Strategic planning is strategy-led planning, not financial planning.

Last week, I kicked off this long-form and continuous sharing of information in a newsletter format that will be helpful for anyone who is working hard to connect the dots across the company. Strategic planning is at the top of mind for such playmakers at this stage of the year. So, we will continue to focus on it. I shared some of the core thematic ingredients of strategic planning last week.

At this stage, you are hopefully already having conversations about your 2025 strategic plan and discussing your approach to arriving at a plan for next year.

If you aren’t, what’s the holdup? If you are wondering who is on point, then you are likely the right person to take point!

Financial planning mindset backfires.

If we are trying to strike up a conversation with someone at a bar, the first thing that comes out of our mouths matters. It does for planning, too. Those words delineate whether we will go about strategic planning or financial planning.

Make no mistake: if you have an effective strategic plan, you will also have a realistic financial plan as a side effect. However, if you move towards a financial plan, I promise you will NOT have a strategic plan.

A financial plan is a stick that we can use to scare people all year and ask them to achieve the numbers in that plan magically. But this is like a coach yelling from the sidelines and asking the players to magically score without setting a tangible path to win before the game.

Mistaking a financial plan as a strategic plan doesn't even help us define what “winning” really is. A draw can be an appropriate desired result in many situations. The definition of “winning” is unique to each company. An effective strategic plan allows us to answer what “winning” constitutes for our company and how we can realistically achieve it.

If we begin with a financial planning mindset, all the decisions and actions in our plan are likely soundbites rather than realistic and practically relevant. Avoid starting with a financial plan mindset, which might sound something like:

• We will target X percent growth.
• We need a Y percent margin.

Such a starting point is disconnected from our unique company. It's sometimes based on prior year results and more often somewhat an arbitrary target set based on what other companies are doing. The most likely outcome is that we will miss this target on the high or low ends.

Overshooting a target means our business will be in disarray. Think about Peloton trying to meet excess demand for their bikes in 2020. It looks good for a year when we are in demand, but it also puts us into several years of funk because all the reactive actions we took only apply to that surprise situation and become a liability.

Missing a target on the low end has similar ramifications in addition to most stakeholders feeling that the company is losing.

The most likely reason we’d hit our target is that we are reining in our company’s true potential or taking actions that only work in the short term and hamstring our progress beyond that. I hope this convinces you to say out loud:

Minimizing strategic planning into financial planning is a bad idea.

Start with strategy.

Anytime there is a meaningful word in society, we use it in every other sentence to the point where its meaning turns sour. The word strategy is core to my work, but I shy away from using it because most people use it to mean something other than strategy. In fact, I had to define the word strategy for myself years after getting a top business school MBA.

Strategy is a decision – a very consequential decision.

One strategy.

First, our company has a single strategy. Anytime I hear the term ‘strategies’ as a plural in the context of a company, I cringe.

Does it make sense for a husband and a wife to make two independent, overarching decisions about their family? They could, but this usually results in a breakup of the family institution.

The same concept applies to a company. There is no sales strategy, marketing strategy, product strategy, and such. This is convenient silo thinking that makes each group feel powerful in the short term. Check out my thoughts on silos from last week. So, what type of decision is a strategy?

A strategy is NOT a thought, a plan, an idea, and, most importantly, a tactic.

Strategy vs. Tactics.

There are three differentiating factors that separate decisions.

1. The probability of achieving the outcome
2. The cost of achieving the outcome, and
3. The impact of the outcome.

A strategic decision always requires the choice to be probabilistic (i.e., we don’t know if it’s really going to work). It has to have a high cost (i.e., it must hurt us to make the choice by losing something important to us). It must expect a high impact (i.e., it has to address the problem we are trying to solve comprehensively). Any decision that doesn’t satisfy all these three conditions is a tactic.

This definition is from the first edition of my book, The Spiral Stairway. If you want to explore the difference between strategy and tactics further, refer to page 260. Speaking of the book, a second edition will be released in the fourth quarter of 2024. I received this note from a reader I never worked with, and it gave me the energy to work harder.

“…a formal thank you in regards to your wonderfully thoughtful book - The Spiral Stairway…

I recently had a conversation with my accountant, and he was completely impressed by the revenue increase for 2023 (69% increase and on pace for an additional 5-10% for 2024). I told him that a large part of it was my interpretation of your how-to-run-a-business philosophy.

I bought your book shortly after it was published… I read it. I was consumed by it (many dog years)… I’m super glad that I invested. I can tell you, without hesitation, it helped change my business acumen. It also gave me a new favorite word – dovetail."

Who-What-How.

And we are back from the commercial break. Using this “strategy” definition, our strategic plan must start with a single dovetailed answer to the three questions:

a) Who do we serve? b) What do we offer them? and c) How do we deliver it? The single answer to these three questions is our company’s strategy.

Obviously, we can answer these questions with fluff like the ones our illustrious presidential candidates give us on debate stages. But that would just be unrealistic, undeliverable stories that would be useless for running the company. One major difference between a strategic plan and a financial plan is practicality and actionability.

We have to invest mindshare and time in articulating the answers to these three questions objectively and arriving at answers that are unique to our company.

Answering these three high-level questions requires considering several underlying variables, and each variable has several possible answers. Understanding our options and choosing the correct combination is strategy development.

Such a choice will not guarantee success. If anyone tells us so, they are peddling stale, rinse-and-repeat tactics. Strategic choices are costly – monetarily and psychologically – because change is hard. The impact of such a decision will be high beyond short-term monetary measurements.

This choice set is difficult to identify and even harder to choose one combination from. That’s why evolution-minded folks make a real difference and make the big bucks!

That difficulty of analysis and risk-filled choice is precisely why many companies do not have an effective strategy. Companies often go down Solomon’s cut-the-baby-in-half path, which feels like a big win for the moment. But these decisions are not really strategic. They are political ones that make everyone happy in the short term.

As you kick off planning, use the sketch below to clearly delineate whether your starting point is setting you down a strategic planning or financial planning path.

Sidebar: Chasing Polish yachts.

Drug war is not a topic to joke about. But when I recently learned that Polish-flagged yachts are now being used proactively by traffickers to move drugs across the Atlantic because such boats have immunity from arrests, I ended up laughing.

I think my general sentiment was “hopelessness” because, in the US alone, we spent $40B on the drug war last year. That’s unlikely to include supporting costs, spanning healthcare, media spending, or peripheral agencies contributing to the cause.

There is an entire operation tracking down yachts and prosecuting traffickers. But how many yachts are they going to inspect? Even if they clear all yachts flying Polish flags at sea and close any registration gaps around using the Polish flag, traffickers will find another path to circumvent laws. Apparently, it's not just Polish flags that have immunity; they are just faster and cheaper to register a yacht right now.

Why do I bring this random story up?

As a problem-solver, this story reminds me of many so-called strategic initiatives into which companies invest mindshare, time, and money. Yacht-chasing efforts are tactical. They keep people busy, but they’re more or less a Whac-A-Mole exercise.

It's very easy to fall into the trap of coming up with big projects that chase down such yachts, especially if we start planning with nebulous financial targets.

Drugs move because there is a market. Drugs move because of so many other reasons that supersede the use of flags on yachts at sea. Unless we figure out how to address those underlying issues, symptom-solving will continue perpetually.

Investing in chasing yachts is a tactic. Yes, tactics are necessary, but they do not move the needle if they are not part of an overarching strategy. In this analogy, we know it will surely stop a few kilos of drugs from being moved. The cost is affordable at a governmental level, and no one will disagree about chasing yachts, which makes it easy to approve. The impact is low in the grand scheme of addressing drug issues.

Given that none of us citizens can articulate what the war-on-drugs company’s strategy really is, we don’t have one. So, all the activity is short-term symptom-tackling. As we enter strategic planning this year, ask yourself:

Are we starting planning with pre-approved symptom-addressing projects that don’t fit our strategy?

Without starting with a comprehensive and cohesive strategy, the rest of the strategic plan and initiatives are unlikely to have a practical impact.