Playing To Win
Integrating Strategy with Planning & Budgeting Processes
How to Make Quality Sausage
I have done pieces before in this series on distinguishing between strategy and planning and what to do by way of planning after strategy, but readers keep asking good questions about the integration of strategy with established planning and budgeting cycles. So, I thought it would tackle that question in this Playing to Win/Practitioner Insights (PTW/PI) piece called Integrating Strategy with Planning & Budgeting Processes: How to Make Quality Sausage. And as always, you can find all the previous PTW/PI here.
Planning and Budgeting: Possession is Nine-Tenths of the Law
There is an ancient Roman saying that has been handed down to current times: possession is nine-tenths of the law. It has persisted for millennia because there is plenty of truth to it. The expression certainly has applicability in modern company life where some systems enjoy that kind of possession. For example, the compensation system has possession. If it stops working for any reason, employees will riot in the streets! Therefore, nothing gets in the way of the compensation system.
Budgeting enjoys a similarly high level of possession for two reasons. First, because it is almost always linked to compensation, there must be a budget. And second, it determines authority to spend. If something isn’t in the budget, the CFO or Controller will tell you that you can’t spend on it. Planning isn’t quite as possessive as the budget. Usually, the plan is either three or five years and the budget is the first year of the plan — and the remaining years are previews of future budgets. Because the plan’s out-years apply to periods that aren’t yet happening, they don’t absolutely control spending, so they don’t have the same level of possession as the budget, which applies to the here and now.
Therefore, budgeting is going to happen, and planning is almost certainly going to happen. Never, in forty-four years of consulting to companies around the world, have I been told by senior management that it doesn’t have time to create a budget. In contrast, I have been told (literally) countless times that the company just doesn’t have time for strategy now. (Parenthetically, that would be a great opportunity for shorting if it wasn’t clearly insider information — i.e. ‘I don’t have time for strategy’ is a powerful signal of likely performance decline.)
Budgeting and planning are going to be there regardless of anything else. If your strategy attempts to ignore their existence, you will pay the price, and a heavy one. If something necessary for strategy isn’t in the budget and/or plan, you won’t be allowed to spend against it. Meanwhile, the budget will direct spending to lots of other potentially useless stuff.
Integrating Strategy into Plans & Budgets
Strategy needs to be integrated proactively into plans and budgets or what is contemplated in the strategy is unlikely to happen at all. The integration starts with making two lists: strategic choices and operating imperatives. As I have discussed earlier in the series, these are the two fundamentally different kinds of choices in strategy.
Strategic choices are those for which the opposite is not stupid on its face. In fact, the opposite is sensible to other competitors who seek to compete differently. Vanguard chose to sell only index funds while Fidelity chose to sell primarily managed funds. Those are strategic choices because the opposite isn’t stupid on its face: it is what your highly successful competitor has chosen.
Operating imperatives are those choices for which the opposite is stupid on its face. These are choices that every competitor is making because it would be stupid not to do so. For example, it is now a stupid choice not to have an enterprise resource planning system (ERP) installed — reportedly over 90% of Fortune 500 companies do. While it is an important thing, there is no strategic advantage to be garnered by installing an ERP — because every competitor has one too. But if you don’t have one, you are likely to be disadvantaged relative to those same competitors.
Both choices are important to strategy. Strategic choices make you distinctive. Operating imperatives help you ensure that you won’t undermine the effectiveness of your distinctive strategic choices. Both need to be baked into the plan and budget. If they can’t be, the strategy isn’t viable.
Start with Strategic Choices
While both choices are important, strategic choices tend to have the biggest implications for plans and budgets, so start there.
Start with Winning Aspiration (WA), Where-to-Play (WTP), and How-to-Win (HTW) and use your WA to specify your glide path toward achieving your target WTP/HTW. That is, when does your target WTP/HTW need to be in place for your strategy to achieve your WA? Does it have to be in place within twelve months or eighteen months or three years? Is the path a straight-line from the status quo, or an accelerated path, or a slowly developing path that accelerates later?
With that picture in hand, you can turn to Must-Have Capabilities (MHC). For most new or altered strategies, the biggest budget implications are in building the enhanced MHC necessitated by the WA/WTP/HTW choice. For example, an altered WTP may require building MHC in a new geography or in a new product area, or with a new distribution channel, or with new customers. An altered HTW might require new MHC in R&D or product development or customer care.
All those categories of MHC enhancements must be financially modeled with the first year of operating expense and capital expenditures built into the budget and additional years (depending on your plan length) built into the out-years of the plan.
Then the same exercise needs to be done for Enabling Management Systems (EMS). The WA/WTP/HTW/MHC entail implications for the EMS that must be built. Remember that a key to a distinctiveness in strategy is distinctiveness in MHC/EMS. If they are the same as those of competitors, the strategy is not likely to be very distinctive.
However, in my experience, EMS enhancements tend to be smaller dollar investments than MHC enhancements. MHC investments can entail big expenditures, like building a new factory or embarking on a new advertising campaign. EMS expenditures tend to be on initiatives like changing people development systems or enhancing customer data collection systems.
Whether big or small, EMS investments must be built directly into the budget and plan, as with MHC investments, or they just won’t happen. And if they don’t, the MHC won’t be built and maintained, the target WTP/HTW won’t be achieved, and the WA will not be reached. Every piece needs to fit together and reinforce one another.
Then Integrate Operating Imperatives
The operating imperatives are the elements of your strategy for which you are not trying to be unique. They must be in place for your strategy to succeed but having them in place won’t give you an advantage. The task is to benchmark competitors on these elements to determine the definition of parity. For example, we may need to have parity of distribution density with competition. If our distribution is at 60% of key competitors, we must increase it by 67% to achieve parity. Or perhaps competitors routinely collect data on customers to use it in their loyalty programs. For parity, we need to start systematically collecting that sort of information and build a similar loyalty program.
When those gaps in operating imperatives are identified and benchmarked, the operating expenses and capital expenditures necessary to close the operating imperative gaps can be quantified and baked into the budget and plan, as with the strategic choices.
Sausage Making
And then it comes to making the sausage! Almost inevitably, the initial operating expense and/or capital expenditure totals will be too high. The CFO will declare the financial implications unacceptable — which will probably have more than a grain of truth to it. So, they will have to be reworked and shaved here and there.
Can it take a bit longer to get to the target position? Sure. Can it take double the time? Probably not. Can the requisite capabilities probably be built with 90% of the initial estimated investment? Probably. Can they be built with 50%? Probably not.
The key is to refuse to abandon the fundamental requirements of the strategy. If you can’t pay for the requirements of the strategy, it isn’t a viable strategy. It is a fantasy. Often, failure will be blamed on ‘bad execution,’ but the failure is because it was never a viable strategy — no form of ‘execution’ could save it. That is because cutting the budget and/or plan to an extent that the MHC and EMS necessary for the target WTP/HTW position to be achieved can’t be built will ensure strategy failure and with it the likelihood that those resources will be wasted.
Sadly, building a terminally under-resourced strategy is often more wasteful than just sticking to the current strategy and producing its expected mediocre results. Don’t spend less than required and hope that it will work — because hope is not a strategy. Instead, get back to work on creating a strategy that you can afford — which requires the back and forth of sausage making.
Practitioner Insights
Budgeting and planning are not the enemies or antithesis of strategy as they are often portrayed. They can be a very helpful forcing mechanism for making sure your strategy is financially viable. Translating your strategy into budget implications is tough love, not hate or disrespect.
When your strategy is built into the budget and plan, you can be confident that the necessary spending is set aside in both the short term and medium term. That means you won’t have to continuously fight for resources on an ad hoc basis.
Just don’t let budgeting and planning drive strategy or substitute for strategy. Planning and budgeting aren’t a substitute for strategy; they are complements. Plus, strategy must drive planning and budgeting — not the other way around. It is tricky sausage making to toggle back and forth until you have a financially viable winning strategy. Be principled but patient.
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As a reminder, I previewed in January 2025 that I am doing a PTW/PI podcast series with friend Tiffani Bova. The sixth in the series will be on LinkedIn here Wednesday, May 21st at 12 noon EST and 9am PST. Look forward to seeing you there.
