Getting Strategic Planning and Financial Planning in the Same Bailiwick

  • Written By: John Diezemann
  • Published: October 1 1999

By partnering with operations on balanced scorecard initiatives, financial managers are helping their companies focus on critical business processes and gain consensus on the critical set of measures to help drive desired business results. In addition, with the explosion of Enterprise Resource Planning (ERP) and e-Commerce systems, financial executives are leading the charge in going from theory to practice by developing a cascading measurement architecture and providing the key linkages to other relevant information (e.g., products, projects, performance plans, and organizational data).

Certainly, the financial community has responded to the 'relevance' challenge that was laid down over a decade ago1. In fact, relevance has been contagious. Already companies are tying balanced scorecard initiatives to leadership and strategy; making sure operating managers are focusing on the right issues and priorities, and coordinating the actions of the company as a whole in implementing those strategies2.

While the role for today's financial managers is quickly moving upstream in the strategic planning domain, the challenge becomes even greater in light of the accelerating pace of change. This reality is quickly rendering obsolete the traditional approaches to corporate governance, such as 3-5 year strategic plans, annual planning and static budgets. In this new environment, financial managers can play a key role in driving the corporate agenda through their sponsorship and support of projects and investments that deliver critical business capabilities. To provide useful financial insight, sooner rather than later, financial managers need to think about business strategy as a process of continuous course corrections, evaluated more like a series of 'real options' than a single projected cash flow3. While the concepts behind real options are certainly familiar to most executives, the trick to identifying, valuing and making strategic choices lies in the complex and often overwhelming task of understanding the linkage between initiatives and changing corporate goals and managing the interaction among projects.

This article provides a breakthrough planning approach for rapidly realizing the business capabilities dictated by strategy and then through the financial lens of 'real options' shows how to time strategic choices4.

Identifying the vision is only half the job

At its core, strategic planning is a process that documents a set of choices made by management of a business describing 'the vision', objectives, goals, and supporting action plans along with the rationale and implications associated with these choices. However, as senior executives seek to realize the new vision, the momentum for change often stalls. As energized and well intentioned as the management teams and project teams may be, they often lack a disciplined approach to orchestrate change within their organizations. To realize the vision, management must be concerned with three key priorities:

  • Developing a set of Business Capabilities to capitalize on the vision

  • Translating Business Capability Requirements into necessary business processes, information technologies, and organizational systems

  • Deploying a process for the rapid, ongoing realignment of key process, technology and organizational elements.

As straightforward as this sounds, most company projects aimed at the vision are often off the mark.

Interviews with over 100 executives in Information Technology (IT) and Operations areas reveal several common root causes leading to strategy execution failure:

  • Rapid changes in technology and business process require a consistent disciplined approach, yet most companies don't have any enterprise-wide strategy

  • Incorrect decisions are made because current reality failed to take into account predictable future events

  • Companies are constrained in the execution of their business plan by past business application choices

  • Key initiatives are often launched from functional silos, lacking alignment and fit with the greater organization with respect to process, technology and/or organization.

  • Financial planning and budgeting fail to take into account the timing and interaction between projects.

The consequences can be disastrous as see in the following table.

Table 1: Lessons Learned from other Companies

Abandoned its SAP implementation after investing over $20m in the project. Management relized late in the game that the system being implemented would not fit its new, decentralized management model that was believed to be a key source of competitive advantage.
Spent 7 years and a half-billion dollars implementing a mainframe-based enterprise system. Abandoned the project and started over with a client-server version. The project duration exceeded the rate of technological change by such a degree that the system was obsolete before deployment. By anticipating that technology changes would in some way impact the project, management may well have adopted a different approach to bringing the desired business capabilities to the organization.
Abandoned its ERP project in mid-implementation The company found itself overwhelmed by the organizational changes caused by the project.
Source: Tom Davenport, Putting the Enterprise into the Enterprise System, (Harvard Business Review, July-August 1998)


The Case for Convergent Business ArchitectureSM

To address these issues, companies need a breakthrough approach for rapidly realizing the new business capabilities dictated by the vision, strategy and/or forces acting upon the business, whether it be entering new markets, deploying a new operations model, product expansion, etc.

Convergent Business ArchitectureSM (CBA) is a low overhead, highly iterative planning process that:

  • Establishes a rapid-response mechanism for monitoring and responding to external and internal change forces

  • Defines the essential business capabilities required to achieve enterprise goals

  • Aligns business process, technology, and organizational strategies to improve operational capability

  • Defines and prioritizes critical initiatives

  • Rapidly deploys an ongoing three-month program/project integration cycle

The science of 'change'

The following figure depicts the process of translating external changes such as market shifts, regulation or new customer requirements and internal forces (e.g. new strategy or vision) into a sequence of appropriate actions that will move the organization in a coordinated way towards the realization of necessary business capabilities.

Figure 1: The Science of Change

Defining the terms

Looking at some key definitions, one can see the model more clearly:

Table 2: CBA Terminology

Change Forces Those external and internal forces that are impacting the enterprise and may require it to move
Reveal critical  
Change Drivers Those change force groupings that will act as a lever upon the company and force it to alter the way it does business
Which must be responded to with  
Essential Capabilities These are the quantified target capabilities that the company must possess in order to respond to the change drivers
Which place unique demands and dynamics on the company's...  
Organizational, Process & Technological infrastructure Those people, process and technology "systems" that interact with one another to get work done.
Which must function within parameters set by  
Architectural Requirements A framework within which the company can act on the delivery of capabilities, thereby greatly increasing the level of assurance that conflicts with other elements of the organization are not being created. They establish guidelines that potential solutions may not violate (without explicit management approval) and offer steerage towards the selection of an optimal solution.
That are realized through  
Projects Actions that affect change on the organizational, process & technological infrastructure to propel the organization towards its goals through the realization of needed capabilities and the removal of obstacles.

In our experience, the CBA process helps to identify and define critical projects - including projects not even on the table - that are needed to build the capabilities to achieve the strategy. It also forces a hard look at the existing portfolio of projects; killing existing projects that are not in synch with the strategy. Eliminating some projects frees up scare resources to work on the projects that have higher value contribution to strategy.

A case study

Dell Computer abandoned their ERP program only after several months of detail planning and implementation when they realized that is was inappropriate in their environment. Analysis had focussed on inefficiencies caused by multiple home-built, unconnected, information systems that inhibited information flow across the company. This analysis led them in to choose an integrated suite of applications. Even as the decision was being made, two Dell executives were providing sufficient information to invalidate the ERP decision.

At one of their Platinum Council meetings where Dell executives meet with key customer account CIO's, Kevin Rollins, Dell's Vice Chairman, talked about the critical need for every aspect of the company to be capable of changing its process rapidly. He referred to this as an essential part of what he called velocity or the continuous speeding up of every business process. At that same meeting, Michael Dell described his business as being a virtually integrated system of processes and products extending from suppliers through Dell's manufacturing and distribution processes, on to end customers and the support of the product on their desktops. He also talked about the company's distributed management style and how continuous process improvement was a way of life throughout the company.

The ERP solution certainly provided zero-latency data availability, and it promised more seamless virtual integration and less complexity. However, other traits of the solution would have limited the ability of the company to manage processes in a distributed manner; violating the company's management and process improvement style. As shown in Table 3, had the Essential Business Capabilities of Dell been mapped against the Operational Capabilities of the ERP system, two strong cautions would have raised. This would have taken place even before potential suppliers were engaged and well before any large expenditure had been made.

Table 3: Sample Reference Architecture Comparison

Architectural Impacts
Business Processes
Org. Dynamics

istics of ERP Systems

Source: CBA Architecture Reference

Pre-defined business functions prescribe organization structure

Work architecture must map directly to transaction definitions. Reporting systems that infer org. structure from business function will need adjustment. Some companies find it inefficient to adopt prescribed business function models
Integrated Transactions and functional modules demand users who are task and context skilled Impact of Zero-latency and Zero Propagation Time must be designed into processes. Data consistency highly determined by workflow configurations. Workers required to learn upstream and downstream implications of transaction

Shared and enforced business rules facilitate a high degree of coordination / collaboration

Rule variations for unique requirements are costly and slow to implement. Business rule changes will propagate simultan-
eously & immediately to all processes.
Demands of a Cross-Functional process Management Orientation.
Good fit or no issue  
Some negative impact  
Apparent conflict  


CBA is a methodology that helps to assess the appropriateness or fit of a solution to its target problem in the context of the complete set of essential business capabilities. The result is a much more thorough examination of project feasibility. There are similar interactions in e-Commerce projects causing delays, overruns and project failures. CBA is designed to assure a complete and appropriate set of actions that will deliver on an enterprise strategy. The completeness of the set of projects poses another set of issues including project coordination, resource allocations and timing.

A New Role for Financial Managers

As enterprise leaders, one of the most important roles that a financial manager fulfills is their sponsorship of critical business projects, in balance with the responsible management of corporate assets. Thinking about projects a set of 'real options' - interacting with each other over time - helps management teams understand which projects to invest in and when to make the investment. In other words making go, no-go decisions on current projects or understanding the value gained from being able to defer an investment (e.g., greater agility, less exit costs, etc.), increases the likelihood of strategy execution.

As seen in Figure 1 above, a crucial phase of a CBA cycle is 'project alignment' to strategy. In other words, are the right sets of projects identified to execute the strategy. By adding the concept of real options into the planning process, financial executives can help operations evaluate when the projects should be funded. First, let's consider the different type of options and how they relate to strategic choices5:

Table 4: Real Options in a Strategic Sense

Real Options Similar 'Strategic' Option
Growth options - investment creates future growth options above and beyond the returns generated by the initial investment Infrastructure projects such as investments in a new platform
Timing options - delay investments until more data is available, thereby reducing risk Delaying new technology until more stable or standards accepted
Staging options - invest in stages rather than all at once, allowing decisions (new options) at critical stages ERP or software releases can be implemented in stages
Flexibility options - investments generate interaction and provides options not previously possible Building shared (or multiple) call centers allows agent load balancing
Exit Options - reduce investment risk by defining exit points Kill projects in markets where share targets not met

Once projects are framed in terms of the options they create, the next step is considering the value to the strategy based on current knowledge of the marketplace. This requires two critical pieces of information about projects: their value to cost (similar to a ROI calculation but for a first pass analysis, a qualitative assessment will suffice) and their volatility (i.e., the stability of the technology, marketplace, etc.).

By thinking about projects in terms of value to cost and volatility (see Figure 2), management can quickly identify not only which projects are needed and when as well as key risk factors.

Figure 2: The 'Real Options' Grid

The following is a partial table of projects at one company, who first identified over 50 candidate projects using CBA and then used the concept of real options to further filter investment decisions prior to detailed financial calculations.

Table 5: Qualifying Real Options

Option Type
Real Options Assessment
1 Enterprise Technical Architecture Staging H L Invest Now Technical Architecture viewed as critical input to determining the sequencing of IT investments and make/buy/lease decisions.
2 "90-day Product Demo" Growth H L Invest Now This pilot, designed to demonstrate synergies between proprietary technologies, will be used to sell clients on the potential of the product platform.
3 Define Product Solution Modules Flexibility H M Maybe Now This move to modular product design, away from custom development, will support solution re-use and rapid deployment. Evaluate resources after 'Invest Nows' are launched.
4 Client Account Mgmt. Growth H H Probably Later Prerequisite projects and change management efforts must be accomplished before this project can be successfully implemented. Take a wait & see approach, but be ready to act.
5 Implement Oracle HR Staging M M Maybe Later Despite the momentum behind the Oracle implementation in other areas, this did not immediately support required critical capabilities. Revisit in 6 months


Convergent Business Architecture provides the science behind change and highlights the interaction among projects. Real Options adds a financial perspective and a common language for both operating managers and financial managers to discuss strategy. In doing so, companies benefit from:

  • Executive teams having a comprehensive & cohesive story about where they are going and how to get to there (even if the destination changes)

  • A clear agenda for setting and measuring operational performance on an ongoing basis

  • Organizational learning about process and technology capabilities

  • Early identification mechanisms to identify tradeoffs, disconnects, and secondary impacts

  • Project discipline; including when to start and stop projects.

About the authors:
Richard Lynch ( is a strategic partner of Results Based Leadership, a Provant Company and the lead author of Measure Up: How to Measure Corporate Performance and Corporate Renaissance: The Art of Reengineering, both from Blackwell Publishers. James F. Dowling, ( is the Vice President of Alignment Consulting at Technology Evaluation Center, Inc. and John Diezemann(, is a senior consultant with the Technology Evaluation Center Inc.

1For example Rich Lynch, with C.J. McNair and Kelvin Cross wrote about the emergence of balanced scorecard and the challenges to the financial community in an article entitled "Do Financial and Nonfinancial Measures Have to Agree?' (Management Accounting, November, 1990) . [Certificate of Merit Winner]

2For example, see Results-Based Leadership: How leaders build the business and improve the bottom line, Dave Ulrich, Jack Zenger, Norm Smallwood (Harvard Business School Press, May 1999)

3Timothy A Luehrman, "Strategy as a Portfolio of Real Options" (Harvard Business Review, Sept-Oct, 1998)

4See Timothy A Luehrman, "Investment Opportunities as Real Options: Getting started on the Numbers" (Harvard Business Review, July-August, 1998) for a primer on the financial calculations and Martha Amram and Nalin Kulatilaka, "Disciplined Decisions: Aligning Strategy with the Financial Markets" (Harvard Business Review, Sept-Oct 1998) for a discussion of options types.

5Martha Amram and Nalin Kulatilaka, "Disciplined Decisions: Aligning Strategy with the Financial Markets" (Harvard Business Review, Sept-Oct 1998)





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