If large, centrally managed corporations are a thing of the past in many industries, so too are large, centrally managed strategy departments. Or are they? We decided to find out.

Decentralization sometimes means the creation of separate business units within a corporation. In other cases, it assumes more fundamental forms, as suggested by the rising number of carve-outs, spin-offs, and letter stocks.¹ Often, too, decentralization involves efforts to enable each individual unit of the decentralized company to make its own strategic decisions, instead of confining them to the senior executive level of the corporate center (Exhibit 1). The idea is to help these units focus on value creation opportunities much more narrow than those that would interest typical centralized strategy departments.

The objective is an admirable one, for a strong broad-based strategic-thinking capability can help these units make dynamic decisions about where and how they should direct their attention in a fast-moving marketplace. Yet replicating this powerful weapon broadly across a company presents quite a challenge. For one thing, such efforts demand a good deal of time from a company’s most talented people, who will have to make a long-term commitment, since quick results are not likely. And a significant shift in corporate culture is often required, especially if a company did little work on strategy in the past or has a long heritage of centralized decision making communicated downward to business units.

These difficulties mean that attempts to build a strategic-thinking capability at the level of individual business units are not always justified. In some cases, the work required more than outweighs the potential rewards; in others, a company is just not equipped for the task. Senior executives should therefore ask themselves two questions: how much will their companies benefit from a broad-based strategic-thinking capability, and does the reward exceed the commitment, resources, and patience required to build it?

Is the effort worthwhile?

We examined 15 large companies in 12 industries. All of these companies had explicitly considered making a commitment to the development of broad-based strategic-thinking capabilities. We concluded that their value depended on two things: the importance of insight and foresight in an industry and the extent to which companies were "atomized"—that is, diversified and decentralized.

Insight and foresight

To innovate continually and to develop superior business approaches routinely, a company must have insight and foresight. They are most valuable in specific kinds of industries.

Industries facing great uncertainty are one example. Deregulation, cyclical changes in the economy, globalization, and other forces are transforming corporations in such industries as high technology, telecommunications, electric power, and chemicals. A strong strategic-thinking capability can help individual business units identify ways to develop confident forecasts of the future and to reduce the uncertainty of business decisions, for in many cases only a part of that uncertainty is truly irreducible; the rest reflects a failure to investigate issues thoroughly.

Other industries that require insight and foresight put a premium on innovation. To identify and launch successful new products and services, management in many industries—including software, biotechnology, investment management, and fashion—must thoroughly understand the real drivers of value for their customers.

Insight and foresight are important as well for industries whose success depends on their managers’ ability to understand key implications of very complex relationships. Examples include commodity traders, insurance underwriters, and people who make complex marketing and pricing decisions.

Finally, insight and foresight are valuable in those industries where it is hard or impossible to develop and sustain structural advantages (a patent on a successful drug early in its life cycle, for example) or advantages based on execution. In today’s fast-moving environment, fewer and fewer companies can depend on strengths of this sort.

Exhibit 2 shows the importance of insight and foresight for our 15 companies, as well as the level of commitment they are bringing to bear in developing broad-based strategic-thinking capabilities. In general, there is a correlation between the importance of insight and foresight and the companies’ level of commitment—but not always. For the telecom companies, to cite one example, insight and foresight are very important, but two of those companies made only a moderate effort to build a broad-based strategic-thinking capability. The textile and optical-fiber companies have a higher level of commitment than would seem absolutely necessary in view of the importance of insight and foresight.

Atomization

Although the need for insight and foresight helps explain a lot about why companies do or do not choose to build broad-based strategic-thinking capabilities, this does not tell the whole story. Another critical component is atomization, or organizational diversification and decentralization. In our review of the 15 companies, we also found a relationship between atomization and the commitment to building a broad-based strategic-thinking capability (Exhibit 3). If a company comprises a number of highly diverse businesses, all confronting a different product, market, or industry reality, each of them must separately identify and pursue opportunities in a timely way even if insight and foresight are not critical to their success.

Thus, while the textile company in Exhibit 3 does not have a special need for insight and foresight, it does have a very marked degree of organizational atomization and therefore, not surprisingly, a strong commitment to building a strategic-thinking capability close to the front lines. The modest commitment of the telecom services company is partly explained by its limited degree of decentralization.

Is the cost too high?

Many companies already have some of the prerequisites for building a broad-based strategic-thinking capability. In this case, the cost and management effort required to finish the job are likely to be acceptable. But those companies that lack most of these prerequisites will be fighting an uphill battle—and should know this from the start.

Internal barriers

Many internal barriers can stand in the way of success. To judge whether your company can surmount them, answer the following questions:

1. Is accountability for strategy clear down the line? People naturally focus on areas for which they feel responsible. Without clear decision-making responsibility and accountability, it is hard for people to get excited about building a broad-based strategic-thinking capability.
2. Do people in the company share a common language for discussing strategies or a common process for developing them? Without a shared way of discussing and developing ideas, gains in the struggle to create a real broad-based strategic-thinking capability tend to get lost in translation.
3. Does the company have skilled strategic thinkers who can play lead roles in building the new capability? The chances of success are greatly improved if an organization already has a strong cadre of qualified people.
4. Does the company actively encourage and support free, rigorous, and fact-based debate? The degree of openness in the corporate environment generally determines whether the new skill becomes a permanent capability, for if people do not feel comfortable offering suggestions and exploring possibilities together it is likely to fade over time.
5. Does the company encourage people to pursue long-term performance goals? Thinking strategically requires a more extended perspective than managing for quarterly results. The policies, style, and incentives of an organization must reward this kind of outlook—and often do not.

Of course, it isn’t necessary for all of these questions to be answered in the affirmative before you begin; if they were, you would already have a reasonably good broad-based strategic-thinking capability. But if the answer to all of them is "no," you face a very tough challenge.

Some examples

Consider the experience of some of the companies in our sample (Exhibit 4). The multibusiness high-tech company faced real internal barriers to the success of its effort to build a broad-based strategic-thinking capability, but industry pressures (insight and foresight) and the diversification of its business gave it little choice. The advantage of undertaking an analysis of the sort we recommend here is that such companies will at least go into their capability-building process with their eyes open.

The computer and insurance companies, which faced equally challenging industry conditions, were less diversified but also faced fewer internal barriers. Their efforts were likely to succeed, so they made a big commitment. By contrast, the telecommunications services company and one of the telecommunications equipment companies did not. In fact, all three telecom companies would have benefited greatly from a broad-based strategic-thinking capability, for they all had a great need for insight and foresight, and the two equipment companies were quite atomized. Even so, only the management team of the second telecommunications equipment company felt that the effort was worth pursuing.

Of the 15 companies in our sample, 7 gave the development of a broad-based strategic-thinking capability a high priority, mostly for the reasons examined in this article. The other companies concluded that the gains were not worth the cost or that other objectives were more important. Of the 7 that went ahead, 5 appear to be on the path to success, though in most cases they are progressing more slowly than they had originally expected. The others, despite investing significant amounts of time and resources, have not made discernible progress.