How business strategy is created

Volume 7 Letter 1

There’s a story, recently retold in HBR1 about an accountant who was confused by a request for capital funding for a chimney – just a chimney. Curious, the controller went to see the site of the proposed chimney and discovered that the divisional managers had constructed a new plant (without a chimney) using a series of work orders. Each work order on its own was under the limit for a capital expenditure review. The divisional managers’ strategy to build a new plant (without involving HQ) was perfect except the last remaining piece – the chimney. The cost of the chimney triggered the needed capital funding approval.

The divisional managers were convinced that the company needed more plant capacity and believed that the normal corporate approval process would have taken too long. In the end they were right – they needed the capacity and quickly. So if strategy is the allocation of resources, were the divisional managers justified in setting strategy and if not, who should set the strategy?

The answer to the question above is complicated yet simple. The simple answer is; anyone who has control over limited resources (time, money or people) needs to set a strategy. The complicated answer is that a lot of people have control over limited resources from the CEO to the divisional managers to the salespeople. How do they coordinate their efforts and who’s responsible for what? We’ll start at the top but first it’s important to understand that strategy is a Push up / Pull up / Push down process. Let’s see how this works.

Senior execs (level 1)
Push up: Senior execs are selling their business strategy to investors telling them why they should invest in their business and what returns investors can expect.

Pull up: Senior executives’ are there to make the bigger decision of “is this a business we want to be in?” To make informed decisions senior execs should “pull up” from divisional managers their strategic plans which must answer “what will you do with the resources if you get them”? This way senior management can evaluate both the external opportunity and internal divisional strength and decide whether to invest further in that division.

Push Down: Senior management decides in which markets to compete and in what divisions to invest to support their strategy. Corporate vision and objectives (and capital budgets) should clearly spell this out.

Divisional managers (level 2)
Push up: Divisional managers must work to protect and build their divisions and use their strategic plans to showcase to senior execs the opportunities their division brings to the corporation. The proposed vision, objectives and strategy must clearly define where the division will grow justifying resources to be used.

Pull Up: Divisional managers must insist their business unit managers present their strategic plans showing how they would use the resources if provided and what returns they would generate.

Push Down: Once divisional managers decide on their strategy they must clearly communicate (through their strategic plan) which business unit strategies they will support.

Business unit managers (level 3)
This “Push up / Pull up / Push down” process continues to penetrate the organization. Business unit managers sell a business plan to resource givers (push up) and then, as resource allocaters, ask for their business regions to compete (pull up) ultimately deciding where to allocate resources (push down).

This pushing and pulling sounds competitive and aggressive but the friction is necessary to be sure of the best use of resources. To ensure a positive outcome from this process it is imperative that all resource allocation decisions are both objective and transparent.

In the absence of a clear strategy one shouldn’t be surprised when managers deeper in the organization usurp control as did the divisional team in our story. Managers can’t delegate or worse yet ignore the responsibility for their company’s, (division’s, business unit’s etc.) direction – managers must actively engage in the strategy process! Leaders must give clear direction as to how resources will be allocated.

Build a strategy, communicate it, be engaged – be a leader!

1. Harvard Business Review How Managers Everyday Decisions
Create or Destroy Your Company’s Strategy by Joseph L. Bower and
Clark Gilbert February 2007 p.72

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