gets turned into the budget.” It is this tension between the plan and the budget that helps to maintain a balance between new development ideas and cash generation. Once headquarters has approved a plan and a budget, it attempts to monitor businesses against strategic milestones, such as market share, as well as budgeted performance. The tension between strategic milestones and financial ratios, along with that between the planning and budgeting systems, creates uncertainty and ambiguity. Every business in the portfolio wants to be viewed as a growth prospect. Yet some must be cash cows. As a result, objectives can become confused and the planning process can be a political platform. The performance of the strategic control companies we studied—Courtaulds, Imperial Chemical Industries (ICI), Imperial Group, Plessey, Vickers—shows the results of this balanced approach. As Exhibits I and III display, these companies had, in general, less internal growth than strategic planning companies, but they achieved substantial improvement in their profitability ratios. Long-term development is traded for short-term financial gains. Exhibit III Which style has the most improved profits? Note: Percentage is average percentage change in ratio, 1981–1985. Sources: Datastream International Ltd. and company records. Some business units do, of course, pursue long-term strategies aimed at building major positions. The pharmaceutical division of ICI and the international paints division of Courtaulds made systematic, long-term investments and are among the greatest success stories in British industry. For the most part, however, the strategic control companies are focused on cleaning up the portfolio. Large investments and acquisitions, so important to the business-building strategies of strategic planning companies, are rare, ICI’s recent acquisition of Stauffer being an exception. These companies have investigated many acquisitions, but few have come to fruition. Further, although headquarters cares about financial results, it is less ruthless than with financial control in driving to raise performance. As with strategic planning companies, “strategic” arguments (or excuses) have allowed less profitable businesses to operate at unsatisfactory levels of return for too long. For example, Imperial Group took more than five years to bite the bullet and dispose of the Howard Johnson chain, which severely depressed corporate earnings during the early 1980s. One of the benefits of the style is that business unit managers are motivated by the freedom and responsibility they are given. The chairman of a Vickers division explained: “Giving freedom like this is a bit nerve-racking at times because you feel you’re not in control. But if you always ask questions and monitor things at the center, the unit managers act as though they’re not really responsible for the decisions. If something goes wrong it’s as much your fault as theirs.” Another advantage of the style is that it can cope with diversity. Because headquarters decentralizes strategy and tailors the controls to the needs of the business, it can manage a broad range of businesses in different circumstances. But doing so is not easy. And managed badly, diversity can lead to superficial planning. One manager echoed many others when he complained that in his company there are “a whole series of rakings-over at different levels—all of them too shallow.” In these circumstances managers lower down are likely to lose the benefits of freedom and responsibility and become demotivated. The main disadvantage of the style is that the strategic and financial objectives, the long-and short-term goals, make accountability less clear-cut and create ambiguity. Business unit managers can be uncertain whether they should be putting forward aggressive growth plans or tight performance plans. They can be too cautious about high-growth businesses and too soft on mature lines. This ambiguity is compounded by the difficulty of establishing strategic goals. If strategic goals are not easily measured, excuses for poor performance can’t be tested and managers become confused about how they will be evaluated. The only real measures of performance then become financial. At its worst, the style becomes an ineffective form of financial control in which time is spent on planning without any tangible benefits and in which achieving planned objectives takes second place to impressing the boss. The Right Fit As we’ve seen, there are at least three ways to divide responsibility between corporate executives and business unit managers. We believe these different styles exist because of certain tensions implicit in the role of corporate management. Virtually all executives want strong leadership from the center, coordinated strategies that build in a variety of viewpoints, careful analysis of decisions, long-term thinking, and flexibility. But they also want autonomy for unit managers, clear accountability, the freedom to respond entrepreneurially to opportunities, superior short-term results, and tight controls. The two sets of wishes are contradictory. Central leadership, if it has any teeth, inhibits business autonomy. Coordinated strategies detract from personal accountability. Thorough reviews preclude quick entrepreneurial responses. Long-term plans compromise short-term performance. Flexibility is at odds with precise adherence to planned objectives. Successful corporations make trade-offs between these choices and draw on the combination that best fits the businesses in their portfolios. Is it worth sacrificing tight control and individual responsibility to build up core businesses? Do the benefits of clear goals and devolved responsibility outweigh the dangers of risk aversion and short-term thinking? Can managers cope with the ambiguity needed to achieve a balanced approach across a diverse portfolio? The answers depend on the very things top management knows best—the characteristics of its businesses and the people who make them work.

Many Best Ways to Make Strategy

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