Executive Briefings

Better Strategy For Business Units

Executives are most positive about the outcomes of strategy formulation for their companies' business units when they work at companies that use a collaborative approach. And while they say following best practices yields better results, they use those practices less often than they think they should.
When a company formulates strategies for its business units, it reaps what it sows, executives say. Those who work at companies that frequently apply best practices--such as assessing trends, risks, and competitor reactions--and take on the challenge of fostering collaboration between executives at the corporate and business unit levels are more positive about the outcomes.

The latest McKinsey online survey of executives around the world reveals tension throughout the process. Corporate-level managers tend to perceive their companies' processes for developing business unit strategy as collaborative, while their colleagues at the business unit level more often see the strategies as mandated by the corporate center.

Most respondents do agree, however, that their companies have some way to go before the formulation of business unit strategy meets the rigorous standards associated with best practice. For instance, while eight executives out of ten surveyed say it is relevant to identify the top business, social, and environmental trends that would affect a business unit's strategy, only half report that their companies frequently do so.

What's more, executives have mixed feelings about the results. While a large majority of respondents say the process aligns business unit leaders with the strategy and makes managers committed to the implementation of strategy, relatively few report that it fosters creativity or incorporates the priorities of employees at all levels.

Equal shares of respondents report taking a collaborative or a corporate--led approach to developing business unit strategy at their companies. Thirty-seven percent say corporate and business unit representatives share the work, and as many say strategy is formulated on the basis of targets set at the corporate level in areas such as growth, profit, or market share. Twenty-three percent report that the business unit formulates its strategic plan, which is then reviewed by the corporate center.

Executives at smaller companies are more likely to report taking a collaborative approach. The larger the company, the more likely it is to use a corporate-led process. How executives characterize the process at their companies also depends on their affiliation. Managers involved in strategy on the business unit side more often view strategy development as being led at the corporate level, while corporate-level executives tend to see it as a collaborative effort.

Companies know what steps to take to formulate an effective strategy, but they don't take them as frequently as they should. The survey asked about critical best practices (such as assessing trends, economic drivers, risks, uncertainties, and competitor and stakeholder reactions), as well as others such as providing more than one strategic option and using case studies and analogies to guide decisions.
A strong majority of the respondents describe nine such practices as relevant for the formulation of strategy in their companies' sector or sectors. Explicitly taking into account the organization's strengths and weaknesses is the practice seen as most relevant. Two particularly sophisticated practices--the use of case studies in a business unit's own industry and examples or analogies from other industries--are the only two that a majority do not consider relevant.

However, a gap of 15 percentage points or more separates the portion of respondents who consider these best practices relevant from those who say that their companies frequently use the practices. The gap is particularly wide--almost 30 percentage points--for two activities: identifying and assessing the top trends that would affect a business unit in the next three to five years and explicitly defining a business unit's industry and its role within the company's portfolio.

What's more, serious shortcomings emerge when we pressed executives about the specific actions their companies take when applying some of the best practices. For instance, while 65 percent say it is relevant to take the reactions of competitors into account, and 41 percent say their companies frequently do so, no more than 29 percent say their companies often discuss and analyze the prospects of other players entering their markets. Only 10 percent say they frequently conduct gaming exercises to test the probability of such market entries and potential responses to them.

Companies with a collaborative approach do somewhat better overall than those with a corporate- or business unit-led approach. And executives at collaborative companies are significantly more likely to say they frequently take into account expected reactions from competitors and analyze top trends.
Although there's general agreement on what companies ought to be doing, there is much less agreement on who's in charge.

The overall response indicates a roughly equal split between the corporate side and the business units about who is taking the lead in formulating and monitoring strategy, but while corporate-level executives most frequently see a small group of senior corporate managers as taking the lead, respondents at the business unit level are more likely to see business unit leaders as being in charge. Both groups overwhelmingly agree that business unit leaders have the main responsibility for implementing the formulated strategy.

The quality of an approach to formulating strategy can be measured in part by whether participants are satisfied that the process meets goals such as involving those who carry out strategy, identifying growth opportunities effectively, and fostering creativity--all of which presumably increase the chances of making and executing successful strategies.

A clear majority of executives agree that their companies' approaches to formulating business unit strategy help to align business unit leaders with the strategy and guarantee a commitment to its implementation, ensure that those who execute the strategy are involved in making it, and build a shared understanding of market dynamics, But only a minority agree that their approaches foster creativity, incorporate priorities of employees at all levels, and effectively identify growth opportunities outside of the core business. What's more, corporate executives hold a consistently rosier view than business unit executives do.

To dig deeper into the satisfaction of executives with strategy development, we combined their levels of agreement with each of the outcomes into a single composite measure and divided the respondents into three groups: those who are satisfied (in overall agreement with the statements), those who are neutral, and those who are dissatisfied (disagree with the statements). According to this analysis, executives who are satisfied are the likeliest to describe the process at their companies as collaborative. Specifically, executives at companies with a collaborative approach to strategy represent 37 percent of the sample but 42 percent of those who are satisfied with their process.

In addition, there is a strong and consistent correlation between satisfaction levels and the frequency of using best practices in strategy formulation. For instance, 57 percent of executives who are satisfied with the process say they apply one of the least-used best practices: frequently providing more than one option when making strategic recommendations. Only 31 percent of the neutral executives and 23 percent of the dissatisfied ones report using that practice.

In the end, though, the effectiveness of strategy formulation must also be measured by whether the company achieves its strategic goals. The frequent use of best practices in the process seems to help somewhat.

For instance, of respondents who report that over the past three fiscal years their companies performed better than the strategic targets they had set, 62 percent say their processes frequently take these targets into account and assess risks, compared with 56 percent of executives at companies that performed on target and 47 percent of those that performed below target. Indeed, the outperforming companies were more likely to make frequent use of 7 of the 11 practices.

About the Contributors: Contributors to the development and analysis of this survey include Jungkiu Choi, a McKinsey alumnus; Dan Lovallo, a professor at the University of Western Australia Business School and an adviser to McKinsey; and Anna Tarasova, a consultant in McKinsey's Waltham, Massachusetts, office.
For the complete report including graphics, go to:
http://www.mckinseyquarterly.com

Executives are most positive about the outcomes of strategy formulation for their companies' business units when they work at companies that use a collaborative approach. And while they say following best practices yields better results, they use those practices less often than they think they should.
When a company formulates strategies for its business units, it reaps what it sows, executives say. Those who work at companies that frequently apply best practices--such as assessing trends, risks, and competitor reactions--and take on the challenge of fostering collaboration between executives at the corporate and business unit levels are more positive about the outcomes.

The latest McKinsey online survey of executives around the world reveals tension throughout the process. Corporate-level managers tend to perceive their companies' processes for developing business unit strategy as collaborative, while their colleagues at the business unit level more often see the strategies as mandated by the corporate center.

Most respondents do agree, however, that their companies have some way to go before the formulation of business unit strategy meets the rigorous standards associated with best practice. For instance, while eight executives out of ten surveyed say it is relevant to identify the top business, social, and environmental trends that would affect a business unit's strategy, only half report that their companies frequently do so.

What's more, executives have mixed feelings about the results. While a large majority of respondents say the process aligns business unit leaders with the strategy and makes managers committed to the implementation of strategy, relatively few report that it fosters creativity or incorporates the priorities of employees at all levels.

Equal shares of respondents report taking a collaborative or a corporate--led approach to developing business unit strategy at their companies. Thirty-seven percent say corporate and business unit representatives share the work, and as many say strategy is formulated on the basis of targets set at the corporate level in areas such as growth, profit, or market share. Twenty-three percent report that the business unit formulates its strategic plan, which is then reviewed by the corporate center.

Executives at smaller companies are more likely to report taking a collaborative approach. The larger the company, the more likely it is to use a corporate-led process. How executives characterize the process at their companies also depends on their affiliation. Managers involved in strategy on the business unit side more often view strategy development as being led at the corporate level, while corporate-level executives tend to see it as a collaborative effort.

Companies know what steps to take to formulate an effective strategy, but they don't take them as frequently as they should. The survey asked about critical best practices (such as assessing trends, economic drivers, risks, uncertainties, and competitor and stakeholder reactions), as well as others such as providing more than one strategic option and using case studies and analogies to guide decisions.
A strong majority of the respondents describe nine such practices as relevant for the formulation of strategy in their companies' sector or sectors. Explicitly taking into account the organization's strengths and weaknesses is the practice seen as most relevant. Two particularly sophisticated practices--the use of case studies in a business unit's own industry and examples or analogies from other industries--are the only two that a majority do not consider relevant.

However, a gap of 15 percentage points or more separates the portion of respondents who consider these best practices relevant from those who say that their companies frequently use the practices. The gap is particularly wide--almost 30 percentage points--for two activities: identifying and assessing the top trends that would affect a business unit in the next three to five years and explicitly defining a business unit's industry and its role within the company's portfolio.

What's more, serious shortcomings emerge when we pressed executives about the specific actions their companies take when applying some of the best practices. For instance, while 65 percent say it is relevant to take the reactions of competitors into account, and 41 percent say their companies frequently do so, no more than 29 percent say their companies often discuss and analyze the prospects of other players entering their markets. Only 10 percent say they frequently conduct gaming exercises to test the probability of such market entries and potential responses to them.

Companies with a collaborative approach do somewhat better overall than those with a corporate- or business unit-led approach. And executives at collaborative companies are significantly more likely to say they frequently take into account expected reactions from competitors and analyze top trends.
Although there's general agreement on what companies ought to be doing, there is much less agreement on who's in charge.

The overall response indicates a roughly equal split between the corporate side and the business units about who is taking the lead in formulating and monitoring strategy, but while corporate-level executives most frequently see a small group of senior corporate managers as taking the lead, respondents at the business unit level are more likely to see business unit leaders as being in charge. Both groups overwhelmingly agree that business unit leaders have the main responsibility for implementing the formulated strategy.

The quality of an approach to formulating strategy can be measured in part by whether participants are satisfied that the process meets goals such as involving those who carry out strategy, identifying growth opportunities effectively, and fostering creativity--all of which presumably increase the chances of making and executing successful strategies.

A clear majority of executives agree that their companies' approaches to formulating business unit strategy help to align business unit leaders with the strategy and guarantee a commitment to its implementation, ensure that those who execute the strategy are involved in making it, and build a shared understanding of market dynamics, But only a minority agree that their approaches foster creativity, incorporate priorities of employees at all levels, and effectively identify growth opportunities outside of the core business. What's more, corporate executives hold a consistently rosier view than business unit executives do.

To dig deeper into the satisfaction of executives with strategy development, we combined their levels of agreement with each of the outcomes into a single composite measure and divided the respondents into three groups: those who are satisfied (in overall agreement with the statements), those who are neutral, and those who are dissatisfied (disagree with the statements). According to this analysis, executives who are satisfied are the likeliest to describe the process at their companies as collaborative. Specifically, executives at companies with a collaborative approach to strategy represent 37 percent of the sample but 42 percent of those who are satisfied with their process.

In addition, there is a strong and consistent correlation between satisfaction levels and the frequency of using best practices in strategy formulation. For instance, 57 percent of executives who are satisfied with the process say they apply one of the least-used best practices: frequently providing more than one option when making strategic recommendations. Only 31 percent of the neutral executives and 23 percent of the dissatisfied ones report using that practice.

In the end, though, the effectiveness of strategy formulation must also be measured by whether the company achieves its strategic goals. The frequent use of best practices in the process seems to help somewhat.

For instance, of respondents who report that over the past three fiscal years their companies performed better than the strategic targets they had set, 62 percent say their processes frequently take these targets into account and assess risks, compared with 56 percent of executives at companies that performed on target and 47 percent of those that performed below target. Indeed, the outperforming companies were more likely to make frequent use of 7 of the 11 practices.

About the Contributors: Contributors to the development and analysis of this survey include Jungkiu Choi, a McKinsey alumnus; Dan Lovallo, a professor at the University of Western Australia Business School and an adviser to McKinsey; and Anna Tarasova, a consultant in McKinsey's Waltham, Massachusetts, office.
For the complete report including graphics, go to:
http://www.mckinseyquarterly.com