Strategic Versus Operational Thinking at the Board Level

By Tracy E. Houston | November 20, 2007
A range of factors impacts the success or failure of an ethanol plant or company. While commodity prices and construction cost fluctuations, international market developments and an unpredictable future affects every plant, it's the human element that oftentimes determines business viability. Ultimately, the board of directors is responsible for success. Two approaches-strategic and operational thinking-are most often used by boards of directors to plan and react to various situations and map a path forward.

Until the beginning of the 21st century, boards of directors acted either formally or informally-most of the time with a great deal of latitude. However, the new century was ushered in with sweeping new legislation that caused unprecedented change for boards.

Within the hallmarks of the Sarbanes-Oxley Act of 2002 was the clear direction of the formal actions to be taken by boards of directors. The groundbreaking legislation resulted in many boards being required to closely monitor company activities. Consequently, time spent on strategic planning diminished. In the Heidrick and Struggles 10th Annual Corporate Board Effectiveness Study, which was conducted from 2006 to 2007, 768 directors from approximately 2,000 of the largest publicly traded companies in the United States responded that they'd been hampered by the same dilemma. "As a large majority [84 percent] of respondents reported, recent governance reforms have resulted in boards spending more time on monitoring and less on strategy," the study notes. "Yet this has occurred at a time when new competitive pressures are pushing directors back to their traditional role as strategic advisors."

Simply put, boards need to think and plan strategically because it is at the very core of effective board governance. Board directors need to think and plan strategically because they are leading organizations through one of the most turbulent periods of change in history. This leadership imperative reinforces the legislative changes, administrative details and programmatic implementation.

Comparing Issues: Operational and Strategic Thinking in the Ethanol Industry

Marketing programs
Financial performance
Tactical problems/issues
Customer requests/feedback
Staffing requirements
People problems
Interdepartmental cooperation/difficulties
Price changes
Cost and budget items

Competition in food versus fuel
Strategic competitor moves (low cost imports from developing countries)
Technological developments in alternative renewable fuels
Distribution expenses (e.g., high retrofit costs)
Mergers and ownership changes
Investor and farmer boards (lack of governance and leadership baseline)
Impact of governmental regulations
Use of strategic resources (e.g., water)
Placement of new plants (e.g., cogeneration distance from customer)

Defining the Differences
While strategic and operational planning both offer beneficial aspects, there are some key differences that should be understood. Strategic planning is the formal process of defining the requirements for delivering high payoff results, and for identifying what, and how, to get from current realities to future ones that add value to the organization. It is not rigid nor lockstep, but rather a self-correcting set of defining requirements and relationships for stating "what is" in terms of results, and moving ever closer to "what should be" the results and payoffs.

Several key questions must be answered during strategic planning. They include:
What profound shifts are, or will, influence the future?
What is our direction and response to these shifts?
How will we describe our desired results in measurable terms?
What are the best ways and means to get there?
How will we measure progress and success?
How will we revise as required?

Several requirements must be considered during strategic planning. Strategic planning develops, creates and records-at minimum-the following results to be accomplished:
An ideal (mega) vision for the organization
An organizational (macro) mission or purpose
Strategic objectives for achieving high payoff results at the mega level
Tactical objectives for delivering results at the macro level
Operational objectives for delivering results at the micro level
Needs assessment based priorities for the mega, macro and micro levels. (These define the gaps in results and the costs to meet the needs, as compared to the costs to ignore the gaps.)

Operational or tactical-level thinking and planning deals with how to make systems, people and processes more efficient and effective. Organizational effectiveness means performing similar activities better than rivals perform them.

Operational thinking is measured. The "productivity frontier" constitutes the sum of all existing best practices at any given time. The frontier is the maximum value that a company delivering a product or service can create at a given cost, using the best technology, skills, management techniques and purchased inputs.

The strategic agenda is the right place for defining a unique position, making clear trade-offs and tightening fit. It demands discipline and continuity; distraction and compromise are its enemy.

In contrast, the operational agenda involves continual improvement and constant change. Failure to do this will result in failure, even with a good strategy in place. Flexibility and relentless effort are required to achieve best practices.

A Board's 'Top 10' Strategic Thinker Checklist
Synthesize research, experience and future outlooks to create the big picture
Use 21st century contexts to ensure your organization is current
Became familiar with what customers need and want
Remain aware of what competitors are doing in the marketplace
Challenge obsolete or restrictive ways of thinking and working
Create new paradigms to replace outmoded ones
Evaluate the benefits, risks and future implications of your own and others' ideas
Focus on the future and visualize possibilities
Ask the senior management team what they see as barriers to performance, quality and customer service
Probe beneath the surface; uncover underlying assumptions and key questions about them.

Organizations need people who think both strategically and operationally. It is the board's role to think strategically and oversee the strategic plan. The board employs "strategic intelligence" that synthesizes research, experience and future outlooks to create the big picture.

Tracy E. Houston, M.A., is a senior consultant in governance with Summit Point Consulting. Reach her at [email protected] or (303) 721-3219.

The claims and statements made in this article belong exclusively to the author(s) and do not necessarily reflect the views of
Biodiesel Magazine or its advertisers. All questions pertaining to this article should be directed to the author(s).
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