Synchronized and Streamlined Processes  581 Start with Strategy Let’s begin with the corporate strategy itself. The strategy should include the company’s broad strategic direction, including high-level resource allocation across units, key strategic initiatives, and portfolio changes (for example, sig- nificant acquisitions and divestitures). The company’s strategy need not be on the same rigid schedule as the rest of the planning and performance man- agement process. In fact, some argue that the timing should be delinked so that the strategy can be refined and revised as circumstances change and new information becomes available.13 This also provides more time for introspec- tion and avoids the “all hands on deck” approach that consumes so much time. The CEO and top team, supported by a strong staff, should handle the strategy itself. Build a Plan Once a year, the strategy must be translated into specific plans.14 Companies typically start with a three- to five-year strategic financial plan. Ideally, the plan should focus on resource allocation: where investment dollars (capital as well as expensed investments) will be allocated and how much will be invested overall. The plan should also consider whether the company has the right people in the right places to execute the investments effectively. One mistake that companies often make in their three- to five-year strate- gic plan is putting the detail in the wrong places. A good strategic financial plan should be granular in terms of its number of business units and strategic initiatives to pursue but simplified when it comes to the number of line items per business. Companies often require detailed, line-by-line income statement and balance sheet projections. In our experience, a value driver approach (see Chapter 29) is better for streamlining the process and focusing on strategic issues. This approach focuses on the most important items for each unit—for instance, market growth, share growth, changes in costs per unit and pricing, overall general and administrative spending, and overall R&D spending. This approach also requires fewer people and simplifies iteration. Shape Operations After the three- to five-year financial plan is set, it’s time to craft an annual operating plan (AOP), although some companies skip this step and go straight to preparing a detailed budget. The AOP is the opportunity for the company to finalize spending decisions and performance targets for the year. 13 C. Bradley, M. Hirt, and S. Smit, Strategy Beyond the Hockey Stick (Hoboken, NJ: John Wiley & Sons, 2019), 175–177. 14 While some companies use continuously updated budgets instead of an annual plan and budget, these are still limited to unique circumstances. 582  Strategic Management: Mindsets and Behaviors This is where linking strategy to action can go haywire. As we mentioned at the beginning of this chapter, only about 30 percent of surveyed execu- tives reported that the ultimate budget allocation for capital expenditures and other investments at their company was “very similar” to the strategic finan- cial plan. This means that for many companies, the process of shaping the first year of the strategic financial plan fails to translate into the AOP. Sometimes this occurs because the two processes are disconnected; the AOP builds off last year’s spending rather than off the strategy. At other times, the desire to hit short-term targets derails the planning process, and the strategy is forgotten. This disconnect can be repaired. Senior management should mandate that the AOP spending align with the first year of the strategic financial plan. An- other helpful tweak is to shorten the time between development of the three- to five-year financial plan and creation of the budget. The longer the gap, the more likely the two will be misaligned. For some companies, the gap between these tasks can be two to three months. That’s too long. It’s better to move the strategic plan later in the process. Strategic financial plans and AOPs can feel static, given that no action plan backs them up. Successful companies remedy that situation by ensuring that action plans support strategic initiatives and detail clear lines of responsibil- ity. Only when these requirements are met should a company put together the detailed budget for every unit and department. Review Performance, Repeat The next step is managing performance during the year, which comprises a regular review of performance against AOP and budget targets. The major stumbling blocks to insightful performance management are a lack of good, timely data at a sufficient level of detail and the wrong kind of data. The best companies have automated and integrated systems that allow them to review results, typically monthly, shortly after the end of the month. Unfor- tunately, many companies still spend too much time generating and debating the performance numbers. Or they focus on just the accounting results, rather than the business drivers of performance. Only by understanding the busi- ness drivers can executives take action to improve performance. Is the market growing faster or slower than expected? Are we losing or gaining share? Are competitors behaving as expected? If the market is growing slower, should we try to gain share, or will a price war just exacerbate the problem? Should we cut discretionary costs because sales are not at target levels? If we do, won’t that move hurt us next year? It’s impossible to know during the planning process what unexpected events will come up during the year. Companies need a process for adjust- ing their resource allocation during the year and sometimes adjusting perfor- mance targets as well.