Step 1: The Environmental Scan

As seen in Figure 6.1, the first step in the planning process is the environmental scan. This step involves collecting information on (1) the market in which the company competes, (2) the company's competition, and (3) key environmental trends that may affect the business (positively or negatively) over the next three to five years. This step replaces and improves upon the opportunities and threats component of the conventional SWOT analysis. It improves upon it because, rather than merely a general notion of opportunities and threats, the approach focuses on three key dimensions (the market, competitors, and trends) that lead to a more in-depth analysis, as explained below.

Market Analysis. The first step of the environmental scan is to collect and analyze information about the company's current and potential market. In brief, this step involves collecting information on the nature of the company's customers, their needs, how they buy, and the potential of different market segments. The output of this analysis should be a very clear picture of the company's present and potential customers, their needs, and the extent to which the company is meeting (or, in the case of potential customers, might meet) customer needs. In addition, the market analysis should identify the threats and opportunities that exist within the company's present and potential markets.

Competitive Analysis. The next step in an environmental scan is to assess the competition. The first step in this process is to identify who the company's most significant present and potential competitors are. These key competitors should be those that pose the most significant threats to the company's ability to be successful in its chosen market. The next step is to identify the strengths and limitations of each competitor—not just in terms of the products or services it provides or its ability to understand and meet customer needs (that, in turn, leads to how customers view each company); but also in terms of the extent to which it has built the infrastructure (has the resources, operational systems, management systems, culture, and culture management systems) needed to support effective and efficient current and future operations. While information about competitors' infrastructures can be difficult to obtain, it can be quite valuable from the standpoint of a core strategy (which will be discussed later in this chapter).

Identifying Market Segments: One Output of the Market and Competitive Analysis. The information collected through the market and competitive analyses can be used as the basis for understanding where a company is competing or might compete within its market—that is, its market segments. A market segment is defined in terms of the product or service categories a company offers, or will offer, as well as the tier of the market in which the organization will compete. These two dimensions of the market come together in what we call the strategic board, which identifies the segments that are included in the market in which a company is competing. An example of a strategic board for the automobile industry is presented in Figure 6.2.

The market for any product or service typically exists in terms of three different tiers or levels of the market (shown on the vertical axis of Figure 6.2). In order to position themselves effectively, companies must understand that customer wants differ at each tier.

The primary concerns for a Tier I buyer or customer are quality, service, and prestige of the product/service or brand. Customers in this tier are less concerned with price or even price differentials than they are with the other factors. While these customers may seek to obtain the “best” price, they will not settle for less in terms of quality, service, or prestige (of the brand). For example, a Tier I automobile customer may consider a Mercedes, a Jaguar, or some other luxury automobile and might negotiate with the salesperson on price. This customer, however, wants a luxury automobile and will pay what is needed to obtain it. Viewed figuratively, the customers in this tier are those who might purchase products and services ranging from a Cadillac to a Rolls-Royce. This is true not only for automobiles per se but for all products and services that fit this particular categorization by quality. The same kind of demarcation can be true for retail (e.g., Saks Fifth Avenue, Barney's), legal services, health care, or products provided by aerospace firms.

The second tier of the market is usually significantly larger than Tier I in terms of the number of customers in this segment. In Tier II, the buyer is concerned with a combination of quality, service, prestige, and price. Typically, the buyer is making tradeoffs between two or more of these variables. The products in this category figuratively range from Volvo down to a Chevrolet. As before, this tier of the market is not just applicable to automobiles but to a full range of products and services.

In Tier III, the typical buyer is concerned primarily with price. Quality, service, and prestige are relatively unimportant. The buyer may still strive to obtain the highest quality of product or service, but he or she only has so much money to spend. In most markets, this tends to be the largest of all three tiers of the market. The buyer in this tier is looking for a serviceable product or service. It may well be a commodity or a generic brand. This tier can be symbolically represented by looking from lower-priced Ford products down through Hyundai, Kia, and used (previously owned) automobiles.

To illustrate the fact that the three tiers of the market do not merely apply to tangible products such as automobiles but to all other products and services as well, consider some examples, such as legal services, medical services, aerospace, and retailing. In Los Angeles, there is a well-known law firm by the name of O'Melveny & Meyers. This firm operates in the Tier I segment, and to paraphrase a well-known saying, “If you have to ask the price, you probably cannot afford it.” In Tier III we have a firm that specializes in being a legal service supermarket: Jacoby & Meyers. And in Los Angeles, there are certainly many Tier II law firms (probably several with a “Meyers”!). With respect to medical services, community or public clinics occupy Tier III of the market, PPOs occupy Tier II, and HMOs occupy the lower portions of Tier II and upper Tier III. Many private physicians are in various levels of Tiers I and II. The upper end of Tier I tends to be occupied by some of the elite private hospitals, as well as by certain private physicians. In the aerospace sector, Hughes Aircraft had traditionally occupied Tier I of the market. It specialized in being able to do whatever was required by its customers, which were subunits of the U.S. Department of Defense. Quality, rather than cost, was the primary consideration. Today, most aerospace firms occupy Tier II, because the customer is concerned with the tradeoff between price, quality, and service; a few aerospace firms operate in Tier III. In the retailing sector, Saks Fifth Avenue and Neiman Marcus occupy Tier I. Stores such as JCPenney and Macy's occupy Tier II, while Tier III is served by Walmart, Kmart, and 99 Cents Only Stores.

It is typically very difficult for companies to compete in all three segments of the market simultaneously. Only some of the largest have traditionally been able to accomplish this feat. For example, General Motors begins with its lower-priced Chevrolets and moves its customers all the way through its product ladder to the Tier I version of its Cadillac. However, in the lower reaches of Tier III, General Motors has not traditionally competed with some of the less expensive foreign imports, and it does not compete in the highest levels of Tier I with products offered by Mercedes and Rolls-Royce.

Developing and analyzing the strategic board can help a company's leadership team understand where it currently competes and with whom it competes. This can then help a company focus on the strengths and limitations of its most significant competitors rather than assume that it competes with “everyone.” If a company competes in Tier II of the retail market, it should be most concerned with understanding the strengths and limitations of others in this segment. Companies competing in Tier I or Tier III of this market should be of less concern unless there is the possibility that they might move into Tier II. For example, Starbucks does not see itself in competition with McDonald's. Starbucks envisions itself in Tiers I and II, and sees McDonald's as a Tier III business. Analyzing the strategic board can also lead to the identification of “open segments”—that is, segments in which the company might compete because no others have yet entered them.

Trend Analysis. The final step in the environmental scan is to clearly identify key environmental trends that may affect the company in the future, and the impact that these trends might have on the company's success (that is, the threats and opportunities presented by these trends). This involves addressing questions such as: What will our industry be like in five years? What emerging trends in demographics, workforce values, the economic and political environment, technology, and so on might affect our organization? What potential opportunities and threats are implicit in those trends? What actions can or must we take to deal with them?

Specific areas of focus in the twenty-first century relate to technological trends, social media trends, and the social and psychological differences of different age cohorts (e.g., what Millennials versus Gen Xers are looking for in their jobs). In addition to these types of trends, each business will have specific trends that are most important to them. For example, Navistar and other heavy and medium truck manufacturers need to be concerned with environmental regulations around emissions. Fast food restaurants like McDonald's and Burger King need to be concerned with (and have adapted to) changing consumer preferences and the trend toward “healthy eating.” Retailers need to track how customers purchase their products, as well as the products that consumers want to purchase.

Many organizations initially missed the significance of the Internet for their business. For example, Borders, a brick and mortar bookstore, went bankrupt. Sears abandoned their catalog business just before direct sales via the Internet exponentially expanded and led to Amazon becoming a giant net-based “e-tailer.”

Even in the technology space, an understanding of trends is critical. The challenge for technology companies is to continuously adapt or perish. Once-powerful technology companies have been weakened or have even perished because they missed trends. Examples include IBM, which initially missed the significance of the personal computer and mini-computers for its core business in mainframes; Microsoft, which initially missed the significance of the Internet; and Intel, which initially missed the significance of the trend to mobile devices. As this book is being written, cloud computing is the emerging trend in technology that will be disruptive. As stated by Tiernan Ray (who writes a weekly column on Technology for Barron's), “The Challenge for Internet Companies Now: Adapt or Die.”³ The challenge to adapt to cloud computing faces companies like Salesforce.com, Oracle, IBM, and many others in the technology space.

Step 2: The Organizational Assessment

The second step in the strategic planning process is to conduct an organizational assessment. This consists of identifying the company's strengths and limitations at each level in the Pyramid of Organizational Development, described in Chapter 2: markets, products and services, resources, operational systems, management systems, and corporate culture. This step replaces and improves upon the strengths and weaknesses component of the conventional SWOT analysis. It improves upon the conventional SWOT because (rather than merely a general notion of strengths and weaknesses) our approach focuses on the key dimensions comprising the Pyramid of Organizational Development, which have been validated as drivers of financial performance, as explained in Chapter 2.

The organizational assessment may be done in several ways. It may involve a self-assessment of strengths and limitations in each area, using the tools provided for this purpose in Chapter 2—that is, both the qualitative and the quantitative pyramid analysis. It can also involve the use of surveys (such as the Growing Pains Survey, presented in Chapter 5) to be completed by a sample of people in the organization or by all of its personnel. Some companies use independent consultants like the authors to perform the organizational assessment. These consultants interview personnel, analyze operational data, and may use other surveys such as the Organizational Effectiveness Survey discussed in Chapter 2. We have described this process in Chapters 2 and 5.

Output of the First Two Steps

The output of the environmental scan and organizational assessment should be a summary of the information collected, along with an analysis of what this information suggests about areas that the company needs to focus on in order to continue its success into the future. Typically, this is done in some type of report that presents:

• A clear picture of the company's current market (that is, customers) and an evaluation of the extent to which the company is currently meeting customer needs. This might also include identification of specific threats and opportunities presented by the market.
• The identification of key present or potential competitors and each competitor's strengths and limitations (from the standpoint of meeting customer needs).
• Analysis of the most significant trends that might affect the business and the opportunities or threats presented by each trend.
• An assessment of the company's most significant strengths and limitations at each level in the Pyramid of Organizational Development.

By analyzing the information collected through the environmental scan and organizational assessment, a company may also identify specific strategic issues that should be addressed in Step 3 of the strategic planning process.

Step 3: Analysis and Resolution of Key Strategic Issues

Once the environmental scan and the organizational assessment have been completed, the next—very critical—step in the strategic planning process is to identify and work to resolve key strategic issues facing the company. It is important that during this step, attention be focused on addressing the seven issues previously identified.

What Business Are We In? This is one of the most fundamental and important strategic issues that needs to be addressed. This is a deceptively simple question, but it is one of the most critical strategic decisions an organization's leadership must make, because it defines the platform or scope of the business. If the answer to this question is too broad or too narrow, it is of no real strategic value. Many organizations fail or at least do not prosper because they do not really understand the nature of their business, because they view it too narrowly, or because they are not focusing enough attention on identifying and adapting to environmental changes.

To illustrate this point, we will cite some important historical examples. During the nineteenth and early part of the twentieth century, the railroads were successful and powerful. However, they viewed the answer to the question, “What business are we in?” as obvious and fairly narrow: We are in the railroad business. Unfortunately for them, the obvious answer was not correct. They ought to have viewed themselves as being in the transportation business—the business of transporting people and goods. By defining their business as being railroads, they completely missed the significance of the development of other forms of ground and then air transportation, which ultimately eroded their strength.

While railroads are an example of defining a business too narrowly, there are also examples of companies that defined their businesses too broadly. For example, at one point AT&T defined their business as the “telecommunications business.” While this was literally correct, it had no strategic value because it did not provide any focus.

Another important historical example is Curtis Publishing Company, which was a great success during the early part of the twentieth century but later failed because of a poorly conceived business concept. Cyrus Curtis, a great entrepreneur, built a publishing empire with major properties such as the Saturday Evening Post and the Ladies' Home Journal. Unfortunately, the company eventually failed because it had defined its business as the “publishing business.” It failed to realize that in consumer media, advertising follows consumers, and one of its principal revenue streams was from advertisers. The managers of Curtis did not appreciate the implications of the new medium—television—and its impact on advertising revenues. Thus they chose to purchase a printing plant to vertically integrate the firm's operations, turning down opportunities to acquire NBC and CBS—a disastrous decision.

A more recent example of this problem concerns RadioShack. As noted in Chapter 2, RadioShack was once a very successful enterprise, serving several generations of electronics hobbyists; but its business concept became outdated leading to a long period of irrelevance in the market suggesting that it is ultimately destined for extinction like the dinosaur or dodo bird.

An organization that is trying to decide what business it is in must understand what its present and potential markets are and what the customers in those markets need. It must answer these major questions: (1) Who are our present and potential customers? (2) What are their needs? (3) How do they acquire our products or services? and (4) What do they consider to be of value in a product or service? To effectively address these questions, a company's management should use the information collected and analyzed in Steps 1 and 2 of the strategic planning process. The analysis of the strategic board, along with the information collected about the company's internal capabilities (through the organizational assessment) can assist in effectively answering this first strategic question. For example, if the railroads had thoroughly analyzed the trends in their market (for example, the advent of new technology to move people and products from one location to another), they might have recognized the need to broaden their business definition. A magazine publishing company such as Curtis must recognize that it serves two related but distinct groups of customers: subscribers, who read its publications, and advertisers, who wish to reach particular groups of people in order to market their own products or services. An organization must understand the needs of all its different segments of customers, especially when those needs differ significantly.

The resolution of this issue results in a business definition (or concept) statement, which is incorporated into the company's strategic plan. The creation of this statement is a complex and subtle exercise, requiring time and skill. Management teams may spend several days—over a period of weeks of months—discussing and debating this issue until they get it right. This is discussed further in Step 4 of the strategic planning process.

What Are Our Competitive Strengths and Limitations? The competitive analysis, along with the organizational assessment, provides the information needed to address this question. The leadership team needs to objectively identify those areas where the company is strong, as well as those areas where it is faced with a competitive disadvantage. In addition, there needs to be a focus on identifying those factors that truly distinguish the company from its competition. For example, both Apple and Microsoft differentiate themselves from others based on their technologies and brands—and both devote a great deal of time to protecting these strengths. Identifying strengths is an essential step even for successful companies, because in order to continue its success, an organization must understand what caused it. One $250 million manufacturing company, for example, has recognized that it has strengths in the areas of management systems and culture that none of its competitors have. As a result, for over 20 years, these have been significant areas of focus for the company.

The resolution of this issue is incorporated into the strategic plan in two ways. First, the key differentiators are used as input to developing the core strategy for the company—that is, the strategy around which all other strategies are based. Second, specific objectives and goals should identify what the company will do to maximize its key competitive strengths and minimize its key competitive limitations.

Do We Have or Can We Develop a True Market Niche? Although many people use the terms niche and segment interchangeably, in our opinion they are not synonyms. A market segment is any subdivision of the market defined by the tier of the market in which the company competes and the products or services it offers (as discussed previously).

A market niche is a place within a market segment where an organization has developed a sufficient number of sustainable competitive advantages to control a portion of that market. A competitive advantage is something (tangible or intangible) that gives an organization a superior opportunity (however marginal) to compete in the market. It can range from a proprietary product (such as a drug under patent) to a well-known brand. Potentially, anything can be a source of competitive advantage: greater resources, speed in execution, a new technology, better customer service, superior management systems, greater skill in strategic planning, or a company's culture.

We view a competitive advantage as sustainable if it will last for at least two years. This is analogous to a fixed asset under generally accepted accounting principles. Just as a current asset is something that will last or be consumed within one year, and a fixed asset is something that will last for more than one year, a sustainable advantage is essentially an organizational resource that will provide the enterprise benefits for at least two years. It can be tangible or intangible, reflected in financial statements or not, but it is still real. Accordingly, just by being the first in a market does not mean the company will establish a sustainable competitive advantage.

At times, the source of sustainable advantage can be the business model (or way the company does business) adopted by an organization. For example, Southwest Airlines has a unique business model that could be described as low-cost airfare plus a positive corporate culture. Southwest focuses a great deal of attention on both keeping its costs down and on effectively managing its company culture. Employees are all owners and, as such, are invested in helping to make the company a success.

The concept of a market niche and, in turn, the notion of a sustainable competitive advantage is important for two strategic reasons. From an offensive standpoint, the primary advantage of a niche in a market is typically that the price (and, in turn, the gross margin) of products is superior to that of competitors. This results in greater profitability and in the opportunity to reinvest those profits in a variety of ways. From a defensive standpoint, during periods of economic decline holders of a market niche tend to suffer less than their competitors. Their products tend to sell to a greater extent than those of more generic or less-established products and services.

A niche is also important defensively if a competitor wishes to invade the company's market segment. Southwest, for example, has been able to remain profitable and to grow as competitors have also begun to match the company's low fares. The reason is that Southwest's niche is not based purely on its fares (which can be easily, although not necessarily profitably copied). It is also based on its ability to effectively manage its positive culture—something that cannot be copied. Passengers experience this culture in how they are treated by employees.

Another example of the defensive value of a market niche is demonstrated by 99 Cents Only Stores, the dominant deep discount retailer of foods and household items in Southern California. It has a true market niche. California is one of the world's largest economies in terms of GDP. In 2012, it ranked 10th in the world in GDP, just behind Italy and just ahead of India.⁴ Southern California contributes 60% of California's GDP. 99 Cents Only Stores achieved revenues of $1.8 billion in 2011. It so dominated the Southern California market for discount retail foods and household items that other national and regional chains have chosen not to enter and compete in that market.

A key point to keep in mind in identifying or working to create a market niche is that the most sustainable advantages are those that exist in the upper levels of the Pyramid of Organizational Development. If a company has a competitive advantage based on its culture, this will be extremely difficult to copy. For example, Walmart sells the same products that Kmart sells, but it has an advantage that has been extremely sustainable (because they have focused on it)—that is, a well-managed culture that stresses customer service.

A company whose only competitive advantage rests with the products it offers leaves itself extremely vulnerable to competition. Any product or service can be copied, thus taking away the advantage. At one time, IBM was a major player in the personal computer (PC) market. As companies like Dell Computers began producing similar products at lower cost, IBM lost its advantage. After posting an $8 billion loss in 1993, IBM began a process of revitalizing the company, which ultimately led to a reconceptualization of its business. As result, in 2005, IBM sold its PC business to Lenovo.

A market niche does not have to be small, as conventional usage of the term implies; it can be very large. For example, Microsoft has a true market niche because of its dominance in operating systems, and this niche is very large. Apple has a large market niche based in part on the “i” brand and, in part, on its ability to consistently produce innovative products.

The answer to the question of whether an organization has a market niche is incorporated into the company's strategic plan as a part of the core strategy. As will be discussed later in this chapter, the core strategy identifies how the company will use its key competitive differences (that create the market niche) to win within its market.

What Do We Want to Become in the Long Term? We define the “long term” as three to five years out, although it is possible to plan in terms of the “very long term” or more than 10 years out. The identification of what a company wants to become should be grounded in the analysis of data from the environmental scan and the organizational assessment. In brief, the answer to this question helps the company's leadership team define where it is going. The output of this discussion is what we call a strategic mission statement, which will be included in the company's plan. We discuss this later in this chapter.

In 1994, when Starbucks was still a relatively small company, it established a strategic mission to become the leading brand of specialty coffee in North America by the year 2000. This was strategic because it was intended to allow Starbucks to achieve a size and critical mass that would be defensible against potential competitors. The debate within management in 1994 centered around whether this could be accomplished if Starbucks achieved $1 billion in revenue and approximately 1,000 stores, or whether a larger number of stores and more revenue were required. The final decision was to target $2 billion in revenue and 2,000 stores by the year 2000. The strategic intent was to prevent a large company like Nestlé or McDonald's from copying the Starbucks formula and controlling the market before this could be achieved by Starbucks itself.

What Is Our Strategy for Competing Effectively in Our Chosen Markets and for Achieving Our Long-Term Mission? Once a company has identified the market in which it will compete (its business concept or definition), its competitive strengths and limitations, and what it wants to become (its strategic mission), the next question involves determining how it will compete in order to achieve the desired results. This involves identifying three levels of strategy that will guide the behavior of the team toward desired results within the chosen market. These three levels constitute a strategy “wheel,” which is shown in Figure 6.3.

The first level of strategy is what we call core strategy, which defines the overall concept of how the company or business unit will compete. In developing a core strategy, a company's leadership team should consider the results of its environmental scan and organizational assessment. This information will help determine how realistic the strategy is.

For example, Starbucks' initial core strategy was something like “to redefine the coffee café and blanket the United States.” With the exception of small, local roasters, there was really no competition in Starbucks' initial market. In other words, there were no true national chains of coffee cafés. Southwest Airlines' initial core strategy (now somewhat changed) was something like to provide “no-frills, short-haul, high-frequency discount air travel in relatively noncompetitive markets.” When Southwest began to expand its operations from its base in Texas (where it had perfected the short-haul, no-frills concept), most airlines were losing money. Southwest's strategy was not to go head-to-head with the majors but to stay in noncompetitive markets, offering potential customers low-cost air travel. The strategy has been successful; Southwest has remained profitable as it has grown to serve markets throughout the United States. Walmart's core strategy is to be the price leader, as reflected in its marketing slogan “Always Low Prices.”

The second level of strategy is called supporting strategies, which describe what a company or business unit needs to do in each level of the Pyramid of Organizational Development to support its core strategy. The supporting strategies a company will pursue at each level in the pyramid tend to be defined in one or two sentences. They are “big picture” strategies, not a list of to-dos. Examples of supporting strategies for Southwest Airlines (based on its initial core strategy) are shown in Table 6.1.

Operational strategies identify how a company will implement its core strategy. Operational strategies might be thought of as tactics, action steps, or “to-dos.” However, they should focus on the most critical to-dos versus everything that the company needs to focus on to make its core strategy a reality. Examples of operational strategies for Walmart are presented in Table 6.2.

What Are the Critical Factors That Will Make Us Successful or Unsuccessful in Achieving Our Long-Term Mission? Once its strategy has been identified, the leadership team then needs to identify where it should focus to maximize results over the long term. This typically involves clearly identifying those factors that will support or detract from the company's ability to execute its strategy. These factors (which, as explained later, are termed “key result areas”) might include aspects of the company's internal operations or environmental factors that are presenting threats or opportunities. Again, the answers to this question are typically derived from the results of the environmental scan and organizational assessment.

What Goals Shall We Set to Improve Our Competitive Effectiveness and Organizational Capabilities in Each of These Critical Success Areas? The output of addressing this final strategic question is a list of goals that the company will focus on to continue its success into the future. These goals will become part of the strategic plan (which is discussed in the next section).

Step 4: The Strategic Plan

The fourth step in the strategic planning process involves preparing a strategic plan or what we term, a “strategic organizational development plan.” This is a written statement of the future direction of an enterprise based on the environmental scan and the organizational assessment. While there are a variety of methods for creating and presenting strategic plans, we have a very specific and proven approach, as will be detailed below.

Key Differences between Our Approach and Traditional Strategic Planning. As alluded to earlier in this chapter, our approach to creating a strategic plan—which has been successfully used by organizations of all sizes and types for more than 40 years—differs in some very significant and important ways from other approaches.

First, each component of our plans is distinct, adds value, and is clearly defined. This is not always the case in other approaches. For example, some companies build their plans upon “Mission, Vision, and Values.” While, as one of our clients told us, “everyone knows what Mission, Vision, and Values are,” a quick Internet search reveals that this is clearly not the case. In some cases, mission statements identify a company's purpose; in others, they define what a company wants to achieve. When terms are not clearly defined or consistently used, the power of the concept is reduced. Simply put, those developing and implementing the plan aren't sure what they are supposed to be developing, why it is important, or how to use it. In fact, this same client, when asked about how Mission, Vision, and Values were used in plan implementation replied, “We really don't need to worry about them. The real focus of planning is on our objectives and initiatives.” The follow-up question might have been, “Then, why bother?” In our approach, every component is important, and we help leaders understand how to use them to enhance the plan and the plan's implementation effectiveness.

Second, our approach focuses a company's leadership team on all of the key factors that drive long-term success—that is, the six levels in the Pyramid of Organizational Development, plus financial results. As stated at the beginning of this chapter, the focus of traditional strategic planning is primarily on markets (customers), product and services, and financial performance. Our approach helps ensure that something important—like effective management systems and a positive, well-managed culture—is not missed.

Third, our approach links strategy with tactics. In some companies, there is the strategic plan, which is managed by the senior leadership team; and then there are the operational or tactical plans that are managed by department or team leaders. Sometimes, there is little or no direct link between what happens on a day-to-day basis and what the company is working to achieve over the long term. As will be explained in more depth below, in our approach, there is a very clear link between a company's long-term (as reflected in the strategic mission and objectives) and short-term goals (as reflected in specific, measurable, 12-month goals that support each objective). Our plans are designed so that there is very much a focus on achieving long-term desired results.

Fourth, in our approach, there is a very specific, user-friendly template for documenting and presenting the strategic plan that is built around the Pyramid of Organizational Development. The long-term strategy, objectives, and goals are presented very clearly and concisely, and it is easy to locate information related to a specific organizational success factor (e.g., markets, resources, etc.). In other approaches, the strategic plan is what we have sometimes described as “a PowerPoint presentation for the leadership team or board.” In other cases, the plan is a lengthy document that provides a great deal of background on strategy without a lot of detail about what, exactly, the company will be working to achieve over the longer term or how it is going to achieve these long-term goals (through what is being done on a shorter-term basis).

Finally, in our approach, planning is a process, not an event. In some approaches to strategic planning, plans are completed every three to five years and are not really examined or updated until the end of that planning period. At the operational level, there may be planning that takes place annually, but the plans developed may be shelved and only examined at the end of the year. In our approach, there is regular review of progress against plans—with a specific focus during the year on the achievement of annual goals. At the end of each year, there is also an update of the longer-term (three- to five-year) goals—using as input the results of an updated environmental scan and organizational assessment. In brief, in our approach, strategic plans are “living” documents and realistic playbooks that are based on the current situation in which a company finds itself.

Components of the Strategic Plan (Strategic Organizational Development Plan)

In our approach to developing strategic plans, there are eight components:

1. The Situational Analysis
2. The Business Definition/Concept
3. The Strategic Mission
4. The Core Strategy
5. Key Result Areas
6. Objectives for Each Key Result Area
7. Goals for Each Objective
8. Action Plans to Attain Each Goal

Note: Action Plans are not typically included in the strategic plan document, but are instead developed and used by the “goal owner” to promote the achievement of a specific goal—as will be explained below.

These eight components of the business plan are presented in Table 6.3 and described in the sections that follow.

Situational Analysis. The intent of the situational analysis is to provide background that will help the reader understand why the company is pursuing the courses of action defined in the remainder of the strategic plan. The situational analysis should include a brief overview of key findings from the environmental scan and organizational assessment, along with a summary of what these findings suggest about where the company needs to focus to continue its success into the future. If needed, more detailed information can be presented in an appendix to the plan.

Business Definition or Concept. The output of addressing the first strategic issue will be a statement that answers the question, “What business is the company in?” Answering this question effectively involves clearly identifying the company's target customers and what the business is seeking to do for them. The purpose of the business definition is to provide focus: It helps everyone on the company team understand what the company does (and doesn't) do.

The business definition or concept should be broad enough to encompass anything that the company might pursue over the next three to five years (based on an analysis of environmental scan and organizational assessment data), but not be so broad that it is meaningless. The railroads, for example, could have stated that they were in the “transportation business,” versus the “railroad business.” The former might have contributed to taking advantage of, versus being the victim of, new modes of transportation.

While railroads illustrate the risk of a narrow business definition, there are also problems with business definitions that are too broad. When a company tries to be everything to everybody, it will ultimately experience problems because this goal is unachievable. In one $250 million distribution company, for example, any and all businesses were viewed as potential customers—regardless of the amount of product purchased—and all were provided with the same hands-on service. It was only after three years of declining profits that the company realized that they could not service small “mom and pops” with their current business model. They narrowed their business definition to focus on higher-volume customers, and their profits improved.

The business definition/concept statement should be viewed as the basis for making decisions about which opportunities to pursue—which can be particularly challenging when a company is growing rapidly. When an opportunity is presented that does not fit with the business definition/concept, leaders need to be disciplined enough to analyze the impact that this new opportunity might have on the existing business.

The business definition/concept statement can be used as a basis for branding and marketing efforts, but it should not be written as a marketing statement per se. It should be written as a description of what the company is in the business to do, and ideally it should consist of no more than one or two sentences so that people can remember it.

A good example of a concise business definition statement is that developed by a rapidly growing health care products manufacturer: “We are in the business of solving nurses' problems.” To implement this concept, the company stayed in close contact with nurses to learn about their problems and develop products that were actually solutions to these problems. Another example, from a very different industry is from an infrastructure development company in Vietnam: “DCC is a reliable contractor and subcontractor for investors and large-scale foreign general contractors in Vietnam. We support our customers to achieve optimum investment return through providing the complete construction product and service solutions with good quality at lower price, on time and safely.” In both examples, it is clear who the customer is and what it is that the company is working to do for them.

The business definition/concept is not a “forever” statement. Instead, it should be written such that it identifies the business that the company will be in for at least the next three to five years (that is, over the life of the plan). Business definitions/concepts can and do change as a result of environmental changes (new opportunities and threats) and as a result of changes in the company itself. Examples of changes in business concept or definition that have worked well include (1) Nike, which transformed from a footwear company to an athletic-wear company; (2) Disney, which transformed from an animated motion picture company to a global entertainment enterprise; (3) Microsoft, which has moved from a concept of software for microcomputers to a broader notion of software for e-commerce; and (4) IBM, which transformed from a hardware company to a “total information technology” company providing hardware, software, and services. Starbucks is another company that has transformed its business concept. Founded as a café/specialty retail business, it has transformed into a coffee and related food products company. It now offers quality coffee, tea, and other beverages along with a variety of food items (bakery, sandwiches, etc.) both through company-owned and licensed stores as well as grocery outlets, restaurants, and other venues (i.e., airlines, airports).

Strategic Mission. A strategic mission is a broad, measurable, time-dated statement of what an organization or subunit wants to achieve during a planning period and is the output of addressing the fourth strategic issue. The purpose of the strategic mission is to provide an overall sense of direction for company employees. In brief, it helps them understand “where we are headed” and what the company wants to achieve.

We are very precise in our definition of strategic mission—which should not be confused with a philosophical mission. In our approach, a strategic mission specifies what the organization will be working to achieve three to five years from the current time, and it should clearly define this time period (e.g., “By FYE 20xx, we will…”). We recommend that the strategic mission be broken into “quantitative” and “qualitative” components. The quantitative aspect should identify one or more “big picture” measurable results to be achieved. For-profit enterprises will typically include revenue and profitability targets in the strategic mission. Revenue targets are important because they provide employees with a sense of how much the company is expected to grow over the planning period. As described in Chapters 3 and 4, this information can help managers at all levels work to develop the infrastructure needed to support anticipated future operations. The qualitative aspect will focus on results that are important but that may not be measurable. For example, in 1994 the qualitative strategic mission for Starbucks was to become recognized as the leading brand of specialty coffee in North American by the year 2000.⁵ The quantitative aspect was to achieve $2 billion in revenue and 2,000 stores by the year 2000. This was a very ambitious strategic mission, and it was actually achieved by 2001, only six months later than planned. Today, the qualitative aspect of the long-term strategic mission for Starbucks might be, “To become recognized as the leading brand of specialty coffee in the world by 2030.” The quantitative aspect of the strategic mission might be, “To grow to $30 billion in revenue and have 30,000 points of distribution by the year 2030.”

Another example is a mining company in Eastern Europe that developed the following strategic mission:

By December 31, 20XX:

Qualitative: To become the low-cost leader and “most wanted” enterprise in the mining industry in the region, dominating the market in terms of efficiencies and technology.

Quantitative: To achieve production output of 600,000 tons, maintain cost of production within 5% range for every year, and increase labor efficiency by 15% over FYE 20XX.

By including the date by which the mission will be achieved, as well as measurable big-picture targets to aim for, the company is providing employees with a clear sense of direction, which is important from the standpoint of motivating people. The company will be able to measure whether or not it attained its strategic mission and, hence, its success. Mission statements that are vague, by their very nature, are not as motivational.

The type of strategic mission developed for an organization will, at least to some extent, depend on its size, scope of operations, and the extent to which the company has developed the infrastructure needed to support its current stage of growth. As described in Chapters 3 and 4, at each stage of growth, there is an implicit overarching mission that needs to be focused on and in some way embedded in the strategic mission. For example, a company in the expansion stage may include in their strategic mission something like, “Develop the operational systems needed to support continued growth,” while a company in the consolidation stage might include something like, “Develop the systems needed to effectively manage our company culture.” The strategic mission might also include a focus on closing infrastructure gaps and reducing growing pains. For example, a number of years ago, we worked with a rapidly growing, $750 million real estate developer, who was experiencing significant growing pains. This company's qualitative strategic mission was simply, “Get our house in order.”

Mission statements can be developed not only for the organization as a whole but for specific subunits as well. For example, the mission statement for the human resource department of a $1 billion high-tech company is as follows:

By December 31, 20XX, the HR team will:

• Fill 90% of open headcount annually by becoming a magnet attracting the best talent in our field.
• Reduce turnover to 3% to 5% or less.
• Be nationally recognized for our world-class HR practices.
• Provide our employees and managers with HR tools to improve efficiency.
• Partner with the company's leadership to sustain and enrich the company's culture.

Core Strategy. As defined earlier in this chapter, strategy refers to how the organization is going to compete, and there are three levels of strategy: core, supporting, and operational. In our approach to documenting a company's strategy, the core strategy—that is, the overall way that the company will compete—is incorporated as a specific statement that serves as a foundational element of the plan and as the theme for the development of supporting and operational strategies. Supporting strategies are reflected in Objectives and, if they are more short-term, in Goals. Operational strategies are typically incorporated into the way that the company does business—that is, in policies and procedures (see the example of Walmart operational strategies presented previously). If the company needs to develop a new system, process, policy, and so on to support an operational strategy, this might be included as a goal in the strategic plan.

The purpose of clearly defining a core strategy within the plan is to help employees focus on and support the overall way that the company will be working to achieve its mission. Many organizations do not have a core strategy, or at least cannot clearly identify one. When this happens, an organization can become somewhat chaotic as it reacts to the challenges of its competition, rather than proactively determining how it will defend or attack. These companies can also miss major opportunities and run the risk that a competitor will take their market from them (because they have not developed a clear understanding of how they should compete). A company that lacks a clearly defined strategy for competing in its chosen market is analogous to a major college or professional football team entering a game without a scouting report on the rival team and no concept of how to deal with their strengths or to take advantage of their weaknesses. In the absence of a great deal of luck, these teams are destined to lose the game. This is true in business, as well. Sam Walton, founder of Walmart, studied the strengths and weaknesses of Sears and Kmart before formulating his strategy of competing via operational systems (i.e., logistics and information systems). Today Walmart has not only surpassed Sears and Kmart but has also developed world-class logistics and information technology capabilities.

The starting point for developing a core strategy is to identify—based on answers to the second and third strategic issues—the company's present or potential competitive advantages and strengths and the extent to which the company has a market niche. Next, the company's leadership team should identify how they will use these competitive differentiators to win within its markets. For example, Starbucks' initial competitive difference was, in a sense, that they “created” a new market—that of a “coffee café experience.” Their core strategy was to leverage this proven concept and quickly expand across the United States before any potential competitor would be able to copy their concept.

Core strategies should typically be stated in one or two sentences that clearly define the overarching way that the company is going to compete. As an example, a $250 million technology firm defined their strategy in the following way: “Leverage our proven supply chain processes and technologies to deliver customized and comprehensive solutions that provide obvious cost advantages to our customers, thus becoming an indispensable business partner.”

When a core strategy is unique, it can be sufficiently powerful not only to fuel a company's growth but also to force competitors to change the way they do business. For example, Michael Dell's core strategy in founding Dell Computer was to sell personal computers that were built to order directly to customers and avoid the markup of retailers. As his company grew, it forced huge competitors such as IBM, Hewlett-Packard, and Apple to change the way they do business. Southwest Airlines perfected the low-cost airfare model and even drove larger competitors such as United, American, and Delta out of certain markets because of their inability to match its low fares.

The cost of the failure to define a suitable core strategy can be quite high. In one family-run $125 million consumer-products company, senior management spent years trying to determine not only what business the company should be in, but what its strategy should be. Even though this company saw a major competitor rising within its market and major opportunities being created within its existing market, senior management developed no concrete strategy to attack its rival or defend its position. Over a period of five years, the competitor grew to national dominance of its market, while the first company continued to lose market share and to argue about whether they could or should take advantage of new market opportunities.

An organization's core strategy should be supported by what we call supporting strategies at each level in the Pyramid of Organizational Development. Most strategies are built around markets and products, but powerful strategic advantages can be derived from other levels of the pyramid as well. For example, Walmart has competed with Kmart and other discount retailers, not just in products and market selection but at all levels of the pyramid, including operational systems, management systems, and culture.

Organizational culture can be an important component of core strategy. For example, Starbucks believes that it is competing not just with its coffee but its customer service as well, and its customer service depends, to a great extent, on how the company treats its people. This is also true at companies like Ritz-Carlton, Charles Schwab, American Express, Delta Airlines, and Southwest Airlines—all of which have strong customer-oriented cultures and superior customer service. We will explain how culture can be a sustainable competitive advantage in Chapter 10.

Key Result Areas. One significant and important difference in our approach to strategic planning is the incorporation of an element that we call key result areas. Key result areas are defined as “Areas or aspects of the enterprise in which performance has a critical impact on the achievement of the overall strategic mission.” Based on our published research and experience in working with organizations over the past 40-plus years (as described in Chapter 2), in our approach to strategic planning, the key result areas for any organization consist of the levels in the Pyramid of Organizational Development (because these factors have been shown in empirical research to have a very significant impact on long-term success), plus financial results management (because no matter what “business” the organization is in—including nonprofits—it cannot continue to function in the absence of adequate financial resources). In brief, in our approach all plans include and are organized by these seven key result areas—markets, products/services, resources, operational systems, management systems, culture management, and financial results management.

The rationale behind this is that the six key aspects making up the Pyramid of Organizational Development are all critical phases of the “business game” and must, therefore, all be focused upon—individually and as a system. As described in the first part of this book, whether they realize it or not, all organizations are competing at all levels of the pyramid. Competition is not only in products and technology; it is in management systems and culture as well. By clearly identifying and focusing an organization's leadership team on these key drivers of organizational success, our approach to planning increases the probability that nothing significant is missed. In brief, if a company ignores any of these critical success factors or key result areas, it leaves itself vulnerable to the competition. This means that many traditional approaches to strategies planning are potentially “flawed” because they do not help leadership teams effectively focus on all factors that drive success. Instead, they focus almost exclusively on markets, products/services and financial results. It should be noted that there can be additional key result areas, but the six levels in the Pyramid of Organizational Development plus financial results management must be present to promote effective planning and long-term success. For example, some companies will include additional key result areas like “Mergers & Acquisitions” or “Strategic Partnerships.”

The concept of key result areas can also be applied to divisions, departments, and individual position holders (as will be described in the next chapter when we discuss roles). Divisions of the company (because each has profit and loss responsibility) should use the seven key result areas discussed above as the basis for their planning. At the departmental level, key result areas will tend to be more specific in nature. They tend to define, using a few categories, what the department is responsible for. For example, the key result areas for the human resources department of the $1 billion high-tech company were the following:

1. Recruiting and Selection
2. Staff Development
3. Compensation and Benefits Administration
4. Human Resource Information Systems Management
5. Staff Retention
6. Employee Relations
7. Regulatory Compliance
8. Corporate Culture and Organizational Development Support
9. Staff Planning

A detailed discussion of the methodology for departmental planning is beyond the scope of this book, but it should be noted that the approach to planning outlined in this chapter can, with minor refinements, be applied at the department level as well. For example, in department plans, objectives and goals (described next) will be organized by the department's key result areas, and the overall department plan will be designed to support the achievement of the company's (or, if appropriate, division's) strategic mission.

Objectives and Goals. In our approach to strategic planning, objectives are broad statements of what an organization or subunit wants to achieve in the long run (that is, by the “due date” of the strategic mission) in each key result area. Goals, by contrast, are specific, measurable, time-dated results that the organization wants to attain to achieve its objectives.⁶

For example, an objective for a medium-sized manufacturer of electronic components might be “To increase our annual sales volume,” while a specific goal might be “To increase sales volume from the current level of $150 million to $180 million in 20XX.” Similarly, an objective in the area of facilities and equipment might be “To increase our capability for inventory storage,” while a specific goal might be “To handle 150% more inventory than existing facilities by 20XX.” In the area of profit, an objective might be “To earn a satisfactory return on investment.” A specific goal might be “To earn a minimum of 18% ROI before taxes in each operating division by fiscal year-end.”

While objectives reflect a company's (or business unit's) strategy, goals typically define results to be achieved within the next 12 to 18 months, and they might therefore be described as more tactical in nature. To help leaders understand what is required to set effective goals, we use the acronym SMART. In brief, an effective Goal should be:

• Specific—Define a specific outcome to be achieved.
• Measurable—Include a standard against which performance can be assessed.
• Accountable—Assign a specific individual on the planning team to be responsible for ensuring that the goal is achieved and for reporting on progress being made.
• Results-Oriented and Realistic—Focus on results to be achieved versus action to be taken; set at a level that the individual responsible can achieve with effort.
• Time-Dated—Clearly identify the due date for completion.

While the criteria for effective goal-setting reflected in this acronym look simple enough on the surface to meet, it can be quite difficult to do so. Effective goal setting does not come naturally to most people—that is, most people do not naturally think in terms of results. Instead, most people think in terms of activities. Learning how to set effective goals—particularly from the standpoint of making sure that they are measurable and truly results-oriented—can require practice. Our experience suggests that it can take sometimes a year or more for all members of a company's planning team to become experts in the goal-setting process, but once they do, the impact on their organizations can be quite significant. In brief, having and using effective SMART goals ensures that the planning team and the company as a whole are focused on results and nothing is more important!

Action Plans. Action plans specify the particular activities or steps that must be performed to achieve a goal. Although action plans are not necessary for all goals, they are useful for achieving relatively complex projects or tasks. In brief, action plans detail what must be done, who must do it, and by when to achieve a particular goal. Action plans can be thought of as sets of to-do lists. The steps in these plans appear in chronological order, and no step in an action plan should extend beyond the date at which the goal is due.

In most cases, we recommend that companies avoid putting detailed action plans in their corporate strategic plans. Instead, the action plan should be developed and retained by the person whose name appears on the goal—that is, the “goal owner.” If a problem arises with respect to achieving a particular goal, the more detailed action plan can be reviewed by the team and adjusted, as needed.

Step 5: Budgeting

Once the strategic plan has been developed, the next step is budgeting. Budgeting involves translating what might be termed the “nonfinancial” plan (that is, the strategic organizational development plan) into financial terms. It should be noted that the development of a strategic plan and budget is an iterative process—that is, the strategic plan may need to be adjusted, based upon the level of financial resources available to support it. This can involve, among other things, moving due dates out on goals, reprioritizing goals, or adding goals (if there are more financial resources available).

Once developed, the budget (financial plan) can serve, along with the strategic plan (the nonfinancial plan) as the basis for evaluating performance. As used here, budgeting includes “capital budgeting” as well as operating budgets.

Step 6: Plan Review

The final, but very important, step in our strategic planning process is plan review—the process by which senior (in the case of the overall company plans) and departmental leadership (in the case of unit plans) regularly assesses progress against the plan and makes adjustments, as required. The focus of plan review is primarily on the progress being made against annual goals—although it can include, as appropriate, discussion of other aspects of the plan (e.g., objectives). In the absence of this step, planning is an event and not a true process. Plan review typically includes two components: (1) preparation of reports on progress being achieved and (2) a plan review meeting.

Each “goal owner” (that is, the person who is accountable for the goal) should be asked to prepare a summary of progress being made in achieving his or her goals. This should include a summary of any goals achieved during the past quarter, updates on goals that are in progress, and the identification of any current or anticipated problems with respect to making adequate progress against goals. This information should be shared with all members of the “planning team” (typically consisting of the CEO/President and his or her direct reports at the company level, or the unit manager and his or her direct reports at department level) in advance of the plan review meeting.

The purpose of the plan review meeting is to (1) review and discuss progress being made against goals; and (2) discuss and resolve specific strategic issues. Generally speaking, it is not a good use of leadership time to review the plan “page by page.” Instead, plan review should consist of asking questions and discussing specific issues that have been identified—based on the review of goal owner reports (which should occur before the meeting). In addition to plan review, agendas for these meetings may include one or two specific strategic issues that the planning team needs to resolve to make progress in achieving its strategic mission, minimize long-term organizational problems, or reduce environmental threats. These issues should be identified and, to the extent possible, researched in advance of the meeting. Meeting discussion time should focus on resolving the issues. The resolution of each issue will become new objectives or goals that will be included in the company's strategic plan.

One output of the plan review meeting should be an updated plan document that contains a summary of progress that has been made to date and reflects any changes to existing goals that have been agreed to by the planning team. Changes to goals can include moving due dates up, reprioritization, deletion of goals, and/or the addition of new goals. This is not to suggest that goals should be constantly changing—because this would suggest that there was not effective planning done up front—but, over the course of the year, there may be a need to make some changes to better support the achievement of long-term goals and ultimately the realization of the company's strategic mission.

We recommend that plan review occur no less frequently than once a quarter (although some companies prefer to conduct some type of review more frequently). At least once a year—typically sometime during the last quarter of the company's fiscal year—there should be a comprehensive review and update of the plan. This involves reviewing and updating the environmental scan and organizational assessment, reviewing and refining (if appropriate) the business definition/concept and core strategy, establishing a strategic mission for the next three to five years, reviewing and refining objectives, and establishing SMART goals for the next year. The output of this annual meeting is the creation of a written document that provides the company's plan for the next three to five years.

The use of quarterly reviews helps to reinforce the idea that strategic planning is a way of life in a company and makes it part of the organization's culture. It also helps hold individual managers accountable for results that will support the achievement of the company's strategic mission.

A Brief Overview of Navistar and International Truck Dealerships

The company that has become Navistar was founded in 1831 by Cyrus McCormick, the inventor of the mechanical reaper. By the beginning of the twentieth century, the company had branched out into other types of farm equipment (including tractors) and had joined with four other companies to become International Harvester Company.

In 1907, International Harvester began manufacturing trucks, and this business would eventually expand to the point where the sale of heavy and medium trucks was greater than that of the farm equipment. By 1910, International Harvester had reached sales of $100 million and by 1950, sales were $1 billion.

Due to a variety of factors, including loss of market share and several years of losses, in 1985 International Harvester sold off the farm equipment business (now owned by Case Corporation) and began to focus exclusively on heavy and medium truck and diesel engine production. It also changed the name of the company to Navistar International Corporation. In 2001, Navistar formed IC Bus Corporation, which was a consolidation of American Transportation Corporation schoolbus body business and International Truck and Engine chassis business. Idealease is a company that was founded in 1982 to offer leasing and rental of International Trucks through the company's dealers.

Navistar is represented in the local market by “International Dealers.” In brief, the International name did not leave the dealership. Dealers are independent business owners—not corporate employees. They are under contract to the company for whole goods (trucks) and parts. Many dealerships are very much family businesses. In some cases, the current dealer is the third (or maybe fourth) generation of the family to work in the business. Typically dealers come up through sales, with a few coming from a financial background. According to one dealer, “We tend to be affable, open, engaging—good front people for the business.”

The dealer network—at one time over 800 strong in the United States and Canada—has been one of Navistar's competitive strengths. Historically, dealers might have had one to three locations. By the early 2000s, the dealer network had consolidated to approximately 300 in the United States and Canada—driven, in part, by Navistar corporate—with some dealerships having more than nine locations that were, in some cases, fairly geographically dispersed. While specific locations may differ somewhat in terms of the products and services offered, each dealership (comprised of several different locations) typically offers new trucks (heavy and medium), used trucks, service, parts, financing, and leasing. Most of the dealerships (distribution/services companies) that participated in the 2007–2009 leadership development program were in or moving into the consolidation stage—that is, they were or soon would be at $50 million+ in annual revenues (and some already had annual revenues in excess of $100 million). Many were facing both competitive as well as internal infrastructure challenges. Some of the types of infrastructure challenges being faced included finding and keeping enough technicians to provide timely service on customer vehicles, upgrading facilities, developing strategies to manage a large, geographically dispersed business, and finding ways to enhance efficiency by implementing more effective operational systems.

The Approach to Developing Dealer Plans

Two key deliverables for each participant from the International Truck dealer six-week leadership development program would be a strategic plan and the ability to effectively implement the plan within their company. Three days of the program would be devoted to plan development, with one-on-one coaching and feedback from program instructors provided as needed to each participant.

One full day in the first week of the program was focused on introducing participants to the strategic planning process described in this chapter. Another day of this first week was devoted to helping participants understand how to use the Pyramid of Organizational Development as a lens for assessing their company's effectiveness—that is, as a tool in completing the organizational assessment. These sessions were highly interactive and included a number of workshops during which participants—all of whom were either the CEO of the company or a very senior executive (e.g., CFO, VP of a specific function, general manager of a location, or a manager in training)—could apply what they had learned to their dealerships. One objective of these first two days of planning was to help participants understand the steps in the process and the language of planning used in our approach. A second objective was to help participants understand the nature of the information that they needed to collect to develop their dealership's strategic plan.

As a follow-up to this first program week, participants were asked to collect the information needed to develop their plan. During the second week of the program, participants used the information collected to develop drafts of their strategic plans. Following the second week, participants worked with other members of their company's senior leadership team to finalize the plans and were then provided with the opportunity to share, discuss, and solicit feedback from other participants during the third week of the program. During week three, participants were introduced to tools for creating effective performance management systems that would support effective plan implementation.

A more detailed explanation of the steps that participants in the International Truck dealer leadership development program took to create their plan—which provides a good roadmap for others to use—is presented below.

Developing the Strategic Plan: The Environmental Scan

For the most part, all participants in the program had a very good understanding of their markets and key competitors. They were also able to draw upon Navistar corporate for additional information. As most participants had been in the business for a number of years—as stated earlier, some represented the third or fourth generation of the family in the business—they understood their customers and their customers' needs. They also had a fairly good understanding about the extent to which they were meeting customers' needs. Most had not systematically incorporated an analysis of key environmental trends into their planning process—but there was a keen awareness of the impact that changes in the regulatory environment (in particular, emission standards) might have on the business.

As a part of the program, participants were given an assignment to work with their dealership team to complete a formal, systematic assessment of the environment in which their dealership was operating. The data collection actually began during the introductory session of the program as participants worked in small groups to identify and discuss their customers, competitors, and key environmental trends. As a follow-up to this first day of planning, participants were given worksheets that could be used to collect the data, and during the introduction to planning, the larger group of participants discussed possible sources of information about customers, competitors, and trends. During the next week of the program—which occurred four months later—participants were given the opportunity to discuss and analyze the information that they collected, and it was used as input to creating their plans. Excerpts from one dealer's environmental scan (disguised for the purpose of this illustration) are presented below.

Sample Environmental Scan Analysis Excerpts

Our Market: The customer base within our geographic market—which encompasses two states—consists primarily of class 6–7 customers who need trucks to move products. Although we have some class 8 business, it is made up of only a handful of customers. Our intent is to gradually expand in our geographic market both to the east in State X and to the south in State Y.

Our strength is in our employees, most of whom have more than 10 years of service with our dealership. Our limitations are the same—finding, training, and keeping employees has become a priority. The climate in our geographic service area calls for harsh winters and we have found competitors in southern states have been placing ads in local newspapers offering competitive salaries without the weather issues.

Competition: Our dealership has a strong Freightliner (XYZ Freightliner) and Mack (ABC Mack) presence in all locations, with Peterbilt (RST Peterbilt) present in our State X market. In every location there are small repair shops that have discounted labor rates and strong parts competitors. The Freightliner dealer is also an equipment dealer who carries several lines of road equipment. The Mack dealer currently has the State Y Department of Transportation (DOT) contract and has sold approximately 100 new Mack's to the DOT in each of the last three years.

The Freightliner dealer has several distractions and oftentimes pays more attention to road equipment than he pays attention to trucks. In addition, this dealer seems to have a significant turnover in personnel and appears to worry more about how our company is doing things rather than paying attention to his business. Although the Mack dealer is well respected in our area they seem to have serious service department issues and excluding the DOT contract they do not have a good market share in central State Y.

Our strategy continues to be to keep tabs on the local competition, but not to over-focus on their successes and failures. Our primary objective is to continue to service our customers and exceed their expectations in new, used, parts, service, and lease/rental.

Trend Analysis. There are several key environmental issues that everyone in the truck industry will continue to face going forward. The price of fuel is on everyone's mind and it appears as though $3 plus per gallon is here to stay. A second issue is the continued EPA regulations that require better, more expensive emissions on all diesel engines, which will continue to drive up costs.

The threat from these environmental issues is that there will be fewer people in the trucking business, which will tend to drive margins down. We would expect about the same number of dealers will be chasing fewer customers and many of these customers seem to be moving out of state.

Our strategy is to educate customers on how the industry is changing and why that will translate into higher cost when purchasing a truck. In addition we will attempt to convince customers that preventive maintenance programs will not only keep their trucks running better, but could possibly increase the time of their buying cycle.

Developing the Strategic Plan: The Organizational Assessment

While many participants in the program could identify their dealership's most significant strengths (what they did well) and most significant limitations, very few had done a comprehensive assessment of their internal capabilities. During the first week of the leadership development program, a full day was devoted to helping participants understand the Pyramid of Organizational Development framework and how it can be used as a tool to assess the level of infrastructure development. This included training in the framework, application of the framework to a case study of an International dealership (developed for use in this program), and then application of the framework to each participant's dealership.

Prior to the session, each participant and a small sample (10) of other managers at his or her dealership had completed both the Organizational Effectiveness Survey (described in Chapter 2) and the Growing Pains Survey (described in Chapter 5). Each participant received his or her results and was provided with instructions on how to interpret them. A summary of the overall group's results was also presented and discussed, so that each participant could see how his or her individual results compared to those of the larger group. Particular areas of strength identified through these surveys included:

• A very clear understanding of the competition
• A willingness to “do whatever is necessary” to meet customer needs
• The ability to make effective day-to-day decisions
• A strong focus on managing financial results

Not surprisingly, the most underdeveloped aspects of the dealerships—based on survey results—were at the operational systems, management systems, and corporate culture levels. The most significant opportunities to improve included:

• Finding ways to better collect and use information about customers and competitors
• Increasing the effectiveness of human resource management systems
• Implementing a more systematic approach to developing managers
• More effectively documenting and communicating the organization's structure
• Better linking the rewards people received to the performance they achieved

Following the session, participants were asked to build upon their own thoughts—documented and shared during the session—to complete an organizational assessment for their dealership. In brief, they were asked to collect and summarize the key strengths and limitations at each level in the Pyramid of Organizational Development and bring this with them to the next session. In completing this assessment, participants were encouraged to solicit input from other managers within their dealerships. Some did this by holding meetings during which the team worked together to complete the assessment. Others asked specific members of their team to complete a survey that was designed to collect this information and then prepared a summary of the information collected. As was true of the environmental scan, worksheets were provided on which each participant could capture the strengths and limitations of their company at each level in the Pyramid of Organizational Development.

Developing the Strategic Plan: Putting the Pieces Together

During the second week of the program, participants focused on analyzing their environmental scan and organizational assessment results and used this as the basis for creating the strategic plan for their company. As is true of most of the organizations in recent years who have adopted our approach to planning, the duration of these plans was three years.⁷ The resolution of the seven strategic issues described earlier in this chapter occurred in the context of developing specific components of the strategic plan as described below. Please note that we have “genericized” the example of each component presented so as not to reveal any particular dealership's strategy.

Developing the Business Definition/Concept (Addressing the Strategic Issue—“What Business Are We In?”). Each participant used information collected about his or her market (customers), customer needs, and information about their organization's internal capabilities to develop the business definition/concept for their company. An advantage that this group of participants had was that they were all basically in the same business—but were located in different geographic areas. A sample business definition/concept statement for an International Truck dealership is presented below.

Sample Business Definition/Concept

ABC International is an International Truck dealership located in the Midwest that provides full service transportation solutions for our customers, who are our top priority, ranging from small business owners to large fleets.

In this example, it is clear who the customer or target customer is (small business owners to large fleets) and what the dealership is doing for them (providing not just trucks or service on trucks, but “transportation solutions”). This definition was broad enough to encompass expansions into other service offerings to better meet customer needs. In fact, some of the participants in the program were exploring the feasibility of providing mobile (roadside) service to customers.

Developing the Strategic Mission (Addressing the Strategic Issue—“What Do We Want to Become in the Long-Term?”). With a focus on the next three years, each participant identified what his or her dealership would be working to achieve. During the time of the program—2007 to 2009—the United States entered the Great Recession, which definitely had an impact on truck sales. The focus for most participants was on modestly growing overall sales—not just through truck sales, but also through parts and service—while working to maintain an acceptable profit level. Many saw opportunities to build their brand and work to become a leader in their market. An example of a strategic mission for one dealership that includes both a qualitative and a quantitative statement of long-term results to be achieved is presented below:

Sample Strategic Mission

Qualitative Strategic Mission: To become the leading truck dealership of choice in the markets we serve by 2010 through leveraging our exceptional abilities to provide a superior customer experience.

Quantitative Mission: To achieve $250 million in sales with 4.5% return on sales.

In this example, it is clear what this dealership is working to achieve. There are clear metrics for success in the quantitative strategic mission, which will provide the company's leadership with the ability to assess performance.

Developing the Core Strategy (Addressing the Strategic Issues—“What are Our Competitive Strengths and Limitations?” and “Do We Have or Can We Develop a Market Niche?”). In developing the core strategy for their businesses, participants were asked to examine information collected about their competitors and to answer the question “What are, or could be, our true competitive differences?” Because dealerships can't directly control the design or production of the trucks that they sell, most participants focused their core strategy on delivering and building a reputation for high-quality service. An example of a core strategy developed by a participant in the program is presented below:

Sample Core Strategy

To provide a customer experience that exceeds customer expectations by such a high margin that our dealership becomes the exclusive “dealer of choice” for our customers.

Identifying Key Result Areas (Addressing the Strategic Issue—“What Are the Critical Factors That Will Make Us Successful or Unsuccessful in Achieving Our Strategic Mission?”). In organizing their strategic plans, participants in the program used the six levels in the Pyramid of Organizational Development—markets, products/services, resources, operational systems, management systems, and culture—plus financial results, as the seven key result areas. Some participants combined markets and products/services into a single key result area because it was difficult to separate the customer from the service provided. In addition, some felt that at the dealership level, they could not really control the design or production of their “product” (trucks).

Developing Objectives and SMART Goals (Addressing the Strategic Issue—“What Goals Shall We Set to Improve Our Competitive Effectiveness and Organizational Capabilities in Each of These Critical Success Areas?”). During the second week of the program, there were a series of workshops designed to help participants analyze and use the environmental scan and organizational assessment data they had collected as input to developing objectives and SMART goals. The purpose of these workshops was not to help participants complete their plans. Instead, it was to train them in these methodologies so that they, in turn, could work with their planning teams to create objectives and goals for their dealership. Excerpts from one participant's plan (disguised) are presented in Table 6.4.

Completing the Written Strategic Plan

Following the second week of the program, participants worked with their planning teams (that is, the other members of senior leadership at their dealerships) to complete and finalize their strategic plans. This involved training their teams in the strategic planning process presented in the program (that is, the process itself and the language used in the process) and then working with their team to reach agreement on what the plan should be.

Each participant was given a PowerPoint presentation—similar to what was used in the leadership development program—that could be used as a tool in helping their teams understand and be able to use the strategic planning process. They were encouraged to model their training after what they had gone through during the program—in particular, we suggested that after they introduced a specific component of the process (e.g., business definition/concept) they present their draft of this component and work with their team to finalize it. Participants were also provided with a set of criteria that could be used as the basis for evaluating the effectiveness of each plan component that they developed. Finally, they were encouraged to draw up other program participants, if needed, for both feedback and for additional ideas about strategies for effectively implementing the process.

With a few exceptions, by the third week of the program—which was held approximately three months after the conclusion of the second week—all participants were able to complete their plan. During the third week, participants had the opportunity to share and discuss their plans with other participants and to participate in a one-on-one coaching session with one of the program's instructors.

Following Week 3 of the program, participants were encouraged to work with their planning team to develop action plans to support the achievement of the goals in their strategic plan. Tips and tools for developing action plans were presented in the second week of the program and built upon during week three. Some participants created fairly sophisticated approaches to developing and managing action plans—including having each owner capture the action plan for a specific goal on an Excel spreadsheet that was stored in a specific location on the company's intranet, and devoting some time at each leadership team meeting to discussing action plans for specific goals.

Developing the Strategic Plan: The Budgeting Process

Participants in the program had a very strong focus on their company's financial performance. In addition, Navistar had historically provided all dealers with both information and tools to develop and manage their budgets. During every week of the program, at least a half-day was devoted to providing participants with training in and tools for financial management. These sessions were facilitated by a member of Navistar's Dealer Operations team to ensure that the information being provided was relevant and user-friendly. There was a specific focus on helping participants understand how to align their financial plan with their nonfinancial plan to maximize their ability to achieve their company's strategic mission.

Implementing the Strategic Plan: Quarterly Management Review and Plan Implementation Meetings

During the third week of the program, a day was devoted to performance management systems design and implementation (a topic that will be discussed in Chapter 8). This session included a segment on how to prepare for, facilitate, and follow up on quarterly review/plan implementation meetings. Participants were given a sample planning calendar (which included key events in preparing for, holding, and following up on these meeting) and asked to create their own for the coming fiscal year. For each meeting, key items that needed to be scheduled included having each goal owner prepare and share a report summarizing progress being made against his or her goals, preparing the agenda, circulating the agenda and any supporting information (e.g., background on issues that will be discussed during the meeting) that needed to be reviewed before the meeting, holding the meeting, and meeting follow-up (including circulating the updated strategic plan and any notes from the meeting).

One key to success in making planning work is to ensure that planning team members make preparation for and attendance at these review meetings a high priority. As we suggest to all those who implement our approach, a participant should only miss these meetings if there is a real emergency. It is possible to “train” people not to miss scheduled planning sessions. For example, in one of our clients, a senior executive we shall call “Jerry” told the CEO at the last minute that he had to make an unscheduled business trip. Since he was an important player, the CEO asked us what to do, go ahead with the meeting or reschedule it? We recommended going ahead with the meeting. Decisions were made without the absent executive's input. When Jerry complained, the CEO told him the meeting was scheduled and held as planned. It was his choice to attend or not. Jerry never again missed a scheduled planning meeting.

The segment on performance management also included tips for effectively managing the meeting. There was also a discussion of strategies for holding team members accountable for goal achievement and for reporting on progress being made.

Taking the Planning Process to the Next Levels: Departmental and Individual Planning

As stated earlier, many of the participants in the International Truck dealer leadership development program had businesses that were multi-location and all actually had several profit centers—including new trucks, used trucks, parts, and service. To meet the needs of these complex businesses, Week Five of the program included a session on how to develop and implement effective departmental plans using an approach that mirrored that used at the overall company level. In this approach, each department has a business definition/concept (which answers the questions “Why does this department exist?” “What is its overall purpose?” and “How does it add value?”), a strategic mission statement (which answers the question “What is the department working to achieve over the next three years, and how does this support the overall company's strategic mission?”), a list of key result areas, and objectives and goals that are designed to achieve both the department's strategic mission as well as support the achievement of the overall company's strategic mission.

As was true of the overall company strategic planning process, participants were encouraged to serve as trainers and facilitators of department managers who, in turn, would be responsible for implementing the process with their teams. In addition, at the request of participants, we were asked to conduct a “mini” version of the larger six-week program for a select group of middle managers from these dealerships. One goal of this two-week program was to help participants develop and implement effective departmental plans.

Results of the Planning Effort at International Truck Dealerships

Over the years since this program concluded in 2009, we have frequently heard from participants about the positive impact that it has had on their business. Several have told us that a focus on strategic planning helped them “weather the storm” created by the 2008 downturn in the economy. Several of the dealerships have grown significantly—some growing from one to nine locations. One dealership—Tallman Truck Group—has been recognized as one of Canada's Best Managed Companies (several times, including in 2014). In 2015, Kevin Tallman, Tallman Truck Group's President, described the impact of strategic planning on his company: “Management Systems' approach to strategic planning forced our company to consider the infrastructure required to facilitate our company's continued growth. In the past five years, our company has grown from $100M in sales (2010) to $230M in sales (2015), and this focus on infrastructure has been a significant game-changer for our company's continued development.”

Stage I: New Venture

During Stage I, strategic planning is probably a very informal, even intuitive process done mostly or entirely by the entrepreneur. Our research has suggested that very few entrepreneurs do formal strategic planning in the sense described in this chapter because the overarching mission at this stage is simply to attain “proof of concept”—that is, confirmation from the targeted market that the products or services being offered are of value to them and that they are willing to purchase them from the company.

Many times, the entrepreneur is consciously or unconsciously following an informal strategic planning process at this stage. The entrepreneur often knows a particular business or industry, such as advertising, printing, publishing, ship repair, garment manufacturing, electronics, landscaping, insurance, or financial planning. Steeped in this knowledge, he or she perceives some market opportunity that is either not currently being served or not being served very well. For example, Steve Jobs and Steve Wozniak found a market for people who wanted a reasonably priced computer that they could use at home or school that actually “worked” when it was removed from the box. This laid the foundation for Apple Computer. After viewing the coffee cafés in Milan, Howard Schultz found the market for a national chain that would provide a “coffee experience” to its customers. Brian and Jennifer Maxwell identified the need for a portable source of energy for athletes and laid the foundation for what would become PowerBar.

Stage II: Expansion

During Stage II, the informal strategic planning process of an entrepreneurial company may begin to change in certain ways. The rapid growth of the organization places considerable demands on the entrepreneur's time and energy, and his or her focus is increasingly on day-to-day operations. This leaves less time and, most important, less emotional energy to do the strategic planning required for the future development of the company. Entrepreneurs in charge of Stage II companies often work 16 hours or more per day simply handling short-term problems and trying to keep up with the momentum of business. The entrepreneur may thus become a “one-minute decision maker,” not by choice but by necessity. Unfortunately, the failure to do strategic planning is itself a kind of strategic plan, for the company that does not plan its future has implicitly chosen to allow the future to happen to the organization. As the legendary coach of UCLA's national champion basketball teams, John Wooden, would say: “The failure to prepare is to prepare for failure.” Similarly, to paraphrase Wooden, we believe that the failure to plan is to plan for failure.

At Stage II, a company does not need a very formal planning system, but it does need some strategic planning. Because the entrepreneur is likely to be more absorbed in other activities than was the case at Stage I, it becomes necessary to substitute a system for what was initially a personal activity.

In essence, a formal strategic planning process is analogous to a “zone defense” in sports. If, for example, a college basketball team has a seven-foot center, the team is likely to have a comparative advantage in rebounding. If the team's center is only six-feet-six, the team is likely to be at a disadvantage in rebounding, but it may be able to compensate for this by using a zone defense. The zone defense is essentially a system in which people are positioned to perform certain tasks; in this example, they will be placed where they are most likely to give the defensive team a comparative advantage at rebounding. In effect, a seven-foot center is a one-person zone defense.

Similarly, if an organization has an entrepreneur who is brilliant at explicit or intuitive strategic planning, it may not need a formal strategic planning process. However, this presumes that the entrepreneur has the time and energy to perform strategic planning. When this ceases to be the case, the company must use a formal strategic planning process as a kind of zone defense to ensure that some strategic planning is accomplished.

During Stage II, a company's strategic planning process can be reasonably simple. In a company with between $1 and $10 million in annual revenues, the process may consist merely of a one- or two-day meeting of the senior leadership team that is devoted to developing the corporate strategic plan. The output of this planning meeting should be a written document that includes a business definition/concept, strategic mission, core strategy, objectives, and SMART goals (organized by the levels in the Pyramid of Organizational Development). The overarching mission of a company at this stage is to “scale,” so a great deal of the plan will be focused upon defining strategies for acquiring the resources and implementing the operational systems needed to support continued growth.

The leadership team should also be meeting for at least a half-day each quarter to review progress against the plan and make any adjustments that are needed. Every company, even a relatively small one, ought to be able to devote one week a year to strategic planning at Stage II. If this modest amount of time and effort is not spent, there is an increasing chance that the company may not be prepared to effectively address external challenges, and may not focus the attention needed to build the internal infrastructure required for continued success.

Stage III: Professionalization

By the time an organization reaches Stage III, it needs to have or be actively working to implement a formal process of strategic planning that now includes a company plan, as well as department plans. The overarching mission at this stage is to “professionalize” the company, and strategic planning is a key system for doing this.

From approximately $10 million to $25 million in annual revenues, the major focus can be on the overall corporate strategic planning process, with departmental or functional plans done more informally. By the time an organization has reached $25 million in annual revenues, however, it needs a more extensive strategic planning process. The corporate plan should be accompanied by formal departmental plans, and the overall amount of planning time and effort should increase.

By the time a company reaches the size of $50 to $100 million in annual revenues, the strategic planning process ought to be well in place. It should be beginning to be a “way of life” in the company. Generally speaking, a minimum of two to three years are needed to institutionalize a strategic planning process in organizations of this size. The first year simply involves the process of learning the planning system's mechanics. During the second and third years, people should increase their planning skills.

How much time should management invest in strategic planning? A reasonable guideline is that management should invest the equivalent of at least one week per year on planning and perhaps up to 10% of its time. If less than one week per year is devoted to planning, management is planning to fail.

Stage IV: Consolidation

By the time a company has reached Stage IV, the planning process ought to be well institutionalized. Leaders and managers at all levels should by this time be “experts” in developing and implementing strategic plans for their areas of responsibility. To ensure that the process continues working effectively, strategic planning should be a topic that is included in the company's leadership development program.

A significant focus at this stage—assuming that the other aspects of the company's infrastructure have been reasonably “built” and are being effectively managed—will be culture management (the sixth key result area in the plan). As culture and plans to manage culture require specific skills, the company may want to have its leaders and managers participate in specific training on this topic.

During Stage IV, there can be a wide variety of refinements to the strategic planning process. At this point, for example, the company has the resources to do more extensive market research analysis and environmental scanning studies.

Stage V: Diversification

The focus of planning in Stage V will be on identifying new market opportunities, new product/service opportunities, or both. The identification of these new opportunities should be based on the results of the environmental scan, as well as the assessment of how the organization's current internal capabilities will support or detract from its ability to take advantage of potential opportunities for growth. The overarching mission of a company at this stage is to identify new opportunities to support continued growth.

The decision to pursue new markets and/or new products and services will lead to significant changes in the company's plan—beginning with the business definition/concept and continuing through the development of objectives and goals for each key result area. In brief, the company will have decided to become a new business and will need to plan accordingly. Frequently, the entrance into new markets or the introduction of new products or services will also have an impact on the organization's structure, with the company becoming divisionalized (versus using a functional structure). This will, in turn, affect how the company develops and implements its strategic planning process, as described next.

Stage VI: Institutionalization

The planning process in Stages VI will include divisional planning, as well as planning for the company as a whole and for departments. If a company has decided to pursue new market and/or product/service opportunities, it will probably have transitioned to a divisional structure—with each division having profit and loss responsibility. Each division, because it is a “business within a business,” will need to develop a plan using the approach for a company as a whole, as described in this chapter—that is, each division will use as their key result areas the six levels in the Pyramid of Organizational Development, plus financial results. The overarching mission of a company at this stage is to design and implement the infrastructure needed to support a multi-business enterprise.

At this stage, the planning process typically begins with the leadership of the holding or parent company (the corporate CEO, corporate CFO, divisional general managers/presidents, and any other leaders of corporate functions) creating a strategic plan for the overall business. This can take many forms, depending upon how the roles of “corporate” and “divisions” are defined. At one Stage VI company, for example, the overall company plan focused on management systems, culture, and financial performance and also established what they termed “priority objectives” for all divisions for the coming year. The divisions were then instructed to be sure to incorporate these objectives into the development of their plans.

In developing their plans, divisions typically need to include a narrative that will help those outside of the division (other divisions and corporate leadership) understand the environment in which they operate (e.g., key threats and opportunities) and their internal strengths and opportunities to improve. This is important because no matter what divisional form is adopted—ranging from a situation in which the divisions receive little input from corporate (as long as they are delivering results) to a situation in which the divisions are managed more directly from corporate—the plan needs to help the reader understand the rationale behind why the division is pursuing certain strategies and what the return to the overall company will be from doing so. Typically, divisional plans are presented to the overall company planning team and approved before being implemented.

Within each division, there will be departmental plans and there may be, depending upon the overall company structure, plans for specific corporate functions like human resources, information technology, and finance. All plans need to align to support the overall company goals.

Plan-review meetings should occur at least quarterly at all levels—corporate, divisional, and departmental. Typically, although not true in all companies, departmental review occurs before the divisional review, which occurs before the review of overall company performance against goals. The output from the departmental review is used as part of assessing progress against the divisional plan, and the output from the divisional plan review is used as the input for overall corporate review. The process for preparing for, conducting, and following up on plan review meetings described in this chapter should be used at all levels.

Stage VII: Revitalization

A company facing revitalization needs to use the steps in the planning process to take a fresh look at every aspect of how it does business. Having a clear and honest assessment of the environmental threats and opportunities and the company's strengths and limitations is critical, because this information needs to be used in creating a plan for significantly improving results and decreasing the possibility of failure. The overarching mission of companies at this stage is, quite simply, to survive.

The leadership team of a company in the revitalization stage needs to be willing to change every aspect of the way it operates, which in turn might mean changing the business definition/concept, strategic mission, core strategy, or aspects of how specific levels in the Pyramid of Organizational Development are designed or function. Sometimes, companies enter this stage simply because they do not have an effective strategic planning process—that is, one that clearly focuses them on all key dimensions that drive long-term success and that has been described in this chapter.