During the recession, as business forecasts based on seemingly plausible swings in sales smacked up against reality, executives discovered that strategic planning doesn’t always work.
Some business leaders came away convinced that the new priority was to be able to shift course on the fly. Office Depot Inc., for example, began updating its annual budget every month, starting in early 2009. Other companies started to factor more extreme scenarios into their thinking. A few even set up “situation rooms,” where staffers glued to computer screens monitored developments affecting sales and finances.
Now, even though the economy is slowly picking up, those fresh habits aren’t fading. “This downturn has changed the way we will think about our business for many years to come,” says Steve Odland, Office Depot’s chairman and chief executive.
Walt Shill, head of the North American management consulting practice for Accenture Ltd., is even more blunt: “Strategy, as we knew it, is dead,” he contends. “Corporate clients decided that increased flexibility and accelerated decision making are much more important than simply predicting the future.”
Companies have long planned for changing circumstances. What’s new—and a switch from the distant calendars and rigid forecasts of the past—is the heavy dose of opportunism. Office Depot stuck with its three-year planning process after the recession hit, largely to make sure employees had a common plan to rally around, Mr. Odland says. But the CEO decided to review the budget every month rather than quarterly so the office-supply chain could react faster to changes in customers’ needs.
In one review session, managers told Mr. Odland that numerous cash-strapped consumers no longer wanted to buy pens or printer paper in big packages. The company soon created special displays promoting single Sharpie pens and introduced five-ream packages of paper, half the size of the normal big bundle. Pleased by those items’ popularity, Mr. Odland vows to continue the monthly budget meetings.
For Spartan Motors Inc., a maker of specialty vehicles, the recession triggered a massive overhaul of strategic planning. Officials used to draft a one-year strategic plan and a three-year financial plan and then review each one every quarter. Chief Executive John Sztykiel says that relatively inflexible method bears some of the blame for Spartan’s sharp drop in sales and gross profit during the first nine months of 2009. The Charlotte, Mich., manufacturer didn’t respond quickly enough to shifting demand, he says.
Last July, Mr. Sztykiel inaugurated a three-year strategic plan that he and his lieutenants update every month. The Spartan CEO has started to see a payoff. In November, the company agreed to buy Utilimaster Corp., a maker of delivery vans and custom chassis, for $45 million. Mr. Sztykiel is sure the deal wouldn’t have crossed his radar in time if he had stuck with quarterly strategy reviews.
Martin Reeves, a senior partner at Boston Consulting Group, believes more business leaders will start to rely less on static five-year strategic plans and more on rough “adaptive” strategies that consider multiple scenarios. Before the recession and the housing crisis, appliance maker Whirlpool Corp. considered scenarios based on a 5% increase or decrease in demand. Now, Chief Executive Jeff Fettig has broadened that to consider swings as wide as 15%.
“The rate of change and width of volatility is much wider and faster than what we would have assumed coming into this,” Mr. Fettig says. The company realized it could no longer count on “a reasonable set of assumptions,” he adds, “so we modeled very significant changes in scenarios.”
J.C. Penney Co. put its long-term strategy on hold and called in a substitute. In April 2007, Chief Executive Myron E. “Mike” Ullman III had unveiled an ambitious five-year plan as the Plano, Texas-based retailer launched its biggest expansion ever. But amid the slowing economy in early 2008, Mr. Ullman realized that “there’s no way you can have all gun barrels blazing.” So he devised a tentative “bridge” plan that lasted through 2009. “We hit the pause button on a lot of things,” he explains, while speeding up efforts to woo customers in fresh ways such as through social-networking sites.
Mr. Ullman says the bridge plan succeeded, and he cites Penney’s improved margins and lack of layoffs. Next month, he’ll offer fellow directors his views about reviving his 2007 strategic plan after he analyzes “whether it is as relevant as it was three years ago.”
Other executives have embraced “just-in-time” decision making, a tactic that Lowell Bryan, a senior partner for consultants McKinsey & Co., thinks will spread during the recovery. Premature decisions can create excessive risks, he says, but “opportunity costs are fantastic” when decisions are delayed for too long. McKinsey itself sought to capitalize on the recession-rattled environment with its October 2008 opening of a Center for Managing Uncertainty headed by Mr. Bryan.
Tying decision making closely to evolving facts helped a major U.S. producer of industrial goods avoid switching gears too soon. Battered by the downturn last spring, the McKinsey client (which Mr. Bryan wouldn’t name) considered closing a large plant. Officials carefully assessed the pluses and minuses of shutting it sooner rather than later, Mr. Bryan recalls.
They agreed instead to keep the plant open unless orders fell to a predetermined “trigger point,” he says. The trigger was never tripped, so the plant stayed open, and the company was ready when orders recovered rapidly last fall.
A big U.S. services-sector business hurt by inadequate strategic planning has decided to create a situation room modeled after the ones recently established by an Asian electronics concern and a Scandinavian bank, according to Mr. Bryan. This McKinsey client wasn’t prepared last year when a financing window suddenly opened, causing it to pay more to raise billions of dollars than a faster-moving company would have had to, Mr. Bryan says. He believes the situation room will bolster the client’s mobilization of strategic intelligence about capital markets, customer behavior and competitors.
McKinsey, along with several rivals, saw demand for its strategy consulting services fall during the downturn. “But now, we are seeing a huge pickup,” Mr. Bryan says. “Businesses are saying, ‘It’s time to think about going on offense again.'”