Research carried out by EY in 2019 suggested that more than 90% of senior executives were making or planning to make risk management and Business Continuity Planning key pillars of their businesses, and that 70% already had begun to. Following COVID, which struck in early 2020, these findings have not aged particularly well.
COVID or not, we know that a majority of companies lack an effective planning process. It raises the question, why do we so frequently invest substantial time and effort into implementing corporate planning without seeing it through to completion?
Applied behavioral economics can help answer his question. This discipline examines the social, psychological, and emotional factors in organizational behavior and decision-making, and an understanding of its core concepts can shed some insight on what we can do to maximize the chances of success when implementing a planning initiative.
Concept 1: The Isolation Effect
In simple terms, the Isolation Effect describes how people are not good at making complex judgements, and therefore prefer to break down integrative processes into isolated components. In a strategic context, the people responsible for implementing strategy usually aren’t thinking about the overall organizational picture; they’re concerned with their own part in it, because that is a level of complexity that people can readily understand and act upon.
The result, as we have all seen, is that departments devolve into siloed thinking, focusing only on how a strategy or initiative impacts them, and not the business as a whole.
When teams consider only their own tasks, it is unlikely that the overall strategy will come to fruition
The problem here is that organizational strategy is usually holistic and integrative, and requires considerable mutual interdependence across functions. When teams only consider their own role and tasks, it is extremely unlikely that the overall strategy will ever fully come to fruition.
Some management frameworks such as S&OP and IBP attempt to address the resulting siloes by (theoretically) connecting every part of the enterprise to a core set of objectives and metrics, but without explicitly making a call to action these processes frequently become mere rote recitations.
Concept 2: The Status Quo Effect
In essence, we respond to the Isolation Effect by pushing the strategy to all levels of the organization and setting up communication between the groups involved. Putting aside the practical issues with such an approach, this generally leads to an unintended outcome that is even more pernicious.
When faced with considerable complexity and/or uncertainty around a task or decision, people tend to avoid making any sort of commitment to a path and stick to what they have already been doing. This is commonly known as the Status Quo Effect.
Attempts to push an integrated strategic plan down through an organization frequently fail
Between issues of isolation thinking and status quo responses, it is unsurprising that attempts to push an integrated strategic plan down through an organization frequently fail.
Connecting Individuals to Enterprise Objectives
As both the Status Quo and Isolation Effects arise both from an individual’s disconnection from overall objectives and the misapprehension that many leaders have about the power of their dictates to influence behaviors, we must clearly articulate the reason for the enterprise’s strategies and goals.
It is insufficient to tell a team that “the plan for next fiscal year is 10% revenue growth”. This may be fine as a target, but makes no reference to a plan or strategy, nor does it provide the many stakeholders with sufficient context or purpose to make clear what specific action is required of them.
Leaders often fail to take the time to explain why each of the steps or actions are necessary
Similarly, while S&OP and IBP processes make a valiant effort at connecting corporate strategy with individual departmental plans, their leaders often fail to take the time to explain why each of the steps or actions are necessary, and why the corporate goals and plans are what they are. Thus, in both cases, although a high-level plan may have been communicated, the complexity which challenges human judgment remains unaddressed. Where questions persist, inactivity invariably arises.
Define Explain Enterprise Targets & Goals
To address the psychological root causes of this inaction, effective communication not only of the plans and the reason for those plans, but also of the specific expectations of action for every stakeholder is key. In practice this can take several forms. In the case of Annual Operating Plans, an explanation of the rationale supporting targets – e.g. why did we choose 10% growth, and not 20% or 5%? – and a requirement from stakeholders to provide a qualitative statement describing how their department will help achieve the corporate plan prior to submitting a departmental action plan and KPIs can help clarify what steps are necessary to advance the plan.
In the case of S&OP or IBP, there are several initiatives which can be useful at addressing inaction. First, a clear statement of purpose at the outset of each meeting, tying the intended objectives and outcomes of that meeting to the overall corporate plan. In the case of a Portfolio Review, that might look like:
“Our meeting objectives are to review New Product Introductions, End of Life Products, and review portfolio performance over our strategic planning horizon. By ensuring we consistently have a healthy pipeline of new products and space for them to grow by culling underperforming products, we can achieve our objective of 20% contribution of the overall growth target of 8%.”
Asymmetries between executive goal setting and employee tasks inevitably create ambiguity and uncertainty
Provide a clear line of sight on every slide in a meeting presentation to the decision or action that is expected. Going so far as to explicitly write it out on the footer of each slide keeps content creation aimed at this critical objective, but also keeps meeting participants laser-focused on action, as is the intent.
The Bottom Line
It is tempting when planning at the highest level to expect that the reasons for plans or paths to goals are as immediately obvious to everyone as they are to those formulating the plans, but the frequent gap between planning and execution makes it clear that this isn’t the case.
Asymmetries between executive goal setting and employee tasks inevitably create ambiguity and uncertainty, and the extent to which we struggle to make judgments and plans under uncertainty in complex environments should not be underestimated. Therefore, to increase the chances of successfully implementing any strategic initiative like S&OP or IBP, leaders must be mindful of the root causes of inaction and both overcommunicate the context and purpose of corporate plans and make explicit the paths to action for key stakeholders.
Jonathon Karelse will be speaking at IBF’s Business Planning, Forecasting & S&OP/IBP Conference in Amsterdam from November 16-18. With dozens of workshop sessions, panel discussions and networking opportunities, it’s the biggest and best event of its kind nf Europe. Click here for more details.