Perspectives on Corporate Finance and Strategy

McKinsey on Finance
Perspectives on
How to improve strategic planning 1
Corporate Finance
It can be a frustrating exercise, but there are ways to increase its value.
and Strategy
Market fundamentals: 2000 versus 2007 8
Whither the S&P 500? Comparing the market’s recent turmoil with its decline
Number 25,
at the end of the dot-com boom can help investors assess what might come next.
Autumn 2007
When to break up a conglomerate:
An interview with Tyco International’s CFO 12
Chris Coughlin explains how spinning off some of the company’s largest
businesses was the key to ensuring its long-term growth.
How to choose between growth and ROIC 19
Investors reward high-performing companies that shift their strategic focus
prudently, even if that means lower returns or slower growth.

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McKinsey on Finance is a quarterly publication written by experts and practitioners in
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How to improve strategic
planning
It can be a frustrating exercise, but there are ways to increase its value.
Renée Dye and
In conference rooms everywhere, corporate planners are in the midst of the annual
Olivier Sibony
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
for the coming 12 to 18 months; sets
in a recent McKinsey Quarterly survey
financial and operating targets, often used
of nearly 800 executives: just 45 percent of
to determine compensation metrics and
the respondents said they were satisfied
to provide guidance for financial markets;
with the strategic-planning process.1
and aligns the management team on its
Moreover, only 23 percent indicated that
strategic priorities. The operative question
major strategic decisions were made
for chief executives is how to make the
within its confines. Given these results,
planning process more effective—not
managers might well be tempted to
whether it is the sole mechanism used to
jettison the planning process altogether.
design strategy. CEOs know that strategy is
often formulated through ad hoc meetings
1
But for those working in the overwhelming
or brand reviews, or as a result of decisions
“ Improving strategic planning: A McKinsey
Survey,” The McKinsey Quarterly,
majority of corporations, the annual
about mergers and acquisitions.
Web exclusive, September 2006. The survey,
conducted in late July and early August
planning process plays an essential role.
2006, received 796 responses from a panel of
In addition to formulating at least some
Our research shows that formal strategic-
executives from around the world. All
panelists have mostly financial or strategic
elements of a company’s strategy,
planning processes play an important role
responsibilities and work in a wide range
the process results in a budget, which
in improving overall satisfaction with
of industries for organizations with revenues
of at least $500 million.
establishes the resource allocation map
strategy development. That role can be

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McKinsey on Finance
Autumn 2007
seen in the responses of the 79 percent
budgets and financial forecasts. If the
of managers who claimed that the formal
calendar-based process is to play a more
planning process played a significant role
valuable role in a company’s overall strategy
in developing strategies and were satisfied
efforts, it must complement budgeting
with the approach of their companies,
with a focus on strategic issues. In our
compared with only 21 percent of the
experience, the first liberating change
respondents who felt that the process did
managers can make to improve the quality
not play a significant role. Looked at
of the planning process is to begin it by
another way, 51 percent of the respondents
deliberately and thoughtfully identifying
whose companies had no formal process
and discussing the strategic issues that
were dissatisfied with their approach to the
will have the greatest impact on future
development of strategy, against only
business performance.
20 percent of those at companies with a
formal process.
Granted, an approach based on issues
will not necessarily yield better strategic
So what can managers do to improve the
results. The music business, for instance,
process? There are many ways to conduct
has discussed the threat posed by digital-
strategic planning, but determining
file sharing for years without finding an
the ideal method goes beyond the scope of
effective way of dealing with the problem.
this article. Instead we offer, from our
But as a first step, identifying the key issues
research, five emergent ideas that executives
will ensure that management does not waste
can employ immediately to make existing
time and energy on less important topics.
processes run better. The changes we
discuss here (such as a focus on important
We found a variety of practical ways in
strategic issues or a connection to core-
which companies can impose a fresh
management processes) are the elements
strategic perspective. For instance, the CEO
most linked with the satisfaction of
of one large health care company asks
employees and their perceptions of the
the leaders of each business unit to imagine
significance of the process. These steps
how a set of specific economic, social, and
cannot guarantee that the right strategic
business trends will affect their businesses,
decisions will be made or that strategy will
as well as ways to capture the opportunities—
be better executed, but by enhancing the
or counter the threats—that these trends
planning process—and thus increasing satis-
pose. Only after such an analysis and
faction with the development of strategy—
discussion do the leaders settle into the more
they will improve the odds for success.
typical planning exercises of financial fore-
casting and identifying strategic initiatives.
Start with the issues
Ask CEOs what they think strategic
One consumer goods organization takes a
planning should involve and they will talk
more directed approach. The CEO, sup-
about anticipating big challenges and
ported by the corporate-strategy function,
spotting important trends. At many com-
compiles a list of three to six priorities
panies, however, this noble purpose has
for the coming year. Distributed to the
taken a backseat to rigid, data-driven
managers responsible for functions, geo-
processes dominated by the production of
graphies, and brands, the list then becomes

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How to improve strategic planning

the basis for an offsite strategy-alignment
with the strategic-planning process rated it
meeting, where managers debate the impli-
highly on dimensions such as including
cations of the priorities for their particular
the most knowledgeable and influential
organizations. The corporate-strategy
participants, stimulating and challenging
function summarizes the results, adds
the participants’ thinking, and having
appropriate corporate targets, and shares
honest, open discussions about difficult
them with the organization in the form
issues. In contrast, 27 percent of the
of a strategy memo, which serves as the basis dissatisfied respondents reported that their
for more detailed strategic planning
company’s strategic planning had not
at the division and business unit levels.
a single one of these virtues. Such results
suggest that too many companies focus
A packaged-goods company offers an even
on the data-gathering and packaging
more tailored example. Every December the
elements of strategic planning and neglect
corporate senior-management team produces the crucial interactive components.
a list of ten strategic questions tailored to
each of the three business units. The leaders Strategic conversations will have little
of these businesses have six months to
impact if they involve only strategic planners
explore and debate the questions internally
from both the business unit and the
and to come up with answers. In June each
corporate levels. One of our core beliefs
unit convenes with the senior-management
is that those who carry out strategy
team in a one-day meeting to discuss
should also develop it. The key strategy
proposed actions and reach decisions.
conversation should take place among
corporate decision makers, business unit
Some companies prefer to use a bottom-up
leaders, and people with expertise essential
rather than a top-down process. We
to the discussion. In addition to leading
recently worked with a sales company to
the corporate review, the CEO, aided by
design a strategic-planning process that
members of the executive team, should
begins with in-depth interviews (involving
as a rule lead the strategy review for business
all of the senior managers and selected
units as well. The head of a business unit,
corporate and business executives) to gen-
supported by four to six people, should
erate a list of the most important strategic
direct the discussion from its side of the table
issues facing the company. The senior-
(see sidebar, “Things to ask in any business
management team prioritizes the list and
unit review”).
assigns managers to explore each issue
and report back in four to six weeks. Such
One pharmaceutical company invites
an approach can be especially valuable
business unit leaders to take part in the
in companies where internal consensus
strategy reviews of their peers in other
building is an imperative.
units. This approach can help build a better
understanding of the entire company and,
Bring together the right people
especially, of the issues that span business
An issues-based approach won’t do much
units. The risk is that such interactions
good unless the most relevant people
might constrain the honesty and vigor of
are involved in the debate. We found that
the dialogue and put executives at the focus
survey respondents who were satisfied
of the discussion on the defensive.

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McKinsey on Finance
Autumn 2007
Things to ask in any
1. Are major trends and changes in your business
5. If your business unit plans to take market share
business unit review
unit’s environment affecting your strategic plan?
from competitors, how wil it do so, and how
Specifical y, what potential developments in
wil they respond? Are you counting on a strategic
customer demand, technology, or the regulatory
advantage or superior execution?
environment could have enough impact
6. What are your business unit’s distinctive competitive
on the industry to change the entire plan?
strengths, and how does the plan build on them?
2. How and why is this plan different from last year’s?
7. How different is the strategy from those of
3. What were your forecasts for market growth, sales,
competitors, and why? Is that a good or a bad thing?
and profitability last year, two years ago, and
8. Beyond the immediate planning cycle, what
three years ago? How right or wrong were they?
are the key issues, risks, and opportunities that
What did the business unit learn from those
we should discuss today?
experiences?
9. What would a private-equity owner do with
4. What would it take to double your business unit’s
this business?
growth rate and profits? Where wil growth
come from: expansion or gains in market share?
10. How wil the business unit monitor the execution
of this strategy?
Corporate senior-management teams can
Adapt planning cycles to the needs
dedicate only a few hours or at most a few
of each business
days to a business unit under review.
Managers are justifiably concerned
So team members should spend this time
about the resources and time required to
in challenging yet collaborative discussions
implement an issues-based strategic-
with business unit leaders rather than
planning approach. One easy—yet rarely
trying to absorb many facts during the
adopted—solution is to free business units
review itself. To provide some context for
from the need to conduct this rigorous
the discussion, best-practice companies
process every single year. In all but the most
disseminate important operational
volatile, high-velocity industries, it is hard
and financial information to the corporate
to imagine that a major strategic redirection
review team well in advance of such
will be necessary every planning cycle.
sessions. This reading material should also
In fact, forcing businesses to undertake this
tee up the most important issues facing
exercise annually is distracting and may
the business and outline the proposed
even be detrimental. Managers need
strategy, ensuring that the review team is
to focus on executing the last plan’s major
prepared with well-thought-out questions.
initiatives, many of which can take 18 to
In our experience, the right 10 pages provide 36 months to implement fully.
ample fuel to fire a vigorous discussion, but
more than 25 pages will likely douse the level Some companies alternate the business units
of energy or engagement in the room.
that undergo the complete strategic-planning

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How to improve strategic planning

process (as opposed to abbreviated annual
system, enabling management to address
updates of the existing plan). One media
unforeseen but pressing strategic issues as
company, for example, requires individual
they arise.
business units to undertake strategic
planning only every two or three years. This Implement a strategic-performance-
cadence enables the corporate senior-
management system
management team and its strategy group to
In the end, many companies fail to execute
devote more energy to the business units
the chosen strategy. More than a quarter
that are “at bat.” More important, it frees
of our survey respondents said that their
the corporate-strategy group to work
companies had plans but no execution path.
directly with the senior team on critical
Forty-five percent reported that planning
issues that affect the entire company—
processes failed to track the execution
issues such as developing an integrated
of strategic initiatives. All this suggests that
digitization strategy and addressing unfore-
putting in place a system to measure and
seen changes in the fast-moving digital-
monitor their progress can greatly enhance
media landscape.
the impact of the planning process.
Other companies use trigger mechanisms
Most companies believe that their
to decide which business units will
existing control systems and performance-
undergo a full strategic-planning exercise in
management processes (including budgets
a given year. One industrial company
and operating reviews) are the sole
assigns each business unit a color-coded
way to monitor progress on strategy. As a
grade—green, yellow, or red—based on
result, managers attempt to translate the
the unit’s success in executing the existing
decisions made during the planning process
strategic plan. “Code red,” for example,
into budget targets or other financial
would slate a business unit for a strategy
goals. Although this practice is sensible and
review. Although many of the metrics that
necessary, it is not enough. We estimate
determine the grade are financial, some may that a significant portion of the strategic
be operational to provide a more complete
decisions we recommend to companies
assessment of the unit’s performance.
can’t be tracked solely through financial
targets. A company undertaking a major
Freeing business units from participating
strategic initiative to enhance its innovation
in the strategic-planning process every year
and product-development capabilities,
raises a caveat, however. When important
for example, should measure a variety of
changes in the external environment occur,
input metrics, such as the quality of
senior managers must be able to engage
available talent and the number of ideas
with business units that are not under review and projects at each stage in development,
and make major strategic decisions on an
in addition to pure output metrics such
ad hoc basis. For instance, a major merger in as revenues from new-product sales. One
any industry would prompt competitors
information technology company, for
in it to revisit their strategies. Indeed, one
instance, carefully tracks the number and
advantage of a tailored planning cycle is
skill levels of people posted to important
that it builds slack into the strategic-review
strategic projects.

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McKinsey on Finance
Autumn 2007
More on strategic planning
Strategic-performance-management systems,
regular review of the key strategic metrics
which should assign accountability for
against its actual performance to alert
In a Quarterly interview, Richard
initiatives and make their progress more
managers to any emerging problems.
Rumelt, a professor at UCLA’s Anderson
transparent, can take many forms. One
School of Management, discusses
industrial corporation tracks major strategic
Integrate human-resources systems
the misperceptions some executives
have about strategic planning:
initiatives that will have the greatest
into the strategic plan

impact, across a portfolio of a dozen busi-
Simply monitoring the execution of
“Most corporate ‘strategic plans’ have
nesses, on its financial and strategic goals.
strategic initiatives is not sufficient: their
little to do with strategy. They are
Transparency is achieved through regular
successful implementation also depends
simply three-year or five-year rol ing
reviews and the use of financial as well as
on how managers are evaluated and
resource budgets and some sort
of market share projection. Cal ing it
nonfinancial metrics. The corporate-
compensated. Yet only 36 percent of the
‘strategic planning’ creates false expec-
strategy team assumes responsibility for
executives we surveyed said that their
tations that the exercise wil somehow
reviews (chaired by the CEO and involving
companies’ strategic-planning processes
produce a coherent strategy.”
the relevant business unit leaders) that
were integrated with HR processes.

Read the full interview, “Strategy’s
use an array of milestones and metrics to
One way to create a more valuable strategic-
strategist: An interview with Richard
assess the top ten initiatives. One to expand
planning process would be to tie the
Rumelt,” on mckinseyquarterly.com.
operations in China and India, for example, evaluation and compensation of managers
would entail regular reviews of interim
to the progress of new initiatives.
metrics such as the quality and number of
local employees recruited and the pace
Although the development of strategy is
at which alliances are formed with channel
ostensibly a long-term endeavor, companies
partners or suppliers. Each business unit,
traditionally emphasize short-term, purely
in turn, is accountable for adopting the same financial targets—such as annual revenue
performance-management approach for
growth or improved margins—as the
its own lower-tier top-ten list of initiatives.
sole metrics to gauge the performance of
managers and employees. This approach is
When designed well, strategic-performance-
gradually changing. Deferred-compensation
management systems can give an early
models for boards, CEOs, and some senior
warning of problems with strategic initiatives, managers are now widely used. What’s
whereas financial targets alone at best
more, several companies have added
provide lagging indicators. An effective
longer-term performance targets to com-
system enables management to step
plement the short-term ones. A major
in and correct, redirect, or even abandon
pharmaceutical company, for example,
an initiative that is failing to perform as
recently revamped its managerial-
expected. The strategy of a pharmaceutical
compensation structure to include a basket
company that embarked on a major
of short-term financial and operating
expansion of its sales force to drive revenue
targets as well as longer-term, innovation-
growth, for example, presupposed that
based growth targets.
rapid growth in the number of sales
representatives would lead to a correspond-
Although these changes help persuade
ing increase in revenues. The company
managers to adopt both short- and long-
also recognized, however, that expansion
term approaches to the development of
was in turn contingent on several factors,
strategy, they don’t address the need to link
including the ability to recruit and train the
evaluation and compensation to specific
right people. It therefore put in place a
strategic initiatives. One way of doing so is

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How to improve strategic planning

to craft a mix of performance targets
An advantage of this approach is that
that more appropriately reflect a company’s
it motivates managers to flag any problems
strategy. For example, one North American
early in the implementation of a strategic
services business that launched strategic
initiative (which determines the size
initiatives to improve its customer retention
of bonuses) so that the company can solve
and increase sales also adjusted the
them. Otherwise, managers all too often
evaluation and compensation targets for its
sweep the debris of a failing strategy under
managers. Rather than measuring senior
the operating rug until the spring-
managers only by revenue and margin targets, cleaning ritual of next year’s annual
as it had done before, it tied 20 percent
planning process.
of their compensation to achieving its reten-
tion and cross-selling goals. By introducing
Some business leaders have found ways
metrics for these specific initiatives
to give strategic planning a more valuable
and linking their success closely to bonus
role in the formulation as well as the
packages, the company motivated managers
execution of strategy. Companies that
to make the strategy succeed.
emulate their methods might find satisfaction
instead of frustration at the end of the
annual process. MoF
Renée Dye (Renee_Dye@McKinsey.com) is a consultant in McKinsey’s Atlanta office, and Olivier Sibony
(Olivier_Sibony@McKinsey.com) is a partner in the Paris office. Copyright © 2007 McKinsey & Company.
All rights reserved.

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Market fundamentals:
2000 versus 2007
Whither the S&P 00? Comparing the market’s recent turmoil with
its decline at the end of the dot-com boom can help investors assess what
might come next.
Marc Goedhart, Bin Jiang,
Talk about summertime blues. After peaking above 1,500 this July, the S&P 500 suffered
and Timothy Koller
an abrupt 10 percent correction before ending the month of August at 1,475. As McKinsey
on Finance goes to press, the broad market has rebounded following interest rate cuts
by the US Federal Reserve Bank in mid-September. But stocks remain buffeted by volatility
in the credit market and by concerns that current high price levels might succumb to the
same economic forces that caused the markets to plunge more than 40 percent in the three
years after the last peak, in 2000.
As central bankers warily eye credit markets
in a few sectors. Performance during the
and ponder further interest rate cuts, no
subsequent decline also varied by sector.
one can really anticipate what might happen
next in a market wracked by volatility and
However, the peak in 2007 differed
skittish investors. Nonetheless, a comparison considerably from the one in 2000. During
of the fundamentals underpinning the
the 1990s investor euphoria and a highly
S&P’s recent performance and those at the
speculative atmosphere overtook the market,
time of the 2000 peak offers insights
raising P/E ratios to heights that made
about the parallels and divergences between
valuations unsustainable. In contrast, this
the two periods. These insights can give
year the market rode to its July peak on
investors a better feel for where the market
the back of exceptional corporate earnings,
is now—and where it might head next.
healthy GDP growth, a fast-paced M&A
boom, and amazing consumer resilience
First, the similarities. At one level, during
despite a slump in the US housing market.
both the run-up to the recent peak and the
earlier dot-com market surge, most of the
To get a better look at what exactly was
growth in market values was concentrated
driving the broad market during these

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