An effective strategy sets the direction for a business but it also should be specific enough to say no—no to pursuing certain customers, no to entering certain markets, no to certain programs or investments, even no to hiring a certain person. No to choices that diverge from the optimal direction for the organization.

Strategic planning sets the direction for an organization by describing where and how the business will compete in order to provide value to target customers that will lead to accomplishing the organization’s strategic objectives. The purpose is to define and provide a clear, succinct statement of strategy that can guide decisions within the organization.

Strategy should focus the organization’s efforts and investments on those with the highest return potential. The strategy then becomes a screen that sifts through decisions regarding which business opportunities to pursue and about the allocation of resources. With an effective plan and management process the organization can then say yes to the right opportunities and no to the suboptimal choices.

For example, one of my recent manufacturing operation clients lacked a clear strategy. They were indiscriminately pursuing sales volume in hopes of making up losses on individual products with volume. In the meanwhile, they were teetering on the brink of bankruptcy.

Sensing an opportunity, an outside group acquired the company. Their first action was to define a clear strategy, a route to profitability. They identified the organization’s core competencies and the customers that were buying the specific products utilizing those competencies. This identified the size, shape and other characteristics of their preferred products and the specialized elements of the associated manufacturing process. Then they carefully examined the customers of such products and their value criteria. This led to identifying small lot sizes and quick-order turnaround as things highly valued by the target customers.

By focusing their new strategy on these very specific criteria, they moved from competing with 11,000 companies within a similar industry classification to facing only two or three operations with a similar value offering.

Having documented and communicated this newly defined strategy throughout the organization, they went about transforming the business. One early step was shedding the customers and products that no longer fit within their strategy yet represented two-thirds of sales—not a task for the faint of heart. But they quickly found that some good cost management and the early steps in growing their targeted business resulted in a strong return to profitability.

This strategy, with time and energy spent on buy-in throughout the organization, greatly simplified company management. Being more focused, the company is now recognized in their industry for their expertise, and many potential customers come seeking quotes. The strategy also provides the guidance to allow them to quickly say, “Nope, that doesn’t fit what we do well.” The people on the shop floor understand the importance of quick product changeovers and turning around orders quickly. This understanding results in a steady stream of innovations and process improvements coming from the floor. Every investment or expenditure of resources can now be examined with the strategy as a guiding light: “Does this investment help us move further down the path described by the strategy?” In short, the specificity and clarity of the strategy has resulted in unity and clarity within the organization in providing value to the customer, which in turn has enabled the company to achieve above-average returns.

Organizations typically make two mistakes in their strategic planning efforts. First, by not thinking deeply enough or not recognizing the value and purpose of effective strategic planning, they don’t develop a plan with the clarity and specificity to actually guide any decisions. Second, they don’t recognize that the purpose of planning is to guide every decision. The strategic plan does not belong on the bookshelf. It must be clearly communicated to the organization and continually held up as the signpost providing direction for the long-term development of the business.

Does your strategic plan optimize your decision-making process? Does it indicate when to say no and when to say yes?

(This article was previously published in IndustryWeek.)