Companies face a multitude of challenges when designing and executing corporate strategies. Many fail to distinguish a strategic review from the annual budgeting process, or lack adequate processes for strategic planning. We have a set of core capabilities and tools that can help clients strengthen their strategies at the enterprise level.
Portfolio strategy and resource allocation
Many companies manage their portfolios through the annual review of a single over-arching budget. But such an approach can turn portfolio management into simply a series of budgeting exercises, hiding the true range of strategic options that a company has and obscuring individual initiatives and their risks. Companies can make high-level corrections this way, but cannot create a truly balanced portfolio.
Senior managers today face an extremely dynamic environment that requires vigilant scrutiny and nimble management practices. Senior strategy executives, in particular, have pointed to the need to better manage uncertainty in strategy development through flexible and adaptive strategic management practices. This requires on-going dialogue on strategic issues, as well as the ability to execute a new strategic plan. Highly effective organizations have few barriers to reallocating resources and implementing their corporate strategies. However, most organizations struggle to implement their plans, with one year's budget allocation being, by far, the largest predictor of the next year's allocation.
Strategic portfolio management requires companies to generate growth through investment in existing businesses, developing or acquiring new businesses, and exiting unprofitable ones. Doing so effectively requires taking a comprehensive approach to resource allocation. We help clients define an optimal portfolio mix by looking closely at their current mix of assets, their capabilities, and their aspirations in light of the evolving marketplace.
Strategic management and planning
Companies often struggle with their strategic management and planning processes. They might find it challenging to reconcile short-term tactical moves with long-term strategic goals, or have difficulty building the capabilities needed to execute their strategies. McKinsey helps companies strengthen their strategy development processes, enhance overall strategic decision-making, and improve execution. We can support clients in designing tailored solutions to specific issues or in fully redesigning their approach to strategic management and planning.
A critical part of enhancing the planning process is improving overall strategic decision-making capabilities. Left unchecked, subconscious biases such as excessive optimism, groupthink, and loss aversion will undermine strategic decision-making. Our own recent quantitative survey of more than 2,000 executives, as well as our candid conversations with corporate leaders, confirms the significant body of research indicating that cognitive biases affect critical strategic decisions made by even the most experienced managers in the best companies. Behavioral strategy provides a perspective on—and a way to mitigate the impact of—the biases that are often inherent in clients’ decision-making processes.
We also help clients determine who should be managing the strategic planning process. Although CEOs remain ultimately responsible for strategic decisions, in many organizations they are turning more and more to the Chief Strategy Officer to craft and implement successful strategies. But the role’s relative novelty raises critical questions about its function and the degree of ownership it carries. We can provide guidance on the issues unique to CSOs, including the functions CSOs generally perform, processes for successful strategic planning, and working with the executive team and Board.
Among other proprietary tools, we use McKinsey’s resource reallocation diagnostic, which assesses a client’s reallocation history and the barriers it has experienced when attempting to shift budget priorities. This tool allows us to evaluate, outside-in, a client’s current performance relative to other firms at a quantitative level. Additionally, we work with clients to do a deeper quantitative and qualitative assessment using surveys and structured interviews.
The Strategic Management Performance Index (SMPI) is our proprietary benchmarking tool for identifying strengths and weaknesses in a client’s strategic planning process. It is a customizable Web-based survey that is easy to use and can be implemented quickly.
Our Strategic Management Architecture (SMArt) offers an integrated approach to strategic decision-making, allowing clients to improve analytical rigor and generate insights needed to address strategic challenges or exploit opportunities effectively.
We have developed tools that can help our clients identify and minimize decision-making biases. Our Decision Challenger looks at the processes that were used to arrive at a proposed decision, such as a capital expenditure or new market entry. We use structured interviews to test for the presence of biases, and calculate a “decision confidence index rating” to highlight areas of potential weaknesses.
McKinsey’s Decision Process Designer helps clients systematically design—or redesign—the processes they use to make the types of routine decisions that, when taken in aggregate, drive a company’s performance and strategy. This tool reduces the impact of biases by diagnosing their presence in a sample of decisions, and then applying appropriate de-biasing techniques to address them.
We have developed a comprehensive catalogue of questions on strategic direction, strategic planning, and improving strategic decision quality. This can help clients articulate their current corporate strategy challeneged. Alternatively—and more powerfully—it can be used to probe clients on what they really know, testing whether they are scoping their own corporate strategy formulation efforts appropriately, and discovering gaps in their current thinking.
Recent examples of our work
- We helped a global consumer electronics retailer decide how to invest across their different businesses in Europe .The client operated in roughly 10 markets in Europe and wanted to determine which of these existing markets warranted further investment, or whether they should enter new fast-growing markets in Eastern Europe. We analyzed the structure and dynamics of each of the relevant markets, prioritized them, and then established the potential returns in each market. By reallocating resources in this way, as opposed to allocating in line with previous plans, they now expect to more than double their return on investment.
- We helped a leading oil & gas company define their long-term strategy, exploring new areas to enter and optimizing across their existing businesses. To improve their ability to translate the strategy into execution, we overhauled the strategic planning process. The new planning process ensured clear linkages between different planning entities, and allowed for more productive interactions between various groups within the organization. This allowed all key stakeholders to have a voice in the process, such that during subsequent execution of the strategy, groups were aligned and ready to support the strategy with the necessary resources.
- During the financial crisis, we helped a leading pan European bank rethink its corporate strategy. With a significant share of its income disappearing due to regulatory reforms, their portfolio of businesses needed to be reevaluated. Taking into account different constraints, largely driven by regulatory restrictions, an optimization model was created to identify the right areas of focus for the future. Intensive discussions regarding the feasibility of the moves and war gaming the possible reactions of competitors supported the final recommendation. The resulting corporate strategy was structured as a series of decisions over time which could be continuously evaluated as the market develops.