Perspectives on corporate finance and strategy

In conference rooms everywhere, corporate planners are in the midst of the annual strategic-planning process. For the better part of a year, they collect financial and operational data, make forecasts, and prepare lengthy presentations with the CEO and other senior managers about the future direction of the business.

But at the end of this expensive and time-consuming process, many participants say they are frustrated by its lack of impact on either their own actions or the strategic direction of the company.

This sense of disappointment was captured in a recent McKinsey Quarterly survey of nearly 800 executives: just 45 percent of the respondents said they were satisfied with the strategic-planning process.1 Moreover, only 23 percent indicated that major strategic decisions were made within its confines. Given these results, managers might well be tempted to jettison the planning process altogether. 

But for those working in the overwhelming majority of corporations, the annual
planning process plays an essential role. In addition to formulating at least some elements of a company’s strategy, the process results in a budget, which
establishes the resource allocation map for the coming 12 to 18 months; sets
financial and operating targets, often used to determine compensation metrics and to provide guidance for financial markets; and aligns the management team on its strategic priorities.

The operative question for chief executives is how to make the planning process more effective—not whether it is the sole mechanism used to design strategy. CEOs know that strategy is often formulated through ad hoc meetings or brand reviews, or as a result of decisions about mergers and acquisitions.