A well-conceived strategy plans for the resources required and, where resources are constrained, seeks alternatives. strategic thinking is closely related to the ability to anticipate and have a long-term vision in order to understand the upcoming changes and challenges in the business, and subsequently be able to advise the organization the most successful pathway to take. The parent can be classified as "in the pack," if it is no better suited than other companies to extract value from a particular business unit, or as a "natural owner," if it is uniquely suited for the job. 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. If the parent is best suited to extract value from a unit, it often makes no sense to sell, even if that unit doesn’t compete in a particularly profitable industry. integrative framework for decisions especially about direction of the business and resource utilization The 7 Strata framework will guide you through the strategic thinking for the OPSP. Flip the odds. 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. In fact, strategic thinking is the framework for strategic and operational plans. "1 1.See B. H. Liddell Hart, Strategy, second edition, Columbus, Ohio: Meridian Books, 1991. 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. The feedback loops shown in Exhibit 4 interact over time to determine the attractiveness of the industry at any given moment. We'll email you when new articles are published on this topic. Once planners see their main role as identifying issues, they shift their attention from the details of their companies’ activities to the outside world, where the most profound issues reside. Strategists are acutely uncomfortable with vague concepts like "synergy." Practical resources to help leaders navigate to the next normal: guides, tools, checklists, interviews and more. These can include taxation, owners’ incentives, imperfect information, and differing valuation techniques. Some large, successful enterprises, for instance, are still firmly embedded in the forecast-based planning phase. 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. Retain structurally mediocre (or even poor) businesses if you can coax more value out of them than other owners could. We call this spark "issue orientation.". Dec 18, 2012 - This Pin was discovered by Glen Ford. It is a process which is applied on an ongoing basis and hence; it involves the generation of shrewd business ideas … Susan Heathfield is an HR and management consultant with an MS degree. The first phase, financial planning, is the most basic and can be found at all companies. It is simply the process of setting annual budgets and using them to monitor progress. our use of cookies, and It’s difficult to become skilled at something if you don’t have a framework and the tools with which to practice. Strategic thinking starts with a vision for the future. Top management supervises the process and decides the issues it must address and which should be assigned to operating managers. 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. Econ… The matrix itself can suggest some powerful strategic prescriptions—for example: Divest structurally attractive businesses if they are worth more to someone else. Most business executives, for example, regard government regulation as a bothersome interference in their affairs. Does this mean that your good idea or project is subject to getting postponed or cancelled? In the MACS matrix, the axes from the old nine-box framework measuring the industry’s attractiveness and the business unit’s ability to compete have been collapsed into a single horizontal axis, representing a business unit’s potential for creating value as a stand-alone enterprise (Exhibit 3). In every case, they can identify individual successes that have repaid many times over the company’s increased investment in planning. The vertical axis in MACS represents a parent company’s ability, relative to other potential owners, to extract value from a business unit. Using both … 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. 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. Very soon, however, planners become frustrated because the real world does not behave as their extrapolations predict. collaboration with select social media and trusted analytics partners The means to become more strategic in your day-to-day activity and so be able to better align with corporate goals 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. Build a Strategic Framework Through Strategic Planning Mission, Vision Statements, Values, Goals and Strategies Identified ••• Javier Larrea/age fotostock/Getty Images By. 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. Phase-three plans can sometimes achieve this kind of dramatic impact because they are very different from the kind of static, deterministic, sterile plans that result from phase-two efforts. Strategic thinkers are able to create and stick to a very clear visioning process. Our flagship business publication has been defining and informing the senior-management agenda since 1964. Of course, the MACS matrix is just a snapshot. 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. that enables us to make sense of a complex world and can transform the . The horizontal dimension of a MACS matrix shows a business unit’s potential value as an optimally managed stand-alone enterprise. your own Pins on Pinterest By the end of this seminar, you will have: 1. 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. Phase-three plans are adaptive rather than deterministic. [A model is] a template: You use it at the beginning of the planning process. Instead, it is woven into the fabric of operational decision making. 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. This framework is defined by tomorrow’s strategic issues rather than by today’s organizational structure. Unleash their potential. It is important that the chief executive model strategic thinking. Their first response is usually to develop more sophisticated forecasting tools: trend analysis, regression models, and, finally, simulation models. Strategic thinking includes careful and deliberate anticipation of threats and vulnerabilities to guard against and opportunities to pursue. … 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. 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. McKinsey’s nine-box strategy matrix, prevalent in the 1970s, plotted the attractiveness of a given industry along one axis and the competitive position of a particular business unit in that industry along the other. Units below the diagonal of the matrix are sold, liquidated, or run purely for cash, and they are allowed to consume little in the way of new capital. They do not work from a standard strategy, such as "invest for growth." Do they have a good feel for the competition? Companies usually learn the shortcomings of phase-one planning as their treasurers struggle to estimate capital needs and make trade-offs among various financing plans, based on no more than a one-year budget. Strategic thinking capabilities that are widespread throughout the company, not limited to the top echelons. Digital upends old models. As in-depth dynamic planning spreads through the organization, top managers realize that they cannot control every important decision. This multitude of possibilities is precisely what makes phase three very uncomfortable for top managers. Strategic thinking is characterized by an all-pervasive unwillingness to expend resources. Strategic issues are hung on the framework like ornaments on a Christmas tree. Phase-three strategies are often surprise strategies. The framework is defined by tomorrow’s strategic issues rather than by today’s organizational structure. This new measure is what makes MACS especially useful. Why? Although it is not possible to make everyone at a company into a brilliant strategic thinker, it is possible to achieve widespread recognition of what strategic thinking is. In seeking to understand what strategic management is, we have conducted a major study of the planning systems at large corporations. Do they know their own cost structures? It appears likely that strategic management will improve a company’s long-term business success. 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. tab, Engineering, Construction & Building Materials, McKinsey Institute for Black Economic Mobility. 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. Only 23 percent of executives are strong at strategic thinking. Managers forecast revenue, costs, and capital needs a year in advance and use these numbers to benchmark performance. The quality of the strategy of such a company depends largely on the entrepreneurial vigor of its CEO and other top executives. The result: the company decided that no achievable level of cost reduction could meet the competition and that it therefore made no sense to seek a competitive advantage on price. 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. 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." Learn more about cookies, Opens in new Ad-hoc studies by task forces and systematic communication of the essence of the strategy to those who need to know may suffice. Subscribed to {PRACTICE_NAME} email alerts. The terms strategic planning framework and strategic framing models are often used interchangeably, but some say they are different. The framework for strategic thinking is a series of powerful analytical tools . tab. 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. A motivational system and management values that reward and promote the exercise of strategic thinking. As financial planners extend their time horizons beyond the current year, they often cross into forecast-based planning, which is the second phase. Once you have your strategic framework in place, you can utilize it repeatedly to alter or refine your course. 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. It means having the ability to plan for the long-term while maximizing performance in the short-term. The planners’ in-depth analyses, previously reserved for inwardly focused financial projections, are now turned outward, to customers, potential customers, competitors, suppliers, and others. 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. Vision. Observing them can teach executives much about strategic management. Select topics and stay current with our latest insights, By Frederick W. Gluck, Stephen P. Kaufman, A. Steven Walleck, Ken McLeod, and John Stuckey. This often boils down to the following five attributes: A well-understood conceptual framework that sorts out the many interrelated types of strategic issues. All rights reserved. Sometimes, this measure can be qualitative. Most transformations fail. It may excel at internal control: cutting costs, squeezing suppliers, and so on. At this point, a creative spark stirs the imaginations of the planners. MACS represents much of McKinsey’s most recent thinking in strategy and finance. 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. 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 particular, they share the following features: Phase-three resource allocation is dynamic rather than static. Many qualities can make a corporation the natural owner of a certain business unit. Follow Linkedin. “Think of models as a way of ideating strategy. Frederick W. Gluck, Stephen P. Kaufman, and A. Steven Walleck. 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. This vision will then drive the strategy of the organization. Finally, there may be financial or technical factors that determine, to one extent or other, the natural owner of a business unit. McKinsey Insights - Get our latest thinking on your iPhone, iPad, or Android device. It involves a process where management evaluates its qualitative options and decides on a common and shared vision for the future. Please try again later. When this investment is successful, the result is strategic management: the melding of strategic planning and everyday management into a single, seamless process. Discover (and save!) The strength of this vertical dimension is that it makes explicit the true requirement for corporate performance: extracting more value from assets than anyone else can. Our mission is to help leaders in multiple sectors develop a deeper understanding of the global economy. The technique most commonly applied to this problem is portfolio analysis, a means of depicting a diversified company’s business units in a way that suggests which units should be kept and which sold off and how financial resources should be allocated among them. Strategic issues are hung on the framework like ornaments on a Christmas tree. 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. A well-understood conceptual framework that sorts out the many interrelated types of strategic issues. That optimal value depends on three basic factors: Industry attractiveness is a function of the structure of an industry and the conduct of its players, both of which can be assessed using the structure-conduct-performance (SCP) model. This article is adapted from a McKinsey staff paper dated July 1989. The OECD Competency Framework displays fifteen Core Competencies grouped into three clusters. ... Strategic Thinking Identifies new information or data to key decision-makers or stakeholders to support their understanding and decisions. We found that planning routinely progresses through four discrete phases of development. Read The Balance's editorial policies. Top management supervises the process and decides which issues it must address and which should be assigned to operating managers. Reinvent your business. The previous experience plays an essential role to build this anticipating instinct as it helps you t… Objectives, Goals, Strategies, and Measures (OGSM) James Story, senior content manager at Lead … The vertical axis of the MACS matrix measures a corporation’s relative ability to extract value from each business unit in its portfolio. Copyright © 1989, 2000 McKinsey & Company. The first published product of Gluck’s strategy initiative was a 1978 staff paper, "The evolution of strategic management.". MACS, a descendent of the old nine-box matrix, packages much of McKinsey’s thinking on strategy and finance. The manager’s objective is to find the combination of corporate capabilities and business units that provides the best overall scope for creating value. Please click "Accept" to help us improve its usefulness with additional cookies. 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. A strategist is always looking for opportunities to win at low or, better yet, no cost. 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. "In strategy," says Liddell Hart, "the longest way around is often the shortest way home. But such a change will come at a cost to the parent and to other units in its portfolio. The Strategic Thinking Framework is a good place to start when deciding on a common approach to strategy. The same fate could easily befall one of the brightest new concepts to come along lately: strategic management. Technology 2. And business units above the diagonal, as the label suggests, should pursue strategies of either selective or aggressive investment and growth. Practical resources to help leaders navigate to the next normal: guides, tools, checklists, interviews and more, Learn what it means for you, and meet the people who create it, Inspire, empower, and sustain action that leads to the economic development of Black communities across the globe, In the late 1970s, Fred Gluck led an effort to revitalize McKinsey’s thinking on strategy while, in parallel, Tom Peters and Robert Waterman were leading a similar effort to reinvent the Firm’s thinking on organization. But the power of the article comes from the authors’ insights into the true nature of strategy and what constitutes high-quality strategic thinking.