Strategic Planning and Budgeting: A Crucial Phase for Organisations
As the year draws to a close, most organisations operating under the Gregorian calendar are entering their final quarter. This phase is pivotal as it involves reflecting on the past year’s achievements and planning for the future. Key activities during this period include:
- Preparation of financial statements and external audits
- Board meetings to evaluate annual performance
- Strategy formulation retreats and budget preparations
Organisations are typically very busy during this time, with increased pressure towards November and December. The final board meetings of the year are crucial, as they involve submitting strategies and budgets for approval, ensuring a smooth start to the next year.
It is widely acknowledged that the success of an organisation hinges on a well-crafted strategy, supported by effective execution. Therefore, the process of strategy formulation and execution is critical in determining organisational success.
This article aims to remind organisations and readers about the essence of strategy and the potential role of the board in its formulation and execution.
Understanding Strategy
Numerous publications, including articles and books, have explored the concept of strategy, yet there is no universally accepted definition. This is due to varying perspectives on what strategy truly entails:
- Some believe that careful analysis of the present, anticipation of market changes, and future planning are essential for success.
- Others argue that the future is unpredictable, and strategy should evolve organically, adapting to disruptions and shifting conditions.
Johnson and Scholes (2005) define strategy as the process that determines the long-term direction and scope of an organisation. It involves configuring resources to meet market and stakeholder needs.
Michael Porter emphasizes that strategy should define and communicate an organisation’s unique position, focusing on combining resources, skills, and competencies to create competitive advantage.
While the evolutionary aspect of strategy cannot be ignored, planning for future success remains vital. This requires organisations to anticipate and prepare for future challenges at all levels.
Levels of Strategy in an Organisation
Strategy can be formulated at three distinct levels:
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Corporate Level: This involves the overall strategy for an organisation comprising multiple business units operating in various markets. It focuses on integrating and managing diverse businesses to achieve synergy.
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Business Level: At this level, strategy is developed to translate the corporate vision into reality for specific strategic business units. It relates to distinct product or market areas.
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Functional Level: Here, strategy focuses on achieving business unit goals using the organisation’s strengths and capabilities. Functional areas such as marketing, production, finance, and human resources develop their own strategies.
McKinsey’s Three Horizon Model
McKinsey introduced a three horizon model to guide organisations in managing their strategy, reliance, transformation, and sustainability amidst disruptions:
- Horizon 1 (H1): Focuses on core business activities that generate current revenue and profit, optimising existing operations.
- Horizon 2 (H2): Involves emerging opportunities that extend or diversify the business, investing in near-term growth areas.
- Horizon 3 (H3): Concentrates on future innovations that could transform the industry or organisation, requiring long-term investments and organisational transformation.
Each horizon demands different focus, tactics, tools, and goals. The interplay between these horizons defines an organisation’s sustainability and resilience. To remain competitive, companies must allocate resources across all three horizons.
The Role of the Board
Boards typically have three interrelated roles:
- Monitoring senior executives, including selecting and dismissing top management, evaluating performance, and supervising internal and external audits.
- Defining, selecting, and implementing corporate strategy.
- Linking the company to its external environment and performing ceremonial functions to enhance legitimacy.
However, discussions on how boards effectively fulfill these roles and influence strategy development are ongoing. There is no consensus on the extent of the board’s involvement in each role. Some advocate for a more oversight-focused approach, while others suggest a balance between independence and strategic input.
Corporate governance has traditionally emphasized the board’s oversight role to address agency problems and protect stakeholders’ interests. Most board agendas reflect a greater emphasis on monitoring than strategy development. Boards often focus on reviewing performance rather than exploring future prospects and opportunities.
There is a growing trend for boards to consider Environmental, Social, and Governance (ESG) factors, along with Risk and Compliance, as key responsibilities. Sustainability has become a global priority, requiring organisations to ensure compliance with set standards.
In the next part of this publication, we will explore the board’s role in strategy formulation, balancing independence with attention to the three horizons of strategy. We will also examine how the three levels of strategy intersect with the three horizons and where the board should engage.
Matigimu is a business consultant and trainer with over 35 years of experience in the C-suite within financial services, industry, and commerce. These weekly New Perspectives articles, published in the Zimbabwe Independent, are coordinated by Lovemore Kadenge, an independent consultant and managing consultant of Zawale Consultants (Pvt) Ltd. He is a former president of the Zimbabwe Economics Society and the Chartered Governance & Accountancy in Zimbabwe (CGI Zimbabwe).
