Summary  569 business unit showed consistent double-digit growth in economic profit. Since the financial results were consistently strong—in fact, the strongest across all the business units—corporate managers were pleased and did not ask many questions of the business unit. One year, the unit’s economic profit unexpect- edly began to decline. Corporate management began digging deeper into the unit’s results and discovered that for the preceding three years, the unit had been increasing its profit by raising prices and cutting back on product promo- tion. That created the conditions for competitors to take away market share. The unit’s strong short-term performance was coming at the expense of its long-term health. The company changed the unit’s management team, but lower profits continued for several years as the unit recovered its position with consumers. A well-defined and appropriately selected set of key value drivers ought to allow management to articulate how the organization’s strategic, marketing, operating, or other initiatives create value. If it is impossible to represent some component of a strategic initiative using the key value drivers, or if some key value driver does not serve as a building block in the initiative, then manag- ers should reexamine the value trees. Similarly, managers must regularly re- visit the targets they set for each value driver. As their business environment changes, so will the limits of what they can achieve. Summary Strategic management encompasses some of the most important decisions ex- ecutives make for creating value in a company. One critical element of man- aging strategically is establishing the analytics to assess performance and investment opportunities. To establish the right analytical base, executives should adopt a fine-grained approach to planning and target setting at the level of individual business segments. Managers should use those granular insights to rank and set priorities for investment opportunities that contribute to value creation for the company as a whole. To monitor performance, man- agers should move beyond standard financial and operating metrics to apply an approach that identifies what drives both short- and long-term value. Another critical element of strategic management is establishing processes to orient the organization toward achievement of long-term value creation. That is the subject of the next chapter. 571 30 Strategic Management: Mindsets and Behaviors As we described at the beginning of Chapter 29, effective strategic manage- ment requires fluency in two distinct yet interrelated disciplines. One, strong analytics capabilities, was the subject of that chapter. This chapter focuses on the other discipline: the mindsets, behaviors, and processes that orient and motivate the entire management team toward its long-term common goals. For all the time managers spend developing strategic plans, they are often ineffective at turning those plans into actions. Budgets and actual spending don’t always reflect strategic priorities. In a 2016 survey of 1,271 executives, only 30 percent said their company’s budgets for capital expenditures, re- search and development (R&D), and sales and marketing were closely aligned with their strategic plans.1 Instead, companies frequently cut back R&D spending or sales and marketing expenditures to meet arbitrary short-term earnings targets. Similarly, managers responding to another survey indicated that their companies are too stingy, especially with investments expensed im- mediately through the income statement and not capitalized over the longer term.2 About two-thirds of the respondents said their companies underinvest in product development, and more than half said their companies underinvest in sales and marketing and in new products or new markets (see Exhibit 30.1). Durably tying strategy to effective action requires effort to change these practices. The greatest opportunity lies in enterprise-wide resource alloca- tion. Mastering the art of resource allocation requires executives to escape the strictures of organizational silos and break them down to make ­allocation ­decisions across the entire enterprise, ranking all opportunities according 1 T. Koller, D. Lovallo, and Z. Williams, “The Finer Points of Linking Resource Allocation to Value Creation,” McKinsey on Finance, no. 62 (Spring 2017), www.mckinsey.com. 2  T. Koller, D. Lovallo, and Z. Williams, “A Bias against Investment?” McKinsey Quarterly, September 2011, www.mckinsey.com.