A barrier to innovation: Hawk’s eye on the Annual Business Plan; while dust gathers on Long-Term Strategy

posted by Ravi Arora September 13, 2015

How often does your company make Long term (LT) strategy/plan? And short term (annual)?

What inputs are considered for to prepare the performance goals of your people? How much is Annual plan or LT strategy considered for this purpose?

How often is the output of LT strategy referred by people? Is it referred while making the next LT strategy? Is it even considered while making the next annual plan?

Why? What happens? Is the LT planning an academic exercise? Is it used more as a fashion statement – to consolidate all the information for the CEO, Board and the leadership?

How much does one see innovation plan in the Long term plan or the annual plan? Why? Or do you see in these documents those initiatives and projects marked clearly that need innovation or fuel innovation? Why?

The blog this month is dedicated to the above topics and I invite reactions, views and suggestions from readers.

Most of us would agree that Long Term Strategy is either not made or if it is made, is never referred after it is printed and submitted to senior leaders. It, no doubt, occupies the key place in the shelf or the table of the senior leader and managers. At the same time, the annual strategy (or Short term), which is predominantly number driven serves as a business plan and is translated into a score card and goals for the teams and individuals. No wonder the annual plan is referred; the compensation and promotions are based on achievement of the individual and team scorecards.

What happens to the Long term plan? Unlike the annual plan, it is never referred because unfortunately, it has no bearing on the future of individuals. The long term plan is almost never converted into annual scorecards or goals. No one refers to it to reward or promote someone. Most leaders do not wish to spend time on developing long term plans. There are three reasons for this behavior:

  1. The future is unpredictable: They feel that unlike the past, the future is far more unpredictable and hence there is no point in spending time on developing a plan that will be irrelevant very soon.
  2. Strategy planning is an annual process: The strategy is all about making decisions and with increasing VUCA, the decisions are not made only once every year, they are made every day, every week and every month. When forced to make decisions during the annual strategy sessions on issues that have a longer term impact, senior leaders successfully postpone those decisions citing (valid) reasons. Managers are indifferent to this behavior because it doesn’t impact their annual goals.
  3. Strategy is developed in Silos: The strategy in companies is usually developed BU-wise or function-wise or Product-wise. The information asymmetry that exists among the BU, Functions, products and also between each one of them and the corporate team doesn’t allow people to actively participate in the discussions to shape the future. Most of these sessions therefore turn out to be negotiations between the corporate team and the BU, functions and product team, which typically happens turn by turn. In reality, the long term discussions and decisions that could actively involve the corporate teams and all the BU, functions and products are centered around problems, issues, opportunities and themes which may impact one or many BU / functions/ products the industry or the country.

The above leads to a situation where the long term strategy is not made in many companies and the focus is always on the annual plan and then to the quarterly plans. In fact a research report by FCLT suggests that company Board is the root cause for the pressure that drives management to focus too much on short term sacrificing Long terms focus. Most management decisions are taken to support those actions which deliver the results in the same year and help achieve the annual target. Some management decisions though are taken to support those targets that are necessary to achieve the long term committed targets. One common aspect for all these decisions is that they inherently have less uncertainty about the outcomes and innovative ideas have higher uncertainty.

In some companies where the LT plan is made, it usually has a lot of details of current reality of various types (Customer satisfaction, employee satisfaction, SWOT analysis, outputs using various strategy frameworks like Porter, 7S, PESTLE, PP Matrix, Segmented Financial and Market results), details of the decisions that were taken by the management in the preceding one year and decisions that are taken during the strategy development which are mostly important to achieve the business plan for the current year. Needless to say that innovation cannot be fueled in absence of LT plan and also if the annual plan is dominated by numbers.

The first reason stated above for not engaging on making a LT strategy is most dangerous and not acceptable because it is based on misplaced logic and thinking. I consider ‘uncertainty’ as an excuse because almost all companies get surprised every now and then with the outcomes of its competitors (including start-ups); some of which surely would have taken them much more than a year. It is a different matter that I feel that that most of such outcomes are because of an individual’s passion and drive but the point is that long term plans have the capability to catch the competition unguarded.

The mindset of being inflexible to changing strategic positions and choices further adds to this reluctance of engaging on long term planning. Companies tend to ignore early warning signals from their competitors and especially the start-ups. Once the threat is evident to everyone, they declare that it is too late to do anything about it. This failure is attributed to increasing VUCA and unfortunately it is accepted by seniors. The information asymmetry that exists across management levels and between the management and the board, makes it difficult for the senior to confront their managers when such a situation (threat and related bad news) is brought up for discussion.

Once the first reason is addressed, the others are easily manageable through some changes in the process of making strategy. One such change is to discuss challenges, issues, opportunities, threats during the strategy development sessions and take decisions. The other change is to build a process that convenes the team more frequently and thereby making them more flexible and open to discuss low decibel and low frequency information, issues, (innovation) opportunities and threats (including innovations of competition and start-ups) and also helps them in being flexible in changing their past decisions.