strategic thinking framework

We found that planning routinely progresses through four discrete phases of development. This framework is defined by tomorrow’s strategic issues rather than by today’s organizational structure. Many qualities can make a corporation the natural owner of a certain business unit. In well over half of the companies McKinsey studied—including some highly successful ones—formal planning was still at this most basic phase. “Think of models as a way of ideating strategy. This initial response brings some improvement, but sooner or later all extrapolative models fail. VRIO Framework. Very soon, however, planners become frustrated because the real world does not behave as their extrapolations predict. This study is unique in that it attempts to pass judgment on the quality of the business plans produced rather than only on the planning process. The main principle guiding this process should be the primary one behind MACS itself: the decision about whether a unit ought to be part of a company’s portfolio hangs more on that company’s relative ability to extract value from the unit than on its intrinsic value viewed in isolation. our use of cookies, and STRATEGIC THINKING FRAMEWORK 11 Macro Sources of Disruption. In particular, this issue should not be decided by the value of the business unit viewed in isolation. If the answer to such questions is yes, there may be little advantage to formal strategic planning. [A model is] a template: You use it at the beginning of the planning process. The parent corporation may be able to envision the future shape of the industry—and therefore to buy, sell, and manipulate assets in a way that anticipates a new equilibrium. With the 7 Strata framework, Verne Harnish integrated several of the best-known components of strategy by gurus like Jim Collins, Michael Porter and Bob Bloom, into a single framework. However, the nine-box matrix applied only to product markets: those in which companies sell goods and services to customers. Start by considering the external forces impinging on an industry, such as new technologies, government policies, and lifestyle changes. "In strategy," says Liddell Hart, "the longest way around is often the shortest way home. hereLearn more about cookies, Opens in new Chances to improve the attractiveness of the industry or the business unit’s competitive position within it come in two forms: opportunities to do a better job of managing internally and possible ways of shaping the structure of the industry or the conduct of its participants. McKinsey’s standard portfolio analysis tool is the nine-box matrix (Exhibit 2), in which each business unit is plotted along two dimensions: the attractiveness of the relevant industry and the unit’s competitive strength within that industry. No more than a few of the world’s companies—mainly diversified multinationals that manufacture electrical and electronic products—have reached this fourth phase. "1 1.See B. H. Liddell Hart, Strategy, second edition, Columbus, Ohio: Meridian Books, 1991. This understanding is based on some relatively simple rules. The first published product of Gluck’s strategy initiative was a 1978 staff paper, "The evolution of strategic management.". … The ostensible purpose of Gluck’s article was to throw light on the then-popular but ill-defined term "strategic management," using data from a recent McKinsey study of formal strategic planning in corporations. Conversely, if a parent company determines that it is not the best possible owner of a business unit, the parent maximizes value by selling it to the most appropriate owner, even if the unit happens to be in a business that is fundamentally attractive. Believing that the internal transfer of goods and services is always a good thing, these companies never consider the advantages of arm’s-length market transactions.) This can be done by creating new capabilities that will help the company meet the most important prerequisite for success within a market, by redefining the market itself, or by changing the customers’ buying criteria to correspond to the company’s strengths. As soon as a new management concept emerges, it becomes popularized as a buzzword, generalized, overused, and misused until its underlying substance has been blunted past recognition. MACS, a descendent of the old nine-box matrix, packages much of McKinsey’s thinking on strategy and finance. Discover (and save!) The authors concluded that such planning routinely evolves through four distinct phases of development, rising in sophistication from simple year-to-year budgeting to strategic management, in which strategic planning and everyday management are inextricably intertwined. If a golfer only had a putter and 6-iron in her bag and lacked a swing framework,  she’s going to be much less effective than the golfer with strong swing mechanics and the full range of golf clubs to use. Consider improving a business unit and selling it to its natural owner if you are well equipped to increase the value of the business unit through internal improvements but not in the best position to run it once it is in top shape. collaboration with select social media and trusted analytics partners The position of your business unit within its industry depends on its ability to sustain higher prices or lower costs than the competition does. Strategic thinking is usually indirect and unexpected rather than head-on and predictable. The vertical axis in MACS represents a parent company’s ability, relative to other potential owners, to extract value from a business unit. Many firms that lack a sophisticated formal planning process make up for it with an informal "implicit strategy" worked out by the chief executive officer and a few top managers. Those on the diagonal—marked "Selectivity, earnings"—can be candidates for selective investment. This article is adapted from a McKinsey staff paper dated July 1989. Of course, lower-level staff members often make key decisions under phase-one and phase-two regimes, but because phase three makes this process explicit, it is more unsettling for top managers and spurs them to invest even more in the strategic-planning process. It appears likely that strategic management will improve a company’s long-term business success. Objectives, Goals, Strategies, and Measures (OGSM) James Story, senior content manager at Lead … that enables us to make sense of a complex world and can transform the . This multitude of possibilities is precisely what makes phase three very uncomfortable for top managers. The key factor that distinguishes strategically managed companies from their counterparts in phase three is not the sophistication of their planning techniques but rather the care and thoroughness with which they link strategic planning to operational decision making. Strategic thinking questions everyone’s unquestioned assumptions. The article is also noteworthy for setting forth McKinsey’s original definition of strategy as "an integrated set of actions designed to create a sustainable advantage over competitors" and includes a description of the well-known "nine-box" matrix that formed the basis of McKinsey’s approach to business portfolio analysis. It is important that the chief executive model strategic thinking. In short, the "market-activated corporate strategy framework" prompts managers to view their portfolios with an investor’s value-maximizing eye. Then consider the industry’s structure, including the economics of supply, demand, and the industry chain. There are at least two others: strategic thinking and opportunistic strategic decision making (Exhibit 1). At first, phase-two planning differs little from annual budgeting except that it covers a longer period of time. Phase-three plans often recommend not one course of action but several, acknowledging the trade-offs among them. Strategic thinking seeks hard, fact-based, logical information. Better knowledge of yourself as a strategic thinker 3. This outward focus is the chief characteristic of phase three: externally oriented planning. The following infographic provides you with a strategic thinking framework used by tens of thousands of leaders around the world to simplify the complex art of setting strategic direction. Susan Heathfield is an HR and management consultant with an MS degree. Do they know their own cost structures? Formal strategic planning, in fact, is just one of the possible sources of sound strategy development. It may have other businesses that can share resources with the new unit or transfer intermediate products or services to and from it. Reinvent your business. The quality of the strategy of such a company depends largely on the entrepreneurial vigor of its CEO and other top executives. People create and sustain change. Once there is a consistent definition of strategy enterprise-wide, organizations should include strategy skills into their leadership development programs. Learn more about cookies, Opens in new Give top priority to business units that lie toward the far left of the matrix—either by developing them internally if you are their natural owner or by selling them as soon as possible if someone else is. The resulting chart can be used to plan acquisitions or divestitures and to identify the sorts of institutional skill-building efforts that the parent corporation should be engaged in. Take the example of a heavy-equipment maker that spent nine person-months reverse engineering its competitor’s product, reconstructing that competitor’s manufacturing facilities on paper, and estimating its production costs. It may excel at internal control: cutting costs, squeezing suppliers, and so on. © 2021 Strategic Thinking Institute • Phone: 847.756.4707. Digital upends old models. It is a process which is applied on an ongoing basis and hence; it involves the generation of shrewd business ideas … Strategists are acutely uncomfortable with vague concepts like "synergy." A well-understood conceptual framework that sorts out the interrelated types of strategic issues. When this investment is successful, the result is strategic management: the melding of strategic planning and everyday management into a single, seamless process. All rights reserved. Strategic thinking chief executive. Vision and Mission. In 1990, Robert S. Kaplan of the Harvard Business School led a research study … Flip the odds. They do not accept generalized theories of economic behavior but look for underlying market mechanisms and action plans that will accomplish the end they seek. Sometimes, a parent company can change the way it extracts value, and in so doing it can become the natural owner of a business even if it wasn’t previously. Phase-three strategies are often surprise strategies. Observing them can teach executives much about strategic management. At this point, a creative spark stirs the imaginations of the planners. But a few companies appear to have revised that assumption and may be trying to participate actively in the formation of regulatory policies to gain a competitive edge. Most business executives, for example, regard government regulation as a bothersome interference in their affairs. A strategic framework enables the survivability of your project through changes within management. An organization’s management does sometimes change, and new managers usually come into their new roles with new ideas and thinking. Ten years later, a team from the Firm’s Australian office took portfolio analysis a step further. Finally, there may be financial or technical factors that determine, to one extent or other, the natural owner of a business unit. Basil Henry Liddell Hart, probably the foremost thinker on military strategy in the 20th century, has written, "To move along the line of natural expectation consolidates the opponent’s balance and thus his resisting power." Top management supervises the process and decides which issues it must address and which should be assigned to operating managers. Strategic issues are hung on the framework like ornaments on a Christmas tree. We have found that it serves well as a means of assessing strategy along the critical dimensions of value creation potential and relative ability to extract value. Once a company’s business units have been located on the MACS matrix, the chart can be used to plan preliminary strategies for each of them. In fact, strategic thinking is the framework for strategic and operational plans. They suddenly realize that their responsibility is not to chart the future—which is, in fact, impossible—but, rather, to lay out for managers the key issues facing the company. All three routes can result in an effective strategy, which we define as "an integrated set of actions designed to create a sustainable advantage over competitors.". Instead, they continually aim to uncover new ways of defining and satisfying customer needs, new ways of competing more effectively, and new products or services. The mental tools to start understanding the strategic environment that you work in 2. Full Bio. The horizontal dimension of a MACS matrix shows a business unit’s potential value as an optimally managed stand-alone enterprise. But the power of the article comes from the authors’ insights into the true nature of strategy and what constitutes high-quality strategic thinking. A strategic framework is your road map for moving your business forward. The framework for strategic thinking is a series of powerful analytical tools . Rather than basing portfolio strategy only on metrics of a business unit’s absolute attractiveness, as suggested by the nine-box matrix, John Stuckey and Ken McLeod recommended adding a key new decision variable: how well-suited is the parent company to run the business unit as compared with other possible owners? MACS represents much of McKinsey’s most recent thinking in strategy and finance. When precision is needed, though, you can calculate the maximum potential net present value (NPV) of the business unit and then scale that NPV by some factor—such as sales, value added, or funds employed—to make it comparable to the values of the other business units. The VRIO framework is an acronym for “value, rarity, imitability, organization.” This … Assess this ability by considering the business unit as a value delivery system, where "value" means benefits to buyers minus price.2 2.See Michael J. Lanning and Edward G. Michaels, 'A business is a value delivery system,' on page 53 of this anthology. Because a comprehensive strategy must also help a parent company win in the market for corporate control—where business units themselves are bought, sold, spun off, and taken private—we have developed an analytical tool called the market-activated corporate strategy (MACS) framework. McKinsey Insights - Get our latest thinking on your iPhone, iPad, or Android device. The manager’s objective is to find the combination of corporate capabilities and business units that provides the best overall scope for creating value. Our mission is to help leaders in multiple sectors develop a deeper understanding of the global economy. Strategic thinking is the process of thought that goes on inside the head of the CEO and the key people around him or her that helps them determine the “look” of the organisation at some point in the future. A motivational system and management values that reward and promote the exercise of strategic thinking. The terms strategic planning framework and strategic framing models are often used interchangeably, but some say they are different. A process for negotiating trade-offs among competing objectives that involves a series of feedback loops rather than a sequence of planning submissions. Many companies have enjoyed considerable success without advancing beyond the rudimentary levels of strategic development. tab, Engineering, Construction & Building Materials, McKinsey Institute for Black Economic Mobility. Subscribed to {PRACTICE_NAME} email alerts. The vertical axis of the MACS matrix measures a corporation’s relative ability to extract value from each business unit in its portfolio. Let’s face it. Strategic issues are hung on the framework like ornaments on a Christmas tree. The previous experience plays an essential role to build this anticipating instinct as it helps you t… Read The Balance's editorial policies. Learn about Ad-hoc studies by task forces and systematic communication of the essence of the strategy to those who need to know may suffice. The key insight of MACS is that a corporation’s ability to extract value from a business unit relative to other potential owners should determine whether the corporation ought to hold onto the unit in question. Practical resources to help leaders navigate to the next normal: guides, tools, checklists, interviews and more. This article is adapted from a McKinsey staff paper dated October 1978. She has covered HR for The Balance Careers since 2000. Only 23 percent of executives are strong at strategic thinking. The following infographic provides you with a strategic thinking framework used by tens of thousands of leaders around the world to simplify the complex art of setting strategic direction. We call this phase externally oriented planning, since it derives many of its advantages from more thorough and creative analyses of market trends, customers, and the competition. In addition to the marketplace, companies must be ready to respond to changes in: 1. In fact, it guides business leaders to construct an industry-dominating plan. Phase-one companies, then, do have strategies, even though such companies often lack a formal system for planning them. If the business unit might be better run under different managers, its value is appraised as if they already do manage it, since the goal is to estimate optimal, not actual, value.

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