Strategic Management Methodology

Generally Accepted Principles for Practitioners C. W. Roney Guidelines for Strategists, Number 1

This book was written for the commercial planning profession—the community of management professionals who form, facilitate, and manage procedures for selecting corporate and business objectives; developing strategy and plans of business, and facilitating strategy implementation. Nearly every sizeable business in America prepares a formal plan of business. In each such business, at least one manager is responsible for overseeing the firm's planning procedures. This book is intended to be a source of methodological guidance for those managers. The focus of this text is on practice—how planning functions best are performed administratively. There is an abundance of theoretical writing and empirical research into topics pertaining to business and corporate strategy. But, surprisingly little definitive information is available to guide professional planning managers or senior executives in selecting the procedural principles most likely to produce plans that can be implemented successfully in the specific circumstances of their firms. This book is intended to fill that void. In this volume, the planning manager will find a collection of methodological principles that are “generally accepted” for one of three reasons. First, their effectiveness may have been demonstrated empirically, either by formal research or case histories. Second, academicians may be in general agreement on the practical application of strategic management theory. Third, even if empirical evidence or relevant theory are unavailable, a pattern of customary practice may have evolved. In the absence of those foundations, I have drawn on three decades ofour firm's experience in formulating plans and planning procedures with and for clients in virtually all sectors of American industry. Wherever possible, the empirical bases for planning principles have been emphasized and theoretically unsupported constructs have been minimized. Nevertheless, the methodologies of business and corporate planning still include many principles and practices that have not been tested empirically. Much applied research still is needed to define planning methods' efficacy, in several types of commercial and industrial settings. Thus, commercial planning professionals today employ methodologies that apply substantial portions of both art and science. C. W. Roney Wilson, NC November 2003

This book explains how the body of knowledge that resides in strategic management theory can be put to effective use by senior executives and practicing planning managers. It is about methodology, the intersection of theory and practice. Thus, these pages focus on methodological principles that may be used to guide managers in the conception and administration of their firms' planning functions.

It is important to emphasize that the study of strategic planning methodology should not be limited to techniques alone. Many books have been written on planning techniques over the years, but without firm foundations in theory and/or empirical verification, very few have endured the test of time. Accordingly, this volume is a compendium of both theory and empirical evidence that pertain specifically to how firms should be managed strategically. Thus, the application of strategic management theory and empirical evidence to planning technique is the subject matter of strategic planning methodology, and this volume which, we believe, is the first to achieve such a nexus. Strategic planning technique is, to strategic management theory, what mechanical engineering is to theoretical physics. More than simply procedural guidelines, then, this book contains principles of applied strategic management theory and empirical evidence that are either generally accepted or sufficiently verifiable to serve as bases for professional practice. Both strategic management scholars and serious strategic planning practitioners who desire a comprehensive collection of generally accepted planning principles should find this volume useful.

The text consists of twelve chapters, divided into five parts. Part I addresses the foundations of strategic management methodology. Its first chapter discusses the “planning mission” from a historic perspective, which should give planning managers the comfort of knowing that their profession has evolved in lockstep with modern management. In the second chapter, the basic approach of comprehensive planning is defined. In the third chapter, that basic approach is elaborated in the form of a classic procedural model. In the fourth chapter, readers will learn how the classic model fell from favor during the 1970s and 1980s, as its evidential and analytic requirements overwhelmed the administrative capabilities of most corporations. In the 1990s, with arrival of new information technology, those impediments to executing the classic model were removed. Accordingly, the fourth chapter also proclaims that a new age in strategic planning methodology has arrived and that “neoclassicism” now represents the state of the planning art. Part Two's three chapters address administrative principles for managing strategic planning functions. It begins with a chapter on the managerial responsibilities for performing and the authorities for approving the work of strategic planning. In research conducted by our firm, we have learned that, in some industries, firms' performance is best when plans are approved by the board of directors. In other industries, performance is best when the chief executive has that authority. This striking difference in industries' planning-performance dynamics illustrates the importance of a proper organizational alignment of planning responsibilities and authorities. The second chapter in Part II reviews administrative principles that should be observed by planning managers in conducting planning functions. The third chapter explores several contingencies that may affect how those administrative principles are best applied in a firm's particular circumstances. For example, the often-encountered impediment of organizational resistance to planning is discussed. In Part III, strategic decision-making procedures are described. This book is intended to provide methodological principles for practicing strategic planning managers who facilitate and administer strategic planning functions, but rarely have the authority or responsibility to make strategic decisions themselves. Accordingly, these two chapters are focused on the procedures rather than the substance of strategic decision making. For a more comprehensive treatment of substantive matters related to strategic decision making, readers may refer to the author's forthcoming volume addressed solely to that subject.

The first chapter in Part III addresses decision-making procedures for firms with single businesses. Even multi-business corporations arecomprised of individual businesses, each of which should follow the principles set forth here. The second chapter addresses special procedural considerations that apply in multi-business corporations; here, readers will find decision-making procedures that are unique to corporate-level planning, as opposed to business-level planning. Part IV addresses requirements for effective implementation of strategy. Planning managers can't implement strategy themselves, of course, but they must work with line executives at all levels to provide the capabilities and resources that are needed for effective implementation. Making such provisions is an essential, but often overlooked, element of the planning function. The first chapter of Part IV addresses implementation capabilities—both skills and resources. Surely, this is the least developed area of strategic management literature. In both theory and practice, our current methodology for realizing strategy has many voids. Much more is known about how to form strategy and formulate strategic plans than about the competences that are required to implement strategy effectively. But, readers may take some comfort from the specific guidelines in this chapter. (Readers also may be encouraged to know that a fourth volume in this series will describe the methodology of strategy implementation in much greater detail.) The second chapter in Part IV addresses procedures for implementing strategies that call for transforming the structure of an enterprise through acquisitions, divestments, mergers, alliances, joint ventures, and bankruptcy reorganizations. Planning managers usually don't do the legal, auditing, tax, regulatory, or engineering work that takes place when firms are restructured. They often are asked to coordinate such functions administratively, however. This chapter provides some procedural guidelines for that role. A forthcoming volume in this series will describe the substance of restructuring methods, legal/regulatory considerations, and related economic issues in much more detail. In Part V, planning principles that were stated at the end of each chapter have been recompiled in a more consolidated form. Practitioners may refer to this abbreviated compendium for quick reference or review as they go about the work of forming plans and planning procedures for their firms. They may refer back to the text for more detailed principles as needed.

At the end of each chapter, readers will find an abbreviated list of “generally accepted” planning principles that apply to the chapter'ssubject matter. General acceptance of these principles is a reflection of (1) evidence that has been assembled in empirical research, (2) strategic management theory that is widely accepted in the academic community, and/or (3) procedures that are customary among practicing planning professionals. As a general matter, those factors were given weights of importance corresponding to the sequence in which they were just mentioned. That is, empirical evidence was given the greatest weight; widely accepted academic theory was weighted second; and customary practices were given less weight, since one purpose of this volume is to provide practitioners with procedural principles that may supplement, or even replace, some of their present customs. Finally, to supplement those three sources and to resolve matters of practical application, the author drew on about thirty years of practice as a planning professional.

When statements of planning principles were drafted, an attempt was made to distinguish between their reliability, or degree of uncertainty. To accomplish this distinction, the following categories of principles (and their definitions) were employed: Axiom: Definition: Postulate: Corollary: A statement that needs no proof because its truth is self-evident A semantic axiom A plausible, but unproven, statement assumed to be true A statement that must be true if the one that precedes it is true A description of a natural phenomenon that can be tested empirically, stated Hypothesis: tentatively to provide a possible explanation of the phenomenon under consideration

This compilation of generally accepted strategic planning principles is long overdue. The legions of academicians who study strategic management, in all of its various forms, have produced mountains of literature, which surely benefit practitioners from time to time. Most would agree that there is a chasm between strategic management theorists and professional practitioners—and that this chasm has been growing wider in recent years. It is time to narrow the gap between strategic management theorists and the practitioners who, like engineers, apply the theory that accumulates in academe. This book has taken a step in that direction. Surely, there will be revisions and additions as we rediscover the rich sources of guidance for planning practitioners that reside in the strategic management literature and harvest them in these guidelines.

Part I
Foundations of Methodology Foundations of Methodology
The community of strategic planning practitioners, although amorphous, is very large. A survey conducted by our firm in 1995 found that 88 percent of 368 publicly owned industrial corporations had formal strategic planning programs (Roney, 2001). Moreover, that proportion had been growing in recent years and probably is approaching 90 percent today. Indeed, Rigby (2001) also reported that his survey, conducted in 2000, found the incidence rate in North America to be 89 percent. Those results should not be surprising. Try to imagine a chief executive standing before his shareholders at an annual meeting, or a meeting of securities analysts, saying something like the following. “Frankly, we really don't do strategic planning in our firm; and we don't have a formal plan of business—no goals and no deliberate strategy. Instead, we're opportunists: we're fast on our feet and take things as they come. I like to manage by walking around, rather than focusing on any particular direction at a time.” Most would agree that any chief executive who made a remark like that, without joking, probably wouldn't be employed much longer. A large majority of senior business executives in fact do practice formal planning; as observed earlier, mostcorporations of any significant size have formal plans of business. They also have staffs of professional managers who administer and facilitate planning procedures. This book has been written for both senior executives and serious planning professionals, as well as academic methodologists. It provides a comprehensive collection of methodological principles for conducting a firm's planning functions. In this, first of four parts, there are four chapters on the foundations of comprehensive commercial planning—historic perspective;

In an age of increasing turbulence. In this chapter. ” “strategy. neoclassical methodology of strategic planning has emerged. Military planning and strategy existed around 450 B. the evidential and administrative burdens of classic procedures greatly impaired their practicality and their effectiveness until information technology eventually made those procedures much less difficult. Neoclassicism today represents the state of the planning art. then. primarily because—being so rational and deductive—it requires substantial evidence and analysis to support executives' decisions. first was practiced in France during the late 1860s. More specifically.some basic methodological concepts. An alternative perspective may be taken. the classic model of strategic planning as a decision-making process is described here in greatest detail. This is an inductive approach.. deductive and inductive— can be effective. information technology has so facilitated execution of the classic models that a new. it also should be able to describe the gap between the present performance potential and those standards. While the classic planning model has made a great impact on the practice of modern management and has influenced how corporations still are administered. In Chapter 4. however. by which planning decisions are made incrementally rather than deterministically. ” “goal. readers will become familiar with a wide variety of electronic planning aids now available to facilitate strategic planning at all stages of the process. that model nevertheless has been cumbersome and difficult to execute. Chapter 3 reviews the basic approach of strategic planning from two quite different perspectives. Chapter 2 explores essential concepts of comprehensive planning and its methodological scope.C. In this chapter. Chapter 1 begins by summarizing the historic evolution of comprehensive planning into a formal management discipline. Benefits to be expected from commercial planning also are discussed in Chapter 1. management may discover opportunities to improve upon the status quo. The purpose of planning is to realize both of those benefits. In one case. 1 . results of empirical research demonstrating that formal planning can improve the probability of a firm's commercial success—by either increasing upside performance potential or reducing downside risk—are reviewed. Each approach—deterministic and incremental. In fact. but strategic planning. as the classic strategic planning models used most frequently today are deterministic and deductive in nature. Planning should entail deducing actions to reconcile differences between the status quo and success. If management knows how to define standards of success. Among those are “comprehensive commercial planning. ” “comprehensive corporate planning. a policy of continuous improvement is adopted without necessarily knowing what the firm's highest potentialmight be. the “classical” approach to planning. some very important terms used throughout the remainder of the book are defined. Thus. At any given time.” A three-stage general planning model—also a bedrock of the remaining chapters—is introduced here as well. readers will learn how modern information technology has been applied to strategic planning methodology so that the impediments of informational overload and administrative burden no longer impair the classic models' execution. General acceptance of commercial planning principles didn't emerge in North America until a century later. at any given time. however. ” “comprehensive business planning. However. as we know it today. and a “neoclassical” approach that exploits modern advances in information technology. planning decisions are viewed as rationally deductive in nature. ” and “objective. A related discussion addresses the firm's economic mission and the role that comprehensive planning can play in helping the firm to accomplish its mission successfully.

which he used in actual practice from 1866 to about 1918. approach to goals' pursuit (strategy). Fayol's plans included formal business analyses. 1994:43).and short-range planning procedures and plans. as explained later. Chandler concluded that formal planning practices (among others) evolved in response to the increasing administrative complexity that accompanied corporate growth and diversification. Using in-depth analyses of how those corporations' managerial and administrative structures evolved. Hannibal. Pericles devised plans and strategies for war against the enemies of Athens around 425 B. They had a full scope of objectives. in a way very similar to the manner in which. Remarkably. Fayol's book on industrial management principles defined the comprehensive business planning process and plans' contents. five-year and tenyear plans that were updated on a rolling-revised basis. 186). Houlden (1995:100) wrote as follows: “Throughout history. in one of the first texts on management principles. which it did in 1903 (Dutton. 1942:185. and very specific implementation programs. EVOLUTION OF MODERN CONCEPTS The Pennsylvania Railroad's management formed a corporate structure to perform long-range planning functions in the 1860s and the 1870s (Chandler. Thus. That was when the terms strategos (military commander) and strategoi (a body of commanders alleged to be the wisest citizens of Athens) emerged. many “modern” concepts of strategic planning unquestionably were initiated by Henri Fayol. or Nelson. his French mining companies formulated comprehensive plans of business. two-year. opponents' capabilities. and action programs. But. Fayol applied these planning methods with great success in his own mining companies. market analyses. Fayol's most widely read work (1916) could be used as a strategic planning text. Chandler (1962) described the early arrival of formalized planning in those and several other large American corporations from about the onset of the twentieth century. which included each essential element of current strategic planning procedures. with principles not unlike many that appeared more than a half-century later. prescribed an elaborate system of well-integrated long. We cannot say when formalized planning began. military commanders have conducted operations according to battle plans predicated upon analyses of their forces' capabilities.C. more than eightyfive years later. DuPont also was among the earliest manufacturing concerns to form a corporate planning function. about 450 B. Cummings (1995) reported that the earliest surviving volume on strategy was written by Aeneas. they . For fifty years. although some formal business plans clearly were being prepared well over a hundred years ago. At about the same time. “Forecasts” in Fayol's plans were much more than simple quantitative exercises. 23). For centuries. it is only recently that science has developed to such a stage that more of a blend between the science and art has given rise to strategic planning as we know it today. Sun Tzu authored a complete text on military strategy that mandated comprehensive planning (Chen. they are practiced today! Fayol developed annual. 1962:22. there have been examples of the art of strategy. but surely it was long before modern management theorists started to write about this subject. Emergence of Comprehensive Commercial Planning Henri Fayol (1916). as well as progress monitoring procedures and contingency plans. They followed deliberate planning procedures. modern commercial planning has existed for only about forty years. whether it be Caesar. ten-year forecasts.” Indeed. and battle conditions in the environment.C.Historic Perspective Historic Perspective The ability to conjecture about the future and to formulate plans is an attribute that distinguishes humankind from other species.

assigning implementation tasks to operating units. Ten-year objectives were revised every five years. this acceleration may have been due to the influence that military management methods and computing systems exerted in business. The first generation of postwar business planners benefited not only from lessons learned in military applications of planning. Igor Ansoff. All elements. but business planning functions surely existed long before then. U. (For example. which Chandler (1962) described in his definitive analysis of how strategy and structure jointly evolved.S. Thus. military planners have developed principles for devising strategy. For example. “Thus. in Managing for Results (1964) and Management: Tasks. Defense Department as secretary of defense. further academic attention to planning functions developed slowly. In part. When World War II ended.contained integrated strategy statements. Subsequent to Fayol's work. it also was due to the rapid growth in size and complexity of American businesses. were carefully interconnected and updated regularly. and Budgeting” (PPB). Practices (1973). ” as Eisenhower called it in his farewell speech (1960). there is always a line of action marked out in advance for five years at least” (Fayol. military veterans with planning experience often put the techniques that they had learned to good use. Responsibilities. planning skills allegedly were transferred from military to business organizations through management migration.D. Robert McNamara applied PPB and quantitative planning methods at Ford Motor Company before taking them to the U. But. Military planners also developed the practical notion that success in plans implementation is closely related to the effectiveness of organization structure. the transference of military planning techniques to business may have strengthened American management's planning capabilities after World War II. The Military Analogy It is a common belief that modern business planning took its genesis from military methods and procedures developed during World War II. 1986. recall that Chandler (1962) documented the presence of planning departments and many of today's business planning functions in American corporations before the turn of the twentieth century and that Fayol had implemented planning practices in the late 1860s—well before World War I. Indeed. Fayol's methods were so novel and successful that he was appointed to the French Legion of Honor (Chevalier in 1888 and Officer in 1913). Although this legend may have some truth. He received the Delesse Prize from the French Academy of Sciences and gold medals from the French Society for the Encouragement of National Industry and the French Mining Society. The first year of a plan's ten-year term was expanded into an operating budget. Modern notions of comprehensive planning began to emerge again in the 1950s. which later were transferred to industry and given popular names such as “Planning. Henry (1981). 1916:47). and allocating resources to those units for many years. “command and control” concepts evolved. reflecting a process of developing plans in progressively greater detail with closer proximity to the points of implementation in operations and in time. degree from Brown University in 1948. During World War II. from short term to long term. after receiving his Ph. a text that may have been one of the first to prescribe modern planning functions. see the histories of LiddellHart. and Houlden (1985. Later. got his early . Drucker wrote extensively on business planning principles in The Practice of Management (1954). Development of comprehensive planning functions by industrial concerns accelerated after World War II for reasons explained by Fulmer and Rue (1973).) After World War II. 1954 and Paret. especially in the “military-industrial complex. Programming. but also from a plethora of quantitative approaches to optimizing outcomes in complex systems and the arrival of the electronic computer.S. military planners developed some formal planning methodologies. among others. Drucker reiterated and refined these concepts. 1995). Therefore.

and U. conducted by the National Industrial Conference Board in 1955 found that 75 percent of 166 large corporations had installed “long-range planning” functions (Baker and Thompson. Subsequent surveys tended to report that the incidence of formal CBP functions increased steadily both in the United States and in most industrialized . 1956). most other studies' results produced less spectacular growth rates. focused on selecting fixed goals (or objectives) and then defining the work required to bridge gaps between present positions and objectives (Argenti. Then. Hoffman. Pharr and Lockeman. Houlden. 1994). the military analogy unquestionably has been helpful to strategy authors (Harrigan. 1980. One study. 1981. 1987. 1986a. manufacturers were twice as likely to have long-range financial plans as service firms. conducted for the Planning Executives Institute. Ansoff's brilliant academic career subsequently took him to Carnegie Mellon. Initially. early in their post-World War II evolution. it will be found in the Appendix. Gilmore and Brandenburg (1962) provided a graphic description of this classic procedural model. as business conditions (and global military situations) became more dynamic and uncertain. 1991. Ten years later. Rogers. He moved to Lockheed Aircraft Corporation in 1957. 1984. b). or contingencies. had highly developed “strategic” planning functions. concepts of business planning. Ultimately. 1985. Kami. 1981. Notwithstanding its uncertain validity. However. but that another 50 percent had long-range financial “plans” that were unsupported by strategy. Parks.S. it was necessary to plan for more than one combination of conditions on the competitive battlefield. Some studies observed that the incidence of comprehensive business planning (CBP) practices was significantly influenced by firms' sizes (Henry. involved relatively static objectives. formal strategic planning had become an established management discipline. Mercer. it may become appropriate to substitute “contingency plans” for corresponding elements in the prevailing plan—at which time the contingency plan will prevail and the predecessor will be discarded. 1969. International University. 1969). 1969). Surveys in other industrialized nations confirmed that the practice of comprehensive plans was widespread on a global scale (Exhibit 1. 1984). 1982. During the 1960s and early 1970s. planning principles in business and the military did seem to evolve in parallel. where he became a vice president for planning and programs (Hussey. By the end of the 1960s. Strategic responses to alternative scenarios. Fahey. 1986. Generally accepted planning principles. 1999). when environmental monitoring indicates that the probability of a contingency's occurrence is increasing. Dess and Beard. Sands and Thompson. alternative “scenarios” were formulated (Wilson. 1973. initially may be prepared in less detail than strategy in the prevailing plan. 1973. Eventually. 1995a. a strategy for responding to that contingency can be refined. General Acceptance of Planning Practices The steady growth of formal planning practices in American business was defined statistically and chronicled by several writers after the mid-1950s. 1975. Downey et al. A survey by Business Management magazine in 1967 found that about half of 101 large corporations had begun to plan formally.. 1985. Fulmer and Rue (1973) found that only 23 percent of 386 respondents to their survey of a broader sample. Both firms were original members of the postwar military-industrial complex and early users of the first large-scale computing machines. Edmunds. For instance. Other studies disclosed that planning propensities tended to differ between industries (Fulmer and Rue. In addition to prevailing assumptions regarding the environment.experience in planning at RAND Corporation. 1965). Peacock. the required work was broken down into manageable tasks that might be assigned to organizational units and individual managers. Cohen. In that study's results. like their military analogs. He was a founder of classic strategic management methodology (Ansoff. that proportion allegedly had risen to over 90 percent (Brown. Kotler and Singh. 1985). Schwartz.1). Vanderbilt.

This is the publication date. Satisfaction levels were reported to be quite high (about 89 percent). H.1 demonstrates. 1995).1 Emergence of Formal Planning in Countries Other than the United States No. 2001). C. 1986 Dierdonck Robert Ackelsberg c. In a survey conducted during 1994-1996. the incidence of formal planning practices was higher in two industrial service industries than in three fabricating industries. as Table 1. N. 1987 John U. Wee Seok Kuan Lee c. we found that 88 percent of 368 publicly owned firms in ten U.S. Morgan Toyohiro Kono 1975 D. EXHIBIT 1. 1987 William Harris H. W. Koufopoulos 1991 Neil A. the incidence rate had reached 89 percent in 2000. of Incidence Companies Survey Year N1 N2 1300 Region/Country ASEAN Region Belgium Denmark France Germany Greece Japan Netherlands Singapore United Kingdom Author(s) Foo Check-Teck P. 1968 Schollhammer W. However. Bamberger 1965 Eduard Gabele Werner Keppler 1973-74 D. Grinyer 1988-89 Peter McKiernan Filip Caeldries R. Farley B. Higgins c. Finn RR Pct. E. 325 25% 100% 1000 124 12% 66% NA 790 NA 289 231 536 20 12 NA 100% 15%70% <20% 371 47% 1600 NA 181 62% 35% 62 74 20 27% 69% 14% 57% 100% 85% 749 300 27 NA 223 30% 56% 225 75% 33% 27 71 100% 81% NA 86% N1: number of surveys N2: total response RR: response rate NA: not available c. Most recently. unlike the findings of Fulmer and Rue (1973) more than twenty years earlier. Lehr Bernard Taylor 1969 Peter Irving J. von c. H. less two years. Rigby (2001) confirmed that the incidence of strategic planning had increased throughout the period of 1993-2000. Denning 1967 M. Theincidence of formal planning was highest of all in the most asset- . In North America. c. 1975 R. 1974 Klaas de Jong C.: Approximate: actual date of survey was not reported.nations (Houlden. H. industries practiced comprehensive business planning and that this rate had increased steadily during the preceding decade (Roney. Strigel I. Jan Eppink Doede Keuning c.

procedures. The Concept of Corporate Planning (1971). Systematic procedural approaches to performing specific tasks of comprehensive business planning also emerged fairly early. implementation. assumptions. performance monitoring. providing guidance in integrating multiple management functions to implement planning procedures. Emergence of Generally Accepted Principles As academic and professional interest in the practice and promise of comprehensive business planning accelerated. 2001 N 194 30 30 60 74 98 26 27 45 76 47 16 13 368 1983 44% 70 57 42 31 60 58 67 58 57 57 62 46 51% 1994 93% 90 93 88 97 77 77 78 76 91 89 100 85 88% Change 49 20 36 46 66 17 19 11 18 34 32 38 39 37% Andrews' theoretical work. Perhaps the first of these broad-scope texts was Melville Branch's (1962) The Corporate Planning Process. (Professor Branch received the first doctorate in planning awarded by Harvard University. Immediately after Andrews' text. our findings probably are reliable for publicly owned firms in the industries that we studied. published in 1965 (followed by subsequent versions in 1979 and 1988). Even more systematic and procedurally definitive were Argenti's two texts (1969. 1974). Branch's text discussed planning's theoretical bases. two others—more along the lines of Branch's—were published by Ewing (1972) and Hussey (1974). Branch's text—which is far more definitive—predated Andrews' by nearly a decade. Among the most important of such works surely was Ansoff's first text. methodologists turned their attention to articulating principles by which increasing numbers of managers involved in formalized planning could benefit from the experience and assessments of others. analytic techniques.) Complete in its treatment of methodology. and even the future of planning as a function of management. Initially. purposes. Lorange and Vancil (1977) probably reached the limit of such early approaches to defining strategic planning functions by compiling a series of articles that prescribed how CBP procedures should be performed in various elements of the organization at different stages of the process. Although not nearly as widely heralded as Kenneth TABLE 1.1 Incidence of Comprehensive Business Planning in Ten Industries Percentage of Planners Process Industries Basic Metals Chemicals Petroleum Utilities Fabrication Industries Auto Components Building Components Machinery Service Industries Banking Industrial Construction Environmental All Industries Source: Roney. attempts at codification were fairly broad in scope. Since our response rates were quite high (85%) and our sample was relatively large. Particularly helpful was Argenti's approach to preparing a “baseline” financial projection as a .intense industries.

demonstrated statistically that rates of return can be maximized in certain competitive circumstances by selecting specific approaches to marketing. Ansoff also was instrumental in defining systematic approaches to “implanting strategy” (1984). Firms that diversified into related lines of business out-performed firms that diversified into unrelated lines. illustrations include the initial study of its kind by Ansoff et al. For instance. and Lorange (1982) focused on strategy implementation. A virtual tidal wave of research into technical planning practices followed. As procedural planning principles emerged. 1977. and financial performance. 1987). financial results were superior to those of firms in which acquisitions were not guided by comprehensive plans. Hamel and Prahalad (1994) argued that management must develop more ambitious and future-oriented strategies to improve their competitive market positions. As academicians grew more interested in business planning and strategy. and Marrus (1984). (1994) has focused on the goal of maximum shareholder value. Ackoff (1970) elaborated on some of these concepts by providing a quantitative context for setting objectives and a general approach to systematizing planning tasks. Other important treatments of systematic approaches to defining procedural planning principles were published by Enrick (1967). “portfolio” techniques to prioritize alternative investments in divisions were devised (Hedley.. 1979). Rothschild (1979). Giegold. they focused research inquiries on the efficacy of alternative planning procedures. Subsequent texts by Hrebiniak and Joyce (1984). Thune and House (1970) reported results of a smaller but statistically more rigorous analysis: they found that planners in some industries outperformed nonplanners. Borrowing from McGregor's (1960) notion. new product development. should be judged by its “economic value added” to shareholders' wealth (Stewart. procedural principles were focused more intensely on implementation requirements. sustained development of core competences to compete in emerging industries and markets. For instance. . who demonstrated the importance of understanding the structure of a firm's industrial environment as a prerequisite to selecting competitive strategy. On the other hand. The merit of strategy. corporate structure. the PIMS (profit impact of marketing strategy) studies. several approaches to “managing by objectives”—following Drucker's (1964) work— established procedural principles for harmonizing organizational resources in the implementation of goal-seeking strategy (Odiorne. according to this view. based on the deliberate. When acquisitions were conducted to implement formal strategies in comprehensive plans. the “human side of planning” also was developed as a vital consideration of implementation methodology by Ewing (1969) and others whose work in this area was summarized by Madden (1980) for the Planning Executives Institute. 1961. For firms with multiple divisions. their architects focused greater attention on practicalities. as well as those that did not diversify at all. 1964. By far the most influential of the modern competitive strategy theorists has been Michael Porter (1980. 1978). Some results of that research are summarized in a subsequent section of this chapter. and promotion that are best matched to the firm's market position. Hamermesh (1986). Morrisey. begun in 1960 at General Electric (Schoeffler et al. Another groundbreaking research report was that of Rumelt in 1974. Pearson. a stream of research and methodology initiated by Rappaport (1981. At the same time. Grant and King (1982). Approaches to the formulation of goals and strategy continue to emerge. In particular. quality management. Sawyer (1983). 1974. managers' work could be prioritized by a hierarchy that connected objectives throughout the enterprise to corporate-level goals and strategic objectives (Granger. 1977. However. Buzzell and Gale.beginning point for quantifying strategic objectives in financial terms and demonstrating how incremental benefits of strategic objectives should be defined. Another important trend in the emergence of generally accepted planning principles was represented by a growing number of investigators and theorists who focused attention on the competitive domain of strategy. (1970). 1978). 1985b). advertising. Hitchens and Wade. Robinson. which focused on relationships between growth strategy. 1986) and manifested in the methodological texts of Stewart (1990) and Copeland et al. which contrasted acquisition results of companies that had highly developed planning functions to those of companies that did not. For instance. 1990). At the same time.

Whereas Steiner's approach was from the practicing professional's point of view. Naylor. But. Unquestionably. But. in the early 1980s.S. Several editions of the text by Thompson and Strickland (1978) followed. although a few anthologies have been produced from time to time (for example: Allio and Pennington. Steiner's survey of “pitfalls” in planning (1972) isolated a variety of procedural reasons for lack of success from planning procedures. taken as a whole.” Perhaps these principles. 1979. The result was an inability of classic planning models to keep up with the pace of change. the development of electronic planning aids' still lagged the acceleration of business conditions' turbulence. the U. 1986). computerized approaches to selecting from alternative goals and strategies. Top Management Planning (updated in 1979 under a slightly different title). Ansoff's Corporate Strategy followed in 1965. and monitoring progress began to be developed (Gershefski. and monitoring plans. where nearly a hundred academicians addressed the subject matter of “strategic management” to be covered by graduate curricula on business policy and strategy.One manifestation of the emergence of generally accepted planning principles was a steady stream of management “handbooks” containingcomprehensive summaries of business planning principles. 1990) and new college texts on “strategic management” continue to appear regularly. King and Cleland. a broad body of knowledge regarding methods and procedures for comprehensive commercial planning had been accumulated and. the text by Schendel and Hofer (1979) was a landmark in the academic community. quantifying objectives. and plans' complexity had grown as the structures of industrial enterprises grew more complex. fundamental concepts of planning nevertheless remained essentially unchanged. Ansoff. Moreover. However. 1969a. collapse of the . were not yet as definitive or fully developed as generally accepted principles in more mature professional disciplines. 1987. As turbulence of the economic environment increased in the 1970s and 1980s. That text contained material developed from fourteen research papers delivered at a conference held at the University of Pittsburgh in May 1977. objectives still were static rather than dynamic. 1983. Consequently. such as accounting. the evolution of CBP principles suffered a severe setback and a decade of suspension. a stock market crash (1987). in the 1970s and 1980s. “strategic management. because there might be many contingencies. environmental dynamism kept increasing. if objectives still were static. Ansoff's Strategic Management (1979) followed in the next year and his earlier paper (Ansoff. The replanning function became ever more important. Ackoff. 1981. as such. Fredrickson. economy was shaken by the Vietnam War (1964-1973). By the late 1970s. Andrews. 1972) initially defined the term. and the importance of computers increased accordingly. by the early 1980s. the Arab Oil Crisis (1974-1975). Thus. 1977. Classic Methodology Breaks Down From the mid-1970s through the 1980s. this was widely regarded as a landmark model for current college texts on strategic management. it became increasingly difficult to perform all of the computations and record-keeping tasks involved in forming.” in Since 1980. The first of those texts was Drucker's The Practice of Management (1954). As noted earlier. Melville Branch's text (1962) also was a landmark. Plans frequently became outdated soon after they were drafted. the theoretical literature and results of empirical research required for general acceptance of planning methodology were being accumulated rapidly. maintaining. represented “generally accepted planning principles. the most comprehensive methodological treatment of comprehensive planning principles to date was Steiner's (1969a) three-volume work. which existed in planning handbooks such as those summarized earlier (and a host of unmentioned others). until the 1990s when the state of planning technology finally caught up. b. there have been no significant new attempts to codify the body of knowledge regarding CBP principles and practices.

savings and loan industry (1991), and two deep recessions, in 1982-1983 and 1990-1991. Critics of business planning chided the planning profession's inability to anticipate and deal with those crises. Eventually, it became fashionable to discredit commercial planning and professional planners for a host of sins—from intellectual arrogance to the failure of CBP to insulate firms' performance from recessions (Kiechel, 1982; Peters and Waterman, 1982; Mintzberg, 1994c). In retrospect, it would seem that strategic planning was blamed for being too rational in a period of economic irrationality. Nevertheless, in the 1980s, planning departments often were downsized or disbanded. This period is designated as the “Dark Ages” of CBP in Exhibit 1.2. After the classical methods were discarded, objectives no longer were necessarily static. Rather, they were subject to frequent change, reflecting volatile social and economic environments, where “uncertainty” became an important issue in policy making (Boulton et al., 1982; Bourgeois, 1985; Camillus and Datta, 1991; Downey et al., 1975; Duncan, 1972; Thurow, 1995). But in those firms where the regimen of classic business planning methods had been discarded, no other methodology arose to take its place. Thus, lacking in viable navigation aids, many managements floundered strategically in the recession of 1981-1982 and afterward. The very mission of commercial planning itself became unclear; and many professional planners lost their identities, as well as their jobs. EXHIBIT 1.2 Evolution of CBP Concepts in the Twentieth Century Emergence of Business Planning 1860 ca. 1865 1903 1916 Evolution of the CBP Concept 1945 1946 1954 1959 1959 1962 1962 1965 General acceptance of planning practices 1965 1969 1969 1970 1970 1972 1970“Generally accepted” CBP 81 1974 1979 1980 1981 1984 - Pennsylvania RR forms a planning office - H. Fayol uses comprehensive business plans to manage French mining companies - DuPont forms Corp. Development Dept. - H. Fayol's mgt. principles include business plans; CBP procedures: 5-10 yr. planning horizon - WWII ends P. Drucker: Concept of the Corporation P. Drucker: first text to include CBP methods IBM commences formal corporate planning E. Penrose: resource based view A. Chandler: Co-relationship of Strategy and Structure M. Branch: 1st text on corporate planning methods I. Ansoff: Corporate Strategy

- G. Odiorne: Management by Objectives - G. Steiner: Top Management Planning - J. Argenti: Systematic Corporate Planning - R. Ackoff: deterministic methodology - Ansoff et al. and Thune and House: first research demonstrating financial impacts of CBP functions - Ansoff: “the concept of strategic management” - Many other empirical studies of principles planning vs. financial performance mainly confirm CBP's benefits - R. Rumelt: strategy, structure and performance - Schendel and Hofer: “state of the art” anthology - M. Porter: Competitive Strategy - Steep recession begins - B. Wernerfelt: resource-based view of competitive advantage

Immediately after the 1981-1982 recession, a wave of acquisitions by means of leveraged buyouts (LBOs) swept over America (Curran, 1990; Faltermayer, 1991). As this wave swelled, “corporate planning” departments became “corporate development” departments. Corporate planners' skills were refocused on the task of identifying opportunities to acquire and/or divest businesses in order to “maximize shareholder value” as quickly as possible. The result was a transformation of many in the corporate planning profession into a new breed of financial gunslingers—investment advisors whose purpose often was to conduct acquisition/divestment searches and to assist top management in effecting transactions. Many planning professionals, whose traditional role was to administer a rational, deliberative discipline in pursuit of an enterprise's long-term well-being, became financial mechanics in search of the quick buck. In the late 1980s, low-quality acquisitions and divestments—and the financing vehicle that enabled them, the undisciplined issuance of “junk bonds” to effect LBOs—came to an abrupt halt, when adverse consequences of high risks inherent in those vehicles were realized by many lending institutions that suffered huge losses. Stock markets collapsed in October 1987. Previous pillars of the industrial community, such as Allis Chalmers, International Harvester, Youngstown Sheet and Tube, Jones and Laughlin Steel, Fruehauf, Revco, TWA, Braniff Airlines, Continental Airlines, R. H. Macy Co., and Wickes Corp. suffered financial catastrophes and bankruptcy. The result was intense risk aversion by both lending institutions and industrial treasurers. By 1990, sources of highly leveraged acquisition funding had withdrawn from the market. The torrent of LBOs and junk bonds ended, and the gunslingers again were unemployed. EXHIBIT 1.2 continued 1986 198190 1982 1994 1994 1992 - A. Rappaport: shareholder value as a primary goal - LBOs and junk bonds. Corporate “planning” becomes “corporate development.” - “Corporate Strategists Under Fire” Fortune, 12/27/82 - Mintzberg: The Rise and Fall of Strategic Planning - Hamel and Prahalad: “competing for the future” with strategic intent and core competences - Emergence of Strategic Planning Technology

“Dark Ages” of CBP

Renaissance of CBP

In Search of a New Concept
In the first half of the 1990s, there has been a renewed interest in the discipline of comprehensive commercial planning; and the commercial planning profession has regained some favor (Houlden, 1995). However, when this book was written, management professionals and academics still had not found a planning methodology to meet industry's current needs any better than those that existed in the 1980s. However, many of the generally accepted commercial planning principles that existed in the 1970s and early 1980s have been forgotten or discarded. The planning profession and academic methodologists seem to be groping for a new approach that is grounded in classical principles—deliberate and rational, as before—but updated to reflect modern information technology, and the need for more effective responses to rapidly changing business conditions. Such an approach has emerged with the aid of modern information technology; it is described in Chapter 4 of this volume. In the 1990s, it became much easier, technologically, to conduct comprehensive planning functions according to classical principles than when those principles initially were formulated. With personal computers, data storage technology, electronic planning software, and the Internet, classic planning procedures that earlier could not keep up evidentially or administratively with environmental change can do so fairly easily (Roney, 2002). Therefore, it is time for the commercial planning profession again to take an inventory of classic business planning principles and define a more conventional, “neoclassical” methodology, appropriate for the present decade. At the same time, any such inventory of planning principles also must

reflect an abundant body of empirical knowledge regarding the efficacy of alternative planning methods accumulated by researchers during the past quarter century. The resulting “neoclassical” methodology should reflect both classical planning principles and the facilitation of planning work that can be accomplished by information technology. In this volume such an inventory has been collected; and an updated collection of generally accepted commercial planning principles has begun to re-emerge. Many of the classic principles remain quite satisfactory. Where they no longer meet current needs, however, it is time for academic researchers and other methodologists to fill those voids.

In a political system of free enterprise, private businesses choose to perform economic missions that would be assigned to them by the state in other political systems. Rather than government, private stakeholders and management make such choices in a free enterprise system. Through their purchasing decisions, consumers of goods and services decide which firms succeed in their missions and which ones fail. As Drucker (1946; xii, 16, 17) observed, this simple description has farreaching implications for management; and that is especially the case for commercial planning professionals. Exhibit 1.3 provides a list of twenty companies that were industry leaders in 1955. None of them existed in 1995, although a few reemerged after bankruptcy as entirely different companies, retaining only their old names (e.g., Greyhound, Insilco, Penn Central). Indeed, only about 20 percent of the companies on Fortune's 500 list in 1955 were on the list in 1995; that survival rate still applies today. The implication of this corporate obituary is quite dramatic. Even companies as large as those among the Fortune 500 may not survive as leaders for as long as a single manager's career. The mortality of smaller companies is even more severe. What accounts for this tendency of companies to fall by the wayside? The answer is that a sort of Darwinian EXHIBIT 1.3 Twenty Companies That Failed Company Allis Chalmers American Motors Braniff Airlines Cities Service Fruehauf Greyhound Int'l Silver Int'l Harvester Jones and Laughlin Steel Kaiser Steel National Steel Corp Pan Am Airlines Penn Central Philco RCA Disposition 1955 Fortune 500 Last Rank Year 65 1987 Chrysler 81 1987 1989 Southland 90 1983 Terex 165 1989 436 23 42 255 54 — 90 26 ** ** 1986 1968 1988 1984 1991 ** 1961 1989

Chapter 11 Acquired by Chapter 11 Acquired by Acquired by Corp. Chapter 11 Chapter 11* Chapter 11 Assets bought by LTV Chapter 11 Partial sale to Nippon Kakon Chapter 11 Chapter 11 Acquired by Ford and EMI Acquired by Sony

Company Republic Steel Studebaker-Packard Uniroyal Wickes Youngstown Sheet and Tube * after LBO failure ** reorganized successfully in a new form


Acquired by LTV Failed Liquidated Chapter 11* Assets bought by Lykes 55 Corp.

1955 Fortune 500 Last Rank Year 21 1984 75 1963 1986 — 1981 1969

natural selection occurs. Over a long time, only the most fit tend to survive. Others fail. What makes one firm “fit”, and another unfit, to survive is the survivor's distinctive competence to supply goods and/or services to some segment of society that demands them (Selznick, 1957:5). Only those businesses that are the most competent to perform their economic missions will survive, in the long term. The source of distinctive competence, in turn, probably is a combination of valuable, unique, inimitable resources that are both physical and intellectual in nature (Penrose, 1959; Wernerfelt, 1984; Rumelt, 1984; Barney, 1986a, 1991; Dierickx and Cool, 1989; Peteraf, 1993). There is a vital corollary to the foregoing statements. The mission of a firm, in free enterprise, is to survive. But, survival—at least in free enterprise competition—usually is possible only when a firm performs an economic function, that is, supplies specific goods or services required by society, more competently than other firms that also attempt to survive by performing the same function. Thus, the firm's “mission” is its socioeconomic function, and a basic requirement of management is to select a mission that offers the firm its best prospects for survival. In short, firms should undertake missions for which they are most competent and acquire or develop the competences that endow them with sustained competitive advantage in performing their missions. Economic and industrial history tell us a lot about business missions. Lester Thurow (1992, 1995) wrote about industrial missions that had been, but no longer are, feasible for American Industry. Throughout their volume, Hamel and Prahalad (1994) also wrote about industrial missions that were feasible for American firms, but still were ceded to foreign competitors in the 1980s, due to poor long-range planning. With a better planning methodology, those firms might have been more competitive in global markets during the 1980s, since sound planning should have resulted in more effective alignments of physical and intellectual resources to emerging market conditions. Thus, it seems that excellence in planning itself can confer a competitive advantage.

Survival of the Enterprise Through Distinctive Competences
Top management's first planning challenge is to discover an operationally and competitively viable mission. However, it is not easy to succeed in that attempt, as the “corporate obituaries” list in Exhibit 1.3 demonstrates. Success is measured in terms of earnings and cash flow because those are the means of sustaining a firm's economic viability. However, generating earnings and cash flow is not the firm's mission. The firm's mission is to perform an economic function with distinctive competence, whereupon earnings and cash flow should provide funding for renewal of resources with which to continue the mission (Drucker, 1954:76, 77; 1973:114-117). The purpose of comprehensive commercial planning is to increase the probability of an enterprise's long-term survival by improving its economic viability—that is, by improving the

were examined in this study. Keats and Pearson. Management “plans” to do things. (1987). Whereas the majority of this research tended to be focused on larger. several studies of small firms also were encouraging (Robinson et al. Capon. and it is not possible to formulate a corporate strategy for success without a viable operating strategy and a correct marketing strategy. but net income was unaffected. comparisons of planners' versus non-planners' financial results generally confirmed favorable concomitants of planning (e. Baker. One corollary to this statement is that strategic planning. 1975. Evidence That CBP Functions Can Fulfill Their Mission A large body of empirical evidence supports the proposition that the purpose of comprehensive business plannings is to enhance the prospects for economic survival of the enterprise. Welch. For the next several years.g. comparisons of planners' versus non-planners' financial results generally (but not always) confirmed favorable financial concomitants of planning. Huff and Reger (1987).. Herold. Other management practices. not just to form creative ideas. Orpen. the planning function is driven by external forces. The first empirical study to demonstrate potentially beneficial impacts of comprehensive business planning (“CBP”) on corporate financial results may have been reported by the Stanford Research Institute (Holden.) Baker. 1973. 500 list. 1941. 1988.. seeking the firm's greatest competitive and economic advantage in doing so. 1984. 1993). . Management attempts to anticipate future business conditions and adjust to them. and no attempt was made to treat the CBP function separately as an independent variable for purposes of statistical analysis. (1970) discovered that “planners” outperformed “non-planners” in terms of conventional financial performance measures. Companies with exceptional growth in sales and earnings during 1939-1949 were more likely to have had formal planning programs than were companies with low growth rates. When slow-growth companies in that period became fast-growth companies in 1949-1956. During 1970-1983. Miller and Cardinal (1994). 1984. publicly owned industrial firms (because their performance data are published). (1990). (Small. Armstrong (1982). they again were more likely to have had formal planning programs than firms in which growth slowed down. Fulmer and Rue. most recently. 1972. Adams and Davis. 1987). privately owned firms realize their earnings in owners' takeouts. 1979. Pearce. 1986. besides formal planning. as the practical application of strategic management theory. not on their tax returns. Fish and Smith. Bracker and Pearson (1986) even found strong evidence that dry cleaners tend to benefit financially from comprehensive planning. management matches internal resources and competences to current and anticipated demand. then. Essentially. The payoff of superior returns is only for superior competences and their conversion into successful performance of the mission. Dess et al. Robbins and Robinson (1987) found financial benefits of formal planning in small manufacturers. can have life-defining consequences for a firm. 1957). Through the planning discipline. Descriptive summaries of that research have been provided by Roney (1976). It was not until 1970 that researchers focused attention specifically on the formal practice of comprehensive business planning for extended periods of time (beyond annual budgeting) as a potential contributor to financial success. Rhyne (1986). Adams and Davis (1993) found similar benefits among small fast-growth firms on the Inc. Rhyne. Bracker. Karger and Malik. Keats and Pearson (1988) found that small electronics firms with the most highly developed planning functions grew faster than others and that their CEOs were able to pay themselves more. such as profit margins and rates of return.likelihood of mission success. Studies by Thune and House (1970) and Ansoff et al. Wood and LaForge. Bracker and Pearson. 1985. Sypher. 1986. and. But resources are the means of performing economic missions. Bracker. 1985. or need. for its present or potential competences.

Banks Discrete*** Composite Scale Composite Scale Composite Scale 3 Categories of CBP development 4 levels of CBP development Discrete*** 38 58 298 14 1975 1964-73 1975 1970-74 1978 1965-74 1978 1974-76 1979 1972-76 1981 1980 1983 1977-79 1984 1979 Machinery Electronics — Chemicals Drugs — — — Aus. as did Herold (1972) in the drug and chemical industries. Thune and House (1970) found beneficial effects of planning in the drug.65 1972 1962-69 1973 1970-72 Drugs Drugs Chemicals Chemicals Machinery Drugs & Drugs & Chemicals Chemicals — Machinery Electronics Chemicals Drugs Sm. albeit far less rigorously. In that study. chemical/drug. Curiously. Fulmer and Rue (1973) found that durables manufacturers. Size 36 10 314 Study Industries in Which Measure of There Was Planning No Benefit Sales* Returns** Sales* Food Oil Steel Machinery — Returns** Food Oil Steel — Discrete*** Discrete*** 1970 1958. 19701989 Industries Dates in Which of Planning Improved Authors Thune & House Herold Fulmer & Rue Karger & Malik Klein Kallman & Shapiro Burt Sample Pub. As mentioned earlier. Retailers Trucking — Wood & 41 LaForge Sapp & 302 Seiler Robinson & 38 Pearce Fredrickson 27 & Mitchell Lg. benefited from formal planning. and steel industries.Performance Research in Specific Industries. and performance. inter-industry differences have been evident (see Exhibit 1. Mfrs.4). Thune and House (1970) also found an inverse correlation between size. small manufacturers also benefited from planning more than larger manufacturers. Keats and Pearson (1988) found beneficial financial concomitants of formal planning in small electronics companies. and machinery industries but not in the oil. Service firms' results actually seemed to suffer impairment from formal planning (although differences were not statistically significant). Banks Trucking — — — Sm.4 Results of Planning. chemical. Banks — Banks — — — Sm.Throughout the research on relationships between planning and performance. Bracker. Karger and Malik (1975) apparently found positive relationships in the machinery. Banks (Sawmills) Composite scale of (Saw mills) comprehensiveness— unstable industry . Durables & Nondurables Nondurables Discrete*** Mfrs. but not nondurables manufacturers. Among planners. planning. the smallest firms benefited most from formal plan EXHIBIT 1. — Sm. and electronic industries. food. Banks — — — Banks — — Durables Mfrs.

** Refers to both profit margins and rates of return. there were no significant differences.Fredrickson Whitehead & Gup Gup & Whitehead Bracker & Pearson Bracker. Banks Banks) — — Roney 1977. Keats & Pearson 38 1984 1981 — Paint & Coatings Paint & Coatings — Composite scale of comprehensiveness— stable industry Discrete*** 4 categories of CBP development 3 categories of CBP development 253 1985 1983 — 253 1989 1983 188 1986 Sm. Sm. revenues in all other industries. . Banks Banks Lg. Metals Auto Parts Bldg 1994157 2001 Metals Construction Comp's 95 Envir. Machinery Services Bldg Composite scale & Comp's Discrete*** Machinery LEGEND: * Refers to growth of deposits in banks. *** 2 categories— planners and nonplanners () Refers to industries in which planning impaired sales and/ or returns. . (Lg. Cos.Dry Dry Cleaners — 81 Cleaners Sm 1979Sm Elect'cs 73 1988 Elect'cs — 84 Cos. in all others.

. size alone distinguished the best performers: the largest non-planners did better than the smallest. 1979. our firm conducted what may be the most recent series of empirical studies on this question (Roney.ning and the largest firms benefited least. ” impactsof practice variables—such as experience in planning. Moreover. has been a popular domain for researchers seeking to discover financial correlates of formal planning. A later meta-analytic study by Miller and Cardinal (1994) produced similar results. Notwithstanding occasional disappointments in planning-performance research. Results have been mixed. Companies that practiced comprehensive business planning could incur either of two beneficial consequences depending upon industry. especially when industry differences and research methods are taken into account. asset intensity. Whitehead and Gup (1985) found that rates of return were lower in large banks that had strategic plans than in those that did not. This probably is because financial institutions are required by regulators to disclose their financial results to public agencies.4). frequency of review. and may not practice planning as often as underperformers in some industries. and linkage of incentives to objectives—can be measured. the preponderance of evidence from planningperformance studies has been positive. Recall that Fulmer and Rue (1973) actually found that service firms with formal planning underperformed other service firms. but Klein (1975) and Robinson and Pearce (1983) did not. Fredrickson and Mitchell (1984) found that greater comprehensiveness of planning in the Sawmill Industry actually was accompanied by slower growth in sales and returns. at best. simple comparisons on the basis of presence or absence of planning are becoming increasingly difficult. Thus. statistical variance was reduced significantly by accounting for differences in research methods.” There are several ways to interpret the negative findings of such studies.” But among “planners. Beneficial impacts of formal CBP practices were reflected in statistically significant differences between planners' and nonplanners' revenue growth. 1983) have failed to confirm the “planning-performance hypothesis. 2001). Wood and LaForge (1979) and Sapp and Seiler (1981) found financially beneficial impacts of planning in banks.” Therefore. a “metaanalytic” compilation of such studies was reported by Boyd in 1991. Using a scaling technique that measures the relative development of planning functions largely resolves issues that arise when non-planners are hard to find. Another is that underperformers employ planning efforts to correct deficiencies and improve results. Those measures also can be assembled into composite scores for use as independent variables in assessing the impact of the development of CBP functions on performance (Wood and LaForge. “Non-planners” still can be compared to “planners”. In this exhaustive analysis. 1978) and banking (Klein and Linneman. Conversely. As time has passed since the initial planning-performance studies were done in the 1970s. Roney. . Pearce et al. perhaps more than any other single industry. One explanation is that planning complicates managerial functions and/or otherwise renders them less effective. 2001). results from nearly 2. thereby providing long histories of valid data. It is important to acknowledge that not all “planning-performance” studies have found beneficial concomitants of planning on financial results. 1987. Robinson and Pearce. Nor did Whitehead and Gup (1985) in an extensive study for the Federal Reserve.500 companies were aggregated. Dess. It also is helpful to distinguish between research studies that classify subject companies discretely as “planners” or “non-planners” and studies in which subject companies are rated based on the relative development of their planning functions (see Exhibit 1. The latter method is now preferred. scale ratings of the former are “zero. 1981. Several studies of regulated industries such as trucking (Kallman and Shapiro. growth in earnings. and rates of return on investment. Banking. among non-planners. But. In 1994 and 1995. Ireland and Hitt (1990) also demonstrated that “industry effects” can influence the outcome of such studies significantly. in that industry. better performers don't need the remedial benefits of planning as much as underperformers. acceptance of comprehensive planning has grown to a point where very few companies now admit to being “non-planners.

sawmills (Fredrickson and Mitchell. probably did not obtain general recognition in the United States until around 1955. 1991). These two types of benefit may be labeled. Important contingency variables (among many others) include the industry's life-cycle stage (Hofer. Kukalis. . 1994). CBP functions enhanced firms' relative market shares. planning methods were refined to a point where “generally accepted principles” of planning emerged in the early 1970s. 1984). 1975). when America's Civil War was ending. in itspresent form. however. at best. industry stability (Fredrickson. leaders of Greek city-states and Chinese generals were formulating formal plans and strategies to accomplish military objectives. To deal with these problems. we found impedance effects in the machinery and buildingcomponents industries. Recall that impedance effects previously had been found in service industries (Fulmer and Rue. and protective (Roney. 1984). the findings of planning-performance research to date have been encouraging. Twenty-five centuries ago (400 B. In any event. Henri Fayol (1916) used formal business planning methods. CONCLUSIONS Comprehensive planning actually has been practiced for centuries. the above-mentioned research findings also seemed to demonstrate that CBP procedures actually have impeded firms' performance. affirmative. that is the implication that one gets from reading standard strategic management texts. 2001) strongly suggest that alignment of methods to industries' (and even companies') special circumstances is a prerequisite for the success of comprehensive planning. Nowhere in the multitude of strategic management or planning texts will one find prescribed differences in planning procedures that should be employed in individual industries. In our study (Roney. “contingency theories” may help to explain how some planning approaches (rather than others) are indicated in specific industries and business conditions (Hofer. our research findings (Roney. 1976). and linkage of top management incentives to objectives' achievement. impedance effects typically occurred as trade-offs: in industries where CBP enhanced market shares. But. and industry turbulence (Miller and Cardinal. Planning principles tend to be practiced uniformly between industries. Thus. CBP functions may bestow a benefit of risk reduction. 1973). new planning methods that work better are needed in industries and circumstances where CBP functions have not proven to be financially beneficial. market shares declined. Who would believe that business planning should be done the same way in a steel company as in a banking concern or an electronics company? Yet. 1989).phase of the economic cycle. Taken as a whole. firms that practiced comprehensive business planning were better able to withstand the onset of a recession than were competitors that did not practice comprehensive business planning. But. Subsequently. While it is intuitively logical that efficacy of the planning discipline—and approaches to maximizing its benefits—should vary sharply between industries. board versus CEO approval of plans.). and several planning “practice variables” such as the plan's term. to manage French mining companies beginning somewhere around 1865. respectively.C. All firms that practice comprehensive planning do not necessarily enjoy either affirmative or protective benefits. similar to those in practice today. per se. 1980). CBP functions enhanced firms' financial performance in terms of both profit margins and rates of return. In some industries. 2001). that reality is not yet reflected in generally accepted planning principles. and large banks (Gup and Whitehead. and perhaps alarming to executives in industries that may be susceptible to such effects. corporate structure (Miller and Friesen.C. In some industries. In all industries. rather than enhancement of performance potential. in others. in industries where CBP enhanced financial results. 1984. financial results were compromised. 1975.-450 B. To the contrary. comprehensive commercial planning. They also present a major methodological challenge to both academicians and the commercial planning profession. Impedance effects of comprehensive planning are confusing. Fredrickson and Mitchell.

Fortunately. a large body of empirical evidence and theory that may guide planning managers in selecting methods and procedures appropriate for the specific circumstances of their firms continued to accumulate during those two decades. and markets grew increasingly complex and volatile in the 1970s and 1980s. The result is a rich body of methodological knowledge. notwithstanding relative silence of the business planning profession during those years. and mergers. In part. adapt to a dynamic external environment.The purpose of modern commercial planning is to increase the probability of a firm's survival in free enterprise competition by improving its economic viability. When a wave of highly leveraged acquisition/divestment transactions collapsed at the end of the 1980s. as information technology began to make the work of planning much easier in the 1980s. its evidential and administrative requirements ceased to be prohibitively burdensome. thereby. indigenous to modern business administration. It is fortunate that. The purpose of CP is to discover how a firm's resources should be deployed in Axiom 1. There is a large body of empirical evidence to support the validity of that mission. Peters and Waterman (1982) called this “management by walking around. this may be because of the frightening pronouncements by some management theorists that the best policies embrace relatively unstructured approaches wherein management existentially moves from one situation to another. throughout the 1980s and 1990s. A summary of the generally accepted planning principles discussed in this chapter follows. academic research into the efficacy of strategic management and planning functions continued. business literature challenged the efficacy of formal planning. 1994a). The remainder of this volume contains a condensation and application of that methodology. With the recessions of 1974 and 1981-1982. and anticipate needs for future changes in those requirements. Postulates . After 1982.” Popular business theorists have promoted various other strategic nostrums. Research demonstrates that in many (but not all) industries. Many “corporate planning” departments were converted into “corporate development” departments. Consequently. its long-term survival. as firms grew in size and Axiom 1. It evolved. formalized comprehensive planning functions are accompanied by enhancements of financial and/or competitive performance. GENERALLY ACCEPTED PLANNING PRINCIPLES: BASIC CONCEPTS Axioms Comprehensive commercial planning (CP) is a management discipline. in response to simultaneous requirements for firms' managers to integrate specialized functions.02 future environments so as to maximize its competence to perform a stated mission for society and. which were re-tasked to assist top management in searching for and effecting acquisitions. making business conditions so turbulent that classic planning methods' evidential and administrative requirements became prohibitively burdensome. industries. strategizing as it goes (Mintzberg. divestments. classic planning practices became much less common and planning departments often were disbanded. However. a vacuum was left: generally accepted planning principles either no longer were relevant to current business circumstances or had been largely forgotten. interest in classical business planning practices. uncontrollable conditions of economies. most senior managers realize that such undisciplined methods do not provide a satisfactory way to run any business.01 complexity. Indeed. aided by information technology. a renaissance of “neoclassical” planning methodology seems to have begun. was revived. In the 1990s. But in their more sober moments.

and interpret.043 Corollary 1. so do the number and complexity of possible contingent strategies.041 Corollary 1. intentional. and strategy is defined as an approach to attain goals supported by a rationale for selecting the approach. and markets where the firm is or may be located.04 Corollary 1. or impedance impacts of CBP functions are contingent upon the following variables in the external environment: . Comprehensive business planning (CBP) can exert any of three impacts on revenue. strategy is elaborated for implementation as deliberate. and evidential. It seeks evidence regarding internal capabilities of the firm and its external environment.The classic model of comprehensive business planning (CBP) is essentially rational. however. As the number of contingent strategies increases. A realistic range of potential significant changes in the environment (contingencies) can be described. Finally. goals are selected to Postulate 1. a threshold of administrative infeasibility is approached. Those environments change continuously. The threshold of CP administrative infeasibility is a function of the firm's information technology and its administrative management abilities. As the number and complexity of contingencies increase. Business planning decisions are made partly to develop and deploy internal resources in pursuit of competitive advantage and maximum economic return. syllogistic. firmspecific variables: —Firm size —Financial condition/resources —The firm's relative level of asset-intensity —Management experience in planning functions —The level of senior management involvement in planning functions Firms' tendencies to realize performance enhancement (“affirmative”).01 Due to its insistence on evidence and syllogism—and the dynamism of business information in turbulent economic environments—the classic model can be administratively impractical because of the limited amount of external information that a firm can attain. industries. risk Hypothesis 1. process.02 impacts of CBP functions are contingent upon the following internal.02 Postulate 1. Business planning decisions are made partly in pursuit of favorable positions in economies.03 reduction (“protective”). objective-seeking work.044 Hypotheses Hypothesis 1. Then.042 Corollary 1.01 define success in performance of the firm's mission. Alternative strategies can be defined for each contingency. risk reduction. market share. profit margins.03 Postulate 1. or impedance Hypothesis 1. and return on investment: —Performance enhancement in stable or expanding markets —Resistance to industry/market downturns or recessions (risk reduction) —Performance impedance in either of the above conditions Firms' tendencies to realize enhancement. Postulate 1.

08 markets with unstable (versus stable) structures.04 CBP functions are contingent upon variables in their planning practices.—The industry's economic structure —Relative stability of the industry and its markets —Relative uncertainty of the firm's industry and markets —Complexity of the firm's industry and market structures —Phase of the economic cycle (expansive or recessive) Firms' tendencies to realize performance enhancement or impedance effects of Hypothesis 1. for example—attempts to discover how all of the firm's capabilities and resources can be deployed within the foreseeable external environment.06 unstable) industries and markets. The notion of “comprehensive” commercial planning is addressed first.10 planning functions will exhibit more persistence (lower termination rate) and greater effectiveness (attainment of objectives) in CP functions. Both objectives are critical because they will reappear throughout the following chapters. those in which asset values are relatively high in proportion to revenues.. Affirmative benefits of CBP functions are most likely to occur in stable (versus Hypothesis 1. 2 The Planning Process This chapter has two objectives: to explain some basic concepts of comprehensive commercial planning and to describe a three-stage procedural model in which those concepts are applied. and implementation procedures are prescribed in a typical planning process. After describing the basic concepts of comprehensive planning conceptually. In a given industry. BASIC CONCEPTS OF COMPREHENSIVE PLANNING . Impedance effects of CBP functions are most likely to occur in industries and Hypothesis 1. selections of goals and strategies are made. Negligible impacts of CBP functions on financial performance are most likely to Hypothesis 1. the discussion will take a more practical perspective by explaining how evidence is gathered. i. Protective benefits of CBP functions are most likely to occur in intensely Hypothesis 1.05 “asset-intensive” industries. so that the firm's mission is conducted with a high likelihood of success. firms that employ information technology to perform Hypothesis 1. Commercial planning— like planning done in the public sector by government agencies or military organizations.07 cyclical industries and markets characterized by the greatest uncertainty.09 occur in highly regulated industries.e. including: —Approval authority: Board or CEO —Planning horizon —Frequency of review —Linkage of incentives to objectives —The use of information technology Affirmative benefits of CBP functions are most likely to occur in the most Hypothesis 1.

Each element will be explained further in the second part of this chapter. which are described in the second half of this chapter. But. When management selects a firm's mission. responding to departures of results from intentions. Both CCP and CBP are conducted in three basic stages.In this volume. greatest emphasis is placed on CBP principles because. which include three types of activities: • Gathering evidence—Acquisition and interpretation of the evidence regarding internal capabilities of the enterprise and external business conditions needed to make planning decisions. resource allocation. financial analysis. even in a multi-business enterprise. standards for the future success of a business or corporation and the deliberate pursuit of those standards through objectiveseeking work. market or industry analysis. Assumption of a Pre-existing Mission Both CCP and CBP methodology presuppose that the firm's management has selected a mission before these procedures begin. which has unique planning requirements. This license will be renewed by society for as long as the firm remains distinctively competent to deliver the benefits promised in its social contract and actually performs the mission successfully. Comprehensive planning (CP) for an enterprise may be conducted at either of two levels: comprehensive corporate planning (CCP) or comprehensive business planning (CBP). Chandler (1962:13) and Andrews (1971:28) used the term. For instance. forecasting. Rather. • Decision making—Selecting from alternative mission success standards (goals) and approaches for pursuing them (strategy). Comprehensive Planning Is Both an Integrative and an Adaptive Discipline The notion of comprehensive planning implies that a commercial enterprise must be treated as a whole entity and as part of a larger economic system. A mission may be redefined after any of the three procedural sequences has been completed. the term comprehensive planning refers to a systematic procedure for selecting goals and strategies that define. CBP is not limited to the analysis of a firm's individual operating strengths and weaknesses. but that is not typically the case. Three-Stage Process Model Comprehensive planning is a system of ongoing managerial procedures. This volume addresses the methodologies of both CCP and CBP. and marketing environment. “strategy” to include an . monitoring their progress. goal setting. or project management. respectively. “Mission” refers to the economic function that a firm's management chooses to perform for society. The terms “planning” and “strategy” have been defined very differently by various authors. CP procedures provide an effective means of greatly enhancing the likelihood of this contract's fulfillment and renewal. All of these procedural elements are necessary to perform comprehensive planning. the planning concepts and methods found in this book embrace all of those techniques. the former's scope includes all units in a multi-business enterprise. but none is sufficient by itself. It is a system of interrelated methods and procedures that deal with the whole enterprise—all of its resources and all of their functions—to predefine the firm's highest performance potential in its economic. budgeting. and • Implementation—Defining instrumental action projects or programs. each business within the enterprise must form and implement plans effectively for the entire enterprise to realize its highest performance potential. industry. it enters into a sort of social contract to deliver certain benefits to stakeholders in exchange for a “license” to exist. while the latter's scope includes just one business or a single-business enterprise. Thus. and performing all three elements of this procedure continuously. As their names suggest.

each provides a different perspective on the timing of strategy and the relative immediacy of consistent objectives. and to perform these functions continuously. A sound plan consists of both shortterm and extended elements: both must exist in the same strategy without contradiction. Rather. systematic. 1979). Hofer and Schendel. The term strategic planning is not a very helpful one.enterprise's fundamental goals as well as its approach to their accomplishment—essentially. Comprehensive planning is not “long-range planning. Such a dichotomous view of strategy and planning is not generally accepted (Ansoff. Argenti (1969. essentially amounts to work programming. Conversely. longer range strategies must provide managers with guidance for current action. It cannot be performed effectively on a once-a-year or piecemeal basis. Mintzberg (1994b. and perpetual process. This concept of strategy places it primarily in a realm of abstract rationale. . Although reasonable persons have differed. Mintzberg's concept has a much narrower scope than the comprehensive methodology in this volume. 1994b). One does not leave off where the other begins: rather. and likely consequences of deliberate actions chosen rationally from alternatives. CP should be an integral element of a firm's management style. The often heard assertion that there is a fundamental difference between long-range and short-range (or operational) planning simply is not logical. adjustments must be made to any part of a plan as and when changing circumstances require. Steiner (1969a. 1964. let alone operational validation—an impractical proposition that most experienced senior managers surely would reject. without the necessity or benefit of justification by intended outcomes or goals. Although it is used widely. To be useful. it is argued. the position taken here is most compatible with the group of authors just mentioned. over the years. It also has been argued that long-range planning entails a relatively simple extension of current strategy into the future. no matter how brilliant. Comprehensive Planning Is Neither Long-Range nor Strategic Planning A sound plan is founded on a solid understanding of the firm's present capabilities. or scheduling (Mintzberg. Strategic insight in the abstract. all of whom described commercial planning as a comprehensive and systematic process in which management selects success standards and an intended course of action based on rational assessments of anticipated external business conditions. 1978). the term is redundant. This is hard work. the firm's performance capabilities. operating plans for the near term must be consistent with longer term strategy and objectives. 1973). a plan for the future is not feasible if it cannot be implemented in the present. Planning. there are no shortcuts.or short-range implementation. Reliable implementation of strategy also must be feasible. 1988). Instead. regarding the scope and content of strategic planning. strategy formulation is distinguished from planning as a much more creative pursuit. either. to decide how strategy best can be implemented. Strategy formulation is one very important element of the CP discipline. Comprehensive planning requires management to evaluate internal and environmental business conditions. On the other hand. Strategy must be appropriate for prevailing and potential business conditions. can planners prepare programs for long. available resources. 1991. as much as it is on an appraisal of future requirements. 1988. Much closer to the concepts in this volume are those articulated by Drucker (1954. For this reason. 1984. 1994. does not satisfy any standard for good planning or a good plan. c) describes “planning” as a process primarily of scheduling work after the more creative process of “forming” strategy has been accomplished. Ansoff (1965. to select from alternative goals and strategies. then. Only when a strategy already exists. that commercial planning is a comprehensive. 1974). Hofer and Schendel (1978). these are two extremes of a procedural continuum. but certainly no more important than the others. the entire scope of what we refer to as “planning” here. In that argument.” Indeed. that is. as well as for an enterprise's goals and capabilities.

Similarly. any single plan of business that is not modified from time to time and implemented long enough probably will lead to a firm's eventual failure. For example. which contrasts the depth of plans' detail to the length of their terms. While strategy (the work by which management intends to pursue objectives) tends to be longer term in its nature than implementation tactics. For example. Figure 2. Since then.1 Comprehensive Planning: Length versus Depth Figure 2.1. Steiner's more descriptive term has been adopted in this volume. strategy often has short. when differences in the term strategy were discussed. there is no short-term element in its definition. longrange planning. As none of their definitions is universally accepted. In either case. business planning. A mission is a long-term social contract between the firm and its stakeholders. as demonstrated in the previous section.and mid-term elements. strategic planning. there is no such thing as a long-term budget: a budget should be the short-term representation of a longer term plan.” Steiner (1971:3) used this adjective to acknowledge the inclusiveness of planning activities and the need for planners to reconcile a wide variety of interests in arriving at policy-level decisions regarding the future directions of complex organizations. Perpetual replanning is essential. the key word is “comprehensive. however. because no plan remains viable for very long. One reason for misunderstanding such terms is our preference for visualizing concepts in only two dimensions. Indeed. terms such as strategic management.2 Comprehensive Planning: Height versus Depth . if not with the whole of society. Here it will be useful to define the term comprehensive planning more rigorously. “mission” is a long-term concept. The shaded areas signify concepts that have no correspondence to actual practice or are simply invalid. simply because internal and external business conditions change continually. We never think of tactics as occurring in the long term. COMPREHENSIVE COMMERCIAL PLANNING: THREE-DIMENSIONAL DEFINITION The term comprehensive commercial planning is used throughout this book to distinguish planning in the private (for-profit) sector from planning in the public sector.When business conditions change. consider Figure 2. and corporate planning have been used more frequently. This confusion over semantics often complicates discourse on planning topics. strategy must change.

and budgets to control the current use of resources. A single business. strategy to achieve the mission's goals. Those persons are mistaken. department plans must respond to corporate and business strategies that prescribe implementation by the various departments. At each level. Many people equate corporate planning to strategic planning and business planning to tactical planning or budgeting. they are the vehicles by which tactics are implemented and resources are employed to enact tactics. and a budget.3 Comprehensive Planning: Height versus Length . as Figure 2.2 demonstrates. Corporate and single business plans are prepared at all four levels of depth: the economic mission. strategy.2.Now consider Figure 2. by itself or within a corporation consisting of several businesses. Figure 2. we will consider the difficulties that arise when corporate and division missions conflict. rather.) Now consider Figure 2. tactics to accomplish strategy and achieve its objectives. tactics.3. (Later in this volume. So does a multi-business corporation. has a mission. which contrasts the depth of planning to the level (or height) in the organization's structure where planning takes place. Rather. which contrasts the plan's length to the organizational level at which it is prepared. plans' terms extend from the current to long terms—with one exception. We don't typically think of departments as preparing long-term plans. We don't usually think of departments as having missions and strategy.

(The reason for this switch is graphic convenience. Putting together a “structure” with all three floor plans results in the odd-shaped edifice depicted in Figure 2. That is because the scope of departments' plans is more restricted than the others'. Finally. Table 2. In fact. we will reverse the scale of organization levels: corporate plans will be on the lower. However. The following paragraphs explain these terms and stages in greater detail. as Part III of this volume demonstrates. Figure 2. As explained earlier. The result is an odd-looking structure. it's no wonder that methodologists have failed to find a generally accepted terminology for all the elements of commercial planning! This is why we prefer to use the term. and 2.3 all together in three dimensions: length.5 Departmental Planning: Length versus Depth THE THREE-STAGE PLANNING PROCESS Before proceeding further. With a semantic structure this complex. orderly implementation. ” as shown in Figures 2. and defining the work required for deliberate.5. it will be helpful to define some more terms. The two methodologies may be very different. depth. the process of comprehensive planning proceeds in three stages: assembling a foundation of evidence.1 summarizes the elements of each stage. Some people mistakenly equate corporate-level planning to the long term and many relegate business planning to the short term: each perception is wrong.5 and 2. ground floor and departmental plans will be on the top floor. let us put Figures 2. The corporate and business levels each have a “floor plan. .4. as Figures 2. one distinction must be made between comprehensive corporate planning (CCP) and comprehensive business planning (CBP).) The top floor—where department plans reside—is smaller than the floors where corporate and business plans reside. corporate and business planning usually should be done for the same terms. making essential decisions. 2. For graphic purposes.1-2.4 Corporate and Business Planning: Length versus Depth Here again there are some misperceptions. indeed. and height.6 disclose. Stage I.6.6.Figure 2. comprehensive planning rather than more common but imperfect substitutes.

regulation. Usually. resources. and an assessment of demand for the company's products or services in relevant markets. Also in this first phase. The first element is an appraisal of competitive problems and opportunities in a firm's external environment. Stage II. None of these—economy. including its physical and intellectual resources in each internal function. and benefits.). including responsibility assignments. Assemble a Decision-Making Foundation INTERNAL: Diagnoses of firm competences. technology.) .1 The Comprehensive Planning Process: Three Stages. management conducts a critical analysis of the firm's capabilities. financial results. perpetural replanning. etc. Six Elements Stage I. industry. we are interested here in taking an inventory of competences and limitations that might influence the firm's competitive position favorably or unfavorably and management's ability to implement strategy effectively. structural characteristics of the company's industry (including the nature of competition. contingency planning. EXTERNAL: Diagnoses of problems and opportunities in the present and foreseeable economy. Only elements of the business under management's control and only those that are relevant to competitive success or failure are included in such an analysis. In essence. costs. and/or local economies. or market—is within management's control. but management still can understand their impacts on the firm's performance potential and prepare for foreseeable changes in them. schedules. industry. and weaknesses. and markets. (The second volume in this series will be devoted to the methodology of meeting evidential requirements in strategic planning. and long-term growth.Gathering Evidence: Forming a Foundation for Decision Making Stage I includes two elements. Orderly Implementation PROGRAMS OR PROJECTS: Statements of intended action to implement strategy. strengths and weaknesses. the scope of such an appraisal includes relevant aspects of global. market position. STRATEGY: Management's approach to achieving goals and rationale for selection from alternatives. CONTROLS: Monitoring and assessment of progress toward strategic objectives and programs' completion.6 Comprehensive Planning: Three-Dimensional View TABLE 2. Make Essential Planning Decisions GOALS: Predefined descriptions of success: level of risk. Stage III. Deliberate. competitive strengths. and forms conclusions regarding competitive Figure 2. national.

operations. These concepts are depicted graphically in Figure 2. (The third volume in this series is devoted to the methodology of strategic decision making. which are assigned to individual managers. management selects from alternative goals and strategies. a line of business. Goals are the intended end results of strategy.) The interdependence of goals and strategy is essential. generically. We call those activity clusters. the model depicted in Figure 2. or administration. Such definitions fall into four broad categories: level of risk. Goals are pre-defined descriptions of commercial success for an enterprise. Figure 2.7 Strategic Planning Nomenclature Stage III. The intended result of any individual activity or program is simply an objective.Stage II. Of course. competitive position. “functional strategies. ” “operating strategies. Strategy is divided into tasks of work. The ultimate goals or strategic objectives that might be stated in a five-year plan prepared at the beginning of one year can easily decompose into lesser objectives within subsequent years' plans. ” “product strategies. In addition.” We call the end objectives of those clusters strategic objectives. and long-term growth. the pursuit of objectives is monitored closely enough for departures from planned progress to be detected as early as possible and .7 is entirely hypothetical and describes the structural elements of a plan only at a particular point in time.7. as progress is made and new goals or strategic objectives later are cast over an ever-extending horizon. This work usually appears in clusters of interrelated activities. “marketing strategies. Strategy includes all of the work that management should perform to achieve goals. and the rationale for their selection. financial results. Strategy is management's general approach to accomplishing its goals—the scope of work required and a rationale for selecting the approach to be taken rather than alternatives. Such clusters of goal-oriented activities often derive their interrelationships from common association with vital functions of an enterprise—such as marketing. Making Decisions In Stage II. ” or. Implementation Stage III consists of devising and executing procedures to implement management's strategy in a deliberate and controlled manner.

the third has two separate elements. industry conditions. the responsibilities of individual organization members to supervise or conduct planned work should be defined. marketing region. as planned. But. progress should be assessed in terms of long-term value drivers such as quality.corrected when necessary. market participation. — Strategy: an approach to goals' achievement and a rationale for selecting the approach to be taken rather than alternatives • Implementation: — Programs and projects — Performance review/evaluation . especially if variances are unfavorable. even if variances are favorable. cost/benefit estimates are converted into more detailed budgets for at least the current year. Typically. a sound plan must contain the following three elements. Within the context of business planning. Such efforts may entail substituting a previously prepared strategy better suited to emerging business conditions than the prevailing but inappropriate strategy. adjustments may be needed even beyond the program or project under consideration. schedules of activities' accomplishment should be developed. In either case. Occasionally. it is important that the most significant causes and effects be monitored. The second element of implementation includes traditional progress reporting and assessment. which can trigger replanning efforts in time to take effective action. Ideally. they need not be. 2003). manufacturing category. The first element includes formulation of ongoing programs (with no specified endpoints) or projects (with specific endpoints). a Stage III function is to assess those conditions' trends and potentials. competitive position. Good progress assessment alsomonitors actual. outcomes of strategic action programs and projects. In this way. If progress departs from the intended schedule or results deviate from the budget. Although perpetual monitoring of external business conditions is a Stage I function. financial results. Preparing new strategies for possible alternative futures is commonly called “contingency planning” (Roney. controls should be focused on objectives rather than financial statement accounts. this important function will be discussed in a later chapter. Like the first two phases. because “ripple effects” of variances can occur. management continuously exerts influence on the outcome of planned activity. management responsibility. — Internal: assessments of critical capabilities—functional competences and competitive strengths and weaknesses • Planning decisions: — Goals: intended levels of financial and competitive risk. as well as their consistency or inconsistency. versus expected. CONTENTS OF A COMPREHENSIVE PLAN While many comprehensive business plans are elaborate and lengthy. To be complete. and strength of internal resources in comparison to competitors. and markets for its products or services. thereby maximizing the probability of objectives' achievement. and long-term growth. Adjustments in response to departures from planned progress may be required. action programs and projects give management an ability to guide the organization deliberately toward its strategic objectives. demonstrating that strategic objectives—and therefore goals—are infeasible. Defined in this manner. and the like. this means that progress should be tracked by sources of profit—lines of business. Whatever tracking device management may choose. however. Beyond the usual financial reporting measures. • Business conditions assessment: — External: analyses of trends in and forecasts of the firm's relevant economy. and cost/benefit estimates should be prepared when possible. discovery of significant variances should occur quickly enough to make adjustments while there is still time to influence the outcome. An entire strategy may have to be changed when program variances are severe. with the prevailing plan's assumptions. even goals must be amended simply because a vital project or program fails to proceed as expected. This control function provides an especially valuable early warning system.

approved. by corporate management as means of both reducing investment risk and maximizing potential returns. and business plans as effective vehicles for reducing risk. lending officers. if not strategic management functions themselves. Comprehensive planning (CP) is an integrative discipline by which all of the firm's resources are focused on achieving objectives. SUMMARY Comprehensive plans have three essential ingredients: evidence regarding internal and external business conditions upon which to pred-icate planning decisions. Boards of directors. with increasing frequency. • Business plans are prepared in bankruptcy cases' reorganization proceedings. planning documents should provide a model of the process. and demanded. and even formulated. finally. costs. • Business plans of divisions and subsidiaries and of jointly owned enterprises are employed.— Replanning methods and procedures All these items are results of the three-stage process described previously. a deliberate. This common practice attests to lenders' perception of business planning. . business plans help to clarify the relative feasibility of achieving financial goals by fulfilling obligations to creditors. Thus. The need for sound plans and skillful planners is pervasive and growing. COMMERCIAL PLANS' MANY USES The most common use of comprehensive business plans—and the one to which we will refer most in this volume—is as a decision-making guide regarding allocation of valuable resources in pursuit of strategic objectives during the conduct of intended managerial functions throughout a firm. general managers. it must be performed continually because environmental conditions change perpetually. Comprehensive business planning typically is viewed by all of those persons as one means of increasing a firm's performance potential while controlling its risk. and benefits as well as a procedure to monitor progress toward objectives and initiate replanning efforts when they are needed. orderly approach to implementing strategy through clearly described actions with assigned management responsibilities. and. to concentrate the organization's efforts on achieving objectives. individual business owners. chief executives. as the stockholders' agents. However. chief operating officers. and to choose rationally from alternative actions in implementing corporatelevel strategy through operating units. to focus managerial attention at all levels on corporate goals. schedules. An executive summary of the entire plan is nearly mandatory as well. by boards of directors. along with a rationale for selecting the approach to be taken rather than alternatives (strategy). who repeatedly are reminded of their governance duties to oversee corporate strategy. • Business plans are required by most banks and lending institutions before large investments in new and/or continuing enterprises are considered. • Corporate-level plans also are developed to facilitate the rational allocation of resources among operating business units. the number of uses—and users—of plans is larger than most observers might suppose: • Corporate plans are reviewed. As elements of reorganization plans and disclosure statements to creditors. including predefined descriptions of success (goals) and management's approach to achieving success. As CP also is adaptive to the firm's external environment. planning decisions themselves. and even bankruptcy judges must make decisions involving large amounts of capital in conditions of increasing commercial complexity and uncertainty. because most plans contain a detail that may distract executives from the plan's primary theme.

or research.090 Planning Predefining alternative strategies to replace a prevailing strategy if and when business conditions (internal or external) render the prevailing strategy less appropriate than a contingent strategy. and implementation elements. GENERALLY ACCEPTED PLANNING PRINCIPLES: PURPOSES AND POSSIBILITIES OF PLANNING . sales. including a firm's Comprehensive goals. A documented result of the CP process. Definition 2.020 Business Planning units within multi-business enterprises (MBE) or for (CBP) single-unit enterprises in their entirety. coordinated work required to pursue one or more goals. Definition Definition Definition An approach. supported by a rationale for selecting the approach to be taken.052 Objective The intended result of an instrumental activity. DEFINITIONS Definition A systematic procedure for selecting goals and strategies Comprehensive that predefine the future success of an enterprise and 2. Implementation A collection of interrelated instrumental activities with an Definition 2. Goals are the ultimate objectives of a firm's entire Corollary 2. such as production.010 Commercial Planning for making current decisions to implement strategies (CP) deliberately though predefined. Comprehensive CP principles and procedures for individual business 2. Implementation A collection of interrelated instrumental activities with no Definition 2.081 Project ultimate chronological objective. supported Definition 2. A collection of instrumental activities that share common Definition 2.A summary of definitions and generally accepted planning principles discussed in this chapter follows. that includes the directed.082 Program ultimate chronological objective. distribution.061 strategy.053 Functional Strategy association with a specified function of the enterprise.060 Strategic Objective The intended result of a functional strategy. Definition 2.030 Corporate Planning level of a multi-business enterprise (MBE).050 Strategy Contingency Definition 2. Instrumental A single task required to implement a portion of a Definition 2.040 Goal entire enterprise (MBE or single business). (CCP) A predefined description of commercial success for an 2. goal-oriented work. strategy.070 Commercial Plan by evidence from internal and external business conditions assessments.051 Activity strategy. Definition 2. Comprehensive CP principles and procedures applied at the corporate 2.

and long-term growth for a single business. and long-term growth of shareholders' equity in a portfolio of business investments. Eventually. Planning principles that are appropriate in government organizations (civilian or military) and governmentowned enterprises are not necessarily applicable in the private sector.” Classic concepts that evolved over many years perceive the planning process as essentially deductive in nature. and vice versa.042 Postulate 2. The CP process includes assembly of relevant decision-making information.03 Postulate 2. based on evidence. CBP (comprehensive business planning) goals include acceptable levels of risk.041 Corollary 2. CP principles are unique to the private sector.01 Comprehensive commercial planning (CP) increases the probability of a firm's survival by effectively matching internal resources and com Postulate 2. definitions of deliberate actions to implement strategies. Because CP is a rational process. and implementation actions. they consider evidence regarding internal resources and environmental conditions. conceptual notions of “planning” and “strategy.02 Postulate 2. approaches to reaching goals (strategy). all objectives are replaced by others. CP treats the firm as a whole entity in which individual functions are vitally interrelated—necessary but not. decisions are made to select goals. is to survive by supplying specific goods and/or services to a served market more competently than do other firms attempting to perform the same mission. sufficient elements of the firm or its plan. Next.Axioms The firm's mission. strategic objectives into simpler objectives.05 Over time. goals degenerate into strategic objectives. 3 The Classic Approach The Classic Approach It was acknowledged in the previous chapter that theorists have differed fundamentally in their most basic. There is no assurance of consistency between CCP and CBP goals. Based on the firm's mission and the evidence that is assembled. CCP (comprehensive corporate planning) goals include acceptable levels of risk. Axiom 2. and perpetual reiterations of this process.04 Corollary 2. market position. selection of intended success standards (goals) and approaches to goals' accomplishment (strategies). The evidence considered describes a firm's internal capabilities and resources as well as its external environment—in both the present and the likely future.03 Axiom 2. The CP process can occur at two levels: planning for single businesses (CBP) and for entire corporations (CCP) within which multiple business units exist. They begin with general premises regarding the firm's economic mission. by themselves. in free enterprise. strategic objectives. strategy. financial return. it employs objective evidence wherever that is possible. financial return.01 Axiom 2. An informal “contract” between the firm and society is renewable as long as the firm meets the contract's performance requirements. This perpetual degeneration and renewal of goals and objectives continues for the life of a firm. That is primarily the approach that readers will find in .04 Postulates Postulate 2. regarding standards of success (goals). and actions to implement strategy (projects and programs). The CP process is focused on making decisions.02 Axiom 2.

Strategy formation is an essentially inductive process for the incrementalist. If widely used texts on strategic management (e. The deterministic approach seeks a single. and alternative means of reconciling the two so as to accomplish a mission successfully. 2004) are a valid indication.. especially with respect to basic approaches that can be taken in strategic decision making. The pure incrementalist is more fatalistic. But. The classic model does not require that deductive assessments of internal capabilities and external problems or opportunities be painstaking. the classic process model of comprehensive planning will be described in greater detail and some illustrations of classical models will be surveyed. Through comprehensive planning. without necessarily having any notion about where or when the next opportunity (or problem) will arise. fundamental differences do exist. According to most incrementalists. and opportunistically—but neither deliberately nor necessarily rationally. it is possible for management to understand a firm's business conditions and to influence the outcome of competition and/or the search for value. Instead. deterministic model surely is more optimistic than the incremental model. 2003.e. one step at a time. Upon comparing the intrinsic philosophies of these two approaches to planning and strategy. regarding deterministic versus incremental approaches to selecting goals and strategy. taking fortune as it comes. 1999. In the second section. the classicist actually undertakes to create a favorable future scenario. Hill and Jones. willing to realize opportunities. The term strategy is used far differently by authors who espouse incremental theories than by those who follow deterministic models. the classical. 1985). based on a logical assessment of the evidence) and free from political influences than otherwise (Dean and Sharfman. insightfully. deductive model is still generally accepted. The debate between deterministic and incremental approaches to strategy formulation may have been stimulated initially by the work of Cyert and March (1956).this text. In this view. The classic model assumes that. 1981. external opportunities (or problems). 1996). “best” decision within the context of imperfectly known business conditions at any given time. Incrementalists argue that there really cannot be a“best” selection because business organizations are prohibitively complex and dynamic—and because political constraints complicate nearly every business planning decision of importance. 1977). while the classic model sees strategy selection as occurring within the planning process. the deterministic model is much more rational and deductive. after goals and/or strategic objectives have been defined. through deductive logic. goals and strategies typically are selected in a process of “logical incrementalism” (Quinn. Conversely. However. strategy usually is something that occurs intuitively—spontaneously. they argued for a concept of “acceptable profit. and some alternatives are discussed in the first section of this chapter. who argued that the traditional economic notion of firms pursuing goals of maximum profit usually does not accurately describe real-life behavior. taking account of internal capabilities. the classic. TWO VIEWS OF STRATEGIC DECISION MAKING A debate has existed within the planning literature. Miller. wherein objectives and strategies evolve over time as political and other opportunities to articulate them arise. success standards (“goals”) and approaches to pursuing them (“strategy”) are believed by the classicist more likely to represent a firm's highest performance potential when they are selected rationally (i. over the years. Thompson and Strickland.g.. Mintzberg (1994a) sees planning as occurring only after strategic decisions have been made. and firms surely differ in the thoroughness with which these tasks are performed.” According to more recent versions of this concept (Bourgeois. which otherwise never might have occurred. firms generate more or less “slack” in the form of retained earnings and other surplus resources—permitting managers to negotiate selections from affordable alternative allocations of resources within a .

Do Managers Have Strategic Autonomy? The level of autonomy that managers are permitted to exercise in selecting objectives and strategy undoubtedly influences the degree of determinism or incrementalism in their decision-making methods.1). when planning is “adaptive” according to Freidman. readers will find an abundance of critical concepts defined. including developmental versus adaptive planning modes. In the latter approach. but a firm's surplus (“slack”) resources afford some latitude within which objectives that are acceptable to all negotiators may be found.” Friedmann's paper is seminal reading for the planning professional who wishes to understand the nature of planning decisions as a cognitive construct. Adaptive planning is highly innovative. determinants of planning effectiveness. in this view.feasible solution space. This is probably true of longer range planning decisions as well. It is widely believed that concepts of slack and acceptable profit do provide an accurate description of managers' strategic decision-making behavior. for instance. Developmental planning responds less radically to shifts in the firm's environmental circumstances. bounded versus non-bounded rationality. These two modes are at opposite extremes on an hypothetical continuum of autonomy (greatest and least. and unlikely to be incremental. the nature of innovation in planning. In developmental planning. In budgeting. Friedmann (1967) argued that planning decisions are made in two principal modes. environmental determinants of planning decisions. a host of political and technical factors influence management's selection of operating objectives. In an early attempt to formalize a model of planning. which he called adaptive and developmental. rationality thereby is “bounded. and the mechanism of control in . respectively). But. allocation of resources to alternative uses (a basic function of strategy) employs functionally rational methods. The amount of a firm's slack determines management's latitude in selecting acceptable strategic objectives. In that paper. options are limited by the specific business conditions to which management responds. entirely new goals or strategic objectives may be discovered (see Figure 3. What is “optimal” for one negotiator may not be so for another. which rarely reflect optimal solutions on any single dimension.

it must occur mainly in the incremental mode (Figure 3.2 How Is Strategy Conceived? (A Hypothetical Rendering) Incrementalism Is Relative . Figure 3. Carter formed several conclusions regarding the sometimes-spontaneous natureof objectives and strategic decision making. spontaneous strategy making is most likely emitted outside of formal deliberation procedures. 1991). developmental mode where objectives are selected and problems are solved in a deliberate manner. which then elicits new search behavior. As experienced executives will confirm. as Burgelmann (1983) observed. Surely.1 Conceptual Model for the Analysis of Planning Behavior implementation. most planning—including strategy conception—occurs in formal procedures. most planning is done. However. That is simply the way corporations function from day to day. Thirty-five years after their publication. Figure 3. (Friedmann had dubbed such cognition “substantially rational thought.2 suggests. spontaneously—at different times in the same firm. strategy is conceived both developmentally—that is. Similarly. as Quinn (1978) acknowledged. Burgelman (1983) referred to this as “induced” strategy. Administrative Science Quarterly. As the hypothetical rendering in Figure 3. elaborating on the model of Cyert and March (1956). which serve as sign posts during implementation. proposed that strategy itself can stimulate “search” behavior. elicit spontaneous strategy as well. leading to new strategy. was correct (Grinyer et al. the result would be chaos..2). and most strategy is formed. adaptive. if strategy always were to erupt spontaneously throughout an enterprise. When strategy is formed developmentally. Later. some incremental approaches to planning and strategy conception make use of routines.”) Based on an analysis of decisions made in a growing high-technology firm. Kukalis. September 1967. Friedmann's conclusions regarding the structure and content of enterprise planning remain remarkably applicable. Carter (1971). Friedmann. in a deterministic. permitting adjustment of implementation efforts and replanning along the way.Source: J. at best. and so on. planning decisions are most likely to be made deterministically. Subsequent empirical research has demonstrated that Carter's prescription for responding to uncertainty and complexity through more comprehensive planning. thus. 1986. Indeed. But some developmental procedures do. as part of a formal process—and adaptively—that is. He hypothesized that greater uncertainty of business conditions should lead to formulation of more detailed objectives.

where possible. creating pockets of commitment. adopt the desired new goals. rather than the logical process by which goal selections occur. however. legitimizing new views. However. while strategy evolves. he argued. proceeding though “zones of indifference. b) articulated the concept of “logical incrementalism. Gradually. 1980a. Quinn observed that organizations tended to react incrementally (for instance. Burgelman (1983) provided a theoretical basis for further rationalizing the two basic views of strategy formulation (deterministic and incremental). and implementation. in the evolution of strategy. in order to avoid polarization of the management team for and against the proposed new goal. step-wise. He argued that management is unable to obtain adequate data with which to determine “optimal” goals. ” the emergence of champions to take charge of new strategies' implementation. and would. variances between expected and observed results elicit unending searches for resolutions that provide new goals. reviews and approvals. He studied the strategic decision making behaviors of managers in ten large corporations over several years. goals allegedly result from perpetual bargaining. Instead. Those strategies might not have been accepted until the organization proceeded. developing alternatives. the goal/strategy selection process proceeds both continuously and incrementally. taking initial steps. CEOs seemed to create favorable political climates within which organizations could. By proceeding gradually in articulating goals and politically promoting their acceptance. He defined a series of incremental stages through which the CEO acts as an architect of organizational goals. Quinn himself acknowledged that strategic decision making really is quite “rational”: the significance of his “logical incrementalism” concept is in the CEO's timing of implementation. Top management can influence autonomous strategy by . Both types can exist at once. But autonomous strategy usually is emitted in a bottom-up fashion. when developing new lines of small cars in response to a Mideast fuel crisis) rather than abruptly. Without any broader sample or statistical rigor. Mazzolini (1981) elaborated on the concept of strategic incrementalism. shaping it. or deciding (usually through political means) on the objectives ultimately to be adopted. The deterministic nature of strategy selection thus was affirmed. Rather. 1978. he concluded that “logical incrementalism” describes the way in which goals and strategy really are selected by successful chief executives. including need sensing. ” which formed a basis for subsequent debates on the nature of goal setting and strategy selection processes. Burgelman acknowledged that most strategic activity is induced (or elicited). he argued. but conflicts over goals' selection never are fully resolved. gaining political support. In Mazzolini's view. Mazzolini opined that strategic selections occur in five classically rational stages: decision-need identification. Thus. goals and strategies are formed and articulated by CEOs. Quinn observed that successful executives did not make their personal goals widely known until well after they were conceived. can be either elicited (“induced”) by strategy itself (to modify previous strategy) or emitted “autonomously” within the organization. A similar process exists. through CEO-guided stages of gathering information. and so on. Unlike Quinn. broadening political support. Induced strategy easily can be elicited in a top-down fashion. Quinn believed that these stages of goal setting and strategy selection occurred in all ten companies he observed. the goal's concept becomes crystallized by commitments to action. and continuing this process as new goals evolve. Even when major shifts occurred in business conditions. according to Quinn. in his view. and management team cohesion is maintained. obtaining organizational commitment. investigation of alternative actions.Quinn (1977. Management takes any or all of three roles in developing strategy: initiating the process. crystallizing focus. Strategic activity. building awareness. ultimately publishing a series of three papers to express how. Quinn believed that goals first are articulated in general rather than specific terms. senior executives seemed to follow deliberately incremental processes leading ultimately to adoption of their preferred strategies. Entrepreneurial activity within an organization (internal venturing) typically is emitted autonomously. search for alternatives.

nor even the best. comprehensiveness and formality of planning were directly related to financial performance. will be discussed later in this volume. Dean and Sharfman (1993a. strategic effectiveness was enhanced. new approaches to objectives and new goals will evolve—usually. But when Fredrickson (1984) then studied 38 other firms in a stable industry. elicited versus emitted—within a classical framework. if not directed. However. necessarily. 1979:53-79. The determinist argues simply that logical incrementalism well may define the autonomous cognitive processes by which goals and strategies evolve in their framers' minds. 1986) because—without goals and strategy —a firm lacks essential direction and functional cohesion. The point to be made here is that the planning manager's challenge is to develop an approach that fits the firm's specific needs and circumstances (Steiner. the classically rational model) characterized decision-making processes. some collection of business conditions—including internal capabilities and external problems or opportunities—is known by management. the potential degree of strategic autonomy can vary widely and may be cultivated. 1996) have developed a rigorous but pragmatic method for measuring both the effectiveness of strategic decisions (viz. Management always has an option to take the initiative and elicit change on its own terms. This approach has been called the “contingency” view of strategic planning by Hofer (1975). stemming from sources that are both endogenous and exogenous to the firm. Many other planning contingencies. these two views (deterministic and incremental) on the nature of strategy formulation and strategic decision making were largely untested by rigorous empirical investigation.framing its context and linking its products to existing strategic processes. For instance. rational versus political. Consequently. 1985). Hambrick and Lei. . Failure to make such basic decisions probably would be viewed by many as dereliction of top management's duty (Lauenstein. But “political” influences on strategic decision making impaired effectiveness. deterministic versus incremental. at any given moment. But. Of course. Other theorists have observed that appropriate planning methodology differs between stages of an industry's life cycle (Allio and Pennington 1979. over time. Contingencies The degree of formality or rationality with which planning should be pursued surely depends on a great many variables within the firm. Environmental munificence and quality of implementation were controlled statistically in this study. however. As time passes. 1993b. Rational versus Political Strategic Decision Making: An Empirical Test Until very recently. rather than waiting for uncontrolled events to occur before responding. both of those factors also were positively related to decisions' effectiveness. for the classi-cist. Fredrickson and Mitchell (1984) studied 27 firms in an unstable industry and found the level of comprehensiveness in analysis and planning procedures inversely related to financial performance. a decision can be made to select standards of success (goals) and the approach to be taken for attaining those standards (strategy) that reflect the firm's highest performance potential. At that point in time. but not the only way. Michael. as should be expected.e. logical incrementalism adequately describes one of the principal ways in which goals. A Conceptual Resolution It really is not difficult to rationalize these opposing views of strategy formulation—that is. actually diagnosing the method that is most appropriate for a given firm is more easily said than done. the extent to which objectives were realized after decisions were made) and impacts of rational versus political decision making methods on strategic effectiveness. Thus.. 1980). and objectives can evolve. In a study of 24 industrial firms. strategies. it was found that when “procedural rationality” (i. incrementally.

It demonstrated that planning procedures can be defined in . One of the first comprehensive process models was published by Gilmore and Brandenburg in 1962. environmental scanning. strategy is broken into its instrumental activities and an ongoing process of progress monitoring. This model and several variations are discussed in the following paragraphs. First.3 The General Planning Model Evolution of Process Models The power of comprehensive business planning partially stems from the way in which contributions of an entire organization may be focused and coordinated to accomplish the functional integration depicted in Figure 3.3. Figure 3. in practice. the classic and most generally accepted approach to business planning is deductive. Finally. That general process is summarized graphically in Figure 3. Their model is provided in an appendix at the end of this volume as a series of five diagrams (Exhibits A.3 suggests.1a-A. planning activities really are much more complicated than Figure 3. evidence describing the firm's internal capabilities and external business conditions is gathered.CLASSIC PLANNING MODELS As explained in the previous chapter. and perpetual replanning is pursued. Second. The remaining pages and several exhibits at the end of this chapter demonstrate how some noteworthy methodologists have prescribed the intricacies of classic planning processes. selections are made from alternative goals and strategies.1e).3. proceeding in three stages. However.

As complex as this model may seem. and divestments.4. separate plans should be prepared for each line of business while another. competitive strategy (Exhibit A. Smalter's placed the definition of goals and objectives after assessments of internal capabilities and the external environment—a much more informative arrangement. which. and opportunities. Nevertheless. he is widely credited with first defining the term strategic management (Ansoff. Corporate Strategy (1965). His sequence of six steps closely resembled current methodology. in one company. Like Gilmore and Brandenburg (1962). Gilmore and Brandenburg did provide a process model for planning a single business that remains valid today.3 of the Appendix. Contrary to Ansoff's (1965) model. resource assessment. how functional contributions throughout the firm can be blended into a procedural whole.1e. The degree of intricacy in formulating an economic mission (Exhibit A. appears in Exhibit A.” It is depicted in Exhibit A. Note that. in this model. as it deals only with planning for a single business. His model divided planning into three stages of “needs research. In that one respect. Smalter's article also is important because it explained how. remains valid and useful. acquisitions. external problems. Evolution of Decision Models . in many other respects.1b). it is portrayed in Figure 3. However. Grinyer (1971) provided a comprehensive review of the principal process models for comprehensive business planning that had been published prior to 1971. A composite of several schematic drawings that appeared in Ansoff's first text. ” “systems analysis. Grinyer emphasized the complex interrelationships of planning work products and dependencies of decisions at each stage of the process on those at other stages. which now is generally accepted. including acquisitions and even internationalization. Ansoff's (1965. more than three decades later. it actually is somewhat abbreviated. Ansoff pioneered strategic managementmethodology. thereby constraining the relevant scope of those assessments. A year after Gilmore and Brandenburg published their model. and performing reappraisal functions (Exhibit A. Hargreaves (1969) provided another systematic. Ansoff (1965) incorporated concepts of synergy. programs of action (Exhibit A.1d) are quite obvious. In his own version. Note. “Needs research” entailed gathering evidence regarding internal capabilities. Ansoff's original model is no longer generally accepted. “Programming” included developing and scheduling action programs. 1968) elaborate models also extended the scope of strategic management and planning into diversification. 1963). particularly in Exhibit A. deductive approach to planning. Corporate-level and lineoperating functions also were separated in that model. Managers who seek guidelines for developing a new plan of business for a multidivision corporation would do well to consider Smalter's approach. long-range and short-range planning are integrated. and competitive advantage in his models. Stanford Research Institute published a similar model (Stewart and Doscher. In Smalter's model. comprehensive plan is prepared at the corporate level. which did recognize diversifications.1c). which he used as a planning officer. ” and “programming. indeed. This model thus neglects the common procedure of integrating more than one business in a more complex corporate structure. Planning for structural changes such as acquisitions and divestments is omitted. Smalter's three phases correspond to the three phases of the general model depicted in Figure 3. The pragmatism of Smalter's approach to developing projects for implementation also is impressive. “Systems analysis” entailed selecting goals and strategy from alternatives. Smalter (1969) provided an especially pragmatic procedural model.1. 1972).1a).sufficient detail to provide guidelines for planning throughout a firm.2 of the Appendix. Hargreavers' article is recommended reading because it defines each element quite neatly. objectives were defined before assessments of internal capabilities and the external environment were performed.

Exhibit A. “Corporate Planning: A Chairman's Guide. His approach recognized the complex nature of decision making when diversification. it demonstrates that medium-range and short-range plans are interconnected by successive refinements from a “master” long-range plan to implementation elements.” Second. is perhaps the most succinct and complete of several versions that he published. Steiner's model is important for several Source: Reprinted from Long Range Planning. 1971. It also includes a search for strategic . pervasive feedback. 1. b. Figure 3. Thus. No. ” p.Steiner (1969a. Ansoff (1965. and divestments are included in the strategy-making process. taken from Steiner's text (1979:17). it acknowledges that planning is a procedure requiring its own administrative “plan-to-plan. Perhaps the latest refinement of classic decision models was provided by Grinyer (1971). short-range plans may be amended in response to feedback from implementation. His text (1979) also provided several diagrammatic representations of how planning procedures unfold at levels of top corporate management and line operations. Hargreaves. D. 3. they look very much like a computer programmer's flow charts. Steiner's model is a heuristic one. 1972a. Similarly. Steiner's models are essentially rational and define several management decision-making steps in the planning process. and the like. b. 1979) published several articles and textbooks that chronicled his extensive contributions to the development of comprehensive planning methodology and recognition of managerial planning as a profession. and themselves may be amended as a consequence of feedback from those programs' results. 1988) offered the most systematic approach of the early methodologists. it acknowledges the interests of outside stake holders—a factor not included in prior models. it indicates that information flows between individual elements of the model provide for continuous. diversification. Finally. “Master strategies” stimulate programs to be implemented over shorter terms. Copyright © 1969. Third.4. in the Appendix. Similarly. 34. roles of the corporate planning department and division planning staffs are portrayed in Steiner's diagrammatic models. acquisitions. First. Indeed. with permission from Elsevier Science. Grinyer's model is interesting because it portrays the previously described information gathering and processing steps. Vol. in both planning for business units' operations and corporate level planning for expansion. Ansoff's texts are full of detailed diagrams that define strategic decision making.4 Corporate Planning Process Model reasons.

and market changes accelerated. those models called for the assimilation of information that. as well. as the pace of economic. M. the classic models often were abandoned and/or their procedures were pared so dramatically as to render them ineffective. it became increasingly difficult to meet classic models' evidential requirements because keeping plans current required burdensome administrative and technical efforts. Planning procedures supported by the highest levels of staff resources also characterized firms with relatively high earnings and rates of return on investment. J. Rhyne's (1985) study of information usage in planning led him to a similar conclusion. Argenti (1969) had articulated this concept as the difference between objectives and a “baseline” or “momentum” forecast of financial results. This concept is illustrated in Figure 3. They collected data from a sample of 93 companies. the strategic objective). industry. Copyright © 1969. which is excerpted from Kami (1969).resources and comparing the firm's current financial potential to objectives in order to identify “planning gaps. Later. (1986) did demonstrate that such research is possible. No. However. could become quite massive and administratively burdensome. in large corporations. 46. Even then. These findings subsequently were confirmed by the extensive studies of Capon et al.e. Figure 3.5 Incremental Improvement Concept The Importance of Strategic Adaptation Since Gilmore and Brandenburg (1962) published their model. which examined performance differences between firms that emphasized externally adaptive versus internally integrative planning methods (among several other procedural variables). 4. “Gap Analysis: Key to Super Growth. So. Feasibility of the “Classic” Model In the 1950s and 1960s.5. . Kami. but those amendments' impacts on corporate plans' feasibility (and new alternatives) had to be evaluated. By contrasting a baseline projection with goals or objectives. Vol. He found that systematic acquisition and usage of evidence enhanced effectiveness of the strategic planning process.. 1996). planning procedures that placed the greatest emphasis on evaluating and responding to external business conditions (“adaptive” approaches) characterized companies with the highest profitability and market shares. economic and market conditions were not as volatile as they became in the early 1980s and international competition was not as intense. with permission from Elsevier Science.” Earlier. Source: Reprinted from Long Range Planning. 1. methodological differences in comprehensive planning models have been enormous. b. however. Not only were continuous amendments to each operating business plan required. Similar findings were obtained most recently by Dean and Sharfman (1993a. management is able to calculate the amount of incremental improvement to be demanded of strategy (i. In those firms. Equally impressive is the general lack of empirical research addressed to the relative merits of alternative planning system designs. when the classic planning models and methods initially were developed. The physical burden of all this information processing very frequently rendered classic procedures impractical. Ramanujam et al. (1988). ” p.

it became apparent that advances in information technology eventually would enable. 1975). Hence. Consequently. As Mintzberg (1994b) has observed. and the extent to which strategy first will be determined in a more formalized way at the top.g.” Most firms' planning approaches will be found somewhere between these two extremes. data storage technology. and determinism in each firm is likely to fluctuate over time with its external conditions and internal capabilities. In the 1970s. It is easy. the firm will be like a ship without a rudder—without a stated . The chief executive must choose a firm's essential approach to planning. b. the evolution of much more dynamic. data communications. and risk-laden world economy (Naylor. to keep a plan up to date and replan as necessary. b. and impractical. in those cases. those same requirements are neither too burdensome nor impractical. and market conditions. Indeed. now is technically feasible. the degree of autonomy. industry. As Burgelman (1983) pointed out. There is no correct answer here. now. 1976a. as Quinn (1980b) observed (contrary to his own thesis in 1977). combinations of relatively high or low levels of induced and autonomous planning activities exist in all firms. 1977. But most companies lacked such capabilities andclassic procedures fell into some disrepute—not because they lacked fundamental logic. This new technology is discussed at greater length in the next chapter. at the same time. In the 1960s. dynamic business planning. Different combinations of emphasiswill be appropriate depending upon the firm's unique circumstances. formality. analytic quality. excessive planning formality can impede strategic effectiveness. and Fredrickson and Mitchell (1984) demonstrated. On the other hand. The “hard copy” is available at any appropriate location for consideration by top management. market shifts can be monitored electronically. Indeed. it was nearly impossible to monitor and perpetually update all of the variables that might be included in a comprehensive plan of business—including economic. the whole plan can be stored in a computer and updated perpetually. 1977b).In a few companies. Naylor. the combination selected surely influences management's style of strategy formation. adaptive planning methodologies. the classic models today are no longer impractical. if not compel. electronic planning technology did permit planning procedures to be much more adaptive and integrative than they could have been when the classic business planning models first were formulated. following the classic model. thanks to personal computers. CONCLUSION Comprehensive business planning may proceed both deterministically and incrementally. and a wide variety of electronic planning aids—all of which may be characterized as “Strategic Planning Technology” (Roney. by the early 1990s. Today. consistent with the faster pace of change in a more complex. Gershefski. and comprehensiveness. Roney. Moreover. A chief executive must choose the relative degree to which autonomous strategy formation from within the organization will be encouraged. there is no time for “logical incrementalism. If strategy evolves completely autonomously. on short notice. turbulent. 2002). Present planning methodology is characterized by perpetual replanning. Information processing that previously had to be done by a dozen people today can be accomplished by only one or two—with far greater accuracy.. burdensome. and communicated to line managers with modest administrative effort. An action program can be updated by a manager at one location and the revised version received almost instantly at corporate headquarters thousands of miles away. 1969a. large mainframe computers did support on-line “decision systems” and dynamic planning methods (e. analyzed at headquarters. Now. expeditious planning procedures occasionally are compelled by a need for immediate decisions and actions. In the same fashion. as well as operating conditions throughout the firm—or to monitor more than a few action programs' progress. even in small firms. and there no longer is a valid reason to reject the classic planning model on the basis of its information processing requirements. but because their information processing requirements were administratively slow. all of the classic models' inputs and planning products can be assembled and kept current with relative ease and at great speed.

Integrative planning methods are primarily resource based.2 firm's business conditions indefinitely. and implementing strategy. making planning decisions. they are more concerned with Definition 3. intellectual productivity will be stifled. plans also must change continually. if strategy is too strictly constrained by top management edicts.01 internal capabilities.02. CP is a deterministic discipline.3 an evolving ex . Any plan that is implemented long enough without change surely will lead to misfortune. and market conditions. However. No plan can be left unchanged for long and remain valid.02 invulnerable to environmental uncertainty that they invest the firm with sustained competitive advantage in multiple environments.01 positioning the firm advantageously to exploit opportunities and minimize problems in foreseeable economic. Therefore. inimitable.1 resources and selects actions that it believes will maximize the likelihood of desired future outcomes. To be effective. and it may follow an outdated strategy for so long that it suffers serious misfortune. and Definition 3. Because business conditions within and outside the firm evolve continually. While they do not deny the efficacy of resource-based methods. lacking a clear course.purpose. and then implements strategic decisions by developing new capabilities and deploying resources.02. changing business conditions. Deterministic or incremental? Elicited or emitted? Rational or political? From this decision. With modern. They seek to develop capabilities and other resources that are so valuable. before choosing from the procedural planning principles to be found in subsequent chapters of this volume. No plan will remain appropriate for a Corollary 3. the chief executive and the planning manager should consider their fundamental options and decide exactly what the firm's basic approach to strategic planning will be. and carried wherever the economic current takes it. are useful to the planning manager in organizing the work and intellectual contributions to be drawn from all levels of the management organization in developing inputs to planning.02 a favorable balance between the firm's internal capabilities and its environment. all of a firm's other planning methods will flow. comprehensive business planning must be a continuous process. industry. this requirement is no longer prohibitive. such as those depicted in the Appendix. CP is therefore a continuous process of rational decisions to form and implement new strategy. Because it responds to analytic evidence about problems and opportunities in Corollary 3. let alone exploit. Management selects from alternative uses of Corollary 3. however. electronic planning aids. CP is essentially a rational process in which management attempts to achieve Postulate 3. Postulates The CP process is both integrative and adaptive: it draws analytic evidence from the enterprise and its external environment about the adequacy of Postulate 3. Process and decision models. The firm then may be unable to detect.02. GENERALLY ACCEPTED PLANNING PRINCIPLES: PRINCIPLES OF CLASSIC PLANNING MODELS Definitions Adaptive planning methods are environmentally focused.

Such selections of new goals and strategies to replace their prevailing counterparts should be made rationally. opportunities and threats in the economy. it has been difficult to implement. intuitive. and markets). This chapter traces a fifty-year process in which information technology (IT) has facilitated the work of comprehensive planning so that. economic. industry. Hypothesis 3.03 size. and market conditions.3. Although the classic model appears to be procedurally straightforward.Strategy induces “search” behavior as managers take action to implement strategy. today. the classic model is fully feasible and much more practical—no longer impaired by informational impediments. and/or incremental approaches. HISTORICAL PERSPECTIVE .. and they were very systematic. The classic planning model. industry. It also describes the scope of IT aids now available to facilitate each stage of the strategic planning process and reflects on implications for the state of the strategic planning art.e. uniqueness. Steiner (1969) coined the term comprehensive planning. entirely new concepts of goals and strategy may be Postulate 3.. After considering evidence regarding internal capabilities (viz. the CP process will differ between firms based on their intrinsic resources' Hypothesis 3. Argenti (1969) and Ackoff (1970) were essentially syllogistic. managers make selections from alternative goals (success standards) and strategy (the approach to pursuing goals' attainment and a rationale for its selection). is procedurally straightforward. Thus.. deterministic approaches to strategy are more effective in improving Hypothesis 3. They also perceived the nature of strategic planning to be both integrative and adaptive. In that process. Hypotheses Strategic planning processes that are the most adaptive will be found in firms that are commercially more successful than other firms. Strategy then is broken into activities instrumental in achieving intermediate performance objectives. on the other hand. Rational.03 discovered.02 performance potential than are political. on one hand. rational selections could be made from alternative success standards and approaches to attaining them. making decisions collaboratively and keeping plans current. portrayed by Figure 3. slack. because of administrative burdens and delays incurred in gathering evidence. taking into account a broad range of evidence regarding internal capabilities and the external environment in order to make fully informed decisions about the goals and strategy to be selected from alternatives. resources' strengths and weaknesses) and the external environment (viz. i. To fulfill its missions of minimizing risk and maximizing performance potential. Steiner (1969). and. after a clarification of alternatives has occurred.01 4 Neoclassical Methodology Neoclassical Methodology The architects of classic strategic planning methodology conceived it as an essentially rational discipline for making present policy decisions based on their implications for future performance potential. The early strategic planning models of pioneers such as Ansoff (1965). and replanning steps are taken as needed. and permanence. Following that discipline. perpetual progress review and evaluation procedures are implemented.

Computer models such as the IBM 1401 gained widespread acceptance among larger corporations. . production planning and materials management. As that figure demonstrates. the evolution of electronic computers passed through five generations. In that generation. fifth generation. research.1 Condensed History of Planning Technology and commercial use of computer systems. when computing systems first were developed. Yet. In a reversal of that trend. developmental generation occurred during 1943-1956. the result was a drastic downsizing and cost reduction in computing systems. information technology has had a fundamental impact on planning methodology at virtually all stages in the process. the fourth generation of computing equipment (19751985) was characterized by integrated circuits and semiconductors. Other mass-produced systems such as the IBM 650 and IBM 1620 models were used more often for scientific applications. Less widely appreciated is the impact of IT on managers' abilities to perform the work of comprehensive planning. computer systems are becoming linked to other computer systems and storage devices in networks that share vast amounts of data and function.The rapid evolution of information technology is a constant source of amazement to professional managers. and eventually personal computers were introduced. and forecasting. System/360. especially those who were present in the 1960s and 1970s when electronic computing machines first began to make major differences in how corporations manage their enterprises. almost as if they were parts of a single organism. Scientific and business software languages (primarily FORTRAN and COBOL) also were introduced during this second generation. Figure 4. In the current. Information technology radically has changed nearly all financial management functions. engineering and other technical management functions. The architectures of internal devices for storing data and executing programmed instructions were unique to each new system. Examples included the IBM models 7090.1 provides a graphic summary of the information technology evolution that occurred after World War II. The first. each new computer's design was fundamentally different from others' designs. as mini. and System/370. Those transformations often have been acknowledged for their fundamental impacts on managerial methodology. a second generation of computing systems had begun. By 1956. The third generation of computing systems (1964-1974) was characterized by larger computers and the ability of computing machines to perform multiple processing tasks simultaneously. Evolution of Information Technology Figure 4. market analysis. micro. and the management of complex administrative systems. The following paragraphs trace development of critical information technologies that contributed to the emergence of a new “strategic planning technology” (SPT) in the early 1990s. designers developed architectures for the mass production Source: Roney 2002. in this generation. 7094.

most companies lacked the ability and/or willingness to commit the necessary resources. the Internet became available for commercial use only in 1991 (Abbate. modems. and timesharing also have been available for a quarter century. He went to Lockheed Aircraft Corporation in 1956 and became vice president for planning and programs. programming languages first enabled business and engineering computingsystems to be used by non-technicians. These flow charts probably reflected the authors' relationships with technologyoriented enterprises and major corporations that recently had gained access to large-scale computers. as well as those of other early methodologists such as Gilmore and Brandenburg (1962). Lotus 1-2-3 became available in 1983. he was vice president and general manager of the Industrial Technology Division at the Lockheed Electronics Company. Thus. Even with the benefit of mainframe computers. Hargreaves (1969). the European Institute for Advanced Studies in Management. mainframe computers were used in the 1960s and 1970s successfully to support integrated decision support systems and strategic planning models (Gershefski 1969a. respectively. Naylor. In the 1950s and 1960s. Ansoff was a pioneer in developing classic strategic-planning methodology. The more advanced Microsoft Excel was announced in 1987. As Figure 4. because firms simply could not afford them. and still is. Subsequently. The Internet greatly facilitated data communications and. 1988). (See Armstrong. he went to Vanderbilt. In a few large corporations.1 also demonstrates. The application of large-scale computer systems to economic forecasting and mathematical processing was facilitated in 1977 by Oracle's development of its database management system. Later. Miller and Cardinal. DBMS. 1999). 1994. for instance. Dr. many large corporations—and most smaller ones—were unable to follow the classic syllogistic model of strategic planning and keep up with the rapidly changing pace of business. degree in applied mathematics from Brown University in 1948. But. While he was at RAND and Lockheed. was not introduced commercially until 1985. the first spreadsheet software system. the Stockholm School of Economics.) The classic models were largely abandoned—not because . even though evidence was. and a version of Excel with several enhanced features was announced in 1992. After receiving his Ph. storage of large data files and multimedia records. thereby. and Steiner (1969b). it is not surprising that flow charts are used abundantly as illustrations of strategic planning processes throughout his writings (Ansoff. This was Igor Ansoff's background.S. executives judged formal planning to be more costly than the benefits it was thought to provide. became commercially available. rapid development. b. Ansoff joined RAND Corporation. it already could be out of date! Classic procedures also often were rejected. 1987. 1991. 1975). Ansoff's academic career began at Carnegie Mellon. VisiCalc. Boyd. Early Systems Models of Strategic Planning The classic strategic planning methodologists often included elaborate flow charts in their publications. International University (Hussey. ever-larger data storage and communication devices appeared continually during the past fifty years. Ansoff must have been impressed by the arrival. using devices such as compact discs. In this light. While large-scale random access devices had been available for many years. 1982.D. and U.Paralleling the evolution of computing hardware. Smalter (1969). Huff and Reger. COBOL and BASIC were introduced in 1959 and 1964. 1999). By the time a strategic plan was completed. and potential planning benefits of computer systems that were being installed in those institutions at the time. providing several features designed largely for business planning applications. In 1963. FORTRAN was developed in 1957 to facilitate the use of computers by engineers. collaborative approaches to strategic planning. In 1979. Roney. programming languages and system software evolved to facilitate the use of computers' information processing capabilities. primarily for use in business applications. 2001. accumulating to demonstrate that planners tended to have better financial results than non-planners. Although widearea communication networks.

But available technology limitations prohibited most companies from easily exchanging plans. four technical barriers prohibited managers from applying IT to the systematic procedures that had been prescribed by classic strategic planning methodology in the 1960s and 1970s. materials requirements planning. albeit to a lesser extent). P/L-1 and RPG). 1969b. Restrictive programming requirements. Emergence of Strategic Planning Technology Business planning models first became available in the late 1960s and were in common use by the mid-1970s (Gershefski. personal computers. 1976b). considerable technical training was required to writeapplication programs that could be compiled on mainframe computers. still had to be retrieved. Inconvenient data storage and access.g. perpetual basis— making their planning managers dependent on off-line data transmission devices such as facsimile machines. These four impediments to comprehensive commercial planning imposed by prior IT generations typically prohibited management from clarifying a complete range of strategic alternatives. (Similar shortcomings existed in data storage and retrieval technology that could be applied to internal operating functions such as process control. and replanning as often as necessary. and even the postal service. analyzed. which essentially prohibited planning managers from conducting the simulation experiments (“what-if analyses”) and strategic analyses of internal and external environments performed so spontaneously and heuristically today. industry. Data retrieval and transmission impediments. However. Planning managers (like others) were dependent on data processing departments and data processing specialists to process their information in batches. Although programming languages were growing more flexible and user-friendly (e. courier services. but because their information processing requirements rendered them impractical and unaffordable.. Impediments to Realizing the Benefits of Classic Planning Notwithstanding the impressive gains of information technology (IT) in the second half of the twentieth century. and production planning. and market forecasts.they were conceptually wrong. and synthesized before they could be employed in strategic planning applications such as computations of economic. which made them dependent on computer programmers for access to the benefits of electronic computing and the benefits of electronic planning aids. While programming languages such as BASIC and FORTRAN subsequently could be compiled on some small computers and. those early models were narrowly focused on the firm's financial statements. Essential sources of data. implementing strategy effectively. Naylor. More specifically. Large econometric models also were developed for environmental forecasting applications in the . projects. planning managers typically were not trained in the use of programming languages. later. Diversified organizations could use telephone lines and slow modems to transmit some information between computers at remote locations (if they could bear the costs). often voluminous in nature. the information technology impediments that planning managers had to overcome primarily were as follows: Physical separation of planners from information processing resources. and progress reports on a flexible. and they were not very flexible.

Without large-scale data storage and transmission devices.mid-1970s. in the early generations of planning software. perpetual approach to decision making. Oracle's database management system. By 1987. DBMS. With commercial inauguration of the Internet and the World Wide Web in 1991. the IBM PC in 1981. Thus. with the introduction of remote computer timesharing around 1970. simply employed accounting codes and computing machines to develop pro forma financial statements. planning managers could do some simulation and calculate objectives using complex mathematical algorithms andprogramming languages such as SIMSCRIPT or GPSS. All of these data classes have grown exponentially with the continued progress of computing technology. distributed computing. finally became technologically feasible. Information technology began to support exploration and clarification of alternatives when computers with user interfaces. however. the classic model of strategic planning. and the desktop PC with graphical user interface (GUI) in 1984 (the earliest version of which first appeared in 1975). These advances began to make computing resources more readily available to practicing managers rather than solely to data processing professionals. and marketing conditions reside. Storage technology has been hard pressed to keep up with the demand. Computer-assisted budgeting systems. But it wasn't until the introduction of high-density CD-ROM discs in 1984. environmental assessment and forecasting systems could not be utilized by the majority of planning professionals or effectively integrated into their firms' strategic planning procedures. Lotus 1-2-3 was announced in 1983. and they propelled the planning art toward its current state. managers still needed access to large quantities of data where vital planning resources resided. and virtual storage all became available even to smaller businesses. thereby relieving users from custodial burdens of large-scale data storage at the local level. and analyses of variances that characterize the state of the art today. Even after the arrival of personal computers. They also could assemble detailed budgets. however. and the first Internet browser with a graphical user interface was released in 1993. VisiCalc was announced in 1979 (before the personal computer). and storage area networks very recently that small and mediumsized businesses could gain access. flexible I/O channels. All of those developments made it possible toexploit the full potential of computer hardware and data storage devices that were being developed at the same time. and high processing speeds became available to the majority of companies. the first Internet browser was announced in 1991. Not only did computers require large-capacity data storage devices for internal processing. but even larger storage devices were required to hold growing amounts of data describing trends in both the external environment and firms' internal operations. as a rational. high-speed modems had provided the technology for wide area data communication networks to be operated on a restricted basis between designated network terminals. But top management did not have either the software or collaborative technology with which to explore a full range of strategic options before setting financial objectives. This concept change occurred gradually. was announced in 1977. wide area networking. Random access storage devices were commercially available as early as 1956. cartridge drives in 1994. A final brick in the foundation of strategic planning technology was modern data communication. Software developments typically paralleled developments in hardware and data storage. perpetual assessment of progress. Microsoft Excel was announced in 1987. A sort of “critical mass” was . to large-scale data resources where vital sources of information about the economy. In the 1960s and 1970s. In the early 1990s. on an affordable basis. high-density flexible disks in 1989. industries. Strategically significant data residing in one location now can be retrieved on demand for immediate processing at another location. rather than to just a few very large ones. That kind of “planning” fell far short of the comprehensive evaluation of alternatives.

2). Source: Roney 2002. in the next section of this chapter.reached when all four of the necessary pieces—computers. Molloy and Schwenk. Stamen. It was the combination of all four evolutionary developments that enabled comprehensive strategic planning technology (SPT) to emerge (Figure 4. software. tangible results for practitioners have been abundant. 1995. Assessment of the external business environment. The following paragraphs summarize these results in functional terms. internal operating functions. The Promise Delivered: Benefits of Strategic Planning Technology The emergence of electronic strategic planning aids has gone largely (but not entirely) unnoticed in the literature of strategic management (Holloway and Pearce. and data communication systems—fell into place. Nevertheless.2 Strategic Planning Technology: Sources Several types of electronic planning aids will be described later. 1990). alternative scenarios of outcomes from a broad range of strategic decisions can be explored and selections can be made therefrom. and market data now can be retrieved from numerous remote locations and used as inputs to analytic systems or forecasting models that provide much more timely assessments of trends in business conditions than were possible in the past. Based on those relationships. and specific markets. Each was necessary. individual industries. relatively inexpensive personal computers now do the work previously done by very large computers and staff organizations within the means of only wealthy corporations and governments. and communication systems enable users in remote locations to retrieve and exchange data so easily that collaboration about potential changes in business conditions and performance potentials can occur continually. Comprehensive analysis. Small. Low-cost data storage devices permit planners to gather large quantities of diagnostic information. and performance measures. industry. Forecasting software has enabled economists to form models of entire economies. Variances between actual versus expected environmental phenomena and . data storage devices. Figure 4. Large-scale databases and statistical software have enabled analysts to discover a wide range of co-relationships between a multitude of variables in the firm's external and internal environments. Large files of demographic. economic. but none was sufficient by itself for the complex work of classic strategic planning to become practically feasible. Affordable personal computing. PC-based software products with a remarkable array of sophisticated features enable planning managers to assess trends and potential changes in the external environment. 1982.

Until the advent of modern electronic planning aids. By finally enabling classic methods to be implemented effectively. 1988. Reimann. exploiting a host of electronic planning aids. have enabled diversified corporations with multiple divisions —even those operating in several countries—to gather plans and progress reports from remote locations and to consolidate them as they are received. Operating units throughout large corporations can share information with each other and their corporate headquarters in minutes rather than days or weeks. 1988. These tasks are now accomplished in hours or even minutes. 1991). The models of shareholder value mentioned earlier aid managers in allocating corporate resources to business elements where returns are likely to be highest. Today. including the Internet and the World Wide Web. Similarly. however. and achieve cohesive. Conclusion Perhaps without realizing how far Strategic Planning Technology has progressed. industry. classic planning methods can and do keep up with changes in the environment very well. data storage. . because they can be kept continuously current. Ansoff (1965). planning managers today have rediscovered the feasibility and power of classical strategic planning models. Reimann. nevertheless. 1989. weeks would be required to accomplish similar results. that surely is the case. and as marketing results are realized. Then. No longer must planning managers wait for days or weeks until such materials arrive through the mail—and even longer for corporate-level consolidations of division data to be completed. the same data communication devices enable managers throughout a corporation to resolve uncertainties. Stewart. Thus. More effective strategy implementation. 1988). projects to implement strategies are formulated. Business alliances of multiple corporations regularly are formed to share data between suppliers. response. effective implementation. at levels of accuracy and comprehension far below those which now can be achieved. 1990. Bidgoli and Attaran. 1998). evaluated. firms routinely employ modern. or markets where a firm competes. information technology renewed the promise of classic strategic planning models first proposed by pioneers such as Ackoff (1964. coordinate their planning decisions. Plans can then be modified heuristically. Today. Tyson. Rapid feedback. and adaptability. As business conditions change in the economy. they too can be communicated from many locations to executive managers at corporate and individual business locations (Huseman and Miles. Stamen. 1981). That neoclassicism represents strategic planning's state of the art hasn't been generally acknowledged. a valid criticism of classic strategic planning methodology was its untimeliness: planning procedures simply could not keep up with the fast pace of turbulent business environments.) They also have enabled planners to formulate models of economic value added to firms by managers' strategic decisions (Rappaport. 1977b. it is no longer true that plans must be outdated as soon as they are completed. 1986. These large databases and elegant analytic software finally have enabled managers to bring the full scope of relevant evidence to bear on planning decisions. and monitored with the aid of electronic data communication systems. that criticism no longer is valid. 1982. and end-users through a multitude of electronic data interchanges all along the value chain. distributors. dynamic versions of the classic strategic planning model. It has been long understood that strategic planning must be a perpetual process in which each step of the planning model is subject to reiteration at any time (Roney. Wide area telecommunication networks. With the aid of data transmission technology. and Steiner (1969a).the firm's performance can than be monitored and assessed. Before such information technology aids were available. Better re-planning. (See Ashmore. 1989a. and spreadsheet systems were combined into modern project management and control systems. Strategy now can berealized with greater reliability than could have been attained before data communication. Holloway and Pearce.

government. lists of nearly every manufacturing facility in every state. Inc. using CSFs as benchmarks. the new determinant of a firm's strategic planning capability is not how much computing machinery it can afford but. free of charge. such as construction. Such drivers will be found in all three domains of the business environment: economy. For example. Value Line. the ingenuity and proficiency of those who employ SPT applications. and forest products. The scope of electronic planning aids now used to facilitate strategic planning may be divided into ten types. methodologists such as Hamel and Prahalad (1994) have underscored the need for strategists to anticipate changes in critical success factors (CSFs) of their industries as well as the likely critical success factors of future industries. strategic management methodologists have understood the importance of identifying industries' “critical success factors” as focal points for environmental assessment (Leidecker and Bruno. and geographic densities of populations throughout the world. Once such factors are identified. Moreover. with the increasing prominence of “resourcebased” theories of competitive advantage. Data from other sources have been compiled into portable compact discs. including employment and a variety of other characteristics. Similarly. now can be purchased relatively inexpensively from Manufacturer's News. These large databases now can be retrieved across the Internet with ease. demographic databases include age. Manufacturer's News data are only on compact discs. For a comprehensive explanation of how these domains are assessed in strategic planning procedures. 1987). Most of these electronic planning aids are relatively inexpensive. electronic planning aids can be very helpful in evaluating a firm's competitive standing in its industry. steel. industry.CURRENT SCOPE OF STRATEGIC PLANNING TECHNOLOGY Strategic planning technology (SPT) applications now are available to managers in nearly all enterprises. numerous privately owned databases are offered commercially. Inc. by the U. regardless of their size. income. Many databases containing economic and demographic variables are provided. Well-known vendors of economic and industry data include Standard & Poor's. In addition. or Dun and Bradstreet Corporation. . Databases Business planners often need to assess trends in environmental drivers of commercial problems and opportunities. CSFs may be unique to each industry and often must be identified through applications of theory or empirical research. 1984. Large files of data describing trends in each of those domains are available. and DRI-WEFA.S. D&B data also are available online. and market. They are listed in approximately the same sequence in which they first would be invoked within a classic planning procedure. 1999). consumer products firms can obtain compact discs containing complete demographic data for any metropolitan area in the United States from organizations such as NPA Data. Quasi-public agencies including not-for-profit industry associations also maintain large collections of data describing most industries—especially those that are relatively mature. Thus. The following paragraphs describe and illustrate each type of SPT application. rather. For example.. these can beused to assess individual companies as well as entire industries and markets. chemicals. readers may consult the author's text on that subject (Roney. Benchmarking and Competitive Intelligence Systems For several years.

These comparisons may be made on the basis of operating characteristics such as employee productivity. 1995. SPI no longer updates the PIMS data base which. Demographic projection devices are perhaps the most readily available of all forecasting systems—and the most reliable. Financial reporting services such as Standard & Poor's and Value Line can be used for such benchmarking applications. planning is forward looking. PIMS users also can receive “par” reports that compare them to strategically similar firms in the same industries. necessarily. Thus. government.. Census Bureau even maintains demographic trend and forecast data for several foreign countries. An incredibly wide variety of forecasting systems now exists. more than twenty-five strategic drivers of performance are included among the independent variables evaluated by PIMS linear regression models. Crock et al. Many of these are maintained by the U. operated by the Strategic Planning Institute (SPI). operating practices. 1988. 1996. since the database includes non-marketing variables describing asset intensity. Competitive intelligence systems are. (See Jones. these are the most common.) The Society of Competitive Intelligence Professionals (SCIP) (Alexandria. forecasts of population in metropolitan areas also can be measured and prepared with reasonable confidence. product quality. By definition.S. a new category of systems has begun to emerge for purposes of gathering competitive intelligence. and it therefore is difficult to evaluate the state of their evolution. and vertical integration. Uses of forecasting systems and procedures in strategic planning have been described by the author in a separate text (Roney. PIMS is somewhat of a misnomer. Fortunately.2%) formal planning techniques and that practitioners are relatively satisfied with their results. In fact. or unit costs.000. is becoming less relevant to current business conditions as time passes. One large database that contains long-term financial performance and operating characteristics of more than 3. therefore. it is generally recognized that competitive intelligence systems now provide significant inputs to strategic planning decisions of many large corporations.) In recent years. 1999). forecasting methods and procedures are among the most basic in any planning manager's repertoire. 1996. R&D expenditures. Rigby's (2001) recent survey of 214 North American firms concluded that benchmarking procedures are among the most widely used (76. Comparisons also may be made on the basis of financial performance measures. Fuld. About half cost less than $500. Ettorre. manufacturing capacity utilization. (Regrettably. Virginia) has been formed to promote the development of this growing profession.S. secretive. relative quality. However. and accessible at little or no cost to the user.000 business units is PIMS (Profit Impact of Marketing Strategy). Statistical descriptions of many nations' highway systems and various other . The U. Users of the PIMS database can identify potential impacts of changes in those driver variables on typical rates of return. of course. 1991. Somewhat less precisely. as well as marketing variables such as advertising expenditures. Kahaner. forecasting system developers have been prolific throughout the evolution of planning technology. Online databases can be used to obtain numerous other demographic trends and forecasts for specific purposes. their prices range from nothing to about $10. Market Analysis and Forecasting Systems By its nature. Such databases and statistical systems enable users to evaluate their firms' operating characteristics in comparison to competitors and/or other firms considered to be “best in class” regardless of industry. ten-year forecasts of persons presently aged ten years or older can be issued with almost perfect accuracy. because the people in those age categories already have been born (except immigrants and emigrants).Benchmarking systems enable the management of one firm to measure its performance against others'.

Many—like the BLS forecast—are even obtainable at little or no cost from public agencies. Such forecasts are particularly useful to suppliers of consumer products. The Bureau of Labor Statistics (BLS) publishes long-range demographic and econometric forecasts biannually. as well as a host of graphic aids that facilitate not only objective setting but assessment of a firm's progress in pursuit of its objectives. will have an impact on the overall economy. A particularly encouraging development in recent years has been the refinement of “inputoutput” models that achieve structural links between econometric models and individual industry supply chains. retail chains. provides a sort of planner's toolkit —including simultaneous solutions of equations in a simplex format. Electronic Spreadsheets Prior to the availability of electronic spreadsheets.S. it is noteworthy that spreadsheets' basic characteristics have been improved dramatically in successive generations. Econometric models are available from commercial economics firms. and private financial institutions. every other November. universities. maintains comprehensive demographic and economic information for that country. DRI-WEFA. banks. construction contractors.S. its provinces. and they. or banking. Environmental Systems Research Institute. a highly popular spreadsheet software system offered by Microsoft. economic consulting firms are more likely to update their tables regularly. transportation services. in total. Input-output (I/O) models enable analysts to assess such inter-industry dependencies and industry-specific relationships to general economic conditions. an agency of the Canadian government. The current version of Excel. A change in the outlook for an entire economy (perhaps due to a shift in fiscal policy or some international shock) will have differing impacts on industries such as steel. Conversely. sometimes in minutes. travel. For another example. and metropolitan markets. Economic forecasts even can be produced by planning managers themselves. Budget Maestro may be the most . excellent forecasts and analyses may be obtained across the Internet from financial institutions such as Wachovia Securities' Economics Group. Most planning professionals are quite familiar with electronic spreadsheets. Whereas the BEA updates its I/O tables very infrequently. commercial forecasting and marketing research services such as MapInfo Corporation. a change in domestic or international capacity to produce crude oil. But. Changing budgets or financial forecasts after they had been consolidated was frowned upon simply because so much work was involved. using commercially available forecasting software and the economic databases mentioned earlier. These systems perform all of the calculations required to budget and analyze the financial performance of individual firms and complex corporations.infrastructure characteristics also can be obtained using data maintained by the U. Econometric forecasting models are now widely available. Statistics Canada. defense. One of the earliest but most important enhancements in spreadsheet technology has been the ability to link or consolidate spreadsheets so that budgets or forecasts for several units can be combined. Input-output tables allow analysts to assess such interactions. and basic input-output tables can be obtained from the Commerce Department's Bureau of Economic Analysis (BEA). metropolitan areas. chemicals. computing systems have been developed to perform every conceivable financial analysis and forecasting function. and NPA Data Services also offer demographic forecasts for many countries and precisely defined U. Financial Analysis and Forecasting Systems Using the power of enhanced electronic spreadsheets. and other firms in any industry where marketing opportunities are location dependent. consolidations are accomplished with relative ease. In addition. Now. linear regression. or some other basic commodity will have differing ramifications in other industries. Central Intelligence Agency. and curve fitting. large numbers of accountants often were required just to consolidate business units' forecasts and budgets.

(Gensight). 1978). the lifecycle market position matrix (Robinson et al. their graphics functions are especially convenient. the spreadsheet software discussed earlier has enabled planning managers to satisfy most of their firms' specific financial planning requirements by building their own financial statement projection models. and its authors were assembling an enhanced version of that successful system as this manuscript was being drafted. Ltd. Financial models have been constructed for at least thirty years to emulate the firm's financial statements and project them according to the individual analyst's forecasting parameters regarding costs. Among such pre-programmed financial forecasting products are Ultimate Financial Forecaster. asset productivity. Cash Focus. In addition. mix of capitalization. comprehension. because these models tend to be used by stock market analysts. PIMS has been used as a strategic decision support system (DSS) because it enables managers to identify operating changes and investment decisions that may enhance financial performance. Systems such as Risk also enable the analyst to establish the realistic range of outcomes through Monte Carlo simulation techniques. presently. Graphing functions in Microsoft Excel are especially useful for portraying industry matrices and maps. Nevertheless. Many of the portfolio assessment capabilities offered by those two vendors actually can be replicated through the use of graphic features now available in spreadsheet systems. Recently.5. corporate executives can influence shareholders' equity values by employing the same models that stock analysts employ in their own planning. they often have the characteristics of self-fulfilling prophecies. (2000) employ discounted cash flows for measuring the present value of forecasted future earnings. Porter's (1980) industry mapping technique. as well as in monitoring a firm's progress in the pursuit of its objectives. working capital turnover. 1976. selling prices. Ltd. which subject them to serious criticisms of external validity. the PIMS system was discussed as a benchmarking device. They make critical assumptions regarding anticipated growth rates and post-projection valuation parameters. Strategic Decision Systems Earlier in this section. “gap” charts such as the one shown in Figure 3. Budget Express is a similar product. These systems. (Matrix) and Strategic Dynamics. such as Alcar for Windows. Since stock market analysts use these models to evaluate companies for purposes of equity valuation. financial analysis and forecasting systems have been developed to aid planners in assessing strategic alternatives' impacts on shareholder value. Several electronic graphic aids now are available to aid planners in communicating these strategic analysis concepts. Comprehensive DSSs. Strategic Focus. Graphic Aids Planning professionals' use of graphic devices to communicate complex strategic concepts has been prolific for about as long as modern strategic management literature has existed. Since the data to be graphed usually are immediately accessible from these spreadsheet systems' tables. 1977). Pro Forma for Professionals and Winforecast. have attracted increasing attention in recent years because they are believed to offer the promise of enhancing the speed. and the like.highly developed of these systems. for straightforward financial statement projections. although the latter is available only to that firm's clients. Holloway and . Finanseer. and innumerable other graphic devices that communicate concepts of competitive advantage and market positioning strategies. 1988. The best-known of such graphic devices are the growth-share matrix first used by the Boston Consulting Group (Hedley. including PIMS. the directional policy matrix (Hofer.. However. and quality of decision processes (Bidgoli and Attaran. 1977). Perhaps the most effective of these software devices are offered by British firms: Market Modeling. and the software included with a text by Copeland et al.

and graphic aids often provide managers with satisfactory toolkits for preparing plans' analytic contents. In the most recent study of its kind. 1986). Leonard-Barton. Some versions are intended to support venture financing proposals. Untrained managers and those with limited staffs who need to prepare business plans without professional assistance should find some of these devices to be very helpful. higher quality of evidence. and experience in DSS use. and PathMaker 3. while others are used in strategic planning for ongoing operations. analytic. Business Insight Crystal Ball. Project planning and management techniques. Managers not trained in strategic planning thus receive a sort of first course by using these systems to prepare initial drafts of their plans. Goslar. better decision-making processes should be followed by better decision outcomes. Over time. their leading questions and prompting sequences thus may be at least as valuable as their documentation elements. Orsini. Documentation Aids A rather unique form of business planning system has become available to small business managers in recent years. Their word-processing modules are usedto produce complete drafts of planning documents. Examples of such cognitive logic DSSs include AliahThink!. Molloy and Schwenk (1995) found that DSS effects did not include better performance. Stamen. 1989. or established strategic management theory. But.0. But. Aldag and Power (1986) found no improvement in students' abilities to solve business cases with DSS assistance. In so doing. art. 1988). In particular. a great deal of attention has been directed to translating the knowledge of experts. Best Choice. Expert Choice. Perhaps DSS techniques' most frequent application. has been the creation of project management systems that can be operated by non-engineers on personal computers. corporate and business planners gained powerful new tools to provide greater reliability in implementing strategic projects and programs. better decisionmaking processes were manifested by more rapid problem definition. training. 1990. with the advent of personal computing systems and software to operate project management systems. Orsini. 1986. consideration of more alternatives. 1988. some of these packages also serve as decision support systems. increasing attention also is being directed to the potential uses of non-quantitative DSS methods. Green and Hughes (1986) found that their sample of 72 marketing executives from 19 companies who received DSS training considered larger numbers of alternatives. Most important. they can gain facility through guided practice. has been to support selections of strategies aimed at maximizing shareholder value using discounted cash flow models (Reimann. in recent years. Nevertheless.Pearce. as mentioned earlier. ANSPLAN-A. into decision rules. shorter decision times. Alavi and Joachimsthaler (1992) subsequently found success rates to improve 20 percent to 30 percent with users' greater familiarity. . However. These “expert systems” or “knowledge-based systems” purport to enhance decision makers' logic in selecting from strategic alternatives. In essence. 1982. empirical evidence on DSS results so far has been somewhat mixed. recently taken by software developers to enhance the state of the planning. 1990). Leonard-Barton and Sviokla.. Project Management Systems A major step forward. initially were conceived even before large-scale computers were available—and certainly before personal computers were invented. Case histories of such systems have begun to appear in the strategy literature as well as in the marketplace (Ashmore. 1987. including PERT and CPM. Dennis et al. in a laboratory study. these systems include templates and guidelines for preparing and documenting complete business plans. However. However. their financial. and more comprehensive approaches.

the state of the planning art is characterized by perpetual replanning. it usually is easy to assemble. and evaluate business conditions and performance via the Internet. formal project management systems were designed to aid in scheduling the hours of work. distributed computing features so that team members throughout an enterprise can receive project managers' instructions. it was difficult to monitor the progress of more than a few implementation programs. Since it is generally recognized that implementation is often the weakest link in strategic planning methodology. which provides a procedural diagram of the planning process and notations indicating the types of information technology that are available to assist planning managers at each stage. it was nearly impossible to assemble and perpetually update all of the elements that should be included in a comprehensive business plan—including assessments of economic. manufacturing facilities. and replan as often as necessary. Project management systems that produce Gantt charts as well as critical path networks and PERT solutions now may be obtained for operation on personal computers at very low cost. In response. chemical plants. Many of these systems are compatible with the Internet so that progress in implementing the projects and programs prescribed by strategic plans now may be monitored practically on an ongoing basis. This fact is portrayed by Figure 4. review. goals. At the executive level. and strategies. which are vital for effective scheduling of operations.Initially. or refineries. strategic planning managers typically don't need the level of project management sophistication required to build rocket ships. and converse about problems. Likewise. 91). availability of resources. CONCLUSIONS In the 1960s. report progress. Summary The foregoing paragraphs demonstrate clearly that electronic data systems now are available to support strategic and business planning at each stage of the process. . industry. All of those industries commonly use project management systems. electric power plants. with modern information technology. and rationalize the evidence to support a comprehensive plan. jet aircraft. the construction of oil refineries. But.0 also offer Internet-based progress reporting capabilities. Primavera Enterprise and Milestones Professional. Progress Review and Evaluation Systems As mentioned earlier. it now is commonplace for remote business units and corporate headquarters to exchange data with which to report. ships. and even aircraft fleets. Illustrations include Microsoft Project. Projecting variances forward then discloses the likelihood of achieving objectives and/or targets for remedial action. Indeed. Simpler devices are preferable. practical project management systems represents a significant step toward enhanced feasibility of most firms' planning efforts. assess. Happily. and costs of very large projects—for instance. when classic strategic planning models first appeared. and market conditions. keep it up to date. many project management systems now provide remote. Spreadsheet systems into which such data are funneled generate graphic and tabular presentations of variances between actual and planned results. many PC-based project management systems are priced quite modestly. the advent of cost-effective. However. as well as operating capabilities.3 (p. Lotus Notes and PathMaker 3. several smaller project management systems that are more user-friendly and pragmatic have appeared.

Barriers that previously blocked planning managers from using electronic computing first hand were thus lifted. in turn. and electronic data communication—that facilitates both adaptive and integrative planning approaches even in very dynamic environments and complex firms. This capability emerged on a cost-effective basis during 1984-1989. electronic Definition 4. data storage. More specifically. after the classic strategic planning model was articulated and had become generally accepted in the 1960s. that also seems to be when SPT emerged. Because those four streams converged during 1991-1993.Personal computers. gave birth to a neo-classical generation of strategic planning methodology. specialized planning software. the evolution of strategic planning technology followed a path of four steps: First. Now. As a result. which currently represents the state of the art. The emergence of SPT. This “strategic planning technology” is a relatively new arrival. Eventually. Postulates . GENERALLY ACCEPTED PLANNING PRINCIPLES: PLANNING TECHNOLOGY Definition Strategic Planning Technology (SPT) is a combination of four information technologies—computing hardware. nearly as if they are all in the same place. Fourth. software emerged to facilitate each stage of the planning process. wide area networking systems emerged in the early 1990s. Managers gained increasing direct access to computers' processing abilities with commercial timesharing services in the 1970s. and modern data storage/retrieval devices now permit classic strategic planning models' inputs and work products to be assembled and updated as often as necessary. This step probably was taken during 1991-1993 with inauguration of the World Wide Web and the first Internet browser with a graphical user interface. composite IT resource that. when the IBM PC was introduced in 1981. The confluence of these four technology streams—computing hardware. in distributed systems. operations in multiple remote locations can be planned and managed simultaneously. “user friendly” software emerged to exploit impending advances in mainframe computers and personal computers during the 1970s and 1980s. SPT is the simultaneous application of information technology in all four of these categories to accomplish the work of strategic planning faster and more effectively than previously was possible. and data communication technology—provided a new. remote data communication. multiple users are able to share largescale data resources and participate collaboratively in solving strategic problems. data storage and retrieval devices capable of handling very large amounts of information and retrieving specified elements of information immediately upon demand enabled managers to describe relationships between the external environment and firms' operations so that integrative and adaptive planning models could be constructed and plans' progress of the plans could be monitored more confidently in both external and internal environments. a wide range of planning software. evolved in the late 1960s. Third. operating systems that could perform multiple tasks. software. respectively. having emerged in the early 1990s from a confluence of the four IT development streams discussed in this chapter. enabled strategic planning Technology (SPT) to emerge.01 data storage. Second. and simultaneously support multiple users. in turn. and when the independent personal computer with a GUI was introduced commercially in 1984.

3 The Availability of Electronic Data Systems to Support Strategic and Business Planning .01 enabled the classic CP process model to be implemented more efficiently and more effectively than when modern CP models first were articulated in the 1960s. These benefits removed many evidential impediments to CP. That no longer is true.03 Ten categories of electronic planning aids are available: Databases Benchmarking systems Market analysis/forecasting systems Financial analysis/forecasting systems General purpose spreadsheets Graphic planning aids Decision support systems Documentation systems Project management systems Progress review/evaluation systems Hypothesis In a given industry. (4) transmission and immediate retrieval of planning data. Strategic planning technology has Postulate 4. using models and data processing. Postulate 4. Figure 4.01 greater effectiveness (attainment of objectives) in CP functions than other firms. (2) the planner can frame difficult questions and obtain immediate Postulate 4. Source: Roney 2002. information processing requirements of CP process models were prohibitive. (3) convenient storage and access to large volumes of data. Benefits of SPT include: (1) the planner has direct access to computing resources.02 answers. firms that employ information technology to perform planning functions will exhibit more persistence (lower termination rate) and Hypothesis 4.Until the 1990s.

The chapter concludes with a discussion of the commercial planning profession and a summary of planning executives' required qualifications. Thus. management style. an overview of planning roles at several levels will provide a perspective from which to appreciate managers' interrelationships in the planning process. including scheduling planning activities. In this chapter. Finally. integrated fashion. the authority to approve plans often resides at an even higher level—the board of directors. CP procedures define how individual managers and business units must contribute to making and implementing strategic decisions in a coordinated. Chapter 5 begins with a review of the responsibilities and authorities for preparing and approving plans of business. organizing. and resistance to planning. 5 Authorities and Responsibilities for Planning Comprehensive planning (CP). Each chapter deals with a different aspect of the planning manager's job.” In other. requires that each element of a business organization and each manager's contribution be integrated rationally into the whole enterprise. roles of the professional planner and possible roles of outside professionals are considered. a “contingency approach” to planning methodology is recommended. Should this always be the case? In some industries. and several behavioral issues—including methods for arriving at participation and consensus. It is self-evident that boards of directors and chief . many elements of this responsibility can be delegated to professional planning managers. including mid-management. APPROVAL AUTHORITY Comprehensive business planning is a top management function that reflects decision making at the highest level of an enterprise. how to select the planning horizon and forecast period. keeping the plan current. and integrating long-range with near-term planning functions. However. this chapter examines several administrative issues. performance can be impaired if plans' approval must await a board review. Chapter 6 delves more deeply into the administrative functions of planning. However. the answer is “yes. and controlling the firm's business. Ultimately. it is the chief executive's responsibility to assure that planning functions are performed satisfactorily. After a brief review of general planning procedures. The adoption of comprehensive planning methods has encouraged more participative approaches to directing. adjusting planning functions as the firm evolves. how to determine the frequency of progress reviews. this chapter examines how planning procedures can be tailored to manage commercial risks. Chapter 7 addresses several procedural contingencies that can arise to complicate the planning manager's life. more than any other management discipline. This chapter also delves into the responsibilities for planning at operating levels. and they usually are. corporate culture.Part II Management of Planning Functions Management of Planning Functions The next three chapters address several administrative and procedural matters with which planning managers must deal. faster-paced industries. how to adjust procedures in response to differences in organization size and structure. Beginning with procedures for initiating the planning function. The chapter concludes with guidelines for keeping the planning process practical and avoiding some wellknown pitfalls.

Capon et al. but that approval authority usually rests with the board. in large firms. but operating executives are the ultimate deciders. if not in their actual preparation. Planning executives also were highly influential at the corporate level. Chief executives. Planning executives also were quite influential. Indeed.executives should be intimately involved in reviewing and approving plans of business. it is generally accepted that the firm's mission. chief executives. However. They were identified by planning executives in 29 percent of these firms.1 Responsibilities for Identifying versus Approving Objectives Incidence (%) Board of directors Chief executive Planning executive Identify 42% 48% 29% Approve 81% 29% 0% even more so in firms with the most highly developed planning functions. This arrangement is consistent with the views of many practitioners who hold that the board must be involved in planning but that the plan..1 summarizes their results. in forming and conducting planning processes. versus 48 percent at the chief executive's level. Pinnell. and TABLE 5.e. 1981:114). some observers have concluded that boards actually should take a much more active role in developing goals and strategy (Aram and Cowen. Whether that level should be the board of directors or the firm's chief executive remains an open question. The roles of CEOs and line executives tended to be far more influential. were found to be the most influential in determining corporate-level planning procedures. goals. But senior line executives influenced missions and goals of operating units the most. Planning executives tend to be influential as architects of the process. 1992. Table 5. Judge and Zeithaml. Objectives were approved by the directors in more than 80 percent of these firms. corporate goals may be formulated either by line management in proposals to the CEO or by the CEO in a proposal to the board. 1986). quite appropriately. must be a creature of top management (Drucker. (Percentages don't total to 100 percent because objectives of a single firm could be identified at more than one level). Corporate objectives were “identified” (i. respectively. in their extensive study of 113 large industrial corporations during 1980. 2001). These results demonstrated that. . 1986. (1987:81-85). and the planning function. These findings demonstrated the different roles of planning managers and operating executives. and strategy must be authorized at a high level of management (Pearce and Zahra 1991. found that boards of directors typically exerted relatively low levels of influence on planning procedures. formulated) at the board level in 42 percent of these companies. But the most appropriate roles of directors. and their planning staffs have not been very well defined through empirical research or even theoretical writings. Stiles. Directors' versus Chief Executives' Roles Ang and Chua (1979) surveyed the planning practices in 119 Fortune 500 companies and separated responsibilities for “identifying” versus “approving” objectives. whereas chief executives had approval authority in less than 30 percent of the sampled firms. Chief executives also exerted relatively strong influence on the planning processes of firms with the most highly developed planning functions.

. An executive committee of Top Management (probably under the CEO's direction) approved plans in 34 (11%) of these firms. 52 25 82 28 7 1 195 Pct.With respect to plans' content. 1987:83).. was invested with approval authority. CEOs in more than 60 percent of the firms studied by Capon et al. the most highly developed strategic planners' approaches were more delegative than others'. in 56 percent of these firms. 27% 13 42 14 4 1 100% before committing to projects potentially involving hundreds of millions of dollars. However.2). line management at both corporate and division levels also would want the board's backing (and plans' approval) before making very large capital commitments and taking commensurate risks with shareholders' equity. rather than the board. and either the Board or an Executive Committee. Division plans were approved most frequently by the chief executive (42%) and by either the CEO or COO. During the recession of 1990-1991. Perhaps the high risk surrounding capital projects in these asset-intensive firms compelled their boards to assure maximum control and minimum risk (through plans' approval) TABLE 5. Among those firms with the most highly developed planning functions. rather than the chief executive or the chief operating officer. but they selected corporate strategy in less than 30 percent of those firms. Our firm also has investigated the roles of chief executives and their boards in strategic planning as part of a broader inquiry into the impacts of planning practices on performance (Roney. Chief executives. but to a much lesser extent (Capon et al. 2001). Presumably. performance was much better during the 1983-1990 “boom. in the troubled machinery industry (plagued by increasing competition from imports). 59% 11 28 2 — 1 100% No. Companies with the most highly developed strategic planning functions reported much lower levels of goal setting (33%) and strategy selection (15%) by their CEOs. However. chairmen and vice chairmen were significantly more influential in determining the contents of corporate plans than in other firms. boards of directors often influenced fundamental planning decisions. approved division plans in 40 percent of them. financial performance was best. Board approvals of division plans were most frequent in the basic metals and chemical industries. the chairpersons of those firms played more significant roles in determining plans' final contents. 189 34 90 6 — 3 322 Division Plan Pct. The Board of Directors retained authority to approve division plans in only 27 percent of these corporations. (1987:81-85) set corporate goals. Thus. rather than a single officer. ” when the chief executive. in the basic metals industry. and executive committees also were influential. chief operating officers. Thus. and the CEO or COO alone did not necessarily make final planning decisions in many of those cases (Table 5.2 Levels of Plan Approval Authority Corporate Plan Board of directors Executive committee Chief executive officer Chief operating officer Group executive No approval Total No. when plans were approved by the board (or an executive committee). Our study's scope included planning practices by corporate and division management of 324 companies in ten industries during 1994-1995. Corporate plans were approved most often by the board (59%) and only half as frequently (28%) by the chief executive. even at the division level.

Norburn and Schurz (1984). only 27 percent (Table 5. regardless of whether the plan is for a single division or the entire corporation. after they have been adopted. 13 percent. Directors either review and approve plans before plans are adopted or when they receive final drafts from chief executives. executive committees. Research regarding performance effects of roles in corporate planning has begun to emerge only recently. Our results. (This matched the 63 percent rate of participation in strategy by British firms' boards reported in 2001 by Stiles. very little theoretical or empirical work has been done to discover the most appropriate roles for directors in corporate planning. suggested that boards of directors should give CEOs the most strategic planning autonomy in fast-paced and/or turbulent markets. the former arrangement is preferable to most directors. especially when competition is intense. Typical. But CEOs. 2001. selection of long-term goals and corporate strategy. but perhaps not to management. and planning for top leadership succession. Pearce and Zahra (1991) studied 139 large corporations (69 manufacturers and 70 service providers). Judge and Zeithaml (1992) studied the relationships of board characteristics to firms' rates of return in three specific industries (hospitals. and boards. deciding to build new processing facilities or not to do so has such far-reaching consequences that the board's backing (and its approval of the plan) probably is essential.) Only 30 percent of those firms authorized their CEOs or COOs to approve corporate plans. Remarkably. perhaps. biotechnology. 2001). concluded that boards should take an active role in establishing goals and high-level strategies.3 Approval of Plans by Individuals and Groups at Corporate and Division Levels (%) Individual N Group Exec 324 NA 198 4 Group COO 0 14 Corporate Division Source: Roney. Clearly. making decisions about capital expenditures. CEO Total Exec Cmte 30 30 7 42 60 13 BOD Total 63 70 27 40 . to illustrate how shareholder value can be pursued with greater assurance when directors are involved in selecting goals and strategies with senior management. In the study conducted by our firm that was mentioned earlier (Roney.Thus.3). The Directors' Role As boards of directors are being held to ever-higher standards of accountability with respect to their governance function and accountability to shareholders. is the detailed report of three case histories written by Aram and Cowen (1988). group executives. directors are taking a keener interest in corporate and business plans. Taking the trouble to seek board approval for a quick change in strategy simply does not seem practical in such circumstances. But in asset-intensive industries. Pinnell (1986) also took this position quite specifically by providing directors with several guidelines for their participation at each stage in the planning process. and textiles) and one general category. and COOs individually approved divisions' plans in 60 percent of the sample. in recapitulating the writings of others on this subject. finding that firms had superior earnings per share when their boards participated most in policy formation. finding in all TABLE 5. in general. future acquisitions and divestments. investing authority to approve plans in the board or the CEO can influence performance differentially depending on the industry in question. we found that nearly two-thirds (63%) of 324 companies in ten industries required corporate plans to be approved by their boards of directors.

and vigilance over progress in order to initiate replanning as necessary. and making pivotal decisions. however. and fewer insiders on the board. While Pennington's observations certainly answer the frequent objection of chief executives with regard to excessive time requirements imposed on them by strategic planning. The results indicated that director approvals in asset-intensive industries were associated with the best financial results. corporate director. defining issues. In a classic paper. The effective planning manager should help the CEO to stay in control of the planning function. Unfortunately. Thereby. but with a much more definite purpose than Quinn (1977) probably intended to convey. This is another illustration of the “contingency” approach to planning methodology that was discussed in a previous chapter. He concluded that successful chief executives consider themselves as resources in their planning functions and as architects of the decision-making environment where strategic planning takes place. lower levels of diversification. Planning should require much more time from those responsible for formulating and implementing strategy in line operations. including personal acquisition of strategic planning skills. and actually using the plan to make . should facilitate planning functions at several levels in such a way that the chief executive's intensive involvement is not required. The planning executive. at the same time. board approval seemed to enhance growth and profitability. reviewing progress. Instead. selection of goals or objectives.cases that board involvement in strategic decisions was positively related to financial performance. assignment of management responsibilities for planning functions. 2001). improving strategic decisions' quality. a good planning procedure actually will relieve the chief executive of time burdens in strategic deliberations while. He suggested that the cliché. That is still good advice. Involvement also was highest in larger firms. that rarely is the case. acquiring vital new planning skills is a critical but often overlooked necessity. was directly related to smaller board sizes. assuring the top management team's ability to implement the plan. ” is misleading. they often avoid over-specificity in defining strategy so that flexibility is maintained. Thus. In our research. as a management consultant. That was not true in less asset-intensive and service industries. it nevertheless is true that responsibility for a sound planning function still rests squarely with the chief executive. the CEO's appropriate role in planning has been the subject of extensive deliberation. and educator. There is no other place in the organization for that accountability to rest. effective CEOs become involved in relatively few strategic programs at a time. selecting those wherein they will have the greatest impact. they encourage comprehensive strategic planning while preserving pragmatism in implementation. However. Board involvement. Edward Wrapp (1967) chronicled his observations of effective CEOs' planning policies as a management consultant. Mace (1965) cautioned that there are at least three duties which the CEO cannot delegate: selection of missions. Rather. assurance of planning staff persons' competence. “planning will not be effective unless the chief executive is involved. he proposed that planning succeeds when it consumes relatively little of the CEO's time. The CEO ultimately is accountable for assuring the quality of planning functions. Since chief executives do not typically rise to their positions through planning. financial results of companies which do and do not require board approval of corporate and/or division plans were compared (Roney. Malcolm Pennington (1972) also observed CEO involvement in strategic planning functions. But the CEO should be involved only at key points of initiating the planning function. as a technician and an administrator. in turn. Role of the Chief Executive For many years. Therefore. CEOs often practice successive approximation in articulating goals. a chief executive must be well informed about generally accepted planning principles. Roney (1977a) suggested the addition of a few more planning obligations to the CEO's list. In such cases.

empirical investigations into effects of alternative CEO roles in the CCP process are much scarcer. Shen (2000a. Pennington (1972).1 Pitfalls in Comprehensive Long-Range Planning: The Ten Most Important Pitfalls to Be Avoided as Ranked by Respondents (N=159) Rank 1 2 3 4 5 6 7 8 9 10 Source: Steiner 1972a. Failure to assume the necessary involvement in the planning process of a major line personnel. by Wrapp (1957). Steiner's classic study (1972) of “pitfalls” in corporate planning demonstrated that over-delegation of planning responsibilities by the CEO was the most likely reason for a planning function to fail (Exhibit 5. for example. changes in firms' top management can be shown statistically to account for significant portions of variance in their results. chief operating officer. Top management's consistently rejecting the formal planning mechanism by making intuitive decisions which conflict with the formal plans. Indeed. Pennington (1972) earlier had made a similar argument that many of these conditions are necessary to avoid the planning function's failure. Failure of top management to review with departmental and divisional heads the long-range plans which they have developed. Planning roles of the chief executive. was accompanied by lower financial performance. such a prescription even appeared in the writings of Fayol (1916:50. and line officers who oversee divisions or subsidiaries also have been the subject of surprisingly limited inquiry.1). More recently. and Taylor (1988). versus insiders. and restrains creativity. Assuming that corporate comprehensive planning is something separate from the entire management process. Mace (1965).operating decisions. Eastlack and McDonald (1970). Failure to create a climate in the company which is congenial and not resistant to planning. This is a glaring void in the planning profession's body of methodological knowledge. Intuitively. b) demonstrated that CEO succession by insiders can influence both a firm's performance and subsequent turnover as well as postsuccession cohesion of top management team members. Lieberson and O'Connor (1972) demonstrated that EXHIBIT 5. However. Failure to develop company goals suitable as a basis for formulating long-range plans. Succession by outsiders. looseness. (1987) also demonstrated that “high performance” companies tend to have CEOs who participate more in the planning process than others. Roney (1977a). Top management becomes so engrossed in current problems that it spends insufficient time on long-range planning. and the process becomes discredited among other managers and staff. and simplicity. Injecting so much formality into the system that it lacks flexibility. largely due to higher postDescription Top management's assumption that it can delegate the planning function to a planner. it seems reasonable that alternative CEO roles in planning should have major impacts on the financial results of a firm. 53) more than eighty-five years ago. . because the planning function is uniquely within the chief executive's span of authority and responsibility. Ramanujam et al. Failure to use plans as standards for measuring managerial performance. Several practical discussions of this subject have been authored.

as Figure 5. Lauenstein argued that top management must accept its responsibility to formulate an integrated structure of corporate goals and strategy. had authority to give final approval to plans. domination of planning functions by CEOs disenfranchises other officers from their vital roles. Grinyer and Norburn (1975) found an inverse relationship between performance and consensus on objectives. However. change. that their consensus on strategy is likely to enhance financial performance. CEOs must resist the temptation to get too involved in the details. The result can be a hardening of operating management positions during proposals' formative stages as they work their way up through the approval process. it is difficult to provide categorical guidelines for planning roles of senior executives.1 demonstrates. Hall (1983) also found a . top management's approval often becomes nearly obligatory. (1987) demonstrated that even senior management team members' influence on the corporate plan's contents drops dramatically at stations below the COO. in Lauenstein's view. or even influence proposals that have gained political force after going through several reviews and approvals before reaching the top level. The implication here is that planning functions work best. After all. in several manufacturing industries other than those with heavy capital investments in fixed assets. Sidestepping its responsibility to make essential corporate planning decisions well may amount to dereliction of duty by top management. but the relationship was positive when there was consensus on strategy. when they serve as devices to manifest the CEO's management style and as aids to directing operations. the CEO's management style. We found that. other than the chief executive and the planning executive. At that point. it will be demonstrated in a subsequent chapter that participation of management team members in planning is likely to facilitate strategy implementation. In the same research mentioned earlier (Roney. however. and that some discord on goals and objectives probably facilitates a broader examination of alternatives and. Lauenstein (1986) criticized American executives for dereliction in the 1980s. our firm also addressed impacts of the CEO on planning-performance relationships more directly.succession turnover of other officers. Pennington argued. Only thereafter should plans to implement top-level strategy be formulated in detail by operating management. in some industries. who else should have final authority and responsibility for basic corporate direction? Role of Top Corporate Management Team Members Roles of top management team members in comprehensive planning will vary in response to the firm's size and structure. Thus. 5) argued very convincingly that the CEO should not spend so much time in planning that the planning process is suspended when other duties distract the CEO from planning. performance was best when the chief executive. Capon et al. Pennington (1972:4. To the contrary. It then becomes very difficult for corporate management to reject. Hrebiniak and Snow (1982) found a positive relationship between consensus on strengths and weaknesses and firm performance. but the CEO's leadership role in planning never can be relinquished. Notwithstanding the beneficial effects of managerial collaboration and consensus. enhances performance as well. He argued that strategic planning in the United States was often mismanaged by top corporate management who over-delegated vital planning functions to subordinates. Instead. Bourgeois (1980a) also found a negative relationship between consensus on goals and performance. In a compelling discussion. 2001). results improved. and so on. he proposed that excellent strategic planning really cannot be conducted as a “bottom-up” procedure even though it frequently is done in that manner. With extended CEO tenure and restabilization of the management team. therefore. This does not necessarily imply that the CEO must spend inordinate time in planning functions. rather than the board. the industry's culture. Moreover.

1994. Thus. Indeed. Vancil (1976) proposed that strategy should become something personal—formulated by managers at all levels. Vancil probably would answer that. while the planning discipline is essential for good management throughout an organization. Thus. Through a process of successive generalization. Schilit (1987) surveyed 60 middle managers' involvement in planning.1 Executives' Influence on Planning Decisions lower-level planning products with substantial impacts realistically should flow up to the next higher level. only a small portion of Source: Adapted from Capon et al. Miller and Monge. Then. Middle managers' involvement in planning was more prevalent during implementation phases than in the actual formulation of strategy. and departmental. Rice and Julian. this is another of those hypothetical questions that remain to be resolved empirically. In Vancil's view. Several studies by experimental psychologists also have found that participation in setting objectives does not enhance actual performance (Latham. Figure 5. 1986. However. the detail of implementation information can remain manageable. It was concluded that these managers' “upward influence” on strategic decisions was most prevalent when decisions entailed relatively low levels of risk and/or return. Erez and Locke. This view often is challenged by practitioners who observe that keeping track of such a complex informational structure is procedurally cumbersome. 1988. Results have not been entirely satisfying. 1986). participation may enhance commercial success further. at best. Researchers have inquired frequently as to whether or not participation of middle and lowerlevel management in planning really is effective. 1987. 1987). 1987. Several metaanalyses have confirmed this generalization (Wagner. . 1986. Wagner and Gooding. it may be an effect. corporate. division. Schweiger and Lena. Vanderslice. each manager must have some strategic responsibilities. Thus. A reasonable argument can be made that greater participation of mid-level managers occurs only after the firm's competitive position and/or financial condition create sufficient slack resources to afford participative management. Leifer and McGannon. then.positive relationship between consensus on strategy and performance. consensus on strategy—but not goals—seems to enhance performance. mid-level managers' involvement was much less prominent. Participation of Middle Management Regardless of whether the firm is centralized or decentralized. Deeper organizational participation simply may tend to occur when the firm can afford it. complex organizations actually may have hundreds of “strategic” programs. greater participation of line managers in planning can't be said necessarily to be the cause of firms' greater commercial success. When decisions carried higher risks and/or returns.

Over time. and Richardson (1984) reported that the planner's role was evolving into one of giving closer support to the CEO and focusing more on competitive market analysis (substantive functions). planning seemed to have a greater impact on operating results. Each of the six resulting combination situations requires one or more sets of planning skills provided by “traditional” staff (budgeting. The planning professional is both an administrator and a technical expert in planning methodology. stay withinprescribed boundaries. A top-down procedure tended to be preferred. planners' work was focused on the process. “technical” specialists in planning. during 1984-1986. Ramanujam et al. these authors concur that planning professionals should not be the primary decision makers who select from alternative goals or strategies.Roles of the Professional Planner There is abundant literature regarding the professional planner's role in conducting and/or supporting planning functions. providing assistance in making decisions and administering progress assessment functions (Steiner. goals were more specific. Burnett et al. while the latter may be suited to single-business planning. charged with assuring that technical functions of CBP and CCP processes are conducted effectively. Leontiades proposed that the types of planners and planning skills a firm requires can be summarized as in Table 5. the CFO). when planning executives had staff reporting relationships. A survey report by Burnett. Lorange (1973) surveyed 60 large manufacturing businesses (sales at least $100 million) to ascertain differences in results attributable to planning executives' reporting relationships— that is. to top line management (e.g. Basic market analysis and forecasting functions were emphasized even more than sophisticated methodologies such as the use of PIMS models. and Mintzberg (1994c).. When planning executives had linereporting relationships. (1984).g. The former seems to be best suited to multi-division corporate planning.4. firms tend to move around within the six-cell matrix in shown in Table 5. capital projects evaluation. and focus more attention on plans' contents than the process.4. Leontiades (1989) provided management with a compelling argument (unsubstantiated empirically) that the type of planning staff resources that a company needs depends on business lines' diversity (single.. However. This generalization remains an unconfirmed hypothesis. ” respectively. 1970). In general. (Traditionalists and specialists. versus narrow and integrative. etc. able to solve strategy problems by going outside traditional substantive and procedural boundaries. ” and “G. and. assisting them in acquiring planning skills. The planning executive serves as a technical advisor to the chief executiveand other senior executives. into planning trends of 207 large companies. The findings were provocative. implementation programs were a more important part of planning. but they can make valuable inputs to such decisions with other executives. a bottom-up procedure tended to be preferred. most important. perhaps. their greater complexity may compel them to acquire more specialized planning skills. they tended to receive more support from the CEO. If the scope of planning is broad and expansive. goals tended to lack specificity. Yeskey. etc. then. a more ..). two completely different approaches to the planning function were disclosed: the procedural and the substantive. or “generalists. financial analysis. ” who are both planning technicians and substantive innovators. exert more influence in goal setting. the CEO) versus senior staff management (e. At the same time. Classic articles on this subject were authored by Steiner (1970). diversified) and breadth (broad or narrow). by necessity. Leontiades (1989). Clearly. versus substance of planning. As firms diversify.) Representing those types as “T. (1987) reported results of extensive research. They confirmed that greater emphasis was being placed on marketing functions. variance analysis. related. gathering and interpreting evidence which is necessary to make planning decisions. pending empirical replication in more current business conditions. ” “S. marketing.

Some of the principal differences and similarities from 1985 to 1995 included the following: • More planners had staff reporting relationships (from 8% to 22%). • Surviving planning executives operated their departments like service firms: to survive in the downturn. Mintzberg allowed that planners can be “creative thinkers. Mintzberg (1994c) has acknowledged the existence of these same dichotomies. He relegates most planners to Leontiades' “traditionalist” role. more line-driven. he argues. with greater experience in planning procedures. they codify. and convert already-formed strategies into programs for implementation. Houlden explored challenges faced by planning professionals resulting from the recent European recession. Such “rare executives” (Leontiades' “generalists”) can stimulate other executives' creativity and facilitate the strategy-making process. Instead. In 1995. dramatic shifts in required planning skills may be occurring. during 1983-1993.4 Appropriate Planning Skills: Impacts of Diversification and Breadth of Strategic Focus Planning Scope Broad G+S G + (T or S) G+T Level of Diversification Diversified Related Products Narrow S T or S Single Product T Source: Reprinted from Long Range Planning. 1995) surveyed large numbers of British companies with planning functions over a ten-year span (105 firms in 1985 and 86 firms in 1995) in order to learn how planners and planning departments adapt to changes in the circumstances that create demand for their services. less complicated methods may be more appropriate. elaborate. Houlden (1985. planners' skills that were appropriate for their firms in the past may be inappropriate in the present or future.K. “What Kind of Corporate Planner Do You Need?” pp. in Mintzberg's (1994c: 27) view. versus specialized approach to planning is indicated. Thus. simply calling them “analysts. Planning units tended to be formed in response to increases in firms' size. and more involved in devising competitive strategy. qualitative (versus quantitative). CBP functions became simpler.generalized. More had begun than had ended. Indeed. environmental turbulence. with recent trends toward corporate restructuring. are not involved with the creative process of strategy making. Leontiades.” Most planning analysts. J. with permission from Elsevier Science. ” as well. and the style of top corporate management. if the firm refocuses on a more narrowly constrained group of “core” businesses. the need for planners' services was found to evolve. • A surprisingly small portion of planning executives had MBA or MS degrees in management (21% versus 23%). In each study. Subsequently. more focused on market conditions. Copyright © 1989. • Surviving planning departments often went through a two-stage process of downsizing (during the recession) and subsequent expansion. Paralleling Steiner's (1972a) “pitfalls” in American firms' planning practices. First on the list (like Steiner's) was the CEO's abdication of his or her responsibility for strategy. and the number of planning professionals had increased. Houlden (1995) also offered a very similar list for firms in the U. Volume 3. 31-39. more TABLE 5. they had to demonstrate an ability to give top management good value as internal consultants. Roles of Outside Professionals . increased complexity of business conditions. Some planning departments had been disbanded and others reduced in size.

2001).000 members in 45 countries. Consequently. these professional societies. the society is headquartered in Lafayette. Indiana. headquartered in London. that these practices extend into thousands of those corporations' businessTABLE 5. Until 1999. and (3) implementation of strategy has reached the point where a legitimate profession has emerged. SPS currently is the world's pre-eminent association for practicing planning professionals. According to the society's staff. England. It issued a steady stream of publications on technical planning topics and a professional journal. In the United States. about two-thirds of the members are academicians. in the academic community. which is the world's leading academic journal for reports of empirical research related to strategic management theory. albeit a relatively small one. However. this profession is most highly developed outside the United States. Without question.Of course. journals. publishes Long Range Planning. objectives. Roney. Further evidence of a maturing planning profession is the emergence of professional societiesthat are dedicated to commercial planning. Bracker and Pearson (1986) endorsed the potential benefits of external planning professionals for small firms during their study of small firms' planning practices. THE COMMERCIAL PLANNING PROFESSION The body of knowledge regarding technical and administrative disciplines used in (1) acquiring evidence for decision-making in planning. a leading international journal in the field of strategic planning. Moreover. Taken as a whole. their common (albeit fragmented) body of knowledge—heavily supported by academic research. only sufficiently substantial corporations can afford the full-time services of resident professional planners and supporting staffs. when one considers that about 90 percent of publicly owned industrial firms practice formal strategic planning (Rigby. However. The remaining third are consultants and other professionals. Delany's (1995) empirical study of the financial benefits that might be derived from the services of strategic planning consultants was inconclusive. The Strategic Management Society publishes The Strategic Management Journal. The society also conducts a large number of technical seminars for planning executives' continuing professional education. with nearly 6.5 The Strategic Planning Society: April 2002 Membership . smaller firms—and occasionally even large ones—often can benefit from the temporary or part-time services of external experts who may play useful roles in facilitating planning functions when top management needs either more or less assistance than a fulltime staff can provide. the Academy of Management's Business Policy and Strategy Division also boasts a rapidly growing membership.5 summarizes the society's membership composition and is suggestive of the various vocations where planning professionals currently are located. the Strategic Leadership Forum (SLF) was the leading American management organization focused on business and corporate planning. Today. Regrettably. the Strategic Leadership Forum was formed in 1985 by a merger of the Planning Executives Institute (formed in 1951) and the North American Society for Corporate Planning (formed in 1966). Table 5.000 members. SPS has collaborative relationships with other strategic planning societies throughout Europe. planning profession was unrepresented by a formal society when this volume was drafted. at Purdue University and has about 2. and strategy selections.S. in 1981 with 459 founding members. and other extensive literature—comprise a true profession. The Strategic Management Society was founded in London. which features articles focused on planning concepts and techniques for planners in both the public and private sectors. England. the SLF's central management staff was disbanded in 1999 and the corporate charter then was abandoned. Societies of planning professionals have several thousand members. due to financial insolvency. The Strategic Planning Society. Moreover. Remarkably. 2001. the U. (2) making planning decisions regarding goals. their memberships.

and that strategic management is taught in most business schools. while more than 42.1 21.S.5 suggests may be obtained from a sample of mailing lists.Number of Members Industrial Manufacturing/Construction Utilities Telecommunications Retail Printing/Publishing Professional Services Consultants Education Other Other Services Financial Transportation Charities Other Public Service TOTAL Source: Strategic Management Society. rather than performing certified audits. Of those.3 25. By a recent count.4 4.3 100. there were over 330.3 39.158 355 46 70 153 624 Pct of total 7. community of commercial planning professionals is very much larger than Table 5.963 220 227 192 78 40 757 692 339 127 1. a retiring planning executive at IBM conjectured that a separate role for planning specialists eventually would disappear as the planning function became an accepted responsibility of general management (Simmons. Thus. as senior executives acquire strategic planning skills in their academic training. However.000 had expressed a professional interest in budgeting and business planning. 424 2.5 2. one mailing service that we consulted in 2001 included more than 5. .500 managers who are engaged in strategic planning and corporate development.0 1. it seems likely that the U.4 11.5 23. As early as 1972.000 members of the American Institute of Certified Public Accountants.0 % units. nearly all business administration curriculae include requisite courses in accounting and economics. Opinions have varied between extremes. Some have foreseen the emergence of planning experts as a unique profession (Steiner. Others have opined that the planning “profession” will be a short-lived phenomenon in the history of American business because planning skills eventually will become pervasive throughout general management.1 12. Finally.6 2.400 management consultants who practice business planning.1 14.4% 7. about 54. Further evidence that the commercial planning profession is larger than Table 5.7 6. 1972b).500 others expressed a professional interest in strategic planning. 1972). questions naturally have been raisedregarding the generic role that those professionals should play in management. That may also be true with the emerging commercial planning profession. fewer will require assistance from staff experts. For example. As commercial planning functions have evolved and the number of planning professionals has grown.5 suggests. this certainly has not been the fate of other professions. it must be recalled that a very large portion of public accountants provide business planning services to their clients.4 5. Another mailing list source listed more than 6.6 1. But a few introductory courses do not qualify one to claim professional expertise as an accountant or an economist.

and only 5 percent reporting to a financial officer. advisory capacity. that is. nearly all substantial U. and operations. capable of functioning at a very high level of management and drawing upon an expanding array of highly specialized tools and methodologies. most “generally accepted” conceptions of planning professionals' roles have emanated from sources such as those cited in the previous paragraphs. some have preferred that the planner serve in a purely technical. chief corporate planners' average experience in their jobs was only about four years. this body of knowledge remains to be codified to a point where the planning profession's technical discipline is generally accepted. There have been differences of opinion over the years regarding the planning executive's most appropriate mode of operation. professional planners must perform as technicians. reporting on the planner's role at Solvay American Corp. planning professionals would have an opportunity to make their skills more available to line management. and more than half had MBAs. administrators. concluded somewhat differently: He believed that when corporate planners actually were involved in forming a corporation's objectives and strategy. it is interesting that Capon et al. 2001. however. and planners had more influence on goals. Rather. there is some evidence that professional planning managers often are not very well informed about their own art. Steiner (1972b) observed that corporate planning professionals should function as experts on the process of planning. when risk levels increase—because of vulnerability of core technology or . But only 28 percent had specific training in planning! Chief planners were less well trained in planning principles than average planning staff persons. in very large corporations. from which he took encouragement because. Surprisingly. when planning managers reported to other staff officers. opinions of observers. corporations have formal planning functions today (Rigby. More than 80 percent had graduate training. who demonstrated that line managers were much more likely to accept formal planning functions when they received ample support from staff professionals in performing the technical work of planning. and coordinators rather than holding positions of authority from which to make strategic decisions themselves. Plans were more substantive. unsubstantiated by very much formal research. Bernard Taylor (1976b) opined that the planning professional should be a technical expert. Unfortunately. However. As previously mentioned. the planning function was fundamentally flawed because planners do not have the authority or responsibility to implement strategy. when they reported to line officers. Pennington (1972) made a similar observation.. most of them saw their planning assignments as temporary stops on the way to other career objectives. (1986). finance. 2001). Capon et al. Lorange (1973) found that whether planning managers reported to other staff officers or to line officers made significant differences in the technical quality of plans and impacts of planning on operating results. Unfortunately. 28 percent reporting to an executive vice president. Remarking on the corporate planner's changing role. In this light.S. Moreover. There also is a large and growing body of technical knowledge that professional planning managers can employ to their firms' advantage. Steiner (1972b) also observed that professional planners are likely to become involved in operational decision-making when long-range and short-term plans are interconnected.Regardless of the planning profession's ultimate fate. Two-thirds of the planning managers in divisions and subsidiaries reported to senior line officers. although their total experience in these firms averaged fifteen years. by becoming more involved in day-to-day decision making. there is widespread demand for it. able to assist line executivesin their decision-making functions. As observed earlier. (1987:89) found 44 percent of chief corporate planners reporting to the chairman or president. Accordingly. (1986) demonstrated that. others have preferred the planner to become more involved in operating matters and participate actively as a member of top management. Knoepfel (1973). Consistent with this view were the findings of Ramanujam et al. Roney. planning procedures seemed to be the most effective. As explained earlier. (1987:63-64) found that. and few said that they saw the planning profession as a career path. Grinyer et al. Their typical backgrounds were in marketing.

Most important. they should have the skills and ability to perform conventional analytic functions and evaluate strategic issues as they arise. Objective and independent in judgment. the chief executive. Adroit in quantitative analysis b. Several universities offer formal academic programs in strategic management at the graduate level. Aspiring planning executives certainly should take advantage of these technical training opportunities. articulate. Able to render advice and counsel to board members. Planners' third and perhaps most important role for Mintzberg is actually to contribute to strategy. and promote its development. who opined that planning professionals really have three roles. EXHIBIT 5. Direct experience in preparing forecasts and analyses of industries and markets c. Training in business planning methods. trustworthy with confidential information d. skills. There is some evidence that board approval of strategic plans enhances profitability in asset intensive industries. They also found that.complexity of the firm's structure—planning functions' analytic sophistication (and the role of professionals for this purpose) increases. the chief operating officer—mature in bearing.A. joint ventures. in very asset-intensive industries. marketing. Direct experience in acquisitions. divestments. formal training. However. Planning Experience a. mergers. including both M. First. Academic Preparation a. they should be in a position to recognize strategy. Minimum of 15 years b.D.2 Qualifications of the Senior Planning Executive: Typical Profile 1. • Approval procedures can influence performance. QUALIFICATIONS OF THE PROFESSIONAL PLANNING EXECUTIVE Exhibit 5. able to separate factual evidence from opinion . Perhaps the most recent pronouncement on professional planners' appropriate roles was published by Mintzberg (1994a). Direct experience in preparing financial projections d. as it emerges within an organization. Many of the same universities also offer concentrated training for senior executives in strategic management methodology. Direct experience in preparing comprehensive business plans b. Second. CONCLUSIONS Eight principles regarding responsibilities of the directors and top corporate management have been developed in this chapter. diplomatic. and typical responsibilities of professional planning executives. while in very fast-paced industries that are not asset intensive. the CEO is more likely to have authority to approve plans at both levels. They are as follows: • Approval of corporate-level plans. degrees. while approval of division-level plans most often is delegated to the chief executive.B. and Ph. is most often a prerogative of the board of directors. the board tends to retain authority to approve both corporate and division plans. there are important exceptions to this norm. planners' status in an organization tends to decrease. 351-90). in larger corporations. Personal Aptitudes a. especially during recessions. Broad exposure to operations.2 summarizes the preparation. or financial alliances 3. and finance 2. through conventional and/or professional education 4. when the firm's market shareis high (reducing risk) or when the firm is devoted to serving one or a very few customers (reducing competitive uncertainty). both by stimulating conceptual thinking throughout the management organization and by proposing their own ideas (pp. Skillful in both written and verbal communication c. as well. Master's degree in business administration or an equivalent degree b. Business Experience a.

it would seem.e. joint venture partners. • Procedures in which the corporate planning staff supports line managers' planning tend to enhance acceptance of planning by the latter. lawyers.) vi. the wherewithal of a true profession is readily available to those who wish to practice the planning art professionally. also contribute to strategy formation. Prepares proposals to the CEO and board of directors for approval of proposed transactions while CEO approval of plans enhances profitability in volatile industries. Works with outside professionals (accountants. Evaluates prospective acquisition candidates' performance potential iv. consultants) to implement transactions v. Certainly. Many academic institutions offer graduate-level training in strategic management. proposed plans' merits. and alliance partners iii. • Planning professionals' roles are best played as internal consultants. coordinates. industries (including competitors. sellers. This is especially true in high-risk businesses. Assists top management in developing acquisition. etc. etc. Provides technical advice to senior officers on methods and procedures of planning. • Influence on planning decisions tends to decline with managerial distance from the chairman's office. this executive may supervise other planning professionals who specialize in the planning process and/or technical functions such as operations analysis. analysts. Maintains surveillance over external business conditions relevant to the firm: economies. regulations. divestment. This chapter also has considered the evolving. as members of the top management team. alternative objectives and strategies. performance potentials of existing and prospective new businesses e. technology. • The chief executive is responsible for staffing and directing comprehensive planning procedures. Conducts searches for prospective buyers. but staff reporting relationships may be more likely to enhance plans' quality and impacts on performance. merger partners. computer applications to planning c. • There is little evidence that participation of mid-level management in forming strategy greatly affects strategic outcomes or enhances performance. but as yet uncertain. Administers the corporate development function: i. and administers procedures for performance of comprehensive planning functions by line and staff persons b.) and markets for the firm's products and/or services d. • Reporting relationships of planning professionals typically are to the CEO. Depending on centralization/decentralization and size of the firm. but should not become so involved that the organizational integration benefits of comprehensive planning or the CEO's ability to exercise objective decision making are lost. May make commerical financing arrangements (with internal financial officers. able to deal on many levels 5. Flexible in approach. is more widespread recognition . and professional societies are devoted to the dissemination of strategic management knowledge to practitioners. industry/market analysis and forecasting. A large body of strategic management knowledge can be found in several excellent academic and professional journals as well as in scores of textbooks. Typical Assignments a. All that remains for a legitimate profession to emerge. financial analysis and forecasting. project/program management. Constructs. and administrators who. process experts. and merger stragtegies ii. status of commercial planning as a formal management discipline and profession. investment bankers.

GENERALLY ACCEPTED PLANNING PRINCIPLES: PLANNING RESPONSIBILITIES Axioms The chief executive has ultimate responsibility for CP functions' design. In asset intensive industries. However. is invested with authority to approve plans. staffing. Empirical evidence seems to demonstrate that. Certainly. but the same conservatism can impair performance in industries that are faster paced and less asset intensive. which can be obtained only through experience in a variety of business settings. Eventually. or should be. and professional planners. in very asset-intensive industries. there may be a need for some form of professional certification and/or formalized academic curriculum by which planning executives' technical qualifications can be confirmed. Corollary 5. not much research has been done on the CBP roles that are. the professional planning executive must possess considerable academic training. The senior planning executive also may be called upon to manage a firm's corporate development function. chief executives. There is general concurrence that only the chief executive ultimately can direct a company's strategic planning function. technical skill. performance is enhanced. The successful planning executive has a broad range of professional skills and aptitudes. played by directors. and maturity of judgment. wherein procedures leading to acquisitions. and other top managers as well as a catalyst to aid them in their evaluations of strategic issues. The same executive also is a technical specialist who provides substantive input into all three stages of the planning process—serving as an advisor to the directors. As an administrator.01 and direction. in some industries.of these facts and codification of generally accepted planning principles that will be found in the strategic management literature. and mergers are initiated and administered. that effect can be beneficial. elements of this responsibility may be delegated to subordinate managers. board approval seems to engender greater success than when the CEO has that authority—probably due to the heavy financial commitments required to implement strategy and decision-makers' commensurate political risks. suggesting that one benefit of CBP functions can be to facilitate the CEO's leadership role. this executive helps to design and coordinate the planning function. Axiom 5. when the CEO. COO. As the chief planning officer. divestments. Thus. based on a common body of knowledge such as that found in this volume. Board involvement can inject conservatism into the planning process. Remarkably. a CEO must be sure that the work of planning is done well. without becoming so involved that the process depends on just that one person's availability and/or other executives are disenfranchised from their planning functions. The CEO must be sufficiently knowledgeable in planning principles to fulfill that responsibility effectively. CEO. rather than the board. directors' growing accountability for corporate governance suggests that their role in planning functions will grow in the future.011 Postulates The chief executive must have at least a basic understanding of generally accepted planning principles. On the other hand. .

decision making.02 and top management style. Procedures in which the corporate planning staff closely supports line managers' planning tend to enhance acceptance of planning by the latter. It is to those administrative procedures that we now turn our attention. experienced practitioners readily will acknowledge that sound administration is vital to the successful management of planning functions. Hypothesis 5. its experience with planning.01 Hypothesis 5. These requirements evolve with the firm's development over time. it is widely recognized that effective planning executives must be very good administrators and that successful administration of commercial planning functions entails specialized methods and procedures. Influence on planning decisions tends to decline with management distance from the chairman's office. performance benefits of CP functions will be minimal. especially during recessions. Reporting relationships of planning professionals typically are to the CEO.01 administration of the planning process (“procedural”) and (2) technical support of actual planning functions (“substantive”). but staff reporting relationships may be more likely to enhance plans' quality and impacts on performance. Participation of mid-level managers in making planning decisions does not enhance profitability (although it may enhance job satisfaction). The following paragraphs are devoted to specific administrative issues that are likely to be encountered by planning managers in most firms. If such leadership is not present. and disseminated in planning for all but the simplest of organizations demands that administrative procedures be soundly conceived and skillfully performed. Nevertheless. and strategy articulation) have attracted more attention in the literature than administrative functions.05 Board approval of strategic plans enhances profitability in asset-intensive industries. Skills required of the planning manager are determined by the diversification versus concentration of a firm's lines of business. The intellectual efforts and administrative work products of many managers in an organization must be coordinated to assemble decision-making evidence. Otherwise. This is especially true in high-risk businesses. Guidelines for dealing with those issues are .02 Hypothesis 5. substantive planning functions (no matter how elegant) may process poor evidence and/or be executed ineffectively. CEO approval of strategic plans enhances profitability in non-asset-intensive and/or volatile industries. Postulate 5. Substantive functions (assessment of internal and external business conditions. Moreover.07 6 Administration of Planning Procedures Administration of Planning Procedures Comprehensive planning entails both administrative and substantive functions. Effective implementation of a comprehensive plan requires direct leadership by the chief executive. select from alternative goals and strategies. the large amount of information that must be acquired. Hypotheses Hypothesis 5. assimilated. ultimately.Professional planning managers perform two completely different roles: (1) Postulate 5.06 Hypothesis 5. For all these reasons. and. to implement strategy.03 Hypothesis 5.04 Hypothesis 5.

in order to gain credibility. the planner must produce a tangible product as quickly as practical. CEOs should not “spoil the child” with too much praise or favoritism. Von Allmen's list of priorities for setting up a corporate planning function includes the following: • Quickly determine where real corporate power lies. along with possible remedies. which would elicit resentment from peers. But planners also must have a high frustration tolerance and a great deal of patience in dealing with cultural resistance. flexibility. • Various diseases of childhood and adolescence. • The gestation period for a planning department (unlike that for humans) can be controlled: essential preparations can and should be made. He observed that the planner's potential scope of responsibilities and tasks is so broad that initial priorities are vital. It's often best not to look outside the company for this manager. “Sex determination” (active or passive) will depend on the CEO's style and level of involvement in rearing a new planning department. some of which can be fatal. • The new bride and president must be completely compatible. the author nevertheless provides sage advice for the chief executive who intends to launch a new planning department. Shortly after Vancil's article appeared. They include correctly evaluating the organizational climate and producing tangible results as quickly as possible. but rather to select a “matron of proven domestic abilities” from within—in order to improve acceptance of planning initiatives.provided to assistthe planning manager in performing the responsibilities of his/her office. Some of the maxims found in Vancil's article include the following: • The CEO is a planning department's only “legitimate” father. It is essential to assess what is possible in terms of a company's stress tolerance. • In the planning department's early years. Von Allmen (1969) also published guidelines for “setting up corporate planning. • It may take two to three years for the planning department to grow up. Although the metaphors in this often-quoted article are quite humorous. article that gives the “expectant” CEO some pointers on conceiving and rearing a new planning department. are discussed. Above all. and so on. for example. but insightful. • Articulate tentative corporate objectives (with the CEO) as early as possible and use . The scope of these guidelines includes: Getting the planning process started Managing and scheduling the work of planning Making the planning process practical Keeping the plan current Adjusting to changes in the firm's planning needs Integration of long-range and near-term planning Avoiding common procedural pitfalls GETTING THE PLANNING PROCESS STARTED Vancil (1967) wrote a humorous. location of the new department within the organization. ” emphasizing the importance of initial priorities for the new function. Early success depends on the ability of a new planning executive to show peers that he or she can make a real contribution. • The CEO's most important initial decision is to select a bride (planning executive).

so must planning techniques. Specifically. line officers must make essential planning decisions and/or determine the level of effort to be exerted in implementing strategy. the comprehensive planning (CP) functionmust be ordained by high authority from the board and the CEO. should be included within the department's scope of responsibilities because of their close relationship to corporate strategy. Kraushar's guidelines were as follows: • The planning department should be kept small. etc. • Establish a solid working relationship with the Chief Financial Officer. planning professionals can return to their offices to finish technical tasks.them as focal points in discussions of strategy. When internal capabilities or the external environment change. he argued that the planning department should be staffed by senior people who are committed to obtaining tangible results. • International corporate development functions are extremely difficult to undertake at an early stage. Von Allmen's prescription of the “planner interview and transcribe” approach warrants special attention. • Planning department professionals' backgrounds should reflect a full scope of functional disciplines. Most important. it must be demonstrated that the department is an asset rather than a drain on the company's resources. • External development functions. Then. • The few people involved should be senior in experience and capabilities. Yet. It is no secret that many line officers hate the administrative work of planning and the preparation of planning documents. most plans never would get done. if a planning manager had to wait until line officers provided all of the inputs required for completion of planning procedures and documents. joint ventures..” The scope of planning can be increased as success and managers' familiarity with planning increase. Because it is imposed on an organization. • The new department should attempt to quantify and communicate its contributions to the firm in terms of financial results. • The new department's performance should be monitored and communicated. including the preparation of drafts. make changes. proposed that firms must learn to plan and that the planning function must “start small and earn its acceptance. documents that have good technical quality. drawing on his experience as a strategic planning consultant. • Use the “planner interview and transcribe” approach to documentation. in order to satisfy the changing needs of an organization as it evolves.” After coaching line officers and eliciting decisions at all stages in the planning process. • Do not start with a process that is too complex. • Do not spend excessive time in the office. and acceptance of. Malcolm Pennington (1972). and even as a “ghost-writer. instead. which we use routinely in our firm. including acquisitions. line officers can review the drafts. the department. early. The planning manager therefore must act as a personal consultant. this is due to international operations' remoteness and the difficulty of assuring reliable implementation. as much as possible. or consider new alternatives in consultation with the planner. here. advising line officers on planning methods. It is better to keep overheads low with options to obtain supplemental resources from within or outside the firm as needed. can be produced by following this procedure. Eventually. • Initiate early efforts to teach planning skills to top executives. Clearly. This is a never-ending process. as well as line managers' commitment. line managers and other staff . in part. Four themes seem to be shared by the well-established guidelines of these practitioners. • The initial emphasis should be on relatively quick payoff projects in order to enlist enthusiasm for. • Begin quickly to monitor the competitive environment and begin to test for important changes. Kraushar (1976) offered some further suggestions regarding priorities for the fledgling planning department and its manager. • At least some members of the planning department should have had line experience in implementing plans as well as formulating them. work with line management on site. First. • Produce a tangible planning product as quickly as possible. • Stay in control of the planning process.

A quarter-century later. subject to approval of budgets. preliminary corporate level strategy. are submitted and approved. multi-business corporations. Third. its principal elements are as follows: Early February: initial corporate/division dialogue. The planning staff should provide internal consulting services at corporate and business levels to facilitate the new process and counsel other executives in CP methodology. including more detailed strategy and programs. the CP function must be conducted competently. MANAGING AND SCHEDULING THE PLANNING PROCESS The typical corporate planning procedure in large corporations with closely related lines of business might span a six-month period. beginning of division-level planning. Mid-June: draft of the corporate strategic plan and articulation of issues defining interrelationships (including conflicts) between business units' plans and the corporate plan. beginning with strategic planning by a team of corporate and line managers. Second. planning products should evolve from basic to advanced over time. Spanning ten months. and complexity. and they must be politically sensitive. Diversified Firms How planning activities are scheduled during the year will differ between firms depending primarily on their centralized or decentralized structures. Vancil and Lorange (1975) provided an illustrative schedule for planning activities in very large. planning managers should make only those initial promises that they can keep. from February through November. levels of diversification. and/or decentralized organizations. strategy. they must produce early results and avoid imposing burdensome workloads on line managers. this schedule remains typical. acknowledgment of preliminary corporate goals and resource allocation policies. . new planning procedures must be pragmatic. Mid-March: review and/or restatement of business units' “charters” and tentative proposals of division/subsidiary goals and strategy. A list of contents for both volumes is provided in the next section of this chapter. Large. Finally. and Vancil's explanation of the procedural sequence still is one of the most articulate in print. diversified. Mid-September: corporate allocations of capital and other resources are made to business units. tentative goals. The plan should be assembled in two loose-leaf volumes: a strategic plan and an implementation manual containing detailed action programs. size. objectives. planning managers must be knowledgeable both about planning principles and the firm's business. Mid-August: proposals of amended business plans. High-level support must be sustained sufficiently to assure that the CP discipline is installed permanently. and preliminary programs. mission review. complex. Mid-November: budgets for the coming year are submitted and approved. The process concludes with issuance of a budget as the first year's implementation element of an extended plan. including revised charters.members may resist both the CP function and the planning manager. Procedures of course are lengthier in larger. Mid-May: proposals of business units' strategic plans.

strategic long-range plans are completed in August. Divisions submit five-year sales forecasts. and because mid-year amendments to annual operating plans are an integral part of the procedure—an unusual but very pragmatic step. and capital expenditure proposals. and Toro. There was a six-month delay between long-range planning and the budgeting procedure of Cincinnati Milacron. P&L estimates for the next year.1. In Wilson's procedure. Warnaco. and Sandalls (1974) confirmed that this procedure is typical. such as steel producers and firms in other process industries. Although Smalter's schedule is somewhat compressed. two-year cash flow projections with “status quo” assumptions. Nevertheless. which are reviewed and approved. Quaker Oats.2. Non-diversified Firms Wilson (1971) outlined a “top-down” corporate planning procedure and schedule appropriate for firms with more limited and related lines of business. which portrays the contents of a typical division planning “package” that was submitted to corporate management sixty days after the planning procedure began. the second half (90 days) was focused on financial planning (Figure 6. the architecture of his administrative work products was excellent. Smalter (1969) condensed a similar process into a six-month period. concurring or submitting counterproposals and proposed changes to prevailing strategy.1 Corporate/Division Planning Schedule for a Single-Business Corporation Milestone Corporate Planning Department prepares Top Corporate Management's proposed 5year financial objectives and (after approval) distributes them to line management. because long-range plans and budgets are completed at the same time. His procedure placed much greater emphasis on financial planning. This procedure is interesting. About half of the planning schedule (90 days) was devoted to strategic planning. Target Date 2/28 4/30 5/31 6/30 7/31 7/31 8/31 9/30 11/30 . Niblock. Only at Raytheon were budgeting and long-range planning done simultaneously. They studied the long-range planning and budgeting practices of six industrial corporations. in Vancil and Lorange's procedure. it still was functionally comprehensive. That Smalter's procedure was truly comprehensive is demonstrated by Exhibit 6. Top Corporate Management notifies divisions of capital project approvals. Headquarters issues corporate and division objectives.1). Divisions submit their 5-year plans and next year's detailed operating budgets. Headquarters issues approved second-half budget. Divisions reply. three months before budgets are submitted. The chronology of planning milestones in Wilson's procedure is summarized in Exhibit 6. formal strategic planning functions are conducted throughout the entire year at both corporate and operating levels of management. a 2-3 month delay at General Mills.Note that. Shank. EXHIBIT 6. unlike the procedure of Vancil and Lorange (1975). Divisions propose revised second-half budgets. Wilson's approach is interesting because it includes the preparation of a “status quo” (baseline) cash flow projection in order to arrive at a beginning point for allocating funds to proposed projects before long-range plans are prepared in detail by operating divisions' management. as well. Planning Department reports proposed capital projects and estimated free cash flow to Top Corporate Management.

D. Thus. Smalter. to identify potential improvements in the sales force structure. with the support of planning staff. 1. it often was useful to obtain the needed evidence by conducting brief. He emphasized that the planning Source: Reprinted from Long Range Planning. Copyright © 1969. and the potential market appeal of proposed new products. J. “Anatomy of a Long Range Plan.Target Date Planning Department issues next year's budgets and revised corporate five-year plan. ” pp. to be effective. pragmatic research of internal operations and/or markets. personnel qualifications required to increase performance. Pennington (1972) suggested that planning systems' flaws usually were the results of impracticality. He observed that. Vol. Another of Simmons' success requisites was a program's flexibility and amenability to change. Therefore. Houlden (1980) also found the planning staff to be an excellent resource for performing ad hoc studies of strategic issues. When decision-making evidence was not available. a planning program must be highly implementation oriented. Small research projects were conducted.1 Planning-Programming-Budgeting Sequence . and providing evidence upon which to base choices from strategic alternatives. it must be conducted by line management. Milestone KEEPING THE PROCESS PRACTICAL Simmons (1972) provided a chronicle of his experience as a planning executive at IBM. A planning staff is often well suited to perform such projects and thereby to add valuable evidence upon which planning decisions may be based. 4-8. with permission from Elsevier Science. 12/31 Source: Adapted from Wilson 1971. for instance. Figure 6. planning managers and departments with applied research skills are likely to be more successful than others.

Gray (1986) conducted research aimed at finding out why planning systems break down. About 70 percent of the companies in this study did not even define how strategy would be implemented. ” pp. most difficulties were attributed to the following pre-implementation factors: Poor preparation and training of line managers in planning methodology Faulty definition of business units Inadequate decision-making information Inadequate corporate reviews of business units' plans Inadequate linkage of strategic planning with corporate control systems On the other hand. Successful planning programs emphasize finding good strategies more than formalized documentation. The procedure should fit the company. process somehow must be integrated with daily decision making and operations. Smalter. Eighty-seven percent of the 300 firms in his survey reported some form of disappointment with planning. 1. Copyright© 1969. Ramanujam et al. Results of extended planning should be reflected in current operating decisions and the current year's budget. Objectives should be specific and pragmatic—not vague or idealistic. What was desired from the . His often-quoted guidelines included the following: Senior management must understand the planning process. D. 4-8. they found that different measures of planning effectiveness were associated with different planning procedure design factors. over-planning should be avoided. Steiner (1974) provided several procedural maxims for improving the planning function's chances for success. After further scrutiny. Long-range planning should not be neglected simply because short-term problems exist. The most frequent (59%) causes of malfunction were related to implementation difficulties. He argued that planning should become an integral part of the corporate management style to gain relevance in the organization's culture. Using discriminate analysis. through regular involvement. 500 lists. Formalized planning procedures should not be allowed to impair managers' informal working relationships. J. and two-thirds of those firms' difficulties could be traced to the planning system's design. (1986) explored reasons for managers' satisfaction with the planning function as well as planning functions' success in developing strategy effectively. “Anatomy of a Long Range Plan. They studied 93 companies selected from the Fortune 500 and Inc. with permission from Elsevier Science. Stress should be placed on results rather than elegant procedures.2 The Product-Line Package Source: Reprinted from Long Range Planning.EXHIBIT 6. Vol. Long-range planning will not be done well if executives' performance evaluations and bonuses are based strictly on short-term results and do not reflect strategic elements of management.

but it also increases the probability of a firm's effective response to changes in business conditions. KEEPING THE PLAN CURRENT Very little appears in the professional planning literature with regard to means for keeping plans current. and accomplishment of commercial success. Forexample. At least two substantial risks stem from the loss of planning assumptions' validity. managers' compensation incentives often are based on objectives in the plan. Consequently. they enable management to identify potential shifts in business conditions that are within the realistic range of possibilities. if not enthusiasm. defined in terms of financial and/or competitive performance. Unfortunately. even goals—are needed. but not necessarily others. When the prevailing plan no longer is appropriate for realizing commercial success. A firm's ability to change its plan can be a test of the planning function's survivability. In either case. strategy. or worse. most planning functions are not set up to meet the requirements of replanning. Accordingly.planning function—improving financial performance or increasing market share and growth— determined the best-suited style of planning: • Financial performance was enhanced when line managers received adequate support from planning professionals as well as top management. it becomes useless or even counterproductive. 2003). Second. implementing a plan that no longer is appropriate for its internal or external business conditions can lead a company to a commercial setback. Moreover. Managers naturally are reluctant to admit that their plans no longer are valid. . Simmons (1972) observed that a well-conceived plan can become out of date after only six months. the planning executive and the chief executive must have a clear sense of outcomes that they expect from the planning function before they design it. contingency plans can be elaborated until—when the contingency in question becomes more realistic than the assumptions in the prevailing plan—the contingent strategy can be substituted for its prevailing counterpart in the current plan (Roney. As alternative scenarios' probabilities increase. such departures may not be recognized until after serious problems have arisen. • Technical proficiency of planning functions was enhanced by the planning system's capability to support strategy formulation by line executives. and it increases the probability of a planning function's survival. First. Depending on the success criterion. and a crisis can occur when management realizes that the plan is invalid. but then. procedures such as scenario forecasting and contingency planning are very helpful. then the manager loses a reason to believe that incentive compensation payments are fair and based on effective effort. although not as likely as assumptions in the prevailing plan. action programs—and. there were no discernible differences in rates of return or other financial results. flexible techniques for updating planning assumptions. because this can be an anxietyprovoking disclosure. plans' loss of relevance occurs when actual business conditions depart from those that are assumed in the plan. planning functions may be structured to achieve that standard. Since most business conditions assumptions ultimately will become invalid and must be replaced eventually. Roney (1977b) also observed that plans routinely fall out of currency. • Managers tended to be most satisfied with the planning function when they received ample support from professional planners and top management and when there was a climate conducive to planning. The point of this study is very important. of managers to participate in the planning process. Success of a formal planning function can be defined in at least three ways: willingness. accomplishment of technically sound planning products. if these objectives no longer are realistic. occasionally. the result will be a rejection of the planning function. Keeping the plan current may add to managers' workloads. • Market share and sales growth were enhanced when the planning system paid greater attention to external business conditions.

Chaffee (1985) proposed that the way in which strategy-making occurs also evolves through stages. Later. ” “adaptive. begun in the 1960s. diversity. This can occur. 1970). However. In most of those same firms. to be sure that it remains consistent with the firm's environmental circumstances and internal needs. 1969). Mitchell and Summer (1985) observed. Financial technicians'. as firms accumulate more or less experience and intellectual resources. firms begin with largely financial and forecast-based planning methods. when a corporation grows in size and diversity through acquisitions and. a firm's structure typically undergoes fundamental changes that impose significant new planning requirements (Chandler. ” and “interpretive” modes. Leontiades' hypothesis was especially important because it acknowledged that a firm's evolution is not necessarily linear. environmental problems and opportunities usually change fundamentally. and strategic generalists' roles vary in importance depending on firm size and complexity. over time. is a continuous one. top management's implementation priorities also shift between stages of the firm's life cycle. She dubbed these types as the “linear. Second. when the firm's environment changes. are not static. at different evolutionary stages. Several practitioners and theorists have attempted to describe how the evolution of a firm's planning needs is manifested in real life: Pennington (1972) observed that a firm must “learn to plan” and that. Those dimensions. of course. As this process unfolds. theircompetitive capabilities naturally change (Boston Consulting Group. the firm may regress on either scale. Consequently. It is especially important to review the fundamental assumptions of a firm's planning methodology from time to time.The best approach to replanning. and breadth of strategic focus. Planning skills needed to conceive. EVOLUTION OF THE FIRM'S PLANNING NEEDS Two natural forces of evolution can change a firm's planning needs over a long term. then. 1962). divests unsuccessful acquisitions in order to focus on a more limited line of related businesses. while others must prospect for smaller targets of more limited opportunity based on differentiation and focus of their business models (Porter. later. but subject to continuous change. First. wherein assumptions and strategies are updated in a perpetual. for instance. industries and markets have “life cycles” (Polli and Cook. “rolling” fashion. those new planning functions bore little resemblance to their predecessors. As Smith. and integrate acquisitions. so must its planning techniques. whereas political support for strategic alternatives seems to become more important during later stages. they add strategic analysis and eventually may achieve full-scale strategic management capabilities. formal planning returned in the 1970s. implement. He observed that many firms' planning programs. either were discontinued or dramatically curtailed. Essentially. There is a high priority on organizational coordination of implementation during early stages. albeit from a different perspective. INTEGRATION OF LONG-RANGE AND NEAR-TERM PLANNING . Henry (1977) observed this same evolutionary process. comprehensive. After growing in size and complexity. may become inappropriate as this process extends into the consolidation stage. More experienced firms in growth industries often can exploit accumulated cost advantages. planning specialists'. 1980). and those that are appropriate at higher levels of diversification or complexity. Leontiades (1989) developed a model by which firms' planning requirements evolve as a function of the firm's size.

Niblock. it seems that actual practices are just as divided as theorists' opinions! Research obviously is required to compare the relative efficacies of these procedural alternatives. They found that the extent of short-range-long-range linkage seemed to reflect the firm's planning horizon. Planning tended to be the most formalized in the United States and Australia. Quaker Oats. PITFALLS During the 1970s. Steiner (1974) wrote that. Toro. and Sandalls (1974) studied the incidence and techniques of linking long. Steiner and Schölhammer (1975) extended the same survey to 460 multinational firms. Pennington (1972) was emphatic in his assertion of the need for plans and planning managers to become intimately involved with operations and current decision making. They called for a definite linkage of long-range plans and budgets (Lorange and Vancil. Simmons (1972) reported that IBM attempted to combine strategic and operational planning functions unsuccessfully: the combination apparently forced too many decisions to be made in a short time. if only to achieve greater pragmatism of each. Very low documentation levels were most frequent in Italy (but not Japan) and least frequent in Australia and England. The most important pitfalls did not differ between sizes of firms. Opinions certainly are not universal on this subject. three surveys were conducted to identify specific flaws of planning functions that could jeopardize their continued existence. (1987:78). theorists and practitioners probably have tended to favor close linkages of strategic/long-range plans to their near-term counterparts. Three years later. it is very interesting to consider the findings of Capon et al. as well as the current term. Shank. encourage tighter linkage and longer horizons encourage less linkage. Firms with fully developed strategic planning capabilities were equally likely to prepare the two documents independently (42%) and to prepare short-range plans as extensions of long-range plans (42%). An equal portion (32%) first prepared long-range plans and then prepared short-range plans from the former. but they did differ between countries.and short-range plans. to attain relevance.and short-range planning. Raytheon. planning products must be employed in current decision making and executives must have incentives to plan beyond the near term. as well as pitfalls. and when goals were not developed specifically enough to serve as a basis for formulating long-range strategy. when it routinely disregarded long-range planning functions in favor of temporary priorities. . leading from long-range planning into annual budgeting. The three most important pitfalls occurred when top management attempted to delegate its planning responsibilities to a staff. but least formalized in Japan and Italy. Henry's (1977) survey then identified firms' failure to link strategic and operational planning as a critical pitfall. while 17 percent followed the reverse sequence and 15 percent prepared both plans simultaneously. plans and the planning function will be most relevant to how a firm actually is managed. Vancil and Lorange (1975) defined their planning procedure as a continual one. In light of those theorists' opinions. Similarly. 32 percent did not link long. Remarkably.and short-range plans in six large industrial firms: Cincinnati Milacron. they opined. On balance. Thus planning practices. and Warnaco. The same three pitfalls just mentioned again were ranked highest. Planning procedures tended to be documented most frequently in Australia but least frequently in Italy and Japan. Steiner (1972a) surveyed 159 companies and published a report on the most important “pitfalls” to be avoided by architects of planning procedures. All three surveys' results were similar. Among 113 large industrial corporations. Thereby. Shorter horizons. 1976). Thus.Several methodologists have called for the integration of long. can differ significantly between nations. Steiner (1971) opined that strategic and operational planning eventually must diverge because the focus of each is so different from the other's. General Mills.

Thus. In those cases. Top management gives inadequate direction to line management by failing to define missions. Henry (1977) also reported a survey of planning pitfalls. and they are not trained to use the planning system.12 Upwards of two years are required to install initial planning procedures. Initial success in 6. Some of Henry's additions to the pitfalls list include: Top management does not reward systematic planning. Those pitfalls seem to reflect the way in which planning functions are managed. This is the same report discussed earlier. The planning manager must establish supportive working relationships with line 6.14 units and become integrally involved with line management. Several administrative procedures are required to make the planning function operate effectively. line managers paid less attention to it.Two years later. comprehensive commercial planning is an administrative discipline. as the plan was manifestly of small importance to top management. Sophistication of planning procedures should grow only as the organization 6. Therefore. Operating managers are not adequately prepared before formal planning is introduced. Many of Henry's results corresponded to those of Steiner (1972a) and Steiner and Schollhammer (1975). Implementation of the new process should be pragmatic. GENERALLY ACCEPTED PLANNING PRINCIPLES: ADMINISTRATION Initiating the Planning Process: Five Postulates Postulate 6. Henry also observed several pitfalls that were not reported by the two prior studies. Scheduling of Procedures: Six Postulates Postulate 6. which found many planning programs to be discontinued or curtailed. Henry also observed one final pitfall. successful planning executives typically are proficient administrators.21 Planning activities should be scheduled through awareness and avoid managerial strain from out the entire year in order to maintain strategic . However.15 becomes more competent and confident in planning. The following eighteen postulates and twelve hypotheses are addressed specifically to administrative functions of strategic management. and strategy specifically enough. 6. He observed that allocation of capital funds contrary to the plan strongly signaled that top management was not using the plan as a basis for operational decision making.11 A new planning function must be ordained by the Board and CEO. There is a failure to link strategic planning and operational planning. these pitfalls should be especially important to planning executives.13 producing benefits to the firm must occur soon after implementation and be widely acknowledged. CONCLUSIONS In many respects. goals. which warrants a particular note.

based on anticipated corporate cash flows.21 Firms learn to plan and improve at it over time.22 experience in planning. Business units' strategic plans are consolidated and a corporate-level strategic plan is drafted at mid-year.23 6. Operating plans and budgets to implement the first year of the strategic plan. Planning managers should lend active support in line management functions. including approved projects. 6. a different set of planning skills will be needed. When its industry stabilizes and the firm focuses on a more limited scope of business. when a firm is growing through acquisitions. primarily as business analysts and consultants.24 6.11 Most firms are unprepared for replanning and do it badly.13 worthless or a prescription for failure. Replanning: Three Hypotheses Hypothesis 6.35 The planning staff should be an internal consulting resource. This process passes through identifiable stages. A sound plan implemented long enough. required planning skills also evolve. Strategic plans then are completed and approved.conducting the process in a more limited period of time. For instance. with corporate-level reviews of fundamental mission-related issues. is either 6. Evolution of a Firm's Planning Skills: Three Hypotheses Hypothesis 6. the firm's structure.23 planning skills will be needed. and other implementation projects/programs are approved. sources of return on investment. capital projects are approved. Management incentives must be based partly on formulation and implementation of extended strategy. successes and failures of the current corporate and business plans.22 6. able to perform analytic projects to facilitate decision making by line management.32 6. certain 6. The process re-initiates at the outset of each year. if at all. Implementation elements of the plan must be fully developed so that they can be executed reliably. and primary strategic issues. .26 Keeping Planning Practical: Five Postulates Postulate 6. 6. During this time. are prepared and approved in the fourth quarter. Strategic plans of business units and/or the single business corporation are prepared during the first half of the year. The operating plan and budget must be linked to longer range plans.25 6.33 6.31 6. Conflicts and uncertainties between corporate and business unit plans are assessed and resolved in the third quarter.34 6. Firms' planning requirements evolve with their life-cycle stages and 6. As firms evolve in complexity or simplicity and size.12 Plans can be seriously outdated within six months of preparation. without replanning.

as a decision-making and resource allocation process. Senior corporate and business unit mangers 6. Executives' compensation must reflect their 6. which must be recognized in crafting a planning process that fits the individual firm's particular needs and circumstances. Postulate 6.41 Pitfalls: Six Hypotheses Effectiveness of planning functions will be impaired if any of the following principles is violated: Ultimate responsibility for planning functions' performance must not be delegated by the CEO to others.43 must understand essential planning principles. spans both long and short terms. Goals must be sufficiently specific to serve as a basis for forming strategy. Postulate 6. These contingencies. 6.Integration of Short.44 linked. Failure to link strategic and operational (long-and short-range) plans is a Hypothesis 6.31 primary reason for the failure of plans and planning functions. include the following: Level of risk Organization size and structure Structural complexity The planning horizon Frequency of review Participation and consensus Corporate culture .42 Long-range planning is at the other end.41 Hypothesis 6. Budgeting is at one end of the time span covered by comprehensive planning. These two disciplines are inextricably related.46 consistent with the corporate plan. Strategic and operational planning must be 6. Capital allocations to businesses must be 6.1) may be applied in actual practice.42 7 Procedural Contingencies: How to Make Planning Fit the Firm This chapter discusses several procedural contingencies by which the general planning model described in an earlier chapter (Figure 3.45 contributions to strategic planning.and Long-Range Planning: Comprehensive planning.

They found that planning practices' sophistication increased with environmental turbulence. T. Lindsey and Rue (1976) studied the relationship between environmental turbulence and sophistication of planning practices in 198 firms during 1973 and 1975. Ansoff (1988:136. 173ff) discussed strategic risk in terms of environmental turbulence—a concept that subsequently became increasingly popular. Paine. Anderson and F. the definitions offered by Dess and Beard (1984) and by Dess and Origer (1987) are. turbulence is most severe in highly dynamic industries. is one means by which management attempts to manage exogenous risk. Several researchers and theorists subsequently have addressed the need to select planning procedures appropriate for a firm's level of environmental risk. dynamism. Copyright © 1975. Presumably. In particular. and/or complexity is high. then a preponderance of empirical research (discussed in the following paragraphs) indicates that a high level of risk tends to encourage the development of more elaborate strategic planning capabilities. Whereas the latter two dimensions are fairly self-explanatory. When munificence is low. it has been acknowledged that planning procedures must deal with business risk. 18. There is no generally accepted view on how environmental risk should be defined. Vol. 811-823. C. Assuming that one's concept of environmental risk is at least generally consistent with that in the preceding paragraph. ” pp. how comprehensive planning rationalizes internal capabilities to the external environment. environmental risk also is high. LEVEL OF RISK Ever since Drucker (1973) published his book on doing business in an “age of discontinuity” and Ansoff and McDonnell (1984) treated environmental turbulence as a critical variable in corporate planning systems. These two factors' combined influence on management's selection of a planning approach is represented in the matrix portrayed in Figure 7. depending on the level of risk in each dimension. dynamism is high. strategic objectives were defined with shorter terms and progress reviews were Source: Reprinted from Academy of Management Journal. that managers adjust their planning approach to perceived levels of environmental uncertainty (risk) and the relative need to change their businesses internally—presumably reflecting the extent to which operating capabilities are satisfactory or unsatisfactory. in this context. This model accomplishes a great deal. the planning function. in terms of methodology. “Managerial Perceptions and Strategic Behavior. Hence. with permission from Academy of Management Journal. the concept of munificence may not be: it refers to an industry's accommodation of the firm in its attempt to accumulate slack resources. three dimensions of environmental assessment are proposed: munificence.Management style Resistance to planning Any of these eight contingencies may compel planning procedure adjustments. But. very convincingly. very helpful. and complexity. It demonstrates. . Moreover. Anderson and Paine (1975) hypothesized. R. let alone measured. at least.1.

environmental complexity (not the firm's structural complexity) also seemed to be associated with less involvement by the planning staff in actually formulating strategy. they tended to develop more comprehensive and multifaceted strategies.1 The Anderson and Paine Strategy Model more frequent when turbulence was highest. Roney (2001) found that firms in ten industries that practiced comprehensive strategic planning did not suffer the downturns of sales and earnings with the onset of the 1981-1982 recession that were experienced by firms without formal planning functions or those with planning functions that . strategic decision-making responsibilities were delegated to business units dealing directly with critical customers. also was Perceived Need for Internal Change associated with a broader scope and more formality of planning practices. In this study of large manufacturing firms. Firms with high market shares (lower risk) gave relatively low organizational status to staff planners. instead. In a recent.Figure 7. Grinyer et al. unpublished longitudinal study of 368 publicly owned firms. However. Bourgeois (1980b) found that the accuracy with which twelve firms' managers estimated environmental uncertainty (compared to objective measures of actual environmental volatility during 1971-1976. the extensiveness of strategic planning also was positively correlated to measures of financial success when the competitive environment was most complex and either of two conditions existed. Khandwalla (1976) similarly studied planning practices in 79 firms: when managers perceived their environment to be dynamic and uncertain. when a deep economic recession occurred) was positively correlated with financial results. In the most recent study of its kind. Kukalis (1991) studied 115 large manufacturing firms and found that planning extensiveness. Taking a somewhat different view of risk. The accuracy with which managers perceive environmental uncertainty also can be important. horizon and review frequency all were significantly correlated to environmental complexity. Those conditions were (1) high levels of capital intensity and a product-related organization structure or (2) the firm was in a mature or declining industry. Moreover. in the forms of diversification and divisionalization. but not necessarily risk). when firms were highly dependent on a few major customers (greatly increasing competitive vulnerability. (1986) found that vulnerability of firms' core technologies led to more sophisticated analytic techniques in planning among 48 British firms. Greater complexity. neither corporate planners nor chief executives were as involved in making strategic decisions as otherwise.

In a large centralized firm. On balance. and financial performance tends to benefit from CP practices in such environments. 1984). when planning functions become too comprehensive they actually may impede adaptation to unstable markets (Fredrickson and Mitchell. For instance. Steiner. management authority probably will be centralized and organizational responsibilities will be divided along functional lines (e.2). as in dealing with most planning principles. 1971. sales. dynamic environments.). However.were less well developed. also. In this “top down” mode. . Fredrickson and Mitchell (1984) also found that comprehensiveness of analysis in planning was inversely related to financial performance (return on assets and sales growth) in an unstable industry (forest products). only. As the firm's authority structure becomes even more decentralized—usually because lines of business are diversified—a single framework Source: Adapted from Vancil and Lorange 1975. ORGANIZATION SIZE AND STRUCTURE Practitioners long have recognized that different organization structures require different approaches to planning (Lorange and Vancil. However. 1979). responsibilities for formulating implementation programs may be delegated from the top to line managers (Figure 7. there have been exceptions to this rule. special care must be taken to avoid that pitfall. manufacturing. they tend to be found more often in complex. etc. the level of planning functions' development.g.. When there is only a single line of business. corporate goals and strategy well may be formulated by a “team” of corporate and line executives. In that mode. as might be expected. we must be reminded that. However. Team arrangements are most suitable for larger centralized organizations that are still engaged in limited lines of related business. distribution. these studies seem to demonstrate that comprehensive business planning performs an important risk-management function. Planning functions can mitigate downside business risks. 1976. Centralized structures permit top management to select goals and strategy unilaterally. In this study. and financial performance tend to be closely related. perhaps assisted by technical specialists. However. for instance. Fredrickson (1984) found that comprehensiveness of analysis in planning was directly related to measures of financial performance (return on assets and sales growth) in a stable industry (paint and coatings). rules have exceptions. allowances for a broader spectrum of informational inputs must be made. it is possible to employ quantitative methods for “optimizing” selections from alternative goals or objectives. the tangible benefits of strategic planning as a risk management mechanism were clearly apparent. When considering these two studies. One of the team's unique purposes is to consider how organizational units can combine forces best to accomplish a single mission. the weight of evidence obtained from studies discussed in this section leads to a general conclusion that environmental risk. As the corporation grows in size.

and line officers. Thus. a large steel producer in Germany and Holland that in the early 1970s had sales of more . in those cases. chief executives. and expected rates of return. but their proposals flow to corporate management in a bottom-up fashion. They studied the extensiveness of planning and strategy making practices in 720 Midwestern industrial firms. and preliminary statements of its own objectives. with multiple lines of business. in a series of further exchanges.2 Appropriate Approaches to Decision Making in Firm Size/Structure Combinations of goals and strategy is more difficult (if not impossible) to hand down to all business entities. Companies with the highest profit margins had the most formal management structures and were less decentralized.e. Very large decentralized organizations. Consequently. Several case histories have appeared in the literature to describe alternative planning arrangements in actual practice. Top corporate management provides operating management with the corporation's goals. and accepted by the organization were among the planner's primary tasks. since that domain must be reserved to directors. But line managers had strategic autonomy. not smaller ones. objectives can be amended before more detailed planning begins. financial performance potential. Knoepfel opined that the planning function would have been fundamentally flawed. Getting objectives and strategy communicated. That study was reminiscent of another. For instance. also may employ hybrid arrangements in which individual businesses' planning approaches are either top-down or team-based. back and forth. capital allocations. Differences between corporate and operating expectations then may be resolved. even though line management was prone to resist significant changes. Subsequently. who also addressed smaller firms' planning practices. However. The capability to form strategy was significantly correlated to performance—but only in larger firms. Knoepfel (1973) described the role of planning professionals at Solvay American Corporation. a “hybrid” procedure consists of both bottom-up and top-down approaches. by Robinson and Pearce (1984). “Optimizing” approaches to selecting goals or objectives are very difficult. seeking to discover relationships between breadth of planning capabilities and measures of performance in terms of sales growth and return on assets. objectives and strategy may be successively refined and elaborated (Vancil and Lorange. if not infeasible. a large. They found that formal planning procedures were much less frequent in these companies and that shorter planning horizons prevailed. they found significant structural differences among 52 European firms with high/low growth rates and high/low profit margins. Their planning styles were participative. preliminary strategic objectives. complex corporation. The political and organizational skills required of a professional corporate planner were emphasized. Impacts of centralization/decentralization and “divisionalization” on appropriate planning styles (based on performance priorities) were studied by Horovitz and Thietart (1982). Formal planning in small firms also seemed to be most beneficial when objective outsiders (consultants and directors) were involved. Informal rather than formal planning practices were preferred most often in these firms. a “bottom-up” approach to planning is more practical. but their control structures were more stringent. 1975). but with considerable intervention by top corporate management. The planning professional at Solvay was a technician as well as a facilitator. Companies that grew fastest tended to be the most divisionalized and decentralized.. Hart and Banbury (1994) discovered that there may be a limit on the attainable benefits of planning in smaller firms. Another task was to promote continual adaptation of plans to a changing environment. delegated. Corporate control systems were more likely to be anticipatory (i. Top management's approach was comprehensive and highly coordinated. where necessary. to use forecasts versus post hoc approaches).Figure 7. in such structures. Using factor analysis. The approach to planning at Solvay American Corporation was in direct contrast to that of Estel. Top management involvement in planning was less intensive than in faster growing firms. if a corporate planner were to take on the role of actually making strategic decisions. Operating management submits preliminary forecasts of market conditions.

1986). close linkage of corporate and line management. was highly centralized. Research seems to have confirmed the first of those expectations at least. consistency of operating plans with central strategy. Thus. strategic flexibility. imparted by internal complexity and diversification (Rhyne. The planning function served to satisfy that need. Rhyne (1985) found that both internal complexity and external volatility were significantly correlated to planning functions' development. formalized business planning mitigates potentially adverse impacts of disorder. found that greater diversification and divisionalization resulted in plans' broader scope and more formal planningprocedures.000 employees. He studied 89 of the 1972 Fortune 1000 companies (out of 210 initially contacted—a response rate of 42%). Rhyne also found a strong inverse relationship between environmental volatility and internal complexity during periods of fundamental change. Since that report. (1986). He also opined that planning skills requirements are likely to change perpetually as the firm evolves. 1985. were uncommon. implying that complex operating systems may need the integrating benefits that comprehensive planning can provide to process information and/or revise strategy effectively. The difference was attributable to a shift toward longer horizons. it actually was engaged in only a few closely related lines of business. However. 1984). at 83 percent. In 1979. The advantages in this arrangement included planning procedures' uniformity. five years earlier. Extended horizons. STRUCTURAL COMPLEXITY Leontiades (1983) hypothesized a relationship between planning skills required in different combinations of corporate size and complexity. such as Solvay American. not much further empirical inquiry has been made into the length of firms' planning horizons. Although Estel was huge by most standards. it would appear that these risk reduction benefits are more demonstrable in large companies than in small ones (Hart and Banbury. that proportion had been higher. (1982) conducted a survey of 142 North American firms' planning practices: 78 percent of all respondents reported planning terms in the range of three to five years. Boulton et al. (1987) found that 60 percent of 113 large industrial firms they studied employed five-year planning horizons and that only 23 percent had three-year horizons. Internal complexity was associated with higher development of planning functions and higher involvement of top corporate management in initiating planning procedures. these studies' results seem to indicate that comprehensive business planning can function effectively as a means by which the business of complex organizations may be made more orderly. Thus. in a study of fortyeight large British companies.. Grinyer et al. implying that organizational complexity tends to be perceived as an impediment to adaptation during periods of fundamental changes in the external environment. 1974). 1991). Robinson and Pearce. THE PLANNING HORIZON Selecting an appropriate planning horizon is a perennial problem for which planning professionals rarely find satisfactory solutions. In essence. They conjectured that their findings reflected a growing need for top-level control and coordination of operating units as a corporation's size and complexity increase. Grinyer et al. thereby serving as a risk management device. beyond five years. Capon et al. 1994. In a similar survey. and of extreme environmental uncertainty (Kukalis. and the planning staff was integrally involved with top corporate management in defining goals and strategy.than DM 8 billion and 75. Firms with greater perceived organizational complexity tended to have more sophisticated planning systems. and integral direction of planning procedures by top corporate management (Friedrich and Land. However. Roney (2001) did investigate the planning horizons of 324 . its planning approach unlike that in more diversified companies.

For example. environmental services. or maybe seven or eight years out. industrial construction. payback periods on strategic programs probably are a lot longer in asset-intensive process industries than they are in service industries. Shaded bars denote asset-intensive industries. the flexibility of the foregoing viewpoint makes intuitive sense. criteria for selecting the planning horizon's limit include: The point where present values of discounted cash flows reach zero The ROI payback period The product life cycle The relative permanence of goals . ” he argued. on turbulence in the competitive environment. 49 percent of firms in the fabrication industries and 42 percent of firms in the service industries had planning horizons of more than five years—further suggesting an asset intensity-planning horizon relationship. should be scanning the future at a distance ahead which will allow the company time to spot. They argue that there is a horizon beyond which planning effectiveness will not be improved. basic metals. Wilson (1972:69) proposed that the planning term should be based. Thus. chemicals. which looms large. petroleum.” “The planning system. but rational grounds for selecting a planning horizon are available. suggesting that the planning horizon and asset intensity may be related. banking.3 Inter-Industry Differences in Long-Range Planning Incidence. Planning beyond that point is fruitless because projections further into the future are irrelevant to performance potential.companies in ten cyclical industries (auto components. building components.3). or set of connected things. Accordingly. This is not to say that companies necessarily choose their planning horizons rationally. plan for. N=324. and electric utilities) during 1994 and 1995 (Figure 7. Planning horizons were five years or longer in 74 percent of petroleum companies and 74 percent of electric utilities. Thus. 69 percent of firms in the process industries. “in any company's future there is usually one thing. in part. and handle these events. but only 33 percent in the banking industry. More than half (59%) of these large public corporations had planning horizons of five years or longer. Figure 7. “There is a connection between turbulence and the distance into the future which a company should look. Indeed. say two or three years out. the vast majority of asset intensive firms prepare plans with horizons of at least five years. 1995 over.” Whereas. the horizon should be shortened when turbulence increases and be lengthened during calmer periods. More- Source: Roney 2001. machinery. Friedman and Segev (1976) offered a more doctrinaire approach to selecting the plan's term. like the radar screen.

16 percent bi-annually. It therefore may be hypothesized that the implications of complexity and volatility of business conditions for an appropriate choice of planning horizons are opposites. who had found that environmental turbulence (versus complexity) was inversely correlated to the planning term's length. Capon et al. the planning horizon should be no more than two years. while 34 percent reported quarterly reviews and nearly a quarter of the respondents (24%) reported monthly review frequencies. Moreover. was significantly correlated to environmental complexity. (1982) of 142 U. however. that result differed sharply from Kudla's findings. from a pragmatic point of view. the number of available projects will decline during recessions. Most recently. as should the planning horizon. they concluded that. and 16 percent monthly. Kukalis' findings must be tempered by those of Lindsey and Rue (1976). (1987:94) found that two-thirds of the 113 large industrial firms reviewed their plans annually. short payback periods should be accompanied by shorter planning horizons. FREQUENCY OF REVIEW Another procedural issue that often concerns planning executives is the frequency with which strategic plans should be reviewed. In the study by Kukalis (1991) mentioned above. and Canadian firms in 1979 disclosed similar results. corporations (58% of the 557 companies initially contacted). Only 33 percent of respondents reported that plans were reviewed annually. Thirty percent of firms with the most fully developed strategic plans reported biannual reviews (about twice the total sample's average). it also was found that the frequency of review. But it is remarkable that long-range plans were reviewed at least quarterly almost half of the time. for small firms. Similarly. Robinson and Pearce (1984) came to a similar conclusion after conducting research into planning practices of small firms. In more complex markets and industries. Roney (2001) also found that 65 percent of 324 industrial firms reviewed their plans no more frequently than once per year. Ang and Chua (1979) reported that 71 percent of 113 large U. On the other hand. firms with short product life cycles also should have short planning horizons. Firms that experience high levels of environmental volatility and/or complexity tend to review their plans most frequently. PARTICIPATION AND CONSENSUS . planning horizons typically were longest. It is not at all surprising that annual reviews were the most frequent.S. Kudla (1978) surveyed 323 large U. corporations updated their plans only annually.S. and vice versa. Lindsey and Rue's (1976) earlier study of relationships between environmental turbulence and several indicators of planning sophistication also found that higher levels of environmental turbulence tended to be accompanied by more frequent reviews. There also seems to be a suggestion that the incidence of frequent reviews has declined over the years that these surveys were conducted. Moreover. The most common review frequency was annually (40%) followed by quarterly (26%) and monthly (18%). and often twice per year. Two hundred seventy-two of those firms (84%) reported that they had a formal plan covering at least three years. long-range plans of business are reviewed at least annually. But the number of possible projects (and planning horizon) will increase with the size (and complexity) of an organization. like the planning term. In conclusion.The “lead time” from formulation of strategy until its realization Thus. Kukalis (1991) studied 115 large manufacturers and found that planning horizon was significantly correlated to environmental complexity.S. A survey by Boulton et al.

202-4. In the past three decades. organizational integration did seem to encourage higher performance levels. a higher level of participation in the planning process should elicit a higher level of acceptance. they wereunable to demonstrate a correlation between consensus on objectives and rates of return on net assets. 1975). A history of this research and theory that stems from it are traced in the following paragraphs. then a non-participative approach is appropriate. 221). In fact. 1974).” In the 1980s. Moreover. Lawrence and Lorsch (1967) first studied structural integration and consensus in ten manufacturing companies. it is now possible to test the foregoing conventional wisdom objectively. Japanese management structures in fact are highly authoritarian and usually centralized (Kono. but they did not follow Western decision-making and implementation methods (Ohmae. 68). 1976). Other groups (agreeing on both goals and means. Grinyer and Norburn (1975) subjected the consensus question to a more rigorous statistical test by studying 21 British companies during 1966-1970 and interviewing 91 of their officers. Consequently. a group decision is desirable. might permit an organization to explore a broader range of alternatives before making ultimate selections. This finding stimulated a great deal of interest in the possibility that discord. Thus. But if acceptance of a decision is more important than quality. Surprisingly. 1972). 1969:44-56. broad-scope involvement of the management team in planning procedures typically is viewed as desirable. Similarly. Combinations of top-down and bottom-up methods also were devised (Berschin. concluded that “if quality of the plan is more important than acceptance. Indeed. Later still. Bourgeois (1980a) reported on a study of twelve non-diverse companies in the northwestern United States. or disagreeing on both goals and means) exhibited about the same moderate levels of performance.It is conventional wisdom that “participative” approaches are most conducive to successful planning procedures. According to this conventional wisdom. 1976:67. in summarizing the state of the art. rather than consensus. autocratic and even highly entrepreneurial management styles (both of which rely on individual top managers for direction and decision making) are not conducive to line managers' acceptance of strategic decisions (Wilson. “resistance” of managers to the planning process should be lessened (Ewing. most observers seem to have missed the point here. They adopted Western management organization structures and planning procedures. Performance was . 1973) and became popular in large corporations (Vancil and Lorange. Taylor. To a great extent. For this reason. Stagner (1969) found that the level of satisfaction with decision-making processes (a probable characteristic of consensus) distinguished companies in the top and bottom thirds of profitability rankings. 1982:220-27). In this early study. consensus actually was inversely related to performance. Highest performers were distinguished by managers' disagreement on goals but agreement on means (or strategy) for their accomplishment. More participative approaches became popular during the early 1970s (Humphrey. Taylor (1976:67). a higher preference also was placed on consensus building (not just participation) as an element of strategy formulation. Bourgeois (1978) later demonstrated that disagreement on goals was positively correlated to performance when management had accurate perceptions of environmental risk. The lowest performers were least integrated. They found that higher levels of integration characterized the best performers. within a management organization. this was because Japanese management styles (which became quite prominent in the 1980s) emphasized consensus of team members in order to achieve high levels of organizational productivity and effectiveness (Ohmae. a considerable amount of empirical study has been directed to questions of consensus and participation in planning. Similarly. However. 1982:220. it is believed. Managers of the lowest performers agreed on goals but disagreed on means to their accomplishment. of the strategy that ultimately is adopted. concurrence of management team members on strategy should result in a higher level of their commitment and willingness to implement strategy.

drawing on the concept of slack resources. Hall (1983) demonstrated that high levels of consensus regarding strategy among members of the top management team resulted in a shared understanding. One of the most recent studies on this issue was conducted by Wooldridge and Floyd (1990). must achieve broader consensus beneath the top . on the other hand. as accuracy of risk assessments (PEU) increased. who examined 20 banking organizations. Goal diversity still was positively correlated with performance. intercorrelations of planning expertise variables were found. Consensus on strategy always resulted in higher performance than when there was disagreement on strategy. companies for cultural reasons. Dyson and Foster (1982) attempted to correlate participation and thirteen measures of planning effectiveness. Conversely. who found that successful firms in Belgium were more likely to manifest disagreement on alternative means to reaching goals of technological innovation. Dess reasoned that this may have been because his study included primarily small companies and employed subjective performance assessments of respondent companies' top managers. Bourgeois (1985) examined the matter further by studying disagreements between executives' goal preferences and their accuracy of perceived environmental uncertainty (PEU). participation levels were less necessary. But. with more slack.highest of all when management agreed on very narrow objectives of strategy (but disagreed on broader goals) and agreed on means for goals' achievement. Dess (1987) studied the planning behaviors of 19 paint manufacturers. They observed that consensus probably is more important in incremental versus deterministic planning approaches. a broader scope of objectives may be pursued by managers who have divergent views. regional and/or national culture is yet another contingency to be considered when designing the participative dimension of a planning procedure. can develop consensus that is limited to the top management team. they argue. performance decreased. as PEU and actual environmental volatility measures diverged. (1978). Participation of mid-level managers may have enhanced consensus. Wooldridge and Floyd (1989) attempted to reconcile the different findings and theoretical views regarding impact of consensus on the efficacy of planning processes and performance. Thus. As slack resources are increased. which in turn facilitated implementation. (1980) observed that planning in European companies often is much more participative than in U. In a study of planning practices in ten U. where shared understanding of strategy should be high. While that finding disagreed with the studies mentioned earlier. However. Somewhat at odds with the foregoing studies were the results of DeWoot et al. Planning expertise was inversely correlated with the level of participation. They also observed that deterministic approaches tend to be found more often in centralized (versus decentralized) organization structures. perhaps suggesting that when firms had achieved technical planning expertise. organizations. Using cluster analysis.K. Incremental approaches. Managers' consensus on goals was associated with higher performance when consensus on strategy was held constant. Kloeze et al.S. They found that managers' consensus on their firms' strengths and weaknesses was associated with higher rates of return on assets than when there was disagreement. Mid-management participation in formulating strategy was correlated positively with performance. Bourgeois and Singh (1983) attempted to resolve the disparate findings of studies regarding participation and consensus theoretically. Deterministic (or “synoptic”) approaches. A study by Hrebiniak and Snow (1982) produced results more along conventional lines. but consensus itself did not enhance performance in this study. the top management team should be more able to resolve conflicts regarding goals and strategy. This is because. without exhausting the firm's resources. so did performance.

Thus. Wooldridge and Floyd (1990) found that mid-management participation (but not consensus) enhanced performance. (1978)—disagreement on strategy Bourgeois (1980a)—disagreement on goals Bourgeois (1985)—disagreement on goals Recall that Dyson and Foster (1982) also found that participation in strategy making was inversely related to “planning expertise. agreement on means surely did so. Notwithstanding the foregoing research findings.” On balance. Still. it is difficult to summarize the lessons of research with regard to roles that participation andconsensus can play in enhancing the effectiveness of planning. More troublesome. or a firm's performance. Notwithstanding the foregoing attempt. while disagreement on goals may have enhanced results. Bourgeois' findings would present a troublesome issue for planning methodologists. by suggesting that discord in the executive suite actually can be beneficial to firms' performance—a proposition from which many chief executives might take little comfort! . however. 1980a) that disagreement on goals might enhance performance. Even Bourgeois's study (1980a) concluded that. strategy. are the findings by Bourgeois (1978. It would be helpful if researchers other than Bourgeois had confirmed his findings. some understanding of a strategy's rationale among the organization's members obviously is required before their full commitment can be achieved. Credible studies actually have produced results on both sides of the ledger. If they were replicated and confirmed. the following studies seem to have demonstrated positive impacts of strategic consensus on financial performance: Lawrence and Lorsch (1967)—“integration” of the management structure Stagner (1969)—“satisfaction with the decision-making process” Bourgeois (1980a)—agreement on means (strategy) Hrebiniak and Snow (1982)—agreement on firms' strengths and weaknesses Hall (1983)—top managers' consensus on strategy Bourgeois (1985)—accuracy of the management team's PEU assessment Dess (1987)—consensus on goals Moreover. the weight of evidence from these studies' results seems to support a conclusion that consensus of the management team on a firm's business conditions (internal strengths and weaknesses and environmental uncertainty) and on means to achieve goals and accomplish strategy serves as a strong performance enhancer. So far. Comprehensive analysis of alternatives is less likely when the planning approach is incremental. credible researchers also have found that management discord may be positively related to performance: Grinyer and Norburn (1975)—disagreement on objectives Bourgeois (1978)—disagreement on goals DeWoot et level. those studies seem to stand alone.

As managers with those skills are hired and succeed. 1987.Perhaps the economic concept of managers' satisficing vs. these are hypothetical conjectures. Snow and Meyer (1978) described this phenomenon by explaining how strategies may become self-reinforcing. Planning executives should attempt to design the planning procedure so that it fits the style of top management as well as other elements of the . In fact. The corporate culture also can perpetuate strategy. they hire other managers with whom they share technical skills and preferences. Their common traits created an “industry culture” that also influenced corporate strategies. the selling organizationgains even more political strength within the firm. Miles. managers with new account development skills are needed. Thus. b). the arrivals and departures of chief executives have been shown to make a significant difference in firms' financial performance (Lieberson and O'Connor. the railroad industry's slow growth rate had affected the type of executives who were found in railroad firms. 1972). Thus. They observed that senior executives are recruited in response to directors' requirements that reflect the directors' own backgrounds and strategic views. was described by Harris (1979) who found that railroad executives were older and more likely to have risen through the ranks than in other industries. However. 1989). 1982). such executives then recruit team members who share those same views. CORPORATE CULTURE In his first text on strategic management. 1981). The result of this process easily can determine a firm's culture. For instance. while consensus on strategy usually is. That slack resources can serve as facilitators of strategy formulation (Bourgeois and Singh. More important. and corporate strategy formulation takes on a bias favoring sales and growth even when that no longer may be appropriate. 1987. 1983) may explain why top management conflicts on goals can exist but still be resolved to a point where consensus on strategy is achieved. optimizing behavior in decisionmaking (Cyert and March. his text on “the human side of planning” still is seminal reading for planning executives. In turn. 1973. 1983. Indeed. when marketing management adopts a “prospecting” strategy. but not necessarily (Dyson and Foster. Shrivastava and Nachman. There have been many subsequent observations regarding the forces and limitations that corporate culture can exert on strategy. 1956) ultimately will help to resolve this confusion. on an industry-wide level. Not surprisingly. they gain prominence in the organization because of their skills' importance. 1972. Perhaps one of the most important was contributed by David Ewing (1969). failure to diagnose and deal with cultural issues can shorten the life expectancies of both the planner and the planning function (Knoepfel. An illustration of this syndrome. Shen. 1998. Mid-management participation in the strategy-forming process may be helpful in this respect (Wooldridge and Floyd 1990). It is widely recognized that there can be dramatic differences in styles of chief executives (Molz. we can conclude only that consensus on goals may not be necessary for excellent performance. 2000a. Ansoff (1965) observed that the executive who intends to introduce a new strategy should be prepared for resistance to change commensurate with the discontinuity that the new strategy may inject into the culture or power structure of an enterprise. Nutt. a management team's mutual understanding of strategy probably facilitates the implementation and therefore accomplishment of results (Hall. Hambrick and Mason (1984) formulated several hypotheses to explain how such cultural phenomena operate. Pennington. MANAGEMENT STYLE The chief executive's management style also will have a determining impact on corporate culture as well as the planning function's approach and effectiveness. Hambrick. Discontinuity is likely to be exacerbated if the power structure actually must shift as a consequence of changes in strategy because managers who are entrenched in the institution—and who probably contributed to the firm's prevailing strategy—will be threatened. At this point.

consensus. They found three styles of management in these firms: “strategic planning. direction of decision authority. his inquiry has not been followed by other researchers. is a step in the right direction. 1975.corporate culture including management structure. nearly always including the CEO. there has been very little empirical research or even theoretical writing on methods and impacts of matching planning approaches to management style. rejection. invisibility. But the third style. in which ten CEO management styles are described. While these three styles' labels are self-explanatory. Readers surely will recognize chief executives whom they have met in these brief but vivid profiles. detail. Goold and Campbell (1988) surveyed 16 large British firms. In this study. Thus. despotism. It would be helpful if researchers could identify the propensities of chief executives with different styles to adopt specific approaches to planning. Hambrick and Mason. 1984). ” and “financial control. interviewing between five and twenty senior executives in each firm. Such style choices typically reflect executives' personal histories and social expectations (Downey. The research by Molz (1987). It is amusing but informative to read Golightly's (1977) small book. mentioned earlier. Golightly formulated these characterizations based upon an extensive consulting career. More modern contributions to the literature of organizational psychology well may add to or delete some of Golightly's archetypes.1). will not be successful. manipulation. Molz (1987) defined three management styles. each of which seems to be associated with a different approach to selecting strategy (Table 7. five “tensions” (or trade-offs) between management styles were discerned: Corporate level direction versus business unit autonomy Profit centers' independence versus interdependence Detailed planning versus entrepreneurship Long-term versus short-term objectives Tight control versus flexibility The choice of a management style will determine how these five “tensions” are resolved. Ultimately. a planning executive presumably will be better prepared to select an appropriate planning procedure. management style is defined by the way in which a chief executive relates strategy to the organization. particularly the chief executive. lacking basic consistency. Hellriegel and Slocum.1 Management Style versus Planning Approach Management Style Charismatic/extroverted Typical Planning Approach Top down/authoritarian .” Each style represented successive steps toward decentralization of decision making and greater autonomy of line managers in performing planning functions. However. however. survival. it is somewhat disconcerting that guidelines for achieving such a match do not exist. It would TABLE 7. the point remains the same: Planning procedures must be compatible with the predominant style of a firm's top management. Golightly labeled his ten styles as management by inaction. it is important to note that either of the first two styles can be successful. Unfortunately. ” “strategic control. There have been very few studies of management style's impacts on planning's effectiveness. Having diagnosed management styles of the top management team and the chief executive. Quite remarkably. and leadership. creativity. normal levels of participation and consensus.

Management Style Indigenous/introverted Disjointed/ad hoc Typical Planning Approach Logical incrementalism Inconsistent. fear of uncertainty. differentiation) in dynamic. With an elegant application of binomial probability analysis. He concluded that there is a perpetual conflict of intellectual interest between planners and line managers. Ansoff's (1965) observation. and need for control over their environment (Reichman and Levy. as well as their own persuasive skills. environmental. fear of failure.. RESISTANCE TO PLANNING There is little doubt that the planning executive must assess corporate culture and management style before attempting to craft an effective planning procedure. scanning. especially because there seems to be a natural tendency for managers to resist planning. product-market innovation.g. rivalrous be even more helpful if the interactions of management styles and planning styles were evaluated in terms of their impact on consensus. and to underestimate the difficulty of making strategic change in an organization. Whether or not any of Ewing's theories ultimately can be proven empirically is almost beside the point. and strategy making. ” (1969:202) regarding the tendency of a planning initiative to elicit an anti-planning response.. observing that every planning process creates an anti-planning response due to three aspects of human nature: The tendency to assert individuality An urge to “get back” at the planner for imposing control The desire to avoid responsibility and accountability Although Ewing's hypotheses have not been put to any systematic empirical test. was noted earlier. Thus. Eventually.g. control. But. risk taking. David Ewing (1969:203) studied the tendency of managers to resist planning initiatives. planning professionals are left to their own devices. corporate performance. that changes in a firm's strategy probably will encounter at least some organizational resistance. Ewing (1969:62) also observed that planners tend to overestimate the logical appeal of planning. Psychologists have offered several reasons why managers naturally resist planning—including anxiety. What has been known by experienced planning professionals for many years is that Ewing's “fourth law of planning. (2) cognitive limitations that cause models of reality to resist reformulation. special consideration should be given to . on this matter. they are consistent with the experiences of many planning professionals. and/or heterogeneous environments. they analyzed “runs” in strategy-making behavior (e. Studying 20 continuous years of history in each of 26 firms. and strategic variables. they demonstrated organizations' resistance to reversals. and/or survival of the planning function. at least for the time being. or (3) reluctance to disturb the delicate balance among structural. They reasoned that the persistence of strategy-making modes could be explained by three lines of cognition: (1) a conscious attempt to pursue an orientation that has proved to be successful in the past. however. 1975). hostile. indeed is an accurate characterization of how managers behave. adaptiveness) and organizational behaviors (e. such studies probably will be done. authority conflicts. centralization of strategy-making authority. Miller and Friesen (1980) demonstrated empirically that the tendency of managers to resist changes in strategy really does exist. indecisiveness. changes in structure.

Planning functions should be most fully developed when the firm's structure and/or its environment are most complex. • Discord regarding goals and objectives may enhance the firm's performance potential when surplus resources (“slack”) give management time to deliberate and the opportunity to plan for strategic contingencies. relies on good organization (1969:175). • Consensus on strategy is most beneficial to performance in firms that practice incremental/bottom-up planning than those that practice definitive/top-down planning. however. when marketing conditions are unstable. but there must be team consensus on risk before this benefit accrues to the firm. this chapter discussed several contingencies that may compel refinements of the general model to fit a firm's particular circumstances. General guidelines for accomplishing that result were discussed in a previous chapter (on comprehensive planning models). While essential characteristics of comprehensive business planning procedures (the general planning model) apply to nearly all firms. but less so. • Consensus of the management team on the nature of external business conditions and strategy should result in better financial and competitive performance than otherwise. Eight collections of contingencies have been reviewed: Level of risk Organizational size and structure Structural complexity The planning horizon Review frequency Participation and consensus Corporate culture Management style Comprehensive planning provides a way for the chief executive to select and implement a rational style of management effectively. The plan should be comprehensive and detailed when marketing conditions are stable. These contingencies include the following: •The firm's size and structure (centralized versus decentralized) will determine how planning authority and information should flow between top and line management. planning procedures must be appropriately designed and aligned with the firm's individual circumstances. Planning functions' development should be increased commensurately with the level of environmental uncertainty.” The professional.psychological inertia by the planning manager. SUMMARY AND CONCLUSIONS This chapter has explained several contingencies that must be considered when designing a comprehensive planning procedure. • Environmental stability/turbulence. Because of their broad scope and far-reaching implications. • Risk. • Complexity. . • Accuracy of the management team's risk-perception increases financial performance potential. “The amateur relies on enthusiasm and zeal to get planning done. he says. when revising the planning procedure or designing a new one.

those with short product life cycles. complexity. and industries' accommodation of slack resources or munificence. complexity. • There is a natural tendency for managers to resist any new strategy or planning procedure. A checklist that may be used in auditing the planning situation and adjusting the formality of procedures discussed in this chapter appeared in a text by Steiner (1979). and volatile marketing conditions. asset-intensive firms. Hypothesis 7. Indeed. The professional planning manager should diagnose each of these contingencies' potential impacts on effectiveness of the planning function and (subject to CEO approval) adjust the firm's planning procedures accordingly.11 Hypothesis 7. Of course. and communication technology have made perpetual replanning feasible for nearly all firms. an acquisition or divestment. and those doing business in relatively stable markets. and least frequent for large. Comprehensive planning functions enhance firm profitability where the environment is complex. from time to time. and/or a significant shift in the firm's financial or competitive fortune (and slack) will cause a significant change in some or all of these contingencies. and environmental stability. asset-intensive firms in stable markets. and strengths or weaknesses of internal functions. just to be sure that they still are appropriate. thereby imposing a premium on the planning manager's political and diplomatic skills. data storage. • The importance of perpetual replanning cannot be overemphasized. • The frequency of review should be most frequent for small businesses in volatile markets. but they are generally accepted by professional practitioners. As a general rule.12 Hypothesis 7. in asset intensive and mature or declining industries. it is prudent to introduce small changes gradually. or risk. Modern computing. short investment payback periods. Comprehensive planning operates as a risk reduction device. it is provided in Exhibit 7. Planning methods should be adjusted to rationalize environmental uncertainty.13 . quarterly or mid-year reviews are believed preferable to annual reviews.• The planning horizon and forecast period should be selected on the basis of a firm's size. Accurate assessment of environmental uncertainty enhances profitability. GENERALLY ACCEPTED PLANNING PRINCIPLES: PROCEDURAL DESIGN CONTINGENCIES Risk Postulate Postulate 7. The planning process may need to be amended when these contingencies shift. • Corporate culture can exert a powerful but often invisible influence on strategy selection and management style: its nature therefore is difficult but important to diagnose before the planning process is designed. as well as acceptance of the planning function itself. it is a good idea to conduct an annual “checkup” of planning procedures. a change of chief executive.1 7. Longer planning horizons are appropriate for large and/or complex corporations. rather than large changes less frequently.12 Environmental risk is a function of dynamism. Shorter terms are more appropriate for smaller firms. Few of Steiner's conclusions in that table have been confirmed empirically.1. asset intensity. and the plan should be subject to review as soon as it is known that business conditions (external or internal) have changed to a point where the plan's vital assumptions no longer are valid. Bearing in mind that managers naturally resist new planning procedures. • The chief executive's style of management also should be diagnosed before a planning process is designed because a CEO's style will determine the flow of authority in decision making.

27 Hypothesis 7.Hypothesis 7. the sophistication of their planning procedures also tends to increase.22 Hypothesis 7. planned results are more likely to occur.21 Hypothesis 7. decentralized) determine appropriate planning and decision-making procedures (top down. rather than politically.26 Hypothesis 7. team. EXHIBIT 7. bottom up. Comprehensive planning.24 Hypothesis 7.14 Comprehensiveness of planning functions is more likely to enhance profitability in stable versus unstable industries. Required planning skills also are determined partly by a firm's complexity. As firms' structural complexity increases. complex. one-plant companies Democratic-permissive Operational leader Intuitive thinker Experienced in planning Turbulent environment Severe competition Single market and customer Short production lead times Simple manufacturing processes Low technology Short market reaction time Tough short-range problems To train managers Organizational Contingencies Axiom 7. Growth is enhanced by decentralized versus centralized planning procedures.1 Factors Influencing Planning Process Formality MORE FORMALITY ORGANIZATION Large companies MANAGEMENT STYLE Authoritarian Policymaker Inexperienced in planning COMPLEXITY OF ENVIRONMENT Stable environment Modest competition Many markets and customers COMPLEXITY OF PRODUCTION PROCESSES Long production lead times Capital-intensive Labor-intensive Integrated manufacturing processes High technology Long market reaction time NATURE OF PROBLEMS Novel.21 Hypothesis 7. To the extent that planning decisions are made rationally. enhances cohesion of complex organizations. LESS FORMALITY Small. tough problems with long-range aspects PURPOSE OF PLANNING SYSTEM To coordinate division activities Source: Adapted from Steiner 1979.23 Hypothesis 7. 54.28 The chief executive is the senior planning officer.25 Hypothesis 7. . Profitability is enhanced by planning procedures' formality. as an integrative discipline. hybrid). Firm size and structure (centralized. Formal planning is less beneficial to small firms than large firms.

42 Review frequency tends to increase with both environmental complexity and volatility. Participation and Consensus Hypothesis 7. A change of the CEO can have a major disruptive performance effect. and firm capabilities enhances performance.36 Hypothesis 7. Cultural Contingencies and Management Style Hypothesis 7.53 Hypothesis 7. Planning horizons of small firms tend to be about two years.34 Hypothesis 7.32 Hypothesis 7.33 Hypothesis 7.64 There is a natural resistance to both initial strategy and changes in strategy. but many industrial firms review their plans more often than once per year.38 The most common planning horizon. for industrial firms. Strategies can become culturally autonomous and ingrained in management style. Environmental volatility is inversely related to the planning horizon's length. The scanning horizon should be consistent with the planning term. environmental complexity.61 Hypothesis 7.35 Hypotheses 7. Part III Decision-Making Procedures . The chief executive's management style greatly influences the firm's procedural approach to planning. which in turn can enhance performance. the pro Environmental complexity is positively related to the planning horizon's length. Planning horizon limits are defined by the point where discounted cash flows' present values approach zero.31 Hypothesis 7. Consensus can enhance the integration of an organization. Review Frequency Hypothesis 7. Consensus on strategy. Extended planning horizons (beyond five years) are most prevalent in assetintensive industries and least prevalent in service industries.63 Hypothesis 7. For best results. the ROI payback period.62 Hypothesis 7. is three to five years. Planning procedures are most effective when they are compatible with the CEO's management style. The planning term should vary inversely with environmental turbulence.41 Hypothesis 7.51 Hypothesis 7.52 Hypothesis 7. Discord over goals and objectives can enhance performance by extending the scope of alternatives considered. environmental scanning should be focused on a few critical variables. Typical review frequencies are at least annual.54 Participative approaches to planning enhance consensus but not necessarily the plan's technical quality or the firm's performance.37 Hypothesis 7.Planning Horizon Hypothesis 7.

based on the relevant evidence that is available. Many large firms in several industries also are engaged in relatively narrow lines of business. These steps include selecting goals and strategies for their accomplishment. many large corporations consist of several divisions and/or subsidiaries that are engaged in multiple lines of business. In those firms. it is their responsibility to facilitate the decision making of senior line managers by providing internal consulting services and numerous administrative resources so that the best possible decisions can be made. Several techniques for gathering the evidence with which to make planning decisions and to analyze that evidence are described in this chapter. comprehensive plan should be prepared. In these firms. Thus. Of course. individual businesses' plans TABLE 8. decision-making procedures for the single business enterprise are discussed. 8 Planning Decisions in the Single Business In this section. In Chapter 8. those procedures will be amplified in a forthcoming volume of this series that is dedicated to the substance of strategic planning decisions rather than the procedural aspects that are explored in this chapter. procedural steps for making planning decisions in firms with narrow lines of business are reviewed. Procedures for selecting performance standards and strategy also are explored.1 for examples). Planning managers rarely have the authority or responsibility to make ultimate planning decisions—selecting goals and strategy. (Incidentally. In fact. Corporatelevel planning functions that are unique from single-business planning functions are discussed here.) Chapter 9 addresses decision-making procedures for multi-business corporations. each subsidiary or division requires its own comprehensive plan. Particular attention is paid to scheduling of planning activities in complex firms. Most small and mediumsized firms are engaged in limited lines of business. Also discussed are some of the administrative complexities that must be dealt with as corporate structures grow more diversified. Rather. as well as corporate-level strategy. and they also are structured functionally (see Table 8. these procedures apply to virtually every corporation because even multi-business corporations are comprised of individual businesses that must follow the principles in this chapter. and the consolidated corporate plan's feasibility rests on feasibility of its individual business plans.1 Industries Where Participants Typically Have Narrow Lines of Business (A single plan is prepared) Airlines Autos/Trucks Banking Basic Metals Beverages Chemicals Electric Utilities Food Processing Food Service Hotels/Motels Insurance Petroleum Railroads Textiles & Apparel Vehicle Parts Vehicular Equipment are the corporate plan's building blocks. a single. Management of each individual business should follow the procedures in this chapter in order to arrive at sound planning decisions.The third part of this volume reviews procedures for making planning decisions. In either case—single business firm or multiple business corporation—planning for the individual business is a fundamental requisite whether . it reviews procedures to be followed by planning managers in supporting the top management team in selecting standards of excellence for performance (goals) and approaches to pursuing them (strategy). in multiple business corporations. Such firms typically are structured functionally rather than divided into separate business entities. More precisely.

(1985) obtained essentially similar findings: Firms that make the most use of external environmental information for purposes of developing adaptive strategy were more likely to enjoy financial success than those which form strategy primarily on the basis of internal capabilities alone. For this reason. Low performers tended to emphasize integrative planning methods alone. Fredrickson (1984) found that formality of planning can enhance the effectiveness of strategic decisions in a stable industry. Grinyer and Norburn (1975) studied the way in which 21 British companies used information to make strategic decisions about market participation and product line breadth. While high performers also employed integrative methods. environmental complexity. A positive relationship between quality of decision-making information and rates of return also was found. both internal and external complexity were significantly related to planning functions development. we turn now to an overview of decisionmaking procedures for the sole business.a corporate-level plan also is needed or not. Later. and low performance companies selected from the Fortune 1000 during 1980-1984. planning methodology entails collecting and interpreting information that is relevant to assessing the firm's internal capabilities or the opportunities and threats in its external environment. A similar but much broader study by Capon et al. should be predicated on relevant evidence to the extent that it is available. THE IMPORTANCE OF GOOD DECISIONMAKING EVIDENCE It is the planning manager's task to acquire sufficient evidence with which to support sound decisions regarding selections of goals and strategy. They interviewed 91 officers of those firms and found a positive correlation between information utilization rates and rates of return on net assets. Certainly. Their performance was measured in terms of total return to shareholders. medium. they avoided excessively complex planning systems. Moreover. That the effectiveness of planning decisions is related to the soundness of evidence upon which those decisions are predicated actually has been demonstrated empirically. either to select standards of commercial success (goals) or to make selections from alternative approaches to goals' attainment (strategies). he concluded that true “strategic” planning was rare because most firms did not employ information about the external environment sufficiently in their planning procedures. Unfortunately. he related types of information used. procedural complications presented by a multiplicity of businesses will be addressed. In the next chapter. therefore. . Hence. The number of information sources used increased with development of firms' planning functions. In many respects. However. Thus. Fredrickson and Mitchell (1984) demonstrated that excessive formality can impede strategic effectiveness in an unstable industry—raising a serious question regarding the efficacy of excessively formal decision-making procedures in such industries. and management's role in planning to thelevel of planning functions development. Rhyne (1987) again studied planning methods in 66 high. and rates of return were reduced when top managers were dissatisfied with the information used in decision making. Rhyne (1985) investigated “the relationship of information usage characteristics to planning systems' sophistication. Empirical researchers also have begun to demonstrate the benefits of rational and evidentially based decision-making methods. Rhyne discovered that more than two-thirds of respondent firms did not develop the adaptive (versus integrative) functions of planning. High performers emphasized adaptive planning methods and used more information to make decisions than did low performers. their sources. theorists often have described business planning from a perspective of information systems and decision making. however.” In a study of 89 large companies. sound decisions.

and markets where the firm conducts its business. Economic Analysis . These relatively few critical success factors should receive the preponderance of analysts' attention. When executives' perceptions of environmental uncertainty (in the economy.” The horizontal axis describes the environmental domain—economy. Thus. market. Accordingly. it is important to acknowledge at the outset that the number of variables included in an environmental assessment could become overwhelming. and respond to important changes in relevant sectors of the economies. ASSESSMENT OF THE ECONOMY. apparently supporting Fredrickson's studies (1984). or market. interpret. and industry) were the most accurate. The planning function should support assessments in both of these dimensions and in all nine cells (not including the row and column entitled “Scope”) of Exhibit 8. Dean and Sharfman (1993a. (1986) studied alternative planning system designs in 93 firms. that a wellconceived commercial planning function shouldprovide for the adaptive requirements of strategy formation. however. Most recently. the following paragraphs discuss the scope of decision-support information that planning managers should attempt to assemble in the single-business firm. Performing the analyses required to identify the most critical environmental variables and select them for continual assessment will pay handsome dividends in the long run. and alternative futures or “contingencies. These studies demonstrate that success of the firm's business planning mission well may depend on the quality of environmental evidence and soundness of information systems available to support executives in making strategic decisions. b. industry. 1999). conventional forecasting. and assessment of alternative futures. thereby making assessment procedures cost effective. readers may wish to refer to the author's previous text on environmental assessment for strategic management (Roney. The remaining paragraphs in this section are divided according to the three chronological dimensions of Exhibit 8. Findings from Bourgeois' (1985) study of 20 manufacturing firms confirmed that requirement. from findings of research described in the previous section. financial results tended to be superior.1. Moreover. AND MARKETS We may conclude.1—analysis of the present situation. A vertical axis represents the chronological continuum—the present situation. finding that approaches that made the best use of environmental information (“adaptive” approaches) tended to result in the best financial and competitive performance. firms with more formalized planning functions also enjoyed higher performance than others. as portrayed in Exhibit 8. most likely future. this is the environmental assessment function. The following paragraphs provide an overview of environmental assessment procedures. it is important to identify those few variables in the external environment that can have the greatest impacts on performance potential of the firm. management must be able to monitor. For this reason. industries. INDUSTRY.Ramanujam et al. 1996) demonstrated superiority of rational strategic decision-making models over more political approaches and the impediments of political influences on the effectiveness of decision making. Before launching into a discussion of each dimension. For a more detailed treatment.1. Scope of Assessment The scope of environmental assessment may be described by a two-dimensional matrix.

manufacturing. etc. models. technological purchasing econometric forecasting.S. . entry/exit. Potential impacts of impacts of structural shifts— Potential impacts structural shifts competitors' of shifts in due to regulation.S. industry ability to firm does business performance. personal income. cycle models. structural consumer. planning managers can assemble complete trend and forecast information describing the economic aggregates and their components in the consumer. saving rates. trends in employment. public. describes trends in just about every dimension of the U. models. technology. and other North American economies usually can be analyzed by planning managers who make use of data resources that are accessible through the Internet. available from agencies of the U. regulations Industry attractiveness. inputpsychological trend/cycle output simulation. government. In addition to economic data. producer goods' prices. intelligence demographics Demographic Time series Analogies.S. in a consumer products company. these also are readily available from public sources.A great abundance of information. demographics should be included in the scope of variables considered here. In the industrial sector. the U. accounts. regulation. Economic suppliers: Buyers' aggregates of competitive willingness and nations where the behavior. and so forth. new requirements. growth forecasts: socioextension: curves. rivalry. industrial models. Data with which to perform analyses of all those variables are abundantly available from government sources. and finance sectors. and installment debt may be relevant. Thus. purchase. life availability. new consumer needs. trends and critical success factors Analysis Forecasting Contingencies and Alternate Futures Scope Sources of Performance demand: National income norms. opinions hybrids Systemic threats. to a lesser extent. 1999. technology Prognosis of most likely future business conditions styles. from the government of Mexico. Thus. Trends in several critical economic variables may influence the firm's industry and markets.1 Scope of Business Conditions Assessment Economies Industries Markets Scope Diagnosis of the present situation. industrial. competitor dynamics. the analyst may be interested in long-term patterns of capacity utilization. historical factors. new industrial resources' materials. economy. geo-demographics. 1 With those resources. work styles Scenarios describing impacts of changes in fundamental forecasting assumptions The Commercial Environment Source: Roney. expert forecasting econometrics. input/output Purchase decision long-term trends tables. labor availability. Fluctuations in age groups' sizes can have substantial direct impacts on consumer economics and secondary impacts on industrial economic activity. government. Similar data are available from the Canadian government and. Abundant data are available to describe both recent trends and long-term cyclical patterns in general economic activity as well as many EXHIBIT 8. business cycles. interest rates.

its attractiveness for strategic development. planning managers should be knowledgeable enough to provide answers to these five questions if only because they typically add considerable insight into an industry's business conditions. The following guidelines may assist the planning manager in gathering evidence regarding Porter's five forces. on equally favorable terms? How easily can suppliers of essential materials. (1996). and suppliers' bargaining leverage. complete forecasts can be retrieved from the U. government and several large banks' Web sites (Roney. customers' bargaining leverage. depending upon the industry in question. Where firm effects predominate. Moreover. But in services industries. a “positioning” approach may be more appropriate. potential new industry entrants.S. labor. In the manufacturing sector. In brief. and when the analysis is complete. and McGahan and Porter (1997). Thus. Industry Analysis Economists frequently have demonstrated differences between industries' intrinsic performance potentials. Rumelt and Wensley (1981). those five forces are: present rivalry of direct competitors. the effective planning manager must obtain sufficient evidence with which to answer the following five questions: What is the intensity of rivalry among present direct competitors? Do realistic opportunities exist for firms in this or other industries to offer substitute products? What is the probability that significant new firms will enter this industry and/or market segment? How easily can present customers purchase products or services offered by the firm from other suppliers. 1999:220-222). firm effects seem to be much more important than industry effects. an internally focused “resource-based” strategy may be most appropriate. few industries actually are free of competitive rivalry. The relative importance of industries' indigenous economic characteristics as determinants of firms' performance potentials—versus the influence which management exerts through strategy—has been studied at length by Schmalensee (1985). Nevertheless. industry effects apparently determine at least half of the variance in firms' profitability. Numerous software systems as well as consulting services may be employed. The point is simply this: an industry's structure and its intrinsic competitive dynamics can have a significant impact on a firm's performance potential. Porter advises the analyst to take an inventory of nine . But. and overhead sell their goods and services to rival firms on favorable terms? Porter's profile is appealing in its ease of application and comprehensiveness. Porter's “Five Forces” Porter (1980) proposed that an evaluation of five “forces” in an industry will reveal the intensity of its competition and. but where industry effects predominate. using these data resources. therefore. Roquebert et al. all of whom demonstrated that industry—versus firm—effects on performance potentials differ dramatically. for instance. to develop economic forecasts for strategic planning purposes. analysts may wonder what to do about the result. Contributors to current rivalry. When evaluating the current level of competitive rivalry in an industry or market segment. in fact. potential substitute products.specific components of the economic aggregates. but such impacts differ significantly among industries.

contributing factors, each of which can have a significant impact on the level of competition. Those factors are (1) the present number of competitors, (2) growth rate of demand, (3) other industry conditions favoring the industry's growth, (4) costs to be incurred by customers when switching suppliers, (5) the presence or absence of competitors aggressively attempting to gain market share, (6) the potential payoff to competitors from strategic aggression, (7) the firm's potential cost of exiting an industry, (8) competitors' diversity, and (9) the likelihood that weak competitors will be acquired by strong outsiders. Since there is a direct link between each of these factors and the level of competition, planning managers should consider all of them in an analysis of any industry. Entry barriers. The probability of new industry entrants, Porter's third “force, ” is sometimes more difficult to assess than the others. The formidability of entry barriers is inversely related to this probability. Porter identified nine such barriers. Once identified, their analysis is straightforward: Inaccessibility of technology and specialized knowledge to potential new entrants Economies of scale enjoyed by present participants Availability of learning/experience effects Brand preferences/customer loyalty Capital requirements Disadvantages of inaccessible resources such as patents Inaccessible distribution channels Regulatory limits (e.g., licenses) International trade restrictions The planning manager should compile an assessment of such entry barriers in a firm's industry. The probability that new competitors likely will enter an industry or market in which the firm competes then may be estimated. Threats of substitute products. In assessing the relative opportunities for firms in other industries to offer substitute products, it will be helpful to assess several “driving forces of competition.” Porter proposed that thirteen such forces should be considered: • • • • • • Changing long-term industry growth rates Potential product innovations Likely marketing innovations Impending diffusion of technical knowhow Changing cost/efficiency of industry participants Potential regulatory changes • Changing consumption trends • Potential technology changes • Potential entry/exit of competitors • Impending globalization of the industry Emerging preferences for differentiated versus standard products • Shifting societal values or attitudes • Changing industry risk levels •

Recognizing and Defining Industry Types
From the preceding paragraphs, it is obvious that a substantial amount of effort may be required to diagnose the specific competitive dynamics in any industry. For example, industries may differ significantly in their sensitivity to driving forces such as those just listed. However, Hambrick (1983) conjectured that a more “parsimonious” approach to industry analysis might be possible if it could be demonstrated that groups of industries share competitive characteristics. Using the PIMS database of mature manufacturing businesses and cluster analysis, he attempted to find such “types” of industrial goods producers. In fact, he found eight of them, which he named as follows: Roller-coaster commodities (e.g., steel, plywood, fertilizer) Disciplined capital goods makers (e.g., turbines, heavy machinery) Aggressive makers of capital goods (e.g., construction and printing machinery) Closeted combatants (e.g., ready-mixed concrete, steel finishing) Unruly mob (e.g., adhesives, valves, pipe, hand tools, parts) Passive provisioners (e.g., paper containers, paints, nonferrous wire) Aggressive makers of stable feedstocks and supplies (e.g., dyes, hoses, belting, small pumps, motors, photo supplies) Orderly producers of mundane supplies (e.g., abrasives, saws, blades) Industry analysts find Hambrick's approach attractive because it suggests that more efficient ways of assessing the competitive environment than diagnosing each industry separately may be available. No pretense was made by Hambrick to having arrived at a definitive list, but an encouraging argument was made that unique types of industries can be discovered. Such a “typology” could support a better understanding of how each industry behaves, based on typical characteristics of an industry group. If the economic and competitive characteristics of an industry's type are known, the practicality of prescribing strategic planning procedures for that entire industry group should be greatly enhanced.

Other Industry Analysis Methods
The foregoing paragraphs describe only two industry assessment techniques, among many others that are available to planning managers. At one extreme, analysts may choose powerful statistical methods—for instance, the U.S. Commerce Department's Input-Output Tables may be joined with a macro-econometric model. The input-output tables describe intricate interrelationships between industries and the entire U.S. economy. Thus, impacts of shifts in employment, interest rates, or commodities' prices on both individual industries and the economy as a whole can be conducted using such systems. Moreover, impacts of a shift in one or more industries on all others—as well as the economic aggregates—also can be assessed. At the opposite extreme, analogies may be used: one example is the “ecosystem” model that Moore (1996) used to describe relationships between Wal-Mart and its suppliers.

Market Assessment
Whereas strategic assessment of industries entails analysis of supply factors in a firm's external environment, market assessment is addressed to demand factors. At the broadest level, such analyses maybe conducted in the consumer, industrial, government, or finance

sectors. In all cases, however, analysts will need to diagnose the structural components or segments of a sector and organize the analytic approach accordingly. For instance, when addressing consumer market segments, an analysis may be divided into factors that influence demand for non-durables, durables, and services. In each of those subsectors, demand may be further subdivided into market segments of goods and services that are relatively essential or non-discretionary versus those whose consumption can be deferred for some period of time. Another useful analytic approach is to describe buyers' willingness versus their ability to make such purchases in order to discover the point where discretionary consumption may begin to accelerate or decelerate significantly. In assessing factors that influence demand for consumer goods, especially, demographic analysis may prove to be highly useful. Consumers' needs and tastes of course differ sharply between age and income groups. Interactions of those two dimensions (age and income) often serve as powerful discriminators of demand for consumer products and services. In the industrial sector and the government sector, consumption tends to be more rational based on cost/benefit trade-offs. In any event, the planning manager should attempt to identify those drivers of demand most likely to explain increases and decreases in consumption of the firm's products or services. With an accurate understanding of such driver variables, planning managers then can proceed to undertake the forecasting procedures discussed next.

Planning is, if nothing else, an anticipatory discipline. In commercial planning, therefore, any of several techniques should be employed to anticipate future changes in economic, industry, and market variables most likely to affect the firm's performance. Recall that, earlier in this chapter, the planning manager was encouraged to identify certain “critical factors” in the economy and industry. Having identified these factors through the procedures described earlier, it should be possible to form forecasts of changes in them that, in turn, may alter the firm's performance potential. Such forecasts of course can aid management greatly in making planning decisions. The scope of forecasting methods available to planning managers is summarized in Table 8.2. This table classifies planning methods in terms of two dimensions: planning horizon (short, medium, and long term) and anticipatory logic (judgmental, extrapolative, and explanatory). TABLE 8.2 Scope of Forecasting Methods Logic Judgmental (Mainly qualitative) Short ( <1 yr.) Market research Expert panels Decision mapping PERT Moving average Exponential smoothing ARIMA Leading indicators Econometric models Simple correlation and regression Medium (1-3 yrs.) Market research Bayesian Delphi Analogy Decomposition - trend - season - cycle ARIMA Regression Econometric I-O simulation models Long (3 yrs.) Visionary Delphi Analogy Cross-impact studies Decomposition Business cycle Kondratiev cycle Growth curves Econometric models I-O models Life-cycle simulation

Extrapolation (Pattern persistence)

Explanatory (Structural/Causal)

Source: Roney, 1999.

Since commercial planning typically is not concerned with short-term forecasting techniques, they will be of less concern to planning managers than techniques that are applicable for the medium and long terms. However, notice, in Table 8.2, that several short-term techniques also are applicable in the medium term. Each of these techniques can be used to a greater or lesser extent in all three of the environmental domains—economy, industry, and market. Economic forecasting devices that planning managers frequently use include econometric models and models of business cycle timing. Industry forecasting techniques frequently used for commercial planning purposes include linking input-output tables to econometric models (as discussed earlier); industry lifecycle models; and mathematical models of industry growth timing (“S curves”). Market forecasting techniques frequently used for planning purposes include demographic population tables that extend forward for several decades; product and market life-cycle models; and long-term inventory replacement models that anticipate consumers' needs to replenish supplies of durable goods such as appliances and autos, as well as any other products that tend to wear out. Those are only a few of the forecasting techniques routinely employed for commercial planning purposes. Specialists trained in the use of these techniques either must be available within the firm (perhaps in the planning department or a market research department) or, alternatively, professional assistance may be obtained. A qualified consultant can design the forecasting techniques best suited to a firm's circumstances, after which the planning staff can employ them on a regular basis. The key, in any event, is to establish a sustained forecasting program. As additional information is obtained from environmental scanning and early warning procedures, forecasts appropriately should be reviewed and revised. A mistake frequently made by senior management is to assume that long-range forecasts actually will come true. Indeed, they may; but forecasts should be viewed as interpretations of current information regarding the critical driver variables that are under regular observation. When trends in driver variables change, so should forecasts. Of course, this susceptibility of forecasts to change injects an element of risk into any environmental assessment and business planning procedure. Management needs to understand the realistic range of alternative futures, and we will turn to that subject next.

Alternative Futures and Contingency Planning
Students of strategic management long have recognized the difficulties and costs that environmental uncertainty can inject into firms' planning methodologies. For instance, Keats and Hitt (1988) studied 110 manufacturing firms' reactions to environmental instability, complexity, and hostility. They found an inverse relationship between environmental instability and firms' operating results. In response to substantial environmental instability, firms responded by developing simpler structures—that is, by reducing their organizations' complexity. While scholars certainly have differed as to how increases in uncertainty should be answered by strategic management methodology (Ansoff, 1988; Mintzberg, 1994d; Mangaliso and Mir, 1996), nearly all would agree that environmental instability can increase levels of business risk to a point where the firm's performance potential may be impaired. How, then, can management control the risks which flow from environmental uncertainty? One answer is to employ a two-fold technique of (1) forming alternative future scenarios describing the realistic range of relevant futures and then (2) preparing responses to all scenarios that are sufficiently likely and/or important to compel preparation of a strategic response. 2 Exhibit 8.2 portrays the categories of alternative futures which warrant formation of such contingency plans and those which do not. Only those high-impact contingent futures

Distinctive core competences for dealing with VSFs is required for long-term commercial success. but whose emergence is uncertain. A classic contingency planning approach is to trace the evolution of alternative futures from the present to their conjectured outcomes (Schwartz. 1994). among others.) Potential Success Factors (PSFs): contingencies which. cost. High-impact environmental shifts that are either very likely or inevitable should be included in the prevailing plan.that can alter the firm's performance potential a great deal warrant the preparation of contingency plans. commencing with the work of Kahn and Weiner (1967). and effort of contingency planning. However. Forecasting techniques described in the previous section may be employed in developing scenarios to describe alternative futures. followed by Zentner (1982). Low-impact con EXHIBIT 8. A scenario simply describes a shift in the firm's future environment that may influence its performance potential significantly. imminent regulatory ban on use of HCFCs.) Contingent strategies must be available for implementation if/when PSFs' likelihood becomes sufficiently high. (Examples: increasing scarcity of important raw materials. even if they are relatively likely. The most likely scenarios of course will warrant planners' greatest attention. Wack (1985). a significant shift in distribution channels. By assessing the feasibility of event-chains that would be necessary for end-state scenarios to occur. if realized. Subsequently. Source: Roney 1999. by reviewing the likelihood of scenarios' event-chains . (Examples: perfection of low-cost fuel cells for autos. There is a rich literature on the methodology of scenario forecasting. entry/exit of important competitors. responses may be developed for appropriately adjusting strategy to each scenario. 1991). analysts objectively can assess the likelihood of those scenarios. could change the way an industry's or market's participants do business. Routine Business Conditions and Occasional Irregularities: the firm's operating resources and managerial functions should be sufficient to deal with those forces comfortably and competently.2 Evaluating the Commercial Significance of Environmental Forces Vital Success Factors (VSFs): inevitable environmental conditions with high impact. Moreover. and Schwartz (1991). an alternative approach is to describe some future state of affairs and then identify the chain of events that would have to occur preceding the conjectured outcome (Mason. tingencies don't warrant the time.

(Such “stars” will be the primary sources of earnings. She found that a “selective . However. also provided positive cash flows. it should be possible to assess emerging changes in their probabilities. and Day (1982) tested hypotheses that businesses in different cells of the market share/growth matrix would have different tendencies to generate or consume cash and exhibit differences in rates of return. as opposed to cash flows. 1985). Consequently. This is precisely the “payoff” intended from contingency regular intervals.g. Scenarios that are growing more likely of course will warrant development of more detailed contingent strategies.1). management can prepare to influence the outcome more successfully than otherwise would be possible. industry. using the PIMS database. Eventually. One dimension describes the firm's relative competitive strength or functional capability.1) demonstrates a classic technique for comparing competitors' positions on an industry's battlefield. while the second dimension describes the industry's or market's attractiveness. Some surplus cash also may be required to fund profitable products with high shares of fast-growth markets.. firms with high shares of slower-growing markets can enjoy positive cash flows that may be invested in faster-growing markets. MacMillan.and slow-growth markets. Businesses did differ in performance and strategic attributes largely as expected.2. those that seem to be declining in likelihood will not warrant much more attention. Hambrick. Surplus cash flows from products or services where market shares are high but growth rates are low (e. For example. as portrayed in Figure 8. “dogs” (firms with low shares of slow-growth markets) actually were not as unsuccessful as expected and. the planning manager should be in a position to evaluate strategic problems and opportunities using any of several two-dimensional “matrix” methods that have appeared in academic and professional business literature over the years. ASSESSMENT OF INDUSTRY POSITION Having assembled satisfactory information regarding the firm's comparative capabilities and environmental conditions. Ideally. Some surplus cash flows should be made available to develop promising products in relatively fast-growing markets where the firm has not yet established a strong position (for instance. these researchers proposed that cash flow expectations of the matrix model should be modified. However. and market forces sufficiently before they occur. thereby confirming the model's general provisions. a scenario prepared at Shell Oil Company in the early 1970s correctly anticipated the Arabian Oil Crisis of 1974-1975. The “high ground” of this battlefield is held by competitors and products with high shares of rapidly growing markets. the firm should have a balanced mix of products with high shares of fast. new products in emerging markets). The following paragraphs discuss five such approaches to evaluating a firm's strategic situation. the likelihood of one contingency scenario may become so high that it elicits a change in the prevailing plan. Shell was more prepared than other Western petroleum firms because it employed the kind of contingency planning procedures described in this section (Wack. Market Share/Growth Matrix The Boston Consulting Group's four-celled market share/growth matrix (Figure 8. Conversely. By gaining visibility into likely shifts of economic. like the “cows” (high shares of slow-growth markets). in mature market segments) should be directed toward faster-growing businesses that require increasing levels of capital (Figure 8. A study by Woo (1984a) of 40 successful firms with low shares of mature markets obtained similar results.) Products with low shares of slow-growing markets theoretically do not offer strategic appeal in any respect and are candidates for divestment or liquidation.

” pp.1 Market Share/Growth Matrix: Cash-Flow Characteristics Source: Adapted from Hambrick. MacMillan. Issue 2. 7. it is not possible to overemphasize the importance of obtaining the best possible information regarding competitors' market shares and industry/market growth rates. Figure 8. assumptions must be made. Channon. Of course. Vol. Copyright © 1977. before using the market share/growth matrix. 41-55. Multifactor Matrix . “Strategy Formulation as an Analytical Process. F.2 Normative Cash Flows within the BCG Matrix—An Alternative View focus” strategy enabled these 40 firms to generate satisfactory rates of return—thereby raising a fundamental question regarding the BCG model's validity for firms with low shares of mature markets. In such cases. An important part of the firm's strategic planning function must be to obtain and maintain this information. Figure 8. In order to employ the share/growth matrix. and Day 1982. However. planning managers quickly will appreciate the importance of having accurate information regarding competitors' and/or products' market shares as well as industry/market growth rate trends and potentials.Source: Reprinted from International Studies of Management and Organization. as such assumptions are subject to significant error. especially in fragmented industries. D. experienced planners and marketing professionals also know that obtaining such information often can be quite difficult.

” The formulators of this approach (see Allen. as portrayed in Figure 8. Moreover. infancy.3) provides a way to evaluate competitors. and cash flow did not decline because operating expenses declined in parallel with gross . But pretax margins. industry segment. decline. and eventual demise (Polli and Cook. 1979) have provided detailed guidelines for evaluating “industry attractiveness” and applying weights to factors entering into that determination. and market segments simply cannot grow rapidly forever. and market segments when specific information regarding market growth rates or market shares is not available. and other “innovation” indices declined as life-cycle stages advanced. research and development. it is important for a planning manager to identify the life-cycle stage of each product. “business strength” is not based solely on market share.The GE/McKinsey multifactor portfolio matrix (Figure 8. an industry's attractiveness may be based on any one of Porter's (1980) five forces or the analyst's assessment of several “driving forces. but also on operating capability. They all seem to follow a natural evolution—conception. Moreover. Product Life-Cycle Stage The life cycle may provide a useful perspective for evaluating growth potential of a business. Market growth rates declined with firms' and products' ages. rates of return on investment. products. Thorelli and Burnett (1981) studied 1. growth. Correspondingly. distribution. other factors may enter into judgments of industry attractiveness and/or a firm's Source: Adapted from Allen 1979.3 GE/McKinsey Multifactor Portfolio Matrix competitive strength in an industry segment. or market segment in which the firm participates. Therefore. For instance. and profitability.4. 1969). Figure 8. gross margins also declined. industries. maturity. Such factors were discussed earlier in this chapter. technology.148 industrial businesses in the PIMS database during 1970-1979 and confirmed that life-cycle effects indeed could be discerned. marketing expenditures. Even when such information is available. Products.

advertising.4 Product/Market Life Cycle Hambrick and Lei (1985) demonstrated that stage of the product life cycle can have a very important impact on the outcome of strategy. In addition to general strategy. Life-cycle stage was the third-most important and still very significant statistically. Inc. J. Since a firm's economic sector and products' purchase frequencies are relatively fixed. Extensive guidelines for fitting strategic and tactical planning to the product life cycle have been prepared by Rink and Swan (1987). regularity of usage) had even more significant impacts than life-cycle stage among the ten variables that they studied. W. Using the PIMS database of records for 1470 businesses and complex statistical methods comprised of both factor analysis and linear regression analysis. physical distribution. with permission from AMACOM and Arthur D. . Pennington. respectively.. Allio and M. Copyright © 1979. Those investigators found that management's priority ratings for technical efficiency. R. and financial management. management's selection of strategy may not be appropriate for the industry's growth potential. organizational coordination. AMACOM Publishing.e. Figure 8. transportation. and political support of management (structural integrity). purchasing. the scope of these guidelines includes priorities for selling. Mitchell and Summer (1985) interviewed 38 senior managers from 27 electronic manufacturing firms (including 26 CEOs and 12 others) that were in different product life-cycle stages. Smith. These studies have made it clear that the planning manager should make an accurate diagnosis of the life-cycle stage for each line of products or services that the firm offers. increased as the life cycle passed from one stage to the next. life-cycle stage may be the most important of these three for purposes of anticipating long-range shifts in strategic problems or opportunities. they found that economic sector (industrial vs.Source: Reprinted from Corporate Planning: Techniques and Applications. Little. consumer) and a product's purchase frequency (i. Otherwise.

unless it can be developed relatively soon to a point of competitive strength. 1977. This “evolution” matrix also can be used in a somewhat different manner. circles' sizes refer to markets or market segments in which the firm competes. product B is a candidate for divestment. therefore. so. Thus.Product/Market Evolution Matrix Hofer and Schendel's (1978) product/market evolution portfolio matrix employs the life-cycle concept in an interesting and generally underappreciated combination of the previously mentioned methods.. In Figure 8. Absent some kind of technological renewal. to display trends in individual products' positions across an industry's history —and to project it into the future. strong future earnings. In this case. In this portfolio. as it is to form a point of view regarding its performance potential. ” it is not as important to evaluate the market or industry. since its market is declining and the firm's share is low. To formulate a “directional policy. poised for rapid growth Source: Adapted from Hofer and Schendel 1978.5 Product/Market Evolution Matrix and. Directional Policy Matrix The directional policy matrix (Hedley. Figure 8. Hussey. 1978. in the future. Shaded wedges reflect the firm's (or products') shares of those markets. the firm's abilities to develop critical competences in an industry or market of the future matter more than present strengths or weaknesses. E. product “A” is an emerging star. “Competitive position” reflects the firm's relative functional performance compared to competitors. the firm should invest in improving its capability in that line of business.5. With a low share of a growing market. the two matrix dimensions are “business sector prospects” and the firm's competitive capabilities (Figure 8. 1978) draws upon managers' judgment more heavily. this matrix can be used as an excellent long-term planning device. Similarly. and F probably are cash cows capable of funding the development of Products A and C. Robinson et al. But. at present. Products D. product C is in the questionable segment of a growth/share matrix. . Product G's prospects are not very encouraging.6).

this one also is a very useful device for strategy formation itself. In other words. Approaches to assessing industry or market attractiveness (the first dimension) were discussed earlier and are explained more completely. and therefore strategies. in another text by this author (Roney. and market segments relevant to the firm's lines of business— and to assemble a realistic estimate of the firm's comparative ability to perform the functions of its industry in the future. the McKinsey/GE matrix requires an assessment of the firm's “strength” on the basis of various objective measures. (1987:64-65) found that forecasting capabilities in most of the firms they studied were not very highly developed. The following paragraphs are addressed primarily to problems that may be encountered in collecting sufficient information with which to conduct such analyses of internal capabilities. to be revised for so many potential reasons that systematic scanning of the environment for impending shifts is an essential part of any sound strategic planning procedure. They observed that shifting environmental forces often require forecasts. Regarding the second dimension. Capon et al. to use the directional policy matrix effectively. In any event. Capon and Hulbert (1985) earlier had summarized the scope of “strategic forecasting” challenges. Unfortunately. 3 The Problem of Analysts' Bias . is to assemble and maintain forecasts of economic.6 Directional Policy Matrix Of course. credible forecasts and strategies are necessary. the planning manager must be able to express a point of view with regard to business sector prospects and functional performance potential. relative to its competitors. therefore. An essential requirement for the effective use of this matrix. the directional policy matrix takes an essential step from situational assessment to strategic prescription. 1999). recall that the product/market evolution matrix requires an assessment of the firm's relative competence. the planning manager must assemble evidence for assessing the firm's operating capabilities in comparison to its competitors. Like the life-cycle evolution matrix.Figure 8. and the directional policy matrix requires a judgment of the firm's future functional capabilities on the basis of more subjective criteria. In each case. industry. ASSESSMENT OF THE FIRM'S CAPABILITIES All of the matrix methods discussed in the previous section require an assessment of the firm's situation within two dimensions: (1) market or industry position/attractiveness and (2) the firm's ability to perform. in given industry or market segments.

critical success factors are likely to change over time. contracted survey services such as Dun & Bradstreet and Risk Management Associates may be used. among others. any satisfactory description of a firm's internal strengths and weaknesses must include a complete and accurate description of costs incurred by products.Achieving objectivity is the first problem. that can have significant impacts on its potential for commercial success. and administrative. such factors can provide unbiased criteria with which to evaluate the firm's strengths and weaknesses and to formulate objectives for competitive improvement. Indeed. Critical Success Factors One way to reduce bias in evaluating a firm's operating capabilities is to make maximum use of objective criteria. operations. Thus. marketing. Diagnosis of internal operating strengths and weaknesses should be. the function in question probably is a critical failure factor.” These are internal characteristics. For publicly owned firms. For privately owned firms. It is inappropriate to explore here competence assessment standards in all domains. such sources include investor services such as Standard & Poor's. Each industry or segment has its own collection of critical success factors. (1987) confirmed their research hypothesis that perceptions of strengths and weaknesses vary predictably between managers' levels within an organization. operating. firms that lose proficiency in it will be unqualified to compete for competitive advantage in other respects. 1976). Critical success (and failure) factors probably can exist in five domains: the financial. Such advantages can be exploited strategically—especially if the distinctive competence is relevant to one or more critical success factors. or competences of a firm. and . That is. that is not always the case. Assessing Comparative Financial Success Sources of benchmarks that can be used in comparing a firm's financial performance to industry norms and individual competitors' results are abundant. Moody's. then no competitive strength or weakness exists. Regardless of the scope of information employed to describe the firm's operating strengths and/or weaknesses. if most competitors lack a certain competence and the firm is strong in that respect. and Value Line. an objective exercise. and usually is perceived as. Ireland et al. However. Individuals' perceptions of a firm's strengths and weaknesses are strongly influenced by the evaluator rather than the organization's actual capabilities. one essential guideline should be observed. the following paragraphs will provide planning managers withsome procedural illustrations that suggest the scope of approaches that may be taken. Leidecker and Bruno (1987) provided a rationale to aid in defining objective evaluation criteria by clarifying the concept of “critical success factors. alone (Stevenson. a firm's strengths and weaknesses will be distinguishable on the basis of their distinctiveness in comparison to capabilities of other firms in the same industry and/or market. although Snow and Hrebiniak (1980) claim to have found ten categories in just four manufacturing industries. technological. For instance. they must be reviewed periodically. Certainly. as well as many online data retrieval services such as the Securities and Exchange Commission's EDGAR system. if all firms in an industry are equally competent in a particular respect. If empirically diagnosed. the individuals' position or status in an organization can influence the results of such a diagnosis significantly. however. thus. Whether or not a functional competence exists may be immaterial. then a distinctive competitive competence probably does exist. On the other hand. However. Of course.

to obtain a composite score. entails direct comparisons of competing suppliers' functional capabilities. each of these two approaches has limitations. A different analysis is required for each product category or market segment where the customer (or customer group) is served. of course. The beginning point in making such comparisons is to define each competitor's distinctive competences. Evaluation scores may be multiplied by the relative importance of each attribute.3 Marketing Focus: Priorities Strategic Focus Evaluation Criterion Market/ Demand Industry Structure Buyers' Discretion Source: Adapted from Day and Wensley 1988. the approach of Day and Wensley is to assess customers' beliefs about suppliers' performance. as opposed to “incremental” or direct methods (which usually are preferable because they avoid assumptions regarding overhead allocation) or “activity based” methods (which may be the most accurate of all). firm's relative capabilities may be made in each functional area.3). marketing strategy should be more customer oriented. When analysis begins from a customer's perspective. A marketing capabilities analysis. A preferred approach. Assessing Marketing Competences Day and Wensley (1988) provided guidelines for evaluating a firm's marketing strengths and weaknesses from two alternative points of view: customers versus competitors (Table 8. done from the competitor perspective. Often. based on attributes that correspond to their buying-decision criteria. For example.elements of the management structure. Then. In this model. unless. However. marketing strategy should be aimed at exceeding the capabilities of competitors when three conditions exist: market conditions and demand are predictable. here. results of a comparative cost analysis probably will be much different if “fully absorbed” cost accounting is elected. the planning manager should go to any reasonable level of effort in order to assure that critical costs and sources of profit are evaluated regularly and accurately. in more dynamic markets. Therefore. criteria are uniform across categories. Unstable Few buyers with much discretion Multiple buyers with less in vendor selection discretion in vendor selection . some degree of difficulty is encountered in making a selection from alternative cost-accounting conventions. A customer-focused approach initially may disregard some of the firm's particular strengths or weaknesses in an Competitors Customers Predictable Dynamic. is to compare competitors on the basis of critical success factors. then summed. However. Stable Fragmented. the competitive structure is concentrated and stable. In doing so. With each type of analysis. Uncertain Concentrated. many competitors. evaluations of the TABLE 8. it is helpful to compare winning versus losing competitors and to identify critical functions that distinguish winners from losers so that a firm's strategy to enhance internal capabilities can be focused on gaining distinctive competence where it matters most. In their view. attributes must be defined as precisely as possible. the purpose is to set objectives for correcting weaknesses and exploiting strengths so that the firm's competitive advantages are maximized and deficiencies are minimized. and there are very few buyers with disproportionate power. and/or a fragmented structure. Evaluation of the firm's marketing capabilities similarly should be approached specifically from one or both of these perspectives. with shifting demand parameters.

Participants in a study need not even be in the same industry. 1997). Camp. by conducting benchmarking studies of how excellent practices are conducted by the most successful firms. For example. 1993. First-initiative opportunities then may be overlooked. it is possible to identify the “best practices” of particular functions. on the basis of presently delivered products or services. this approach to assessing and elevating internal competences is worth serious consideration—especially as one element of a “continuous improvement” program (Watson. Since numerous benchmarking success stories have appeared in the literature (Glavin. and marketing. The same is true of many functions outside of operations. excellent order service functions may be found in several industries. comparisons of a firm's financial.3). For example. Kearns and Nadler. The first such formal studies appear to have been done by Xerox Corporation in the U. Watson (1993).3 Industry Trade Associations as a Source of Operating Benchmarks . of course. research and development. Thus. including those in administration. which typically are quantitative measures. How to Attain Objectivity of Comparisons The best way to assure objectivity in analyses of internal strengths and weaknesses is to employ unbiased parameters. 1992. planning managers may wish to consult Camp (1989). Equipment manufacturers also publish engineering standards for their products' operating rates: if it is known that a competitor has a particular manufacturer's equipment. then the competitor's operating capabilities should be estimable (see Exhibit 8. which contrasted operating practices in several divisions: underperformers soon closed the gaps between their performance and the best performers. and operating performance indicators to those of comparable firms—that is. Assessing Operating Competences Whereas there are numerous sources of standardized data for assessing firms' financial performance (as explained earlier).attempt to set benchmarks that are focused on end-users' demands. industry associations such as the American Iron and Steel Institute (AISI). 1993. On the other hand. Feltus. marketing. American Petroleum Institute (API). will include both perspectives. In processing and fabricating industries. Benchmarking studies are also performed between several firms rather than within just one corporation (Drew. Zimmerman and Flaherty (1997). for example. Drew (1997). 1989. they are not competitors. 1984. the scope of a competitor-focused perspective can become too narrowly limited to existing functional capabilities: The firm attempts to outperform competitors. albeit with some difficulty. 1992).K. O'Toole. 1989. 1994). American Welding Society (AWS). Camp. Sources of industry norms for such “benchmarking” exercises are abundant. and the American Pulp and Paper Institute (TAPPI) all provide their members with processing standards and numerous technical studies of best practices. but it may neglect customers' emergent needs for different benefits. When benchmarking study participants are in different industries. standards forassessing firms' operating capabilities are harder to obtain. firms in the same industry—often are made. 1996). 1984. Watson. of course. In any industry. or Murray. (Glavin. The best analysis. Kearns and Nadler. but they do exist. As EXHIBIT 8. Numerous guidelines for conducting benchmarking programs will be found in the literature. disclosure and secrecy concerns then are less troublesome.

research and development. asset intensity. sales per employee. quality Institute control.000 businesses. SPI maintains a database describing relationships between 37 “strategic” variables (such as market share. wages and compensation. They also may receive reports defining “optimum” strategies for improving performance potential. which therefore may lose relevance to current business conditions with the passage of time. and EDGAR—the Securities and Exchange Commission's “electronic data gathering analysis and retrieval” system.vma.S. Another excellent source is the Strategic Management Institute's highly developed PIMS program. www. semiconductor firms Association including productivity measures. the Strategic Planning Institute was formed to extend the PIMS program beyond GE and into a broader scope of industries. American Petroleum Numerous practice standards including capacity utilization. desk-top publishing. and worldwide employment figures The Society of the Plastics Industry Financial and operating norms of plastic processing companies Association of Business Support Services Industry production standards for business support such as word International. In 1972. steel Institute imports and exports. which requires more effort but can be especially effective. www. The database recently reflected long-term results of more than 3. the Value Line Survey.afandpa. Inc. and the like. and advertising expenditures) and two dependent variables: cash flow and investment. The PIMS program was begun in 1960 at the General Electric Company.nada. worker training. market share. etc. Also reports energy Paper Association usage.Illustrations Association Industry Norms Reports Annual and historical operating data including fabrication facilities Valve Manufacturers Industry financial and operating ratio and salary Association of America surveys www.abssi.S. by countries. graphic design.api. relative quality. because . etc. American Iron and Steel Statistics on steel industry operations in the Semiconductor Industry Analyses and operating performance for U. wafer www. Dun and Bradstreet. Moody's Industrial mentioned earlier. Studying the performance of firms in a more limited segment may be preferable to using industry-wide norms. Subscribers to the PIMS program are able to obtain reports on “par ratings” for firms in their industries bearing similar characteristics of size.semichips. American Forest and capacity and international trade of major grades. Standard and Poor's. and National Automotive Compiles and publishes average automobile dealer financial operating Dealers Association performance measures www. financial performance and industry structure. Another useful technique. capital www. Regretably.steel. these include trade associations.collisioninsight. SPI has discontinued updating the PIMS database. raw material consumption. and world production of pig iron and raw steel www. processing. is to gather annual reports published by publicly owned companies in a specific industry segment or to tabulate their performance using a commercial data Collision Repair Industry-INSIGHT Financial and operating statistics of automobile collision repair shops www. Weekly capacity utilization reports. statistical compilation services such as those provided by Risk Management Association (formerly Robert Morris Associates).

Thus. The economic value of such cash flows is what is left after cash flows have been discounted at a rate of return reflecting blended costs of debt and equity funding. On the other hand. basic metals. therefore. 1993). Doyle. 1991. (1982) found that objectives most frequently are stated in terms of rates of return on investment and market share.. in a survey of planning practices. economic returns on capital should be based on discounted free cash flows and residual values during a projection period long enough to represent the accomplishment of strategy. Substantial attention has been directed in recent years to the concept of shareholder value as a means of defining the firm's financial success more effectively than simpler accounting measures such as ROI (Rappaport. Blankenship. When a firm elects to define goals in terms of economic value added by strategy to shareholders' . two other strategic success criteria may be an acceptable level of risk and long-term growth (Krijnen. 1979. Financial Success Standards It was mentioned earlier that the firm's financial performance trends should be contrasted to those of competitors and the industry as a whole. Tully. it is the planning manager's responsibility to identify success criteria that may be used in developing goals. many analytic data sources. we will dwell only on the first two categories: financial and competitive. such as Standard and Poor's “Compustat” files. According to the shareholder value concept. a successful firm in a mature industry—such as automotive. 1982). therefore. Shetty. or chemicals—may be more concerned about the industry life cycle and achieving competitive competence in emerging markets to support long-term growth. Copeland. and sales growth are not themselves acceptable as objectives. Those firms are unlikely to be representative of privately owned competitors. empirical research may be required. (That is the subject of the third volume in this series. However. and strategic objectives. whose financing includes greater portions of debt versus equity and who tend to be relatively small in size. that is not necessarily the most useful standard available. 2003:41-45) concur on this dichotomous scope of goals or objectives. The third volume in this series examines these four categories of success standards at length. IDENTIFYING GOALS AND OBJECTIVES The reader should recall that this volume's purpose is not to explain in detail how planning decisions actually are to be made. rates of return. Of course. It is generally recognized that there are at least two fundamental types of commercial success standards that may be used to set goals and objectives: financial and competitive. Moreover. However.. 1990.. a severely indebted firm—perhaps one emerging from bankruptcy—may view success from the perspective of risk reduction and financial solvency rather than profit margins or market shares. et al.g. For the present.) The discount “hurdle” should reflect rates of return that investors can realize in the same industry at comparable rates of risk. in some industries only rudimentary public data can be obtained. For example. Abouzeid and Weaver. we focus on the planning manager's responsibility to install methods and procedures for supporting strategic decisionmaking. Although the most frequently employed financial success standard is a firm's rate of return on invested capital (Boulton et al. but they do provide useful frames of reference. competence benchmarks. 1977. original. 1978. Thompson andStrickland. 1986. Most texts on strategic planning (e. Certainly.) Here. industry performance norms regarding profit margins. in the long term. Stewart.results are more valid and comparisons to the firm's performance are more meaningful. 1994). Thus. the firm that does not seek strategically to exceed normal industry performance levels has no right to anticipate competitive success (or even survival). In order to achieve a truly representative sample. 1977. contain records only of firms whose securities are traded publicly. (Several software packages are available commercially to perform the actual computations. Boulton et al.

That is partly because. unlike financial measurements. Interrelationships of Competitive and Financial Success It is interesting to observe that financial and competitive successes can be closely related. 118 producer goods firms. companies that accumulate significantly more experience in producing a line of products or delivering a line of services eventually may expect to do so at a lower cost than less experienced competitors (Boston Consulting Group. (1982). and Boulton et al. and strategy formulation requires a prescription of core competences that will be needed to achieve future competitive advantages. Competitive Success Standards Defining competitive success standards is more difficult than defining financial success standards. Buzzell et al. 50 “old industry” firms. as well as relevant costs of debt financing. goal setting requires management to predict future business conditions. market share. The most significant model explained more than 60 percent of the variance in consumer goods firms' returns. to obtain. 1970. Abouzeid and Weaver (1978). The producer goods model explained more than 50 percent of the variance in . such as those by Blankenship (1977). and it would be difficult to alter the current structure. 113 consumer goods firms. Other factors being equal. 1975. Presumably. exactly what future competitive success will be like. have demonstrated that firms' competitive goals typically include measures of market share. competitive success tends to be accompanied by financial success. Shetty (1979). well ahead of time. the planning manager of course must assemble sufficient data to monitor rates of return on invested capital and shareholders' equity obtained bycomparable firms in the same industry. at least in the growth stage of an industry's life cycle. competitive measures cannot be assembled by following “generally accepted principles.wealth. as long as production technology remains relatively unchanged. He built ten regression models to determine the sensitivity of returns in several groups of firms—for example. Although the specific concept of a competitive goal as the endpoint of strategy never does appear in Porter's writings. in present industry and market settings. Shepherd (1972) studied relationships between rates of return. Moreover. According to these theorists.. although there may be several intervening variables to complicate the interpretation of this principle. surveys. Hamel and Prahalad (1994) have gone the furthest in defining the nature of competitive success by challenging management to determine. 1985a) broadened the idea of competitive success with his notion of sustainable competitive advantage. After all. it has been demonstrated that firms with disproportionately large market shares typically enjoy higher rates of return on invested capital than their less experienced competitors. Hedley. Porter (1980. and market concentration during 1960-1969 in 231 publicly owned firms. firms with competitive cost advantages are more likely than others in the same industry to achieve high market shares. it is implied that his guidelines for strategy are focused on holding a high share of market segments that management deems to be desirable. some principles regarding competitive success standards have begun to emerge. relevant data regarding the market's size and competitors' sales may be very difficult. Thus. or impossible. Nevertheless. rivals already have probably staked out their preferred positions of competitive advantage. At the most basic level. 1976). 181 “young industry” firms. Early in an industry's life cycle. competitive goals are statements of strong positions in emerging industries and markets that will be attractive in the future.” Moreover.

firms were more likely to have higher profit margins and rates of return. market share was the most significant and first-entered independent variable (see Figure 8. notwithstanding industry concentration or frequency of products' purchase. Shepherd. Hedley (1976) demonstrated that they apply in the life insurance. materials processing.) However. These advantages were most pronounced for businesses in fragmented markets that supply infrequently purchased products. As market shares increased. they also were quite robust. turbine generator. Volume 54. (See Buzzell and Gale. N=231 beginning market shares during 1970-1972. Buzzell. 25-37. W.7 ROI Relationships to Market Share and Industry Concentration. the degree to which these principles may be generalized across industries is quite impressive. a substantial amount of .7). Competitive versus Financial Success: Trade-Offs As the previous section explains. railroad. ” pp. “The Elements of Market Structure. The effect of “share” on profitability was largest in industries characterized by high concentration and moderate (versus rapid) growth. higher quality. Gale (1972) obtained similar results using firms' shares of industry employment as a proxy for market share. G. Gale and Sultan (1975) later studied nearly 600 companies in the PIMS database and compared rates of return on investment of businesses with different Source: Figure 2 from The Review of Economics and Statistics. Copyright © 1972. a longstanding line of empirically supported theory has held that a direct relationship exists between market share and profitability. For instance. and higher prices. with permission from MIT Press. But. and automotive industries. lower proportionate material costs. electronic components.those firms' returns. electronic equipment. lower proportionate marketing costs. Indeed. Figure 8. In each regression model. 1987:70-102 for an excellent explanation of this theory.

1985. finance—and often for combinations of functions. then the objective of that firm's marketing strategy is $50 million of revenue from sources that presently do not exist unless management improves. Figure 8. its competitive strategy (see Figure 8. the relationship between market share and profitability really isn't linear. in plan- . across 45 years. thus supporting the hypothesis that strategies aimed at market share may conflict with those aimed at financial returns. The value of such a gap is a strategic objective.other research has raised serious questions about the fundamental market share-return relationship (Jacobson and Aaker. for example. further increments must be “bought” by lowering price or (more likely) adding value that can't be recovered by higher prices—for example. Anterasian and Graham.9). operations. it must take the shape of an inverted “U. A firm typically has strategic objectives for most functions—marketing. if no changes in internal capabilities or competitive strategy are made. if management intends to capture 25 percent of a billiondollar market ($250 million) and its “baseline” projection suggests that present momentum will achieve only $200 million. After a certain share has been achieved. new features. a wider variety. broader distribution. 1996). 1981. For instance. 1984b. Similar findings were obtained by Anterasian and Graham (1989). disclosed that those which attempted to increase market shares suffered from significantly lower financial results. Eventually. Armstrong and Collopy (1996) have shown convincingly that.8 Hypothetical Relationship of Market Share and Return Some would argue that the firm's goal should be to maximize return on invested capital and not necessarily to maximize market share. Woo and Cooper. contrary to conventional wisdom.8. Developing Strategic Objectives The general approach to be taken in developing financial and competitive objectives of strategy typically entails contrasting goals to “baseline” projections of the firm's likely performance—that is. ” as depicted in Figure 8. Armstrong and Collopy. The resulting “gaps” between baseline projections and goals enable management to measure the amount of improvement required of strategy for goals' achievement. or adjusts. 1989. strategies to achieve these two goals may be in sharp conflict. Woo. administration. A longitudinal study of 20 large firms. advertising and promotion. Rumelt and Wensley. As every seasoned marketing executive knows. 1982. 1981.

4 Purposes of Goals: Management Perceptions . defined clearly enough to permit objective assignments of managerial accountability. success standards will vary. where a strategic objective of $50 million in revenue from new sources was needed to achieve a sales goal of $250 million. As Berg (1965) first observed. In fact. conflicts of interest often arise between corporate and operating management because there usually is competition for investment funds between business units. A diagram identical to Figure 8.9 would suffice to depict this inductive paradigm just as well as the deductive paradigm which was discussed earlier.9. 1974. More detailed discussions of such strategic gaps have been provided by Ansoff (1965). and specific with regard to timing of interim accomplishments (Morasky. 1975). an inductive approach is the preferred alternative. (1987) found that goals were viewed by management of firms with the most highly developed strategic planning functions as serving the purposes listed in Table 8. focused on worthwhile results. Steiner and Schölhammer. the inductive approach is used very commonly. Thus. This principle is exemplified in Figure 8. such procedures are so conjectural as to undermine validity of the goal-setting process.4. In such cases. allocating resources to those with the greatest potential. Criteria for Goals' Acceptability It is generally recognized that success standards must be. sufficiently challenging to elicit vigorous effort. 1977. Of course. Sometimes. however. Inductive Definitions of Goals and Objectives Throughout this chapter.9 Baseline Projection. especially by managers of small businesses in very fragmented industry segments where neither market segment sizes nor market shares are easily estimated. depending upon where they are defined within the management structure. both financial and competitive. Capon et al. Steiner. In their broad-scope investigation of 113 publicly owned firms' planning practices. Argenti (1969). That adjusted total becomes the goal. Program benefits are added to a baseline projection and the total is adjusted for a contingency allowance. Goal and Strategic Objective: Interrelationships ning acquisitions and divestments or launching new lines of business.Figure 8. it may be in the best interest of aTABLE 8. Management simply assembles all of the performance-improving projects that it can. and Kami (1969). we have made an assumption that goals' definition precedes strategy formulation. at a minimum. But what should be done if the firm's market share simply cannot be known? One option is to make reasonable assumptions regarding market size and to proceed with selecting market share and sales goals.

failure of firms seeking to perform a mission similar to that of the firm An assessment of conflicts of interest and timing within and between business units insofar 10. 1987. Competitors' and the firm's market shares Core competences of the firm and its competitors with similar missions. TABLE 8.5. it certainly cannot provide directional guidance to line managers for their planning purposes. When that situation arises. because of the levels of funding that might be required by other divisions. however. borrowed capital 3. until considerable preparations are made. an optimum solution at the corporate level will be sub-optimal at the division level. Gaining acceptance of corporate goals throughout a management organization is not necessarily a straightforward matter of top management decision making. and administration 8. Quinn (1977) observed that the goal setting and approval process can differ considerably depending upon where it occurs in the organization. marketing. An assessment of the product's or industry's life-cycle stage 5. particular division to pursue goals and strategic objectives that entail commitments of resources and levels of risk that are not appropriate for the corporation as a whole. An assessment of Porter's “five forces” of industry competition A list of “driving forces” or “critical success factors” that seem to determine success or 9. Financial performance trends of the industry and principal competitors Rates of return realized by investors in competitors' and the firm's equity versus costs of 2. including 6. At the top level of management. as a whole.5 Information Required for Goal Selection 1. Estimates of competitors' costs of production. 97. That information includes the ten items in Table 8. Market and industry growth rates: trends and forecasts 4. in order to avoid the appearance of excessive authoritarianism. Conclusions We may conclude this discussion of single business success factors by assembling a list of information that the professional planning manager should attempt to compile in order to support efforts of top management in ultimately selecting goals and strategic objectives. or even alerting competitors to the firm's competitive direction. competitors' principal product claims 7. undesired centralization of decision making. Chief executives and planning managers alike must be prepared for the consequential political tension that surely will arise. “political” opposition.Corporate Planning Challenge and motivation of managers Basis for monitoring performance Basis for evaluation of performance Communication of strategic intent to the public Variances' activation of contingencies Division Planning Standards to evaluate business units' performance Basis for determining incentives Source: Adapted from Capon et al. Until the CEO's goal is announced to the management team. successful chief executives may formulate goals privately but not announce them to the organization. as standards of success and strategy are concerned .

Adaptive versus Integrative Approaches The selection of strategic objectives. so that the planning manager may prepare to facilitate strategy formation procedures and assemble the required evidence. Thus. task. there should be a deliberate managerial function with responsibility for assembling and maintaining this information. and/or to identify segments of the industry or market that are not well served (in order to focus the firm's competitive resources on them). and focusing on a limited industry or market segment (versus the entire industry or market) where either least cost or differentiation approaches to competitive success may be taken. specific staff personnel may be assigned to do this work. in a survey of 142 Canadian companies during 1979. within a host of industry-specific circumstances. Porter (1980. to define and evaluate competitors' principal claims with regard to customer satisfaction (in order to differentiate the firm's products or services from others). However. albeit rarely with the benefit of replicated empirical confirmation. in their extensive study of 113 Fortune 500 manufacturing companies.The ten input factors for defining commercial success standards (financial and competitive) shown in Table 8. SELECTING STRATEGY Numerous theories and methodologies for selecting an approach to goals' accomplishment (strategy) have been proposed over the years. they must be monitored regularly. and strategy itself. maintaining a close watch over such a broad scope of vital information may be a difficult. were able to distinguish these two approaches to strategy. the following paragraphs address seven popular approaches. In a large corporation. However. Of course. external staff resources may be obtained from consulting and accounting firms on a part-time basis so that this need does not go unmet. 1985a) attempted to guide practitioners in implementing such generic strategies. these prototypical strategies imply that the planning manager is able to discover competitors' costs (in order to set objectives that represent the lowest costs). In his two treatises. Consequently.5 all are subject to change in every firm. The extensive subject of strategy selection will be addressed at length in the third volume of this series. However. Firms typically tend to emphasize integrative strategies and de-emphasize adaptive strategies. differentiation. (1988). albeit critical. quite clearly. in medium-sized and smaller firms. through factor analysis. the burden and difficulty of obtaining and maintaining all of this information can be prohibitive. In those cases. Capon et al. found that the most frequent types of strategies in those firms' plans were as follows: Plant expansions (82%) New product development (77%) Acquisitions and equity investments (55%) Recruiting key managers (42%) . Boulton et al. (1982). may be either adaptive (focused primarily on the environment) or integrative (focused primarily on internal capability). Least-cost versus Differentiation Porter's (1980) essential methodology includes three “generic” operating strategies for attaining competitive advantage: least cost.

and even advertising may be adaptive in nature.. deductive model of strategy formulation does not fit such situations. but the inductive model does. Even new products tend to be line extensions rather than strategic adaptations. Such a model clearly is “adaptive” in nature. the planning manager is left with a mandate to prepare evidence equally well to support the formation of both integrative and adaptive strategies. it also found that ROI and cash flows of firms in all four matrix quadrants responded most favorably to fundamental operating strategies aimed at efficient resource usage. Rhyne's (1987) study of 66 Fortune 1000 firms during 19801984 found that those generating the highest total return to shareholders tended to emphasize adaptive planning methods. market shares and pricing trends). MacMillan and Day (1982) used the PIMS database to test the BCG matrix model of performance expectations and strategic priorities for industrial firms in each quadrant of the market share/growth matrix. But the reverse sequence also is possible. Accordingly. 1984. Strategy entails exploiting strengths and correcting weaknesses so that the firm's capabilities most closely fit critical market/industry success factors. Moreover. Management may not know the entirety of its competitive environment perfectly. Comparative data for selecting internal operating strategy (e.g. 1984. The economy. personal computers. Then. “Inside-Out” Approach Throughout the literature of commercial planning. In recent years. this model of strategy formation has been called the “resourcebased view” of competitive advantage (Wernerfelt. strategies calling for new products. the strategist attempts to exploit those strengths by finding market and industry segments where the firm's strongest abilities can be exploited to the greatest advantage (Ewing. Planning can begin with a searching analysis of the firm's present and potential functional strengths.. Performance of firms in the two growth quadrants reflected rates of industry growth more than choices of strategy. Barney. or “beepers” before their initiators created those products. this study's results seemed to suggest that—in industrial firms at least—“integrative” (or resourcebased) strategies are employed most frequently and can be more effective than “adaptive” strategies. Hambrick. While this study's results did confirm some of the model's expectations regarding relationships between strategy and performance. However. and market are assessed first. and critical success factors are defined. 1991. and it has gained wide acceptance—especially in fastpaced high-technology industries. This approach has a certain intuitive validity. a special effort should be made to acquire and maintain diagnoses of competitors' operating capabilities as well as shifts in marketing conditions. 1995).g. . In essence. Thus. and product quality. Thus. plant expansions and recruiting are more integrative than adaptive. 91). best practices and benchmarks) typically are harder to collect than data to support selections of adaptive strategy (e. industry. and most acquisitions tend to extend lines of business rather than modify them in response to changing markets. strategists have been instructed to develop strategy by adapting the firm's internal capabilities so that they “fit” market conditions. There were no markets for portable tape players. productivity. On the other hand. in some situations. Then. research and development. capacity utilization. 1969:80. but it certainly should know its own competitive capabilities and how they can be employed most effectively. “markets” for the firm's distinctive competences do not exist yet.Research and development (41%) Advertising (40%) Arguably. 1986b. Firms with the lowest total returns to their shareholders tended to emphasize integrative planning methods. internal strengths and weaknesses are assessed. Collis and Montgomery. management seeks out industry/market segments with critical success factors that match the firm's strongest capabilities and resources. Rumelt. The classic.

versus competitors— • Usually increases market share.Competing for Future Leadership Hamel and Prahalad (1994) declared that the planning executive's two most important challenges in formulating strategy are (1) arriving at a correct vision of future business conditions and (2) developing core competence to do business in the most attractive industries and market segments of the future. vertical integration. 1974) and have been codified since then by Buzzell and Gale (1987). PIMS is an acronym for “profit impact of marketing strategy. Nevertheless. and advertising—to their market shares and rates of return now is within most planning managers' abilities. and environmental scanning (Fahey and King. forecasting.. their thesis is incontestable: if you can foresee future opportunities.. While Hamel and Prahalad may have challenged managers to accomplish excellent strategic concepts to “compete for the future. With modest effort and the aid of information technology. and the PIMS database no longer is being replenished steadily by subscribers' data. • Increase ROI when market share is high. 1977. you should prepare to exploit them! The PIMS Approach The PIMS industry research program was discussed earlier in this chapter. ” coined by founders of the Strategic Planning Institute in 1972. Since then. and • Can enhance ROI even when market share is low. Still. 1987). Research and development expenditures tend to— • Decrease ROI when market share is low. It is encouraging that the PIMS approach of relating competitors' traits—such as quality. New products tend to— • Increase ROI the most. Unfortunately. Unfortunately. research has shown that very few firms are skilled in industry/market analysis. thanks to the availability of large databases and user-friendly statistical software.000 businesses' strategic profiles and financial results have been correlated in order to develop “par” performance standards for firms in different market and industry positions. This is a formidable challenge because it requires management to be skilled in forecasting future markets and developing competence to perform in industry segments that may not even exist. very little new information has emerged from the PIMS program in recent years. ” they unfortunately did not prescribe a methodology for doing so. in slow-growth markets. Capon et al. and • Increase ROI most in slow-growth markets. Several “rules” of strategy (for maximizing return on investment) emerged from this program in the late 1970s (Schoeffler et al. They are illustrated by the following excerpts: High productivity is most rewarding in fast-growth industries. Thus. the fact that such principles indeed can be developed empirically should encourage planning managers to watch the professional literature for further developments like these. more than 3. but that really are too equivocal and rudimentary to form a doctrinaire basis on which to build strategy. planning managers can compile their own PIMS-like protocols. Identifying a Driving Force . These are the kind of “principles” that professional planners and other strategists long for. Differentiating product quality. and • Increase ROIs of firms with low market shares. this program may soon become outdated unless it can be revitalized. asset intensity.

and technology—during 1970-1974. (2) customer focus. a firm's management should select from his list of ten alternative themes (“driving forces”) as a foundation for its strategy. Through applied industry research. Strategic planning procedures must be flexible enough to accommodate such exigencies.or short-term nature of required responses. While these findings should be confirmed by more rigorous research. Jauch. (9) maximizing growth. (8) exploiting natural resources/materials. it seems to omit political and regulatory forces. Using content analysis of case histories in Fortune magazine. the tenth option (maximum return) recognizes that management also has the option of liquidation in the event that one of the other nine themes will not produce competitive success. If those CSFs are not on Robert's list.1 of this volume. Strategic reactions differed between stable environments and unstable. Their model is depicted in Figure 7. “Longrange planning” responses occurred in uncertain environments. The following lists provide a summary of principles that apply to such procedures in a single business. (3) market focus. However. They believed that they discerned four types of response based on the degree of environmental uncertainty and the long. Anderson and Paine (1975) proposed an adaptive model for strategy. distribution channels. The ten alternatives are (1) product leadership. According to Robert. (5) exploiting technological advantage. they found characteristic tendencies in strategic responses to each type of crisis. Smart and Vertinsky (1984) studied the attempts of 94 firms to deal with crisis during 1980.Robert's (1993) ten driving forces comprise another list of strategic themes. Responding to Crises Crises and sudden environmental irregularities provide special challenges to both the integrative and adaptive functions of strategic management. Adverse governmental legislation or regulations typically elicited exit strategies such as divestment. riskier environments. Similarly. CONCLUSIONS This chapter addresses procedures that must be followed by a single business enterprise and its planning manager to support strategic decisions effectively. for instance. the planning manager may identify other critical success factors (CSFs) that characterize the firm's industry or market segment. technological crises tended to be answered by either adjustments to the product mix or fundamental mission changes. while formation of more immediate strategies occurred in relatively certain environments. they do remind planning managers that appropriate strategies and their outcomes often are contingent on the nature of environmental circumstances and that adjustments must be made when circumstances change. (6) exploiting a sales/marketing methodology. adverse changes in government regulations. and (10) maximum (versus acceptable) return. Osborne and Glueck (1980) studied short-term strategic reactions of 358 large corporations to such challenges in their environments—for example. . (7) focusing on a distribution channel. Robert's list may not be exhaustive. (4) maximizing production volume. based on interactions of managers' perceived needs for functional change (integrative challenge) and their perceived environmental uncertainty or risk level (adaptive challenge). For instance. they still must be addressed by a firm's strategy. A firm's strategy might pursue industry leadership in any one (or more) of the first nine categories. Distribution system changes typically were paralleled by reductions in rates of return and met by attempts to improve either costs or market share.

Axiom Goals may be established on any of four dimensions: level of risk, financial results, Axiom 8.01 market position, long-term growth. Goals at least must define criteria for competitive and financial success. Postulates Postulate 8.01 There are interrelationships between goal types. A requirement of goal setting is to find a combination of acceptable results on all four dimensions. Strategic objectives express differences between a firm's present performance potential or position and the firm's ultimate goal. Thus, if the firm presently projects sales of $200 million and needs $250 million to achieve its competitive goals, the strategic objective is $50 million in sales from sources that presently are not being exploited. Strategic objectives can be defined either deductively (goals versus baseline projection) or inductively (the sum of identified program benefits). Management must declare the type of strategy by which it intends to pursue goals; there is a wide range of choices including generic (applicable to all firms), contingent (depending on the firm's circumstances), adaptive (market focused), and integrative (resource based). Each strategy must have a fundamental theme, the title of which often is the name of a “driving force” that management decides best explains how internal resources and the external environment can be rationalized for optimum performance potential and sustained competitive advantage. This theme must be articulated before a strategy can be fully developed. Objective evidence regarding the firm's industry position and internal capabilities is required for well-balanced strategic decisions. Critical success factors (CSFs) of an industry should be diagnosed empirically as a means of avoiding bias and focusing analytic efforts productively. CSFs define functional capabilities at which firms must excel in order to compete successfully in their industries. Benchmarking systems such as the PIMS program may be helpful in diagnosing a firm's competitive strengths and weaknesses in CSFs, according to objective criteria. While composite statistics, based on publicly owned companies' disclosures, may provide useful norms for objective setting and benchmarking, such norms may not be valid for privately owned firms because their sources of capital do not include the public equity markets. Porter's (1980, 1985a) “five” forces are essential elements of a strategic assessment; they form an effective frame of reference for gathering evidence about industry attractiveness. At least one “matrix” technique to jointly assess the firm's functional strength and its market or industry position should be employed, as a means of disclosing integrative and adaptive priorities for strategy. Among these techniques are the growth/share, industry attractiveness/firm strength, directional policy, and life-cycle/competitive position matrices.

Postulate 8.02

Postulate 8.03

Postulate 8.04

Postulate 8.05

Postulate 8.06

Postulate 8.07

Postulate 8.08

Postulate 8.09

Postulate 8.10

Postulate 8.11

Hypotheses Assembling sound evidence for strategic decisions enhances firms' rates of return. The quality of environmental evidence is directly related to planning Hypothesis 8.02 outcomes. Objective evidence regarding the firm's internal capabilities enhances planning Hypothesis 8.03 outcomes. Analyst bias impairs objectivity in gathering evidence about internal Hypothesis 8.04 capabilities. Hypothesis 8.01

Firms that form both integrative and adaptive strategies will perform better Hypothesis 8.05 than those that prepare strategies emphasizing only one dimension or the other.

Planning Decisions in the Multi-Business Corporation
When a corporation consists of more than one business, special procedural considerations arise. However, these additional procedures do not invalidate, in any way, the planning procedures for single businesses discussed in the preceding chapter. To the contrary, no matter how diverse a corporation may be—or how many businesses exist within it—the performance potential of each business will be enhanced by a sound plan and a well-conceived planning procedure. Moreover, the feasibility of a corporate plan, when there are several divisions and/or subsidiaries, depends on the feasibility of those individual businesses' plans as well as the feasibility of corporate-level strategy. However, the presence of multiple businesses does present corporate management with some additional planning challenges not to be found in the single business. The following paragraphs discuss those special concerns that must be addressed by corporatelevel planning managers in multi-business firms.

Top-level corporate managers of multi-business corporations, just like managers of single businesses, should be guided by the General Planning Model presented in Figure 3.1 of this volume. By referring to that model, the corporate planning executive can organize planning procedures that must be performed at the headquarters level, separate from those performed by individual businesses within the corporation.

Is There a Mission?

A legitimate question may be raised about the true “mission” of a corporation that is comprised of very diversified businesses. As observed in Chapter 2, the mission of a business is defined by the economic function it performs for society. Each individual business within a diversified portfolio probably has (or can have) a definable mission. But what is the parent company's mission? The more diversified a corporation becomes, the more difficult it also becomes to define that corporation's mission in the aggregate. Perhaps, like a merchant bank, it is simply to provide capital with which to finance portfolio businesses. Typically, like a merchant bank, the mission of a multi-division corporation is stated primarily in financial terms and commits the corporation to maximizing shareholder returns. However, it certainly is possible to define the mission of a multi-business corporation in other terms. For instance, the corporation might perceive its role as something of a “management company, ” versus a “holding company”—providing scarce managerial resources to businesses in its portfolio and actively exploiting synergistic opportunities to increase long-term yields by combining portfolio companies' resources, thereby enabling them to compete more successfully. Corporate resources provided by parents to divisions and subsidiaries include cash and credit, of course. But, they also may include technology, management skills, and other intellectual resources (Calori, 1988). Subsidiaries and divisions of such management companies are more likely to be closely related to one another than they are to be highly diversified. In such cases, the parent company indeed may be able to perform a truly economic mission for society by combining the capabilities and missions of individual businesses into a more valuable amalgamation (Rumelt, 1974), rather than acting solely as an investor for the benefit of its shareholders. Examples include Ametek, Inc. (electrical products), Parker-Hannifin Corp. (motion controls), SPX Corp. (tools), Textron Inc. (industrial technology) and United Technologies Corp. (industrial technology). Defining the corporate mission is a province exclusively of top corporate management and the board of directors. But, as mentioned earlier, each individual business unit has its own economic function to perform and, therefore, its own mission. For that reason, as Berg (1965) first observed, conflicts can arise between corporate and subsidiary business interests. Indeed, they often do. Reconciling such conflicts is a function that ultimately can be performed only at the corporate level—often with substantial difficulty.

Defining Corporate Strengths and Weaknesses
Whereas the “capabilities” section of an individual business plan addresses strengths and weaknesses of functional capabilities, the corporate focus of a business analysis shifts substantially. At the corporate level, a “portfolio” of investments in operating businesses is evaluated in terms of those businesses' financial performance trends and potentials, and their competitive positions. In a “capabilities analysis” performed at the corporate level, individual businesses also can be evaluated in terms of their synergies with other businesses in the portfolio, as well as their operating competences. Thus, groups of related businesses (“strategic business units”) can be formed and evaluated without the myopic limitations that may exist when each individual business is evaluated in a vacuum. This opportunity to evaluate individual businesses' potential contributions to a corporate enterprise is an often overlooked, but vital, function of corporate planning procedures. In addition to an evaluation of individual business units' performance potentials, a corporatelevel analysis of strengths and weaknesses will address functional capabilities of headquarters departments. Thus, management of financial, administrative, information technology, and planning functions should be evaluated. Headquarters departments that provide shared resources (e.g., market research) to business unit management also must be evaluated on the basis of their effectiveness as service providers to their clients in the field as well as at

headquarters. Finally, analysis of corporate-level strengths and weaknesses must address adequacy of the senior management organization—both its capabilities and structure.

Market Analyses
This dimension of analysis typically receives a great deal of attention from corporate-level planning management—especially in firms with related businesses. Whereas individual businesses or subsidiaries might not be large enough to justify the resources required for evaluating a full scope of economic, industry, or market trends and potentials, such resources well may be afforded at the corporate level and shared with all corporate entities. This is one illustration of administrative economies of scale that may be achieved by the multi-division corporation. Providing such services from a central location also should help to assure that plans submitted by different businesses will begin with a similar outlook for external business conditions during the planning period. Conversely, by consulting with operating managers of each business about the economy, industry, and markets, the planning staff can maintain a realistic appraisal of environmental problems and opportunities as they impact each business and thereby, it can better advise top corporate management on marketing potentials within the portfolio of corporate entities.

Goal Selection
Corporate-level goals of multi-division corporations usually are expressed in terms of rates of return on invested capital or, preferably, value added to shareholder wealth by business units' and corporatelevel strategy. The concept of added shareholder value provides a common thread for formulating goals that can flow from the very top of a corporate structure to every business unit. For this reason, among others, value-added concepts have been particularly fruitful in formulating goals and objectives for portfolio businesses as well as the corporation as a whole (Rappaport, 1981; Reimann, 1989a, b; Copeland et al., 1990; Stewart, 1991; Tully, 1993). Individual business units usually formulate goals based on their respective shares of individual market or industry segments. But only when business units are closely related to each other is it possible for corporate-level goals to be expressed in competitive terms. Thus, multibusiness firms that confine their portfolios to relatively limited lines of business—for example, those in the basic metals, petroleum, chemical, textile, and food-processing industries—are able to formulate consolidated competitive goals based on market shares or other indicators of competitive position. But highly diversified enterprises can't establish market-share goals at the corporate level. When corporations diversify, their goals typically emphasize either growth or earnings—one more than the other. In a study of 170 European executives, Horovitz and Thietart (1982) demonstrated that each of those goals will be served best by planning procedures, organizational structures, and controls that differ materially. Diversified firms with fast growth rates were characterized by a decentralized but well-coordinated management structure; a participative planning style in which top corporate management remained closely involved; and the use of forecasts in control procedures. Diversified firms with high profit margins were characterized by less involvement of top management in the planning process. However, those with the highest profit margins also tended to have more formalized organizations and more effective coordination than others. Here, as in the previous chapter, we find the very contingent nature of both strategy and strategic planning. In this case, the emphasis of growth or earnings in selecting a firm's goals and objectives can have a determining impact on the appropriate method of planning, as well as the strategy to be selected.

Strategy Selection

The multi-factor matrix (Allen. Robinson et al. In that case. the planning procedure must include evaluations of individual units' major capital spending projects. When multi-business corporations' investments are diversified in several unrelated industries. For instance. Hussey. a “portfolio” approach is taken to allocate capital investments between business units. Ideally. Businesses' market cycles might offset one another. In Chapter 8 of this volume. it has been unclear that hedging approaches actually can be effected successfully (Burck. Such investigations have extended beyond the United States (Calori. But. Thus. the same techniques can be used when a portfolio includes several businesses in different industries or markets. The Issue of Diversification As observed earlier. top-level strategy in the multi-business corporation must include allocations of corporate resources between industries and business units. applicability of the market share/growth matrix becomes less likely because complete information regarding market shares and/or forecasts of growth rates for markets served by all businesses in the portfolio may not exist. and diversification should act as a hedge against overdependence on a single industry or market. 1978. Typically. However. In more complex corporations.In the multi-business corporation. and shift allocations between portfolio businesses as their market opportunities shift. To support such decisions. 1979). from the outset. 1967). All of those techniques are described in the preceding chapter. Several confirmations of the argument that highly “focused” corporations tend to outperform others have appeared since Rumelt's research was published. The corporate strategist's challenge then is to identify a collection of business investments that offers the most attractive opportunity for balancing cash flows and maximizing total returns over a long term. 1971:66. they are called “conglomerates. other researchers also had been examining the financial effectiveness of diversification (or conglomeration) as a corporate strategy. and their acceptance or rejection must be based on the merits of business units' strategic plans. Weston and Mansinghka (1971) found that conglomerates grew faster during 1958-1969 than other . 67). more subjective criteria must be employed.” One purpose for forming conglomerates initially was to minimize risk by balancing investments between industries and markets with asynchronous cycles. In such cases. 1977. Rumelt's research was so broad in scope and highly developed that his conclusions were widely accepted. the directional policy matrix (Hedley. Rumelt (1974) reported results of extensive research spanning the 20 years of 1949-1969. Otherwise. corporate management should be able to concentrate resources where prospects for growth and earnings are currently highest. Prior to Rumelt's report.. 1978) may be preferable in such cases. even after Bettis and Hall (1982) discovered a flaw in Rumelt's sample. which seemed to demonstrate that diversified companies with businesses in “related” lines of business performed better than those whose portfolios were diversified into “unrelated” lines of business. with positions in multiple markets. 1996). Just as competitors in a single industry can be evaluated using matrix methods. 1978) or a life-cycle matrix (Hofer and Schendel. increasing skepticism was raised regarding the effectiveness of diversification as a risk-management strategy. all of the corporation's businesses are represented on a single grid. to include measures of shareholder wealth creation (Lehn and Makhija. “matrix” approaches to assembling portfolios of business investments are discussed. with onset of a steep recession in 1974. several conglomerates were formed. the planning manager must accumulate adequate information with which accurately to represent each business in the portfolio. such as the market share/growth matrix. top-level corporate strategy largely entails decisions regarding allocations of corporate resources between lines of business. the planning procedure will not be meaningful or worthwhile for those units' top managers (Wilson. During the 1960s and early 1970s. 1988) and gone beyond simple accounting definitions of financial success.

All businesses in a “relatedconstrained” portfolio must have some significant functional trait in common. sales growth. and 17 percent of those firms were unrelated diversifiers. the researchers concluded that Rumelt's original findings reflected inter-industry differences more than diversification strategy. Accordingly. However. Thus. which in turn out-performed those with unrelated portfolios. mainly because of increased leverage. which is not likely to achieve abovenormal returns. Varadarajan and Ramanujam (1987) later tested the effects of diversification on performance more extensively. conglomerates seemed to succeed in raising the performance of acquired firms with depressed earnings back up to industry averages (but not much more). Thus. but no better. Performance variables—including the rate of return on equity. More important. implying the possibility that higher riskmay not necessarily be required for higher return in a synergistic portfolio. Results partially supported Rumelt's (1974) findings: “narrow” diversifiers tended to outperform “broad-scope” diversifiers. related-linked (N=25). Holzmann et al. but variability of the returns also was lower—thereby implying a lower level of risk. The study by Bettis and Hall (1982) found that variability (risk) of returns did not differ between categories of diversified firms.companies (as did Rumelt. They assembled a sample consisting of the ten largest firms in each of the 25 largest industriesin the United States. A classification scheme based on “broad” versus “narrow” diversity was employed to divide each population. Data on diversity were available for only 223 of those 250 firms. Bettis and Hall (1982) also tested Rumelt's (1974) findings by studying rates of return on assets and risk (as reflected in returns' variance) among 80 diversified corporations during 1973-1977. Melicher and Rush (1973) divided corporations that were in the same industries at the beginning of the 1960s into two groups: one group was comprised of 45 firms that subsequently became conglomerates. It was concluded that risk reduction is not a valid rationale for selecting a strategy of unrelated diversification rather than related diversification. For firms with relatedlinked portfolios. But differences between average performance of corporations with extremely low levels and extremely high levels of diversity were not statistically significant. Firms were classified according to Rumelt's scheme as related-constrained (N=31). this still was one of the largest studies of its kind. For the related-constrained firms. these researchers noticed that four of the six highest-performing firms in the related-constrained category were major participants in the pharmaceutical industry and that two other pharmaceutical firms also were in that category. Corporations with related-constrained portfolios out-performed those with related-linked portfolios. Thus. and growth of earnings per share—were obtained from the Forbes Annual Report on Industry for 1984 and reflected five-year averages. there was no significant relationship between risk and return. Bowman (1980) had obtained similar results . Linear regression models also disclosed statistically significant relationships between risk and return for corporations with unrelated portfolios. the other 45 did not. each business must share a significant trait with at least one other business in the portfolio. In a “relatedlinked” portfolio. return on capital. and unrelated (N=25). a “constrained” portfolio contains businesses that are more strongly related than those in a “linked” portfolio. Conglomerates' rates of return on assets were lower than those of other firms. statistically significant differences no longer existed. Conglomerates' rates of return on equity were a little higher than other companies'. Indeed. Conglomerates performed as well as the other companies. It was concluded that conglomeration was beneficial primarily as a defensive strategy but not effective as a means of obtaining superior returns. Whether or not diversification (or conglomeration) really is effective as a hedging or riskreducing strategy remains an open question. 16 percent of companies with very low rates of return were related diversifiers. (1975) obtained similar results. The related-constrained and related-linked firms in this study included all of Rumelt's original sample for which data were available in Standard and Poor's Compustat® files. The unrelated category of additional firms were drawn randomly from the Fortune 500 lists. 1974). When pharmaceutical firms were removed. but. it again was concluded that conglomeration serves primarily as a defensive strategy. there was a statistically significant negative relationship between risk and return. they recalculated their statistical analyses without pharmaceutical firms included in the sample.

This is because significant alterations of corporate structure and large allocations of capital always require the directors' approval and sometimes require shareholder approval. Acquisitions. In 56 of those 85 industries.572 companies' rates of return on equity and variability of returns in 85 industries covered by the Value Line Survey during 1968-1976. Corporations with a broad diversity of portfolio investments must overcome several indigenous barriers to maximizing performance that do not confront managers of corporations with portfolios of more closely related businesses. (1970) demonstrated that acquisitions performed in order to implement a higherlevel corporate strategy tended to enjoy significantly better financial performance than those conducted more opportunistically. Birley (1976) observed that acquisition investments typically are not guided by corporate strategy. there seem to be important interindustry differences in risk-reward relationships. but it probably will not enhance returns above industryaverages. a study of 1. . If management's objective is to reduce risk. Divestments. can punish diversified firms' rates of return severely. In conclusion. 1978. divestments. (No significant differences could be discerned in eight industries. However. 1998). the most “related. 1979. corporate-level strategy in the multi-business corporation requires top management to adopt some form of a portfolio management approach. Therefore. Thus. 1979:36-46. Rappaport. and Restructurings A specialized element of strategy implementation is addressed to the conduct of acquisitions. Copeland et al. Fundamental to this approach is a two-step process of (1) deciding upon a portfolio's scope—that is. Porter. it is not surprising that a large portion of acquisition investments do not turn out well (Salter and Weinhold. Indeed. Documented reasons for under-performance of conglomerates have included corporate management's inability to master more than a limited number of industries and markets. joint ventures. ” or “focused” portfolios are likely to enjoy the highest financial performance potentials. when capitalized. returns may be sub-normal due to the burden of corporate-level expenses. the relationship between risk and return was negative. in opportunities to benefit from diversification as a corporate strategy for reducing risk. in particular. Salter and Weinhold. As a very general rule. therefore. (1990:259) estimated that such expenses. On balance. without the benefit of a corporate-level strategy to guide them. 1987.) Thus. While some of this work can be done at the division/subsidiary level. there are significant interindustry differences in risk-reward relationships and. the risk-reward relationships of each industry in which the diversified corporation invests (or may invest) must be assessed before a portfolio composition strategy can be formulated effectively. the level of diversification—and the industries in which to participate and (2) allocating corporate capital to portfolio businesses. In a landmark study of about 300 transactions. but the relationship was positive in 21 other industries. Corporate-level expenses. 1994. the weight of empirical evidence seems to support a contention that broad diversification may provide some protection against downside risk. but it is unlikely to produce better results than a more focused approach to portfolio construction. and other large reallocations of capital resources that modify the corporate structure. and the generally poor record of acquisitions' long-term financial results (Burck. 1990:319-321). a “hedging” strategy of diversification (conglomeration) may be helpful. unless the scope of diversification is constrained sufficiently to provide some synergy. Koller and Murrin. Copeland. represented upward of a third of the equity value in 22 of the 25 largest American industrial corporations at the end of 1986. However. The planning manager therefore must assess such relationships in industries where corporate investments have been made or may be made. that is. Ansoff et al. Copeland et al. responsibility for the policies directing these functions almost always rests at a high corporate level. extra administrative costs required at the corporate level to oversee groups of unrelated businesses.

. A supplemental acquisition strategy. virtually 92 percent of the successful acquisition programs were conducted by firms that had strong core businesses (Copeland et al. and only 23 percent in success. during 1972-1983. as portrayed in Figure 9. in this case. return on investment requirements. Most important. corporate goals. rather than just one “gap” between the baseline projection and goal. the corporate goal still is unreachable. and corporate level strategy—including the allocation of corporate resources to business units—must remain a responsibility of top corporate management (Vancil and Lorange 1975). Probably such decisions will reflect the personal preferences and background of senior corporate officers. The first strategic objective (Os1) represents a consolidation of existing businesses' best efforts to bridge the gap between present momentum (baseline) and the ultimate goal.1. However.The corporate planner's task in formulating strategic objectives for acquisitions and divestments is similar to that discussed in the previous chapter (see Figure 8. Other planning functions and decisions that cannot be delegated include the formulation of financial policy regarding dividends. as well as the industry culture from which managers of different companies in the same industry derive common experiences and values (Hambrick and Mason. selections of corporate mission. 1990:319-21). with its own objective of Os2. is then devised to resolve the deficiency. To illustrate. The importance of conducting an acquisition program as just one means of implementing a broader corporate strategy cannot be over Figure 9. Argenti (1969:161-64) seems to be the first to have defined this second strategy gap. The results disclosed that 61 percent of these programs ended in failure. or even an entire industry. The chance of success was increased to 45 percent when acquiring companies bought smaller companies in related businesses. An assessment of such psychological and cultural predispositions to planning practices of top management in a single firm. there now are two. can be a source of professional advantage for the planning executive. 1984).9). Exclusively Corporate Functions Some planning functions simply cannot be delegated to line management no matter how participative the approach to planning and strategy making may be. If the target was large in an unrelated line of business. and the amount of . However.1 Strategic Objective of Acquisitions stated. the success rate fell to only 14 percent. usually involving multiple acquisitions. McKinsey and Company's Corporate Leadership Center studied 116 acquisition programs. Companies were either among the Fortune 200 or the Financial Times top 150. Companies with strong core businesses prior to their acquisition programs had much better chances of success than those without strong core businesses.

and replaces managers who do not perform successfully. and even divisions' objectives is possible. • Strategic control: Corporate management requires plans to be prepared. funding of growth programs and portfolio investments or divestments) are primarily based on ROI trends and potentials.g. forest products. Consider the case of a large integrated producer of steel. the appropriate allocation of responsibilities for preparing plans and making planning decisions will depend largely upon the level of portfolio diversification and the extent to which the corporate management structure is centralized or decentralized. they identified the following three styles of corporate involvement in business-level planning: • Strategic planning: Corporate management actively joins operating businesses' management in formulating plans. petroleum. through commonality of served markets. Recall that Rumelt (1974) provided a taxonomy of corporate diversification and relatedness that remains in common use. because lines of business are narrow and closely related. a corporation may consist of a single business. either a bottom-up. development.g. there is one function that calls for critical decision making by top corporate management alone: This is the identification. either tightly or loosely constrained). or team approach will be required. Corporate-level planning decisions (e. IMPACTS OF CORPORATE STRUCTURE ON PLANNING STYLE IN DIVERSIFIED FIRMS As observed in a previous chapter. Corporate management directs the process and evaluates proposed plans. monitors financial performance. a group of related businesses (tightly or loosely constrained). Firms in the basic metals.. strategy. Often. Participation of Corporate Management in Division Planning To the extent that corporate entities are related (e. and appointment of individuals to whom top management of businesses within the corporate portfolio will be entrusted. goals. However. and other natural resource-based industries all .. which in turn may affect divisions and/or subsidiaries. then a top-down approach to formulating planning methods. but delegates authority for planning and implementation to line management. copper. Although there may be several operating divisions. to the extent that diversification and decentralization are present. regardless of corporate size. Finally. a group which includes a dominant line of businesses (vertically integrated. that will be made available to operating entities (Vancil. rewards managers who accomplish their strategies successfully. Accordingly. or a group of essentially unrelated businesses (passive versus acquisitive conglomerates). or aluminum. Corporate management also must provide objectives and policy guidance to managers of headquarters functions. If the corporation is engaged in relatively constrained lines of related businesses and the corporate management structure is centralized. research and development functions also are conducted at the corporate level. 1976). Specifically. chemicals. • Financial control: Corporate management delegates all planning and operating authority to line management. manufacturing methods. Such functions surely include the administration of policy regarding acquisitions and divestments. marketing). there will be more opportunities for transfer of technology and other intellectual assets from corporate-level management to the management of individual business units in strategic planning. strategic management still can be centralized. Goold and Campbell (1988) observed that such structural distinctions are likely to be accompanied by significant differences in the style of strategic planning and corporate control over planning by divisions and subsidiaries. not on businesses' plans. hybrid.

Negotiations between corporate and division managers and revisions of operating plans typically are accomplished by the end of the third quarter. But. industry. corporate management must make selections from resource allocation alternatives. as diversification broadens. corporate.are likely to present such situations. financial statement objectives. In a large minerals concern. internal strengths/weakness evaluations.and divisionlevel planning functions were divided. it is most likely that individual businesses' executives will be delegated relatively broad powers for formulating strategy independently of corporate management (Kinnunen. the entire process took only about six months. perhaps even extending into multiple industries. management at each level may be severely challenged. line managers know more about the individual businesses with which they have been entrusted than corporate management. the corporate planning executive must be prepared to advise top corporate management on such conflicts. Corporate-Division Conflicts As mentioned previously. At the corporate level. 1965). Variousother conflicts between divisions' and corporate interests may arise in complex organizations. Yet. tests of objectives' feasibility. division .2). an acquisition strategy. Frequently. the sum of investment requirements. even in very large corporations. and evaluations of management competence. In any event. because they are inevitable. Eventually. in this single-industry concern. the fundamental strategic thinking of top corporate management and line management will disagree in some respects. internal strategy. Planning staffs existed at both corporate and division levels. which emphasized corporate allocations of capital to division's development projects before they completed their plans. the strategic interests of large corporations and their individual divisions or subsidiaries easily may be in conflict (Berg. and market forecasts. and a budget for the first year of implementation. 1976). SCHEDULING OF PLANNING ACTIVITIES IN COMPLEX FIRMS The typical schedule of planning activities in a substantial firm lasts all year. For instance. corporate management may prefer to fund the development of a fledgling business with excellent (albeit risky) longterm potential while declining to fund otherwise attractive projects in a larger subsidiary that dominates its stable or declining market with a mature technology. Long-range plans are prepared by operating management. These procedures are discussed. baseline financial projections. (Otherwise. in time for corporate management to review them at mid-year. In such cases. On the other hand. marketing problem/opportunity definitions. and those selections often will leave some subsidiaries or divisions unable to realize their maximum performance potentials because capital resources simply are not sufficient. When this occurs. a five-year plan of business was updated each year: It included corporate goals and objectives. corporate executives make the final funding decisions. Wilson (1971) defined a similar process. economic. in Chapter 6. Annual operating plans for each business and the corporation then are completed in November. Roney (1977a) prescribed a number of diagnostic criteria by which to evaluate such conflicts based on the quality of line management's planning rationale. capital expenditure projections. This axiom has far-reaching implications. at least in concept. If ideal levels of investment were made by each business in order to maximize its performance potential. Divisions prepared plans with a similar structure. Smalter (1969) provided a detailed explanation of how such procedural models are implemented in real life (see Exhibit 6. well might exceed corporate resources.

Ansoff (1988:99) characterized international operations as the most risk-prone of diversifications. Vancil's entire process also required a full year and culminated with approval of operating budgets. With that information. he argued. Vancil and Lorange (1975) proposed that interactions between corporate and division management during planning activities should evolve through three cycles of progressive refinement. Ultimately. “Constraints” are to be imposed on lower levels within the organization by policy decisions made at a higher level. Then. negotiations ensued with division managers regarding their businesses' potential roles in realizing corporate objectives. In the first cycle. each department or functional manager should have a personal “strategy” for contributing to achieving objectives at the next highest level. The entire process took nearly a full year. or reducing corporate goals. divisions submitted their updated five year plans. involving more members of their management teams. corporate-level decisions regarding allocations of capital resources are made and detailed budgets for implementing the plan in its first year are prepared at all levels. While the foregoing procedural norms are over a quarter-century old. Even at the most basic level of the corporation. considering acquisitions or divestments. as American businesses extended their reach beyond domestic markets. Sometime in September. such decisions can be made only at the top level of corporate management. special procedural problems were encountered in corporate planning. final drafts of corporate and division plans were completed and the coming year's budget was prepared. corporate-level objectives and general strategy are developed. subject to their proposed projects' approvals. During this cycle. If the sum of proposed division objectives is not sufficient to accomplish corporate-level objectives. Those plans were reviewed and approved somewhere around the end of the ninth month. how strategy should be developed at each level of each cycle. By the end of the seventh month. strategy. reallocating corporate resources to the most promising businesses. Indeed. By the end of the fourth month. at this point. divisions then could prepare their plans of business with reliable funding assumptions.) The process began with definitions of corporate-level objectives for a five-year period. division/subsidiary plans should be available for presentation to corporate management and review by the corporate planning staff. Cain (1972) drew on his extensive international management consulting experience to characterize several differences between multinational and domestic business . division managers propose broad strategic objectives. MULTINATIONAL COMPANIES: FURTHER COMPLICATIONS Previous paragraphs have discussed complications in planning procedures that occur when firms grow more diversified and/or more decentralized. By mid-year. they remain generally accepted and characteristic of customary practices. He proposed that the firm's concept of strategy must permeate an entire corporation. These complexities are magnified when a firm enters international markets. top corporate management arrives at basic decisions regarding corporate objectives. in greater detail. negotiations between corporate and business unit managers must address this “planning gap” by identifying opportunities to improve division performance further. Subsequently. and performance required from divisions or subsidiaries. the third cycle begins. division managers develop more detailed plans to pursue approved objectives.managers' assumptions might not be realistic. Vancil (1976) later explained. a corporate-level plan was drafted and division objectives were issued. In Vancil's second cycle. By the end of the third fiscal quarter. The corporate plan prescribed approximate funding levels that would be available to divisions. This concept of constraints is essential to Vancil's procedural approach because it avoids the kind of conflicts which Berg (1965) had described earlier.

the extent of actual versus apparent control. at the outset. information deficiencies. Between the two extremes. To illustrate the geographic dimension. planning functions simply may fail. or plants. At one extreme. the headquarters office is the source of local decision authority. A More Complex Corporate Structure Channon (1976) studied strategic planning in 50 European and American multinational corporations. Rutenberg (1970) took a somewhat different approach than the one just described. plans and planning may be rejected by foreign management for cultural reasons or perhaps because they seem to be imposed unreasonably on the foreign firm by a U. Prahalad argued. 1980). standards because of a lack of good information and the unfamiliarity of foreign managers with American planning methods. Second. high levels of technology. The challenge for top corporate management in resolving multinational conflicts. Food processors. In that case.S. and changes in. because of local tastes and relatively low-scale economies in that industry. and (5) occasional changes in profit center managers' reporting relationships.planning. such. Finally. tended to be more nationally organized. and so on. and operating management implements corporate decisions. even to be installed successfully because of impracticalities emanating from remoteness. and managerial rotation are made. the quality of plans and planning initially may be beneath U. language differences. Powercontrol tactics available to corporate management include (1) transferring managers between regions. Third. and universality of products' use. due to very high capital costs. Prahalad (1976) addressed the complex power relationships between business units of multinational corporations that can occur when operations are located in several countries. multinational firms' management personnel also are especially important in multinational corporate planning (Hussey 1972. firms in the chemical industry tended to be globally oriented. subsidiary executives have much greater autonomy but receive much less support from the parent corporation. so that a more or less multinational management structure can emerge. Thus. and the levels of politically engendered risk that enter into planning decisions. At the opposite extreme. and product design are made by top corporate management. parent and so engender resentment of subsidiary or division personnel. products. product designs. asset management. (4) managing the pattern of internal information dissemination in order to control business unit managers' relative political advantages. high-scale economies. on the other hand. Among the difficult issues with which international business planning managers must deal are conflicts of political interest that can arise between a corporate parent in one country and a subsidiary in another. pricing. uniformity of production processes. He proposed that differences between these two concepts determine how strategic decisions regarding capital costs. subsidiaries may have to obtain their own financing. and subsidiaries are viewed as tightly integrated elements of the global corporate structure. for instance. . pricing. preferring to distinguish authority structures within the MNC management organization as either “ethnocentric” (locally focused) or “geocentric” (global) at corporate or division levels. Development of. all strategic decisions regarding finance. is to control the “locus of power” in order to minimize conflicts between managers of international business units and top corporate management. sharing of corporate and local resources can produce various degrees of integration or differentiation of financial. (3) building broad scope corporate-wide communications and cultural institutions. (2) standardizing plants in order to minimize differences that can elicit conflict. He identified four principal problems with which international business planners must contend. He observed that each corporation's structure could be described using geographic or product dimensions. First. marketing. international businesses sometimes tended toward parochialism and away from the synergies that corporate-wide planning seeks to accomplish.S. the planning manager in an international business must evaluate a broader range of environmental contingencies and contemplate more alternative scenarios than planners in corporations that do business only domestically. and operating authority. These relationships greatly complicate strategic decision making and global strategy implementation.

When TABLE 9. Ultimately. The record on such questions simply has not been kept current. little additional research has been done in the past twenty years to identify procedural pitfalls and methodological problems that tend to occur in multinational business planning. Of course. Procedural pitfalls in planning for international businesses also were identified by Brandt and Hulbert (1980). First. they reflected top management's emphasis on short-term results and insensitivity to Brazil's cultural requirements. Pitfalls emanating from Brazilian subsidiary management included resistance to the planning function itself and fabrication of data included in plans simply to satisfy corporate executives. negligence of the planning function altogether. insufficient data Unreliable data. and corporate management alone selected the top managers of each business and their compensation. Pitfalls Steiner and Schölhammer (1975) studied 460 multinational companies to identify the incidence of pitfalls in multinational business planning.In all multinational corporate planning procedures. two fundamental decisions must be made by planning managers and senior corporate executives at an early stage. an organizational structure and approach to managerial control must be selected. Formal documentation was most frequent in Canada. insensitivity to culture Resistance. while the least formal procedures were found in Japan. doctored data Planning System Oversophistication. formality of planning did differ between countries. The study's purpose was to trace sources of pitfalls in MNC business planning either to headquarters or management of Brazilian subsidiaries (see Table 9. selections of countries in which to invest and operate offshore businesses must be made. and failure to develop goals specific enough to guide strategy formulation. the most formal planning procedures were found in the United States and England. or Japan. unskilled planners planning problems occurred at the parent company's headquarters. No differences in the incidence of these pitfalls were attributable to corporate size. such plans' contents were unreliable and the local management team tended not to develop good planning skills. The three most important pitfalls were overdelegation of planning to planning managers. the organization's structure was based on groupings of countries with common languages. Thomas (1974) discussed those two aspects of corporate planning decisions in describing how a large subsidiary of Unilever Corp. CONCLUSION . capital expenditures in excess of certain maximums required corporate approval. chose to organize about 160 businesses geographically. However. Europe. overformalized. Second.1 Sources and Impacts of Pitfalls in Multinational Business Planning Problem Type Problem Locus: Headquarters Subsidiary Source: Adapted from Brandt and Hulbert 1980. who studied 63 multinational corporations with manufacturing subsidiaries in Brazil and headquarters in either North America. Regrettably. but least frequent in Japan and Italy. Planning systems in those cases tended to be over-sophisticated or overly formalized and to suffer from insufficient data with which to make formal planning decisions. Management Short-run orientation.1). Legal restrictions between countries and practical limitations compelled Unilever to grant subsidiaries a great deal of local autonomy subject to just three controls: Each business had to have an approved two-year operating plan and a five-year strategic plan.

This chapter explored some of the added planning procedures and issues that arise in corporations with more than a single business unit. As in the previous chapters, several principles, derived from this review, now will be summarized as axioms (self-evident truths), postulates (assumed to be truthful without proof), and hypotheses (subject to empirical verification).

Axioms Axiom 9.01 Corporate-wide planning policy, both procedural and substantive, is the responsibility of top corporate management.

The parent company's mission, like subsidiaries' missions, must be defined. In the case of diversified corporations, a core mission may not exist. Corporate-level analysis of internal capabilities embraces business units' risk levels, performance potentials, competitive potentials, and growth potentials, as well as Axiom 9.03 the quality of unique corporate functions, including top management and staff services. Corporate-level environmental analysis provides an independent assessment of Axiom 9.04 business units' present and potential competitive positions, industry conditions, and marketing conditions. Corporate-level strategy declares the intended levels of capital invested in business Axiom 9.05 units, diversification, and synergy. Axiom 9.02 Postulates Corporate-level goals can be expressed in terms of risk level, financial results, Postulate 9.01 and long-term growth. But corporate-level competitive goals may not be meaningful in diversified corporations. Conflicts occur between holding companies' missions and subsidiary businesses' Postulate 9.02 missions. These conflicts often cannot be resolved. A portfolio matrix approach should be taken to assess the quality of a corporation's business portfolio. Such techniques are especially useful for cashPostulate 9.03 flow planning purposes, capital allocation, and forming acquisition/divestment strategies. Planning activities at corporate and division levels must be scheduled Postulate 9.04 throughout the year so that strategic awareness is sustained and planning responsibilities do not become too burdensome. Corporate- and business-level planning must be coordinated. The corporate plan cannot be finished until business units' plans are finished. However, assessments of competitive capabilities, market positions and potentials, Postulate 9.05 assembly of baseline financial projections, definitions of strategic issues, development of goals and strategy, action programming, and budgeting can occur simultaneously at each level.

Planning activities are complex in multinational corporations because planning practices and cultures often differ between nations. However, as in the purely Postulate 9.06 domestic case, multinational commercial planning must be coordinated based on some concept of corporate structure, for example, centralized or decentralized by product line, geographic region, and the like. Hypotheses The justification of portfolio diversification as a corporate risk-reducing Hypothesis 9.01 strategy will differ between enterprises, depending on the industries in which they participate, partly because industries differ in risk-reward relationships. Hypothesis 9.02 Acquisition investments turn out unsuccessfully more often than successfully. Acquisitions conducted to implement a previously defined strategy are more Hypothesis 9.03 likely than others to be successful. Acquisitions related to existing businesses are more likely to succeed than Hypothesis 9.04 divergent diversifications. Firms with the most related portfolios provide more opportunities for top corporate management to participate in business units' strategic planning, Hypothesis 9.05 while very diversified enterprises' senior executives typically exercise greater detachment, relying mainly on financial measures for planning and assessment of business units' performance. The relatedness or diversification of corporate entities predetermines the most Hypothesis 9.06 appropriate style for proposing plans and decision making: top-down or top team (related) versus bottom-up or hybrid (diversified).

Part IV
Implementation of Strategy
Part IV addresses strategy implementation, an often-overlooked requirement for effective planning functions. Chapter 10 approaches this subject from perspectives of competences and resources. Readers will discover that a firm must possess several critical skills if it is to implement strategy successfully. Implementing strategy can be likened to athletics. First, the player must be in good shape; that is, a firm must be proficient in “the fundamentals” of management. Then, there must be adequate equipment and other resources, a well-aligned organization, and sufficient motivation of both individuals and the entire team. With those fundamental capabilities, the firm's management can, through training and practice, acquire essential skills for converting strategy into effective action. As these implementation skills are practiced, the management team gets into even better shape. Resources, organizational integrity, and motivation all grow stronger. Conversely, if the essential skills are not practiced or if, for some other reason, the firm allows itself to get out of shape, then implementation proficiency also suffers. Finally, some specialized techniques for implementing strategy are discussed. Among these techniques are management by objectives, balanced scorecard, budgeting, project management, incentive compensation, teamwork, and management development. Here again, there is a reciprocal relationship. With better skills, it is easier to employ specialized implementation techniques. Conversely, if the techniques are not kept current, basic skills can grow rusty and the team will lose its competitive edge. Chapter 11 includes a collection of special procedures to be followed when strategy calls for restructuring. Corporate planning executives often administer their firms' restructuring procedures, which may include acquisitions, divestments, mergers, alliances, joint ventures, and even reorganization of business units or the entire enterprise in bankruptcy proceedings. Each of those restructuring procedures is addressed in this chapter. Also discussed are several legal, regulatory, and economic issues that can arise when an enterprise is restructured. Those issues and technical methods for restructuring the firm will be developed at greater length in a forthcoming volume of this series.

Making Strategy Happen: Required Capabilities
Implementation often is the Achilles heel of strategic planning. A regrettable but confirmed fact is that a majority of strategic plans are not implemented successfully, if at all. It would appear that the proportion of plans that do enjoy successful implementation is somewhere between 10 percent and 50 percent, depending upon the method of observation and measurement (Alexander, 1985; Judson, 1991; Schiemann, 1992; Floyd and Wooldridge, 1992; Pellegrinelli and Bowman, 1994). Thus, the most optimistic estimate of success rates in implementing strategic plans seems to be 50 percent, and most well-informed observers probably would agree that the actual success rate is lower than that. The purpose of this chapter is to assist readers in improving those odds. The implications of low success rates in implementing strategic plans are far-reaching. First, the low success rate seems to imply that it is a lot harder to implement plans than it is to form them in the first place, because even the most brilliant strategy apparently may have no better than a 50 percent chance of being realized. Another implication is that when plans and planning efforts falter, flaws are more likely to be found in plans' execution than their content. Indeed, in our strategic planning consulting practice, we have observed firms' frequent success in forming plans with excellent quality and their equally frequent failures in implementing them. What accounts for management's remarkable propensity not to convert strategy into effective action? Oversimplified, our conclusion isthat management and methodologists have become far more adept at conducting strategic analyses and forming strategies than in developing plans' implementation procedures. Thus, there is a large void in strategic management methodology—not in the conception of strategy, but in its realization. What we have learned from our studies of strategy implementation has convinced us that the theory and methodology of strategic management is woefully deficient in its understanding of what is required to realize strategic intent. Therefore, management is left largely to its own devices in this critical function. At a minimum, planning managers and chief executives must understand that a strategic plan or a business plan—indeed, any plan—that lacks a well-developed approach to implementation is incomplete and probably will not succeed. Top managers, and even planning executives, seem to make a widespread assumption that, if a brilliant strategy has been formulated, it then will be implemented simply by virtue of its intellectual merit. Moreover, the conventional wisdom seems to be that forming strategy requires more talent, if not intelligence, than implementation; implementation accordingly is a matter to be delegated down the chain of command to managers and supervisors who probably weren't involved in forming strategy in the first place. There is the fatal flaw. Senior management assumes that strategy will be self-fulfilling. To the contrary, we have concluded that there is no such thing as a self-fulfilling strategy. Implementation of strategy surely calls for methods and skills much different from those required to form good strategy. However, there appear to be far fewer methodological guidelines for implementing strategy than forming it. Texts that have included “strategy implementation” in their titles really have focused on the dynamics of organization structures as strategy is formed (Hrebiniak and Joyce, 1984) or on the planning process itself (Lorange, 1982). In fact, there has been no methodological examination of how strategy is realized. Therefore, a forthcoming volume in this series will address that topic comprehensively. In this chapter, a few of the most important skills and competences that firms must have to implement strategy successfully are summarized. These are the skills that any management must have to realize the intended benefits of its strategy, no matter how elegant that strategy may be.

Essentially, the implementation section of a plan must describe management's approach to converting strategy into goal-oriented behavior. That approach must be supported by three essential elements: adequate resources, an appropriately aligned organizational structure, and the motivation of organizational members to exert sustained goaloriented effort. Our studies of empirical and theoretical evidence have convinced us that a framework of competences in those three fundamental categories must be developed before a firm can implement strategy effectively. Resources must be adequate to support strategic intent, because strategy must be implemented in the future as well as the present. Resources, present and intended, will determine the scope of strategy that is feasible. In our consulting practice, we have observed that management often attempts strategy that is beyond its means, because capacity of some kind is lacking. At other times, the problem is less immediately apparent and reflects misalignment of intellectual and physical assets. For instance, management may acquire powerful computing resources; but if organizational skills and practices aren't able to make proficient use of them, powerful computers actually may impair performance rather than facilitate it. Moreover, some level of “slack” resources, or reserves, will be required if competences to implement future strategies are to be developed. If a firm's resources are stretched thin and fully utilized in the present, it will be difficult to build reserves for the future, let alone respond effectively to unanticipated exigencies. Thus, management must build surplus resources that can be developed for competition in the future while deploying other assets effectively in the present. These concepts of course are well founded by the work of theorists including Bourgeois (1980b, 1981), Bourgeois and Singh (1983), D'Aveni (1994), and Hamel and Prahalad (1989, 1994). A second class of generic capabilities required for effective strategy implementation is a wellaligned organizational structure. By this, we mean that the structure must be able to integrate a wide variety of specialized skills for its strategy to be accomplished. As competitive environments become more dynamic and organizations grow in complexity, integrating mechanisms become correspondingly more important. This principle has been generally accepted since the pioneering research of Lawrence and Lorsch (1967). An organization may have many talented people. But, if their skills and efforts cannot be integrated and focused on strategic objectives, the result will be wasted effort at best and, at worst, self-defeating internal conflicts. The organization structure also must be adaptable because, as most would agree, rates of change are accelerating and competition is growing ever more hypercompetitive (D'Aveni, 1994, 1995). Finally, organizations must be able to do more than just adapt to change; they also must integrate new information within their structures and benefit collectively from experience. In short, organizations must be able to “learn” (Senge et al., 1999). Unfortunately, many organizations have difficulty in learning. Ewing (1969) first observed this impediment in organizational members' seemingly natural resistance to both change and formal planning. This resistance to change apparently reflects some very fundamental psychological mechanisms. Among top managers, for example, strategic failures actually can elicit escalated commitment to the failed strategy rather than making adjustments and forming new, more appropriate strategy (Teger, 1980; Brockner and Rubin, 1985; Staw and Ross, 1987; Brockner, 1992). This tendency for decision makers to persist in failing programs of action, or “escalating commitment, ” reflects their unwillingness to acknowledge that mistakes in prior commitments of resources were made. In short, they seem unwilling, rather than unable to learn. A third class of generic requirements for effective implementation of strategy is the motivation of individuals at all levels to persist in effective goal-seeking behavior. In part, this means that strategy managers must be able to overcome the natural resistance of people to change and a

it often is necessary to achieve the consensus of an organization's members because. leadership combines all three of these implementation capabilities. vigorous effort in the pursuit of strategic objectives. The following ten profiles checklist may be used by strategy managers to be sure that these skills are available in their firms. Leaders themselves are valuable resources. good leaders guide organizations in adapting and learning from experience and in changing strategy when it is necessary to do so. 1978. but each is raised to an acceptable level. it also provides a vehicle for instilling awareness of strategy in individuals throughout the organization. Such a framework provides expectations for critical success factors and standards for assessing performance of individuals as well as the entire organization. Whether it is through consensus or the more direct device of a lucrative incentive compensation program that links rewards to objectives' accomplishment. Indeed. They provide and sustain motivation throughout the organization. 1983). The Ability to Achieve Strategic Awareness . individuals must be more than just willing to enact the firm's strategy. Thus. some discord regarding objectives may be beneficial by promoting consideration of a broad range of alternatives (Bourgeois. Indeed. and over a quarter-century of practice. Just as important. The level of motivation must be sufficient to sustain persistent. These skills flow naturally from the three generic categories of implementation capabilities described in the preceding section. Research also indicates that consensus in approaches to pursuing objectives is more important than consensus on the objectives themselves. consensus is the antithesis of resistance. A framework of internally consistent objectives is a vital integrating mechanism for coordinating specialized organizational units' conflicting interests. However. Hall. 1980a. the challenge is to find a “zone of tolerance” where all objective criteria may not necessarily be maximized. Finally. The Ability to Set Internally Consistent Objectives The firm's objectives should reflect standards of success in financial and competitive performance. supported by viable strategies in all four dimensions. Unfortunately. of course. thereby overcoming otherwise formidable cultural resistance. few effective mechanisms for achieving reliable consensus are known.. and effective motivation—will be greatly affected by leadership. leaders are the ultimate structural integrating mechanisms. 1986. also have convinced us that ten critical skills must be present in any firm for strategy to be implemented effectively and reliably. 1990). they must be enthusiastic about doing so. that is internally consistent. especially when difficult obstacles are encountered and problems must be solved. a properly aligned organizational structure. 1988. TEN CRITICAL SKILLS FOR CONVERTING STRATEGY TO EFFECTIVE ACTION Our studies of strategy implementation. it often is difficult to find a collection of objectives. to take effective action in implementing strategy. As Doyle (1994) asserted. A firm's ability to draw upon all three categories of generic implementation capabilities— balanced resources.wide range of cultural barriers. Participative approaches to selecting objectives and strategy seem to be among the most widely accepted techniques (Miller and Monge. as well as acceptable levels of risk and rates of long-term growth. Cotton et al.

1974. focused effort. 1972. but implementing it is just plain hard work. 1990. 1988. 1986. in any participative approach to objective setting. several approaches have been proposed (Schweiger and Lena. Top management may be able to conceive brilliant strategy in bursts of creative insight. to persist in the pursuit of obviously unsuccessful strategies in a form of behavior that has been called escalating commitment (Brockner. 1991a.It surely is difficult for managers to implement strategy if they are unaware of it! Yet. But. a properly designed incentive compensation program in which incentives are well matched to the type of strategy employed also will help to direct and sustain effort. 1992). b. For instance. 1981. especially at higher levels of management. Some method of communicating strategy throughout the organization is essential. of course. Managing resistance to strategic change and attaining strategic consensus thus may be one of the most difficult of all strategy implementation skills to master. Carbone. which created the first atomic bomb during World War II. One device to accomplish such awareness. Cotton et al. Latham and Saari. 1976. which created the first desktop computer. We will conclude only by observing that proper alignment of incentives to objectives requires careful. that usually is not the case (Hambrick. 1969). a majority of companies seem to take for granted that line supervisors and mid-level managers will implement strategy effectively without such an awareness. Forming strategy is an intellectually stimulating exercise. There is insufficient space here to delve more deeply into this subject. 1979. . there is a tendency. resistance to change is minimized to the extent that consensus on strategy is accomplished. Schweiger and Latham. 1992. Rodgers and Hunter. Our research also demonstrates that linkage of incentives to objectives is more effective in some industries than in others. let alone to overcome resistance. There seems to be a natural resistance to strategic planning itself (Ewing. depending upon the circumstances. Mitchell and Dossett. Thus. in more mundane settings. 1991). our unpublished research has disclosed that bonus incentives tend to be most effective during weak marketing conditions and that equity-sharing incentive arrangements (such as stock options) are most effective during expansive markets. this is easier said than done. at least for their areas of responsibility. 1977. 1982. is to invite managers at all levels to participate in forming strategy and objectives. It may be necessary to assemble an elite team such as the Manhattan Project. The Ability to Manage Resistance to Changes in Strategy Resistance to change can take many forms and be pervasive throughout most organizations.. Miller and Monge. Erez and Locke. Latham. Published research further has demonstrated that equity-sharing incentives are not very reliable enhancers of performance potential (Crystal. 1981). The Ability to Sustain Vigorous. competent crafting. the methodology for achieving such a consensus is not well developed (Locke. 1990. Regrettably. Focused Effort Here is where the difference between conceiving and implementing strategy becomes most apparent. Linden and Contavespi. 1978) and little is known about how to accomplish consensus reliably. Effective leadership surely is required. 1988. However. How to attain this kind of motivation still is more of an art than a science. 1986. Kondrasuk. strategic awareness is a natural complement of internally consistent objectives because. 1991). 1986. Nevertheless. Mandel. vigorous. but realizing strategy requires sustained. 1975. Numerous studies of incentive compensation effectiveness over the years have demonstrated that some types of incentives are more effective than others. internal consistency also must be achieved. The “management by objectives” technique has been used to effect such arrangements with favorable impacts on performance (Ivancevich. Moreover. c. Clearly. Meyers and Hood. Latham. As observed in the previous section. Latham and Marshall. or the Xerox Corporation's Palo Alto Research Center (PARC). 1994).

Christensen and Montgomery. But. 1961. respectively). The professional style of leadership relied upon information and expertise. The edict approach was especially ineffective. the manager remains in control and accountable for the outcome. most recently by Harris and Ruefli (2000). committing to adopt the group's recommendation. the importance of organizational integrating mechanisms will increase to the point where such mechanisms are essential for effective strategy implementation (Lawrence and Lorsch. but that it was employed relatively infrequently (in only about 10% of 352 cases that he studied). mechanistic organizational structures can be effective. Shrivastava and Nachman (1989) studied 27 published case histories and identified four leadership styles: entrepreneurial. In a more participative style. Nutt found that the intervention approach had the highest success rate. The entrepreneurial style incorporated minimal delegation of authority and was edictive in nature. As a general rule. 1981. Grinyer. used by 13 percent of the sample. The bureaucratic style employed rules and models corresponding to Nutt's persuasion approach. and competition intensifies. an interventionist approach should be given very serious consideration. Of course. Nutt's research (1987. managers actually delegate responsibility for setting objectives and forming strategy to a selected group. there are still other taxonomies. while corporations with multiple businesses that are sufficiently related to each other to provide internal synergies tend to enjoy superior performance (Rumelt. in stable environments where firms are not subject to severe internal imbalances. To illustrate other leadership style taxonomies that are available. . the intervention approach seems to be the most effective: in that approach. The political style was based on achievement of dominant coalitions. Persuasion is a style in which managers attempt to “sell” strategic ideas to organizational members. it has been generally accepted that changes in a firm's scope of business or other fundamental changes in strategy must be accompanied by an appropriate realignment of the corporate structure. an edictive style is the most authoritarian and least participative. 1974. such as a consultant's report. AlBazzaz and Yasai-Ardekani. 1998) seems to demonstrate that there are at least four generic styles—intervention. 1967). organic structures are most appropriate (Burns and Stalker. This principle has been confirmed by scholars for three decades. 1980). political. persuasion. Perhaps this is why decentralized decision structures seem to be preferable to more centralized structures as firms become larger (Dalton et al. in less stable and more complex environments. the challenge of top corporate management is to select leaders whose styles are appropriate to the firm's circumstances. In any event. 1980). 1965). In most cases. often with the aid of some claim to incontrovertible authority. While responsibility for enactment of strategy is delegated to organizational members. It also is generally accepted that.The Ability to Align Structure and Strategy Since Chandler's (1962) pioneering work. functional specialization is likely to occur. but they had the least success of all. and professional. but they do seem to lend themselves to empirical assessment. Excessively narrow or diverse collections of businesses within the same corporation are unlikely to enjoy superior earnings. Participation was the next most effective approach. The Ability to Identify and Develop Leaders and Managers The most appropriate leadership style for any particular firm may differ depending upon that firm's circumstances. bureaucratic. Of course. As organizations grow more complex. managers implement strategy by setting objectives and reasoning with organization members regarding both the objectives and the approach to pursue them. Woodward. Persuasion and edict approaches were taken most frequently (49% and 30%. However. This is not to say that these four styles are the only ones available. participation.. and edict. In such cases.

The Ability to Budget and Monitor Progress Whereas strategic plans often take a long-term view. because they naturally prefer to avoid the risks associated with measuring . Bennis. A large body of professional methodology has emerged in recent years to guide executives in managing projects and programs effectively. Yet. physical. Managers tend to resist the budgeting function when budgets are used as tools for measuring their performance. it would be much better if qualified managers were developed deliberately in strategic programs of long-term management development.. 1989a. good project management skills have a functionally integrating benefit and enable project members to adapt effectively when variances between actual versus planned progress or resources' usage occur. Forming a management development program certainly is not easy. will organize such activities either into projects with defined endpoints or procedural programs. Most firms are ill-prepared for events of executive succession. An effective program to develop strategic leaders probably includes two essential elements. the annual operating budget should represent the first year's implementation of a longer range strategic plan. Then. as Shen (2000a. b). Project management methods also enable executives to clarify alternatives when barriers to progress are encountered. albeit a rarity. and capital resources on attaining specific objectives. Thus. The annual operating budget becomes a microscopic view of the strategic plan's first year. The Ability to Conduct Projects Ultimately. as scholars have observed for many years (e. Modern project management methods have become important facilitators of strategy implementation because they focus human. and/or require the commitment of significant resources. qualified candidates must be selected based on their aptitudes. They reduce the uncertainty and confusion surrounding projects' implementation by clarifying paths to objectives' achievement and resource requirements for successful completion. 1977. Zaleznik. the problems of resistance to planning and strategic change discussed earlier are aggravated. But what happens when qualified candidates are not available? Of course. enabling them to make fully informed decisions faster and to take effective action with greater confidence. if firms are not fortunate enough to have qualified internal successors. 1996). b) recently demonstrated. management eventually must come to grips with implementation in the present and near-term future. strategy must be implemented through deliberate action. Consequently. last for any significant period of time. For all of these reasons. As such. Rarely is there a section on development of management and future leaders. we have reviewed scores of companies' strategic plans. Different still are the skills required of line supervisors and team leaders (Murphy. 1997).In our strategic management consulting practice. the two should be seamless. they must take their chances in the open market. they must be exposed to strategically important issues in successive increments (Bowman and Kakabadse. In effect. This is why budgeting and progress evaluation are critical skills for implementing strategic plans. managers who conduct strategic activities that are at all complex.g. Consequently. a planned approach to developing strategic leaders as they grow within organizations is unquestionably the most enlightened approach. These two types of requisites vary considerably. First. such events can impact organizational stability and performance greatly. Among the challenges to be faced are obvious differences between aptitudes and skills required of functional managers versus business unit leaders. One of the greatest impediments to achieving consistency between budgeting and strategic planning seems to be the tendency of some executives to use budgets and annual operational plans as “control” devices rather than for more constructive purposes. Whether they do so intentionally or not.

top management's higher-level strategy well may call for the disintegration of those same functions over a longer term. Even an excellent strategy will have an unfortunate outcome if it is not replaced by a more appropriate one as the firm's business conditions change. is to impose positive control so that a firm's near term strategic intent is affirmed by the budget and controls encourage the accomplishment of objectives. Such diagnoses must be accomplished sufficiently in advance so that management can assemble the requisite organizational competences and technology and deploy them before competitors can seize the initiative. defined several requirements for long-term strategic success. presents a certain irony: Whereas functional integrating mechanisms are necessary to implement current strategy. there is a growing body of knowledge regarding technological forecasting procedures and for identifying the likely transitions from current to emerging technologies. or Apple developed a new kind of computer. some form of control is essential for keeping resources focused on achieving strategic objectives and avoiding financial risks. For some interesting and practical illustrations. There comes a time in every firm when management realizes that implementing the current strategy long enough surely will lead to failure. as when Disney developed a new form of motion picture. strategy making is an ongoing process and the need to make continuous changes in strategy must be expected. and senior managers clearly are derelict when that situation exists. The Ability to Envision Needs for Future Competences Hamel and Prahalad. Nevertheless. and the struggle to develop them even may be culture defining.their levels of achievement in comparison to previously established standards for success. Indeed. This requirement. However. Hamel and Prahalad give readers very little guidance in determining exactly how the requirements for future competitive advantage may be developed. extraordinary leaders—with visions of doing business in entirely new ways—are required. For extraordinary accomplishments such as these. The Ability to Realize When It's Time to Change Strategy and Replan This final implementation skill is a natural complement to the one just discussed. 1994. a deliberate program of competence development over five or even ten years before deployment may be necessary. and their well-known book on competing for the future (1994). their article on “strategy as stretch and leverage” (1993). They argue that managers' ultimate challenge in the pursuit of long-term success is to identify requirements for competitive advantage that will exist in successive stages of an industry's or market's evolution. A firm eventually will be required to constructively disintegrate operating functions that well may be quite satisfactory for the present. 1998). today's competences eventually will become insufficient to meet future needs. readers might consult the works of Foster (1986) and Modis (1992. The challenge. rather than discouraging managers from participating in the planning process. Acquisition or development of new competences may require investment of considerable time and effort by many persons. Indeed. Development of such intellectual and technological resources cannot occur overnight. Certainly. However. Unfortunately. of course. To develop altogether new competences also may test an organization's ability to learn and adapt. only after the need for new competences in the future has been envisioned can a strategy be formed to develop or acquire them. Rather. therefore. It is the threat of embarrassment that makes budgeting so disagreeable to them. in their widely circulated article on “strategic intent” (1989). . absence of control implies that an organization is out of control.

the generic categories become stronger. practicing those techniques enhances the ten critical skills. the most effective strategic managers initiate strategic change in planned programs of “creative destruction. is reciprocally reinforcing. a properly aligned organization structure. organizations must become increasingly proficient in their replanning skills. in strategy implementation. or even is self-imposed by the firm itself in programs of planned obsolescence. as each skill grows. successful strategic management requires the ability to modify strategy and replan continually. we have reviewed three generic classes of implementation capabilities in the form of balanced resources.” Scope of Available Techniques Over the years. Needs for replanning may be discovered in the ordinary course of formal planning procedures. as the ten critical skills are channeled into the specific implementation techniques which we are about to discuss.With faster-changing environments. it is time to consider how those skills can be converted into effective action so that strategy in fact is realized. until they are refined into the ten critical skills. In either case. several techniques have been employed by strategic planning methodologists to implement strategy. and motivation of both individuals and the organization. CONVERTING SKILLS TO IMPLEMENTATION COMPETENCES At this point. Those foundation capabilities are needed in order to acquire ten critical implementation skills: Objective setting Achieving strategic awareness Managing resistance Sustaining vigorous effort Aligning structure to strategy Selecting and retaining leaders Budgeting and progress evaluation Conducting projects Envisioning needs for future competences Critically assessing current strategy Now. Contingency planning. Together. Proficiency in the ten critical skills reinforces the three generic capabilities (resources. Some of these were . whether strategic change is compelled by sudden shocks in the competitive environment or responds to emerging shifts identified through environmental surveillance. in a second reciprocal reinforcement mechanism (Figure 10. ” a term that D'Aveni (1994) borrowed from the famous economist Joseph Schumpeter (1939). these two systems of mutually reinforcing relationships between generic capabilities. But generic capabilities. functional skills. is a hallmark of proficiency in strategy implementation. or they may be thrust upon management by sudden environmental shocks. structural alignment. however. the common phrase “practice makes perfect” really does apply. Proficiency in the ten critical skills. and techniques for taking specific action to implement strategy comprise a reciprocally reinforcing system of implementation competences. In any event. Similarly. the firm will be well served if a reservoir of contingent strategies and adjustments to implementation programs is available. which may be called the “implementation-competences bridge. then. Thus. As observed earlier.1). and motivation). are not sufficient to implement strategy directly.

whatever combination of techniques may be used. But. such as those discussed shortly. identify the need for future competences. Since then. effective use of the balanced scorecard requires abilities to set internally consistent objectives. b. through practice. 1973) have existed for over a quarter-century. 1970. having been initiated in the early 1950s at General Motors. The choice of techniques is a planning manager's option. in all cases. the most generally accepted MBO process model probably was drafted by Odiorne (1965). the objectives of all organizational elements are aligned to support and justify corporate goals and strategic objectives. as long as the requirement that all ten skills be used is satisfied. it must be one of the very first. the balanced scorecard of Kaplan and Norton (1996a. Individual managers are integrally involved in this process. Odiorne. In fact.Figure 10. Over the years. The skills enable strategy to be realized as action. Management by Objectives If management by objectives (MBO) was not the first formal technique for implementing strategy. all ten critical skills must be employed for strategy to be implemented successfully. 1964). Mid-level managers negotiate with corporate executives in a similar manner. The process involves establishing comprehensive corporate objectives and then articulating them at successive levels of the organization for each operating unit and support department in a cascading pyramid of increasing precision. First formally defined by Peter Drucker (1954. d). practicing those techniques will reinforce and help to build the basic skills. there have been numerous adaptations and revisions. and replan. Not only does implementing the balanced scorecard draw upon each of those critical skills but. Action programs and projects to achieve objectives are defined at all levels. In turn. align structure to strategy. developers of several implementation techniques and their followers have proclaimed them as all-inclusive strategic management systems. modify strategy. c. For example. Managers and their subordinates at all levels negotiate subordinates' proposals for contributing to the accomplishment of their units' objectives. Accordingly. it enhances them so that they grow stronger with practice. 1965) and zero-base budgeting (Pyhrr. In order to implement strategy effectively.1 The Implementation Competences Bridge developed relatively recently—for example. The following paragraphs summarize ten specific techniques for implementing strategy. 1954. all ten critical skills must be deployed in some combination of techniques. achieve strategic awareness of the management team. Each draws upon one or more of the ten critical skills discussed in the previous section. However. Performance in the pursuit of planned objectives and implementation of planned action programs is reviewed . Others. what we have learned is that planning managers must make use of multiple techniques as the circumstances of their firms and their strategies require. they must be deployed through the use of formal techniques. monitor and control progress. implying that no other is needed. 1964. such as management by objectives (Drucker.

a wide variety of electronic computing aids has been . The balanced scorecard extended the scope of strategic objectives' measurement and assessment—and of strategy implementation—to a broader framework. The methodology of formal project management has progressed immensely in recent years to a point where it now is formally studied by scholars of both management and industrial engineering. On balance. For this reason. management should be able to develop a valid theory of how the firm performs in each of the four dimensions. For instance. projects are often unique endeavors. d). are likely to increase the rate of success in strategy implementation significantly (Kondrasuk. 1996a. But this technique must have top management endorsement to succeed. Plans' reliability thus should increase over time. Empirical studies seem to have demonstrated that MBO programs' impacts on organizational performance and employee productivity have been generally favorable. The balanced scorecard's performance measures are developed to reflect an assessment of unique cause-effect relationships between driver variables and performance measures in each firm. based on analyses of variances. and numerous techniques to implement project management methods have been developed. the balanced scorecard was created by a project team managed by an accounting professor and a management consultant (Kaplan and Norton. Management then will have a reliable basis for relating strategic action to results. b. it is focused more on the performance of functions and departments. (2) customer satisfaction. direct. Kaplan. That is. But when commitment was low. Project Management A “project” is an endeavor that has a definable objective. as the organization learns from perpetual hypothesis testing. the average gain was only 6 percent. an entire profession of project managers has emerged in response to the wide recognition that project management methodology can enhance organizational performance potential. c. Then. However. It is this rational orderliness that makes MBO so appealing. The process of deriving strategic objectives to be assessed by balanced scorecard performance measures is similar to that of management by objectives. a greater understanding of performance drivers and critical success factors should emerge. and (4) innovation and learning. using the balanced scorecard. Instead. Most recently. in four dimensions: (1) conventional financial measures. employees' productivity often has been treated as a performance variable. to test such hypotheses. and quality. 1981). Eventually. The Balanced Scorecard MBO procedures certainly don't focus exclusively on financial performance. 1994. and control activities that have not been attempted in the past and may not be repeated in the future. Nevertheless. one difference is that the balanced scorecard procedure does not extend necessarily to individual managers throughout an organization. MBO seems to have been the single most effective strategy implementation technique among all of those that have appeared in the strategic management literature. Perhaps this is simply because MBO is very rational and systematic. 1993. cost. Rogers and Hunter (1991) reported that the average productivity gain was 56 percent. as well as effective. The challenge of project management is to plan. consumes resources. it is true that strategy implementation techniques typically have neglected nonfinancial measures of performance that precede the creation of economic value. Indeed. Such relationships enable managers to form hypotheses about what makes the firm successful and. (3) internal business processes. and operates under constraints of time.regularly and often enough so that variances from planned progress can be recognized in time for management to influence results. organize. Kaplan and Norton. in MBO programs. and the weight of evidence seems to demonstrate that MBO programs. When top management commitment to MBO programs was high. while certainly not perfectly reliable.

planning managers also should be aware that numerous alternative approaches to classic budgeting procedures are available. The purpose of most capital expenditures of significant size is to facilitate the accomplishment of strategic action projects such as construction of new capacity. In these cases. the costs and benefits of quality improvement programs can be expressed more accurately and included in operating budgets. capital budgets should be justified by strategy first and then confirmed by conventional capital budgeting procedures. and planning managers should be familiar with them. and they must achieve rates of return higher than capital costs. 2002). greater weight may be given to short-term justification of projects than their strategic justification. If near-term capital budgeting procedures are detached from strategic planning procedures.” As production requirements vary. planned operating results will “flex. In such cases. Yet another alternative budgeting technique of which planning managers should be aware is zero base budgeting (ZBB). In some industries. and operational plans typically are expressed as “flexible budgets. so that the likelihoodof accomplishing intended results within constraints of time and resources has been greatly improved. standard costing systems are required. firms in capitalintensive industries require relatively elaborate capital budgeting procedures. This technique is employed to accomplish a better match between objectives and overhead resources' utilization. The payback periods of such projects may be upwards of seven to ten years. A few generic budgeting and progress evaluation techniques have emerged over the years. Capital budgeting is one point where the connection of annual budgeting and longer-range strategic planning endeavors often becomes obvious.. operating budgets should be a detailed representation of how the strategic plan will be implemented in the current year. elaborate models of costs may be needed to construct operationally valid performance objectives. There is no excuse for allowing this to happen. Rather than assuming the same functions will be performed by staff and other support organizations year after year. For example.developed to facilitate the work of project management. For example. While the project management profession finds its greatest appreciation in several “projectdriven” industries such as defense and construction. collections of activities' costs are combined for more valid estimates of costs when fluctuations in operating levels occur. if they are to increase economic value of the firm. and their costs can be measured. Then. Budgeting and Control It was observed earlier that operating budgets and strategic plans should be connected seamlessly. the ZBB method recognizes that objectives eventually are achieved and that some functions need not be . those related to consumption of materials. These may include costs of reworking or otherwise correcting defective products or producing replacements. managers will lose respect for the strategic planning process. A recent development in accounting methodology is activity based costing.e. nearly all firms that attempt to implement elaborate strategies by coordinating more than a few persons' efforts and multiple resources can benefit from project management methodology. In addition to conventional procedures for creating financial business models to be used in establishing near-term performance objectives and assessing progress in the pursuit of those objectives. Thus. several “user friendly” software products have emerged for use by strategic and business planning managers to coordinate the smaller systems of activities typically found in implementation elements of strategic plans (Roney. costs associated with quality defects often are not reflected in standard costs. Here. soshould direct manufacturing costs (i. ” depending upon operating levels. and variable overhead). labor. Standard cost systems are not the only devices that can be used to arrive at flexible budgets. Several activities are involved in such processes. In response. For this reason.

multiple proposals for each department's budget may be submitted at alternative performance levels. 1985). it has been logical to delegate responsibilities for forming objectives and strategy to members deeper within the organization. Once those skills have been defined. Thus. Bostrom. It is generally recognized that ZBB provides a more rational basis for allocating corporate resources to overhead functions by matching those functions to strategic objectives. However. it also is well recognized that ZBB requires extensive documentation and administration (Anderson. The fundamental logic of this assertion is self-evident. and training procedures. collaborative techniques are required. Management Development Programs These techniques include management selection. Since successful strategy formation and implementation require managers with appropriate skills and organizational units with distinctive competences. to delegate responsibility for forming strategy and developing implementation programs that previously would have been left solely to top management. with the diffusion of responsibility and authority for strategy (i. and forming programs to fill the resulting gaps are the procedural steps involved in defining programs to develop sustained managerial competences. 1993. Austin and Zenowich.. the budget for each department or function begins from a “zero base” and declares the costs of minimal operating levels as well as achieving objectives specified in the strategic plan.repeated perpetually. auditing the inventory of presently available skills versus those requirements. Instead. In designing management development programs. just one organization will possess the highest levels of skills and the greatest competences for performing a specific mission. top management can select from alternative packages depending upon objectives' priority and the firm's financial limitations. Moreover. it is incumbent on top management to acquire them and to fill gaps between the present level of competences and those needed to achieve competitive advantages in the future. management development programs can be decisive in determining firms' long-term competitive potentials. Only those firms which possess distinctively superior skills and competences are likely to enjoy competitive advantages over the long term. 1979. empowerment). With ZBB. Therefore. rather than retaining those responsibilities solely at the top: The result has been a growing tendency toward empowerment—that is. Teams as Strategy Implementation Devices As business conditions have grown more complex and the growth of technological knowledge has exploded.e. budgets for non-production departments do not begin by assuming that current functions must be maintained. Then. With the advent of spreadsheet software for personal computers. Specifying the skills that will be required. These changes have called for dramatic departures from classic conventions of organizational structures and decision making. those limitations no longer are as prohibitive as they were previously. 1994) challenged management to identify competences that will be required for competing successfully in future markets. recruiting. This is because individual levels of technical competence necessarily fall short of the complex skills typically needed to accomplish strategy. considerable attention has been directed to teams and teamwork as means of enhancing management's ability to implement strategy. in any given industry. there has been a corresponding increase in the need for integrating mechanisms. Hamel and Prahalad (1989. For example. it is vital that specific objectives be stated. however. as the level of education and sophistication of technological know-how among organization members has grown. in the sense that Lawrence and Lorsch (1967) originally conceived .

They must bestrong enough to maintain the group's focus. Unlike operational process teams. Studies such as that by Parker (1990) have attempted to disclose characteristics of effective teams. how to manage them. The empirical history of teams and teamwork is far from consistent. For instance. there must be broad participation of team members in decision making. teams also seem to be more effective as strategy implementation devices in intellectually advanced industries and highly technical environments than in more mature industries and routine environments. Some case histories have demonstrated that it is quite difficult to improve process-performance through teamwork (Williams. tendencies to challenge assumptions. So much has been written in recent years about teams—how they should be formed. Teams can be powerful integrating mechanisms. team leaders will be selected based upon the challenges that they must face. With effective strategy teams. Some team members even may be selected because of their skeptical natures. Thus. These teams' tasks are usually very difficult and their work may be intense. Thus. but. Others may be selected for their ability to perceive longer-range strategy. and how to select their leaders—that it is difficult to treat this subject adequately in the present summary. Based on our study of numerous case histories in the academic literature. and teams must be able to assess themselves and practice self-improvement. A great deal of attention has been directed in recent years to using teams as means of assembling required expertise to form and implement strategy. while others may be selected from within the operating organization. accordingly. are willing to defer to each other's specialized skills in order to accomplish the group's mission (Bennis and Biederman. it no longer may be necessary for top management to be the sole source of functional competence. Technology teams' members and leaders will be selected much differently than members of top and mid-management teams. challenging objectives. it is generally recognized that high-impact teams and task forces are much more likely to succeed. These teams' leaders must be talented in special ways. some members should be selected because they are task-oriented. high-impact teams have relatively short lives that end when an assigned task has been completed. team leaders' necessary qualifications certainly will differ depending upon teams' locations and functions within the organization. specific teamwork skills must be developed. 1997. in such isolation. team members should be selected to provide different kinds of skills and forms of teamwork. 1995). Often. Their members are selected for specific skills and abilities to contribute to objectives' accomplishment. Owen. LipmanBlumen and Leavitt. ongoing processes and high-impact teams. team members must have clearly defined roles but share leadership functions. consensus must be achieved. 1999). esprit de corps may be built more quickly. High-impact teams' members are motivated by the importance of their mission and. . above all. A critical distinction should be made between teams formed to perform routine. they must be diplomatic and resourceful enough to obtain necessary resources. Depending upon the team's mission and circumstances. or task forces. which are formed to achieve specific. they must be supportive and able to facilitate conflict resolution. high-impact teams' work is so confidential that members must be isolated from the rest of the organization. there must be an environment of open communication and trust. rational. they must be able to relate to other elements of the organization outside the team (because the team's purpose is to accomplish organizational objectives). Some may be executives. Still others may be selected for their social interaction skills and abilities to facilitate processes.the term. a wider range of technical skills can be made available for strategy conception and implementation without losing the cohesion and integration that otherwise might occur. and abilities to provoke positive debate. through the use of teams and teamwork. and logical. 1996. how to select their members. they must recognize that each member's competence is a very valuable resource. Rather. they must have a clear sense of purpose. Similarly. as might have been expected in the past. However.

for instance. objectives of strategy. earned bonuses can be deposited in each participating manager's “bank account. therefore. and the firm must have a reliable methodological mechanism for continuous replanning. our unpublished research (Roney. Payment need not be immediate. One criticism of bonus arrangements is that they may encourage management to set low targets so that objectives' accomplishment and bonus payments are assured. SUMMARY AND CONCLUSIONS . there are two types of incentive arrangements: bonus payments and equity sharing. In bonus arrangements. empirical research also seems to demonstrate that equitysharing arrangements have little or no correlation with firms' actual performance (Blasi and Kruse. If the strategic planning horizon is four years. proficiency in administration of business and corporate planning procedures is a prerequisite to successful implementation of strategy in a deliberate. it does. 2001:235) has demonstrated that linkage of executives' incentives directly to objectives in strategic plans differs widely between industries. 1991. Bonuses may be paid for achieving difficult objectives to entire top management teams or to individual managers. well beyond top management levels (Kanter and Ward. b. It is widely recognized that arrangements such as these have grown rapidly in recent years and now extend into many organizations. sacrificing long-term corporate health for short-term gains ultimately will not be rewarded as much as sustained improvement.” indeed. schemes for paying bonus awards over an extended term can be devised. Proficient administration of the planning function and continual maintenance of the plan. are also prerequisites for effective strategy implementation. Equity-sharing arrangements include both stock options and stock grants. Comprehensive plans and their strategies are ever-changing by necessity. Such arrangements give managers long-term perspectives. Thus. although most firms have equity-sharing arrangements. for instance. Indeed. Crystal. specific linkage of incentives' payment to accomplishment of strategic objectives is not very frequent in industrial services and fabrication industries.” Subsequent years' achievements increase or decrease the account's balance. But. This is not to say that top management doesn't usually receive “incentive compensation. 1991a. Indeed. bonus arrangements are more likely to be successful in enhancing the probability of strategic objectives' achievement. Because plans quickly can become invalidated by changes in the competitive environment and/or internal capabilities. Paulin. reliable manner. 1991. c. 1991). for instance. One way to avoid this pitfall is to adopt payouts based on the contribution to “economic value. ” which requires that rates of return exceed costs of capital to an extent greater than comparable firms in the same industry. or even strategy itself must occur continually. Administration of the Planning Function Recall from the previous section of this chapter that the tenth “critical skill” for implementing strategy is an ability to recognize when it is time to change strategy and replan. However. significant payouts are made when objectives are achieved. modifications to implementation tactics. The manager receives a payment equivalent to one quarter of his bank account's balance at the end of each year. most firms have some form of incentive compensation arrangements. 1992).Incentive Compensation Arrangements It is generally accepted that attaching valuable rewards to objectives' accomplishment will increase the likelihood of successful outcomes. Essentially. more than 90 percent of executive incentive plans studied by Linden and Contavespi (1991) actually did result in payment. Thus. Unfortunately.

There are three fundamental reasons why strategy usually is not implemented effectively.This chapter began with a recitation of the regrettably low rate at which commercial plans' strategies are realized by effective implementation. Planning managers are free to choose as many or few techniques as they wish—as long as all ten critical skills eventually are employed. or essentially all of a firm's employees may be either unwilling or unenthusiastic about implementing a strategy that management has chosen. and markets in which the firm participates. Those ten criticalabilities stem from the three classes of generic capabilities proposed previously. If plans aren't implemented. To repeat a phrase coined at the beginning of this chapter. ten generally accepted implementation techniques. strategy. the economy. The third reason is insufficient motivation. and motivation. . the lack of such a methodology. Alternatively. We have drawn the following conclusions from our review of implementation methodology. The first reason is insufficient resources. Conversely. as well as the strategic management literature. A great deal is known about how managers may form goals. or business planning—often have beencriticized. Estimates of successful implementation rates are in the range of 10-50 percent. as well as most general texts on strategic management principles. There have been other techniques in the past. the flaw that has made strategic management unsuccessful on so many occasions is not in our theories of strategy. and strategic objectives. The second reason is disorganization. rather. industry. or correct as stated remains to be determined by the community of empirical academicians and practitioners who are concerned with strategic planning. indeed. Finally. Thus. individuals. organization structure. too long. It began with a general model of strategy implementation methodology that requires a firm to possess three types of fundamental competences in the form of balanced resources. long-range planning. were reviewed. because it nearly assures that the planning effort will fail. that is. and there surely will be more in the future. This is probably the most destructive misconception that can exist in strategic management. strategic planning. the ten critical implementation abilities are taken from our consulting experience of over twenty-five years. but in our methodology for implementation—or. Next. they can't make much of a contribution to firms' performance. While the three generic capability classes are well grounded and established in the literature of strategic management. not a great deal is known about how a firm can acquire the resources. which can be used to deploy the ten critical abilities. capital. Among these are the texts by Hrebiniak and Joyce (1984) and Lorange (1982). and motivation that are required to implement strategy with reliably positive results. the firm may not be able to adapt its organization structure or strategy to a changing environment. Most estimates tend to be near the low end of that range. Many executives seem to have adopted a conventional wisdom that intellectually elegant strategies that are well documented or otherwise well communicated constitute the finished work of commercial planning. organizational structure. Unfortunately. a collection of ten specific abilities required to implement strategy was proposed. Whether this list is too short. there is no such thing as a self-fulfilling strategy. the firm may not be able to integrate and concentrate its resources so that they are focused in a chosen direction. This seems to be why various forms of commercial planning—whether it is called comprehensive planning. First. there has been no definitive reference or source of generally accepted principles to guide management in strategy implementation. an excellent strategy is far from certain to be implemented on its own merits. Most texts that address this subject at all tend to focus on organizational dynamics alone or on administrative procedures for implementing the strategic planning process rather than actually performing strategy. or intellectual assets. the firm may not have an adequate depth or breadth of physical. groups. The purpose of this chapter has been to take a step toward filling that critical void in strategic planning principles by providing a consolidated framework of concepts and implementation guidelines that demonstrate how managers can make their firms' implementation practices more effective.

the ability to conduct projects. but no longer is. GENERALLY ACCEPTED PLANNING PRINCIPLES: IMPLEMENTATION Axioms Axiom 10. a firm Hypothesis 10. Conversely. Practicing implementation techniques builds basic Hypothesis 10. such as the balanced scorecard.there is no such thing as a self-fulfilling strategy. the ability to sustain vigorous. the Hypothesis 10.02 strategy. a full complement of the ten critical abilities is necessary before strategy can be implemented successfully. Attempting a “quick fix” by adopting a “fad” technique to implement strategy is like building a house on sand. and management may employ as many as it likes —as long as all ten implementation skills are employed. The relationship between implementation skills and generic capabilities is reciprocally reinforcing. the ability to budget and monitor progress. Hypothesis 10. implementing all but the most existential of strategies probably is not possible until a firm has attained three classes of prerequisite capabilities: well-matched physical and intellectual resources. focused effort. if any skill degenerates through lack of practice. Then. the ability to manage resistance to changes in strategy. or techniques. the ability to envision needs for future competences. The relationship between implementation skills and techniques is reciprocally reinforcing. The ten critical abilities must be available first. some of the techniques that were popular in the past but have lost their prominence may be just as beneficial as those that have emerged more recently. There are many such techniques to choose from. and well-motivated personnel.04 balanced scorecard. Second. Management must have ten skills to implement strategy effectively: the ability to set internally consistent objectives. the ten skills build generic capabilities. and adequate motivation. Strategy is not self-fulfilling: a deliberate implementation method is required to realize strategy. Yet MBO probably is the one implementation technique that demonstrably has increased rates of success in strategy implementation more than any other. Management by objectives (MBO) is an example of an effective technique that was once.05 implementation skills.01 first must have three generic capabilities: sufficient resources. such as management by objectives. and the ability to realize when it's time to change strategy and replan. an organization structure that is suited to the firm's strategy.01 Postulates Postulate 10. popular. and strengthening implementation skills facilitates the future use of techniques.03 and vice versa. the ability to align structure and Hypothesis 10. Conversely. it will become more difficult to use some techniques. a wellintegrated organization structure. the ability to achieve strategic awareness. . Effective implementation of plans is a requisite for the success of commercial planning. Implementation skills are converted to implementation competences by procedural routines. With practice.01 Hypotheses In order to acquire and develop proficiency in implementation skills. Third. and zero base budgeting. degeneration in one category—either generic capabilities or implementation skills—will produce degeneration in the other category. the ability to identify and develop leaders and managers.

Hypothesis 10. including participative. at either the corporate level or in an individual business. In a multi-business corporation. added to the corporate baseline projection. Equity-sharing incentives are most effective in expansive markets. The objective of strategy that can be supported by presently available re . management is able to compute objectives for bridging gaps between the firm's current momentum and intended outcomes. The sum of business unit strategies' benefits.07 incentives are most effective in recessive markets. return on shareholders' equity. With these two elements. The interventionist approach to leadership in strategy implementation is Hypothesis 10.1. a generalized procedure for developing strategic objectives was described. a problem can arise..08 more effective than others.e. This “second gap” is portrayed in Figure 11. as portrayed in Figure 10. should produce a consolidated estimate of corporate results that exceeds standards of excellence (goals) for corporate-level performance—in terms of total earnings. the gap will be filled by programs or projects defining activities to be conducted by managers who are responsible for their implementation according to defined schedules and budgets. in the form of the ten interrelated skills listed in Hypothesis 10. bonus Hypothesis 10. In that procedure.02. persuasive. combined. the strategic objective is denoted by the term OS. objectives of corporate-wide strategy also may be described by the beneficial impacts of all business units' strategy.1.06 Generic functional capabilities and proficiency in using implementation techniques are not di rectly related. However. before any benefits of strategy) is described in a “baseline” forecast of financial and competitive performance. In a single business enterprise. and edictive approaches 11 Restructuring the Enterprise In the previous two chapters.1). or goals. A mediating variable is implementation competence. and/or various measures of shareholder value (Figure 8. In Figure 11.1. when the sum of strategic benefits and the baseline projection does not meet or exceed goals. the firm's current momentum (i. The baseline projection then is contrasted to standards of excellence.

some executives and corporations actually have adopted business combinations as the cornerstone of their strategy: These are the conglomerates and business holding companies which buy. in recent amendments to accounting standards for business combinations. and bankruptcies. joint ventures Structural transformations in both categories will be discussed in the following paragraphs. Before proceeding further. since corporate-level planning and strategy typically include restructuring tactics. CHANGING OWNERSHIP: ACQUISITIONS AND DIVESTMENTS In this section. and economic considerations of acquisitions. As such. “mergers” are conducted relatively infrequently today. the Financial Accounting Standards Board (FASB) disallowed most forms of pooling transactions. That volume will address structural transformations from the perspectives of procedural methodology. as Ansoff et al. alliances. and purchases are the normal form of transaction in which changes of business ownership are effected. Thus. and thereby enable additional strategy to fill the second gap. Such actions fall into one of two general categories: Ownership changes: acquisitions. Structural transformations often can be implemented to bring new resources into a firm or to relieve existing resources from the burden of supporting unproductive assets. An alternative form of business combination is the merger. as of June 30. How that second gap (OS2) can be filled is the subject of this chapter. Notice that there is a significant difference between OS and OS1. mergers. acquisitions and divestments are considered to be devices for implementing a higher-level strategy and do not hold the status of strategy itself. a general procedure for conducting projects leading to the purchase or sale of one business by another will be discussed. structural transformations comprise a special class of managerial action that can be taken to implement strategy. 2001. In that context. insisted that nearly all business combinations now must be accounted for as purchases. mergers. divestments. and sell businesses purely for investment purposes. Therefore.. acquisitions. (1970) first demonstrated. joint ventures. divestments. it is important to acknowledge that business restructuring is to be discussed here within the context of strategic planning. more opportunistic transactions.1 Measuring the “Second Gap” sources is denoted by the term OS1. hold. It has long been recognized that acquisitions conducted to implement a higher level of strategy enjoy financial outcomes superior to those of less deliberate. A forthcoming volume in this series will deal comprehensively with the subject of corporate restructuring. But. no attempt has been made here to treat this large subject area in complete detail. the remainder of this chapter will address some of the related procedural issues.Figure 11. in Statement 141 (July 2001). in which equity interests as well as the assets and liabilities of two firms are pooled— often without tax liabilities to either party. However. Of course. and other restructuring tactics are treated solely as devices for implementing a higher level of strategy. Twelve Procedural Steps . legal/regulatory environment. The Board. divestments. But in this volume. bankruptcy Resource sharing: alliances.

or merger. cash flow. business brokers. purchase of assets. The second step consists of a search for buyers or sellers. transaction costs may be minimized and premature public disclosures may be avoided. the parties' staff and professional advisors have clear guidelines that avoid the confusion and/or misunderstanding that can stem from a failure to articulate the parties' intentions and understandings at the outset. attorneys. because a transaction that has favorable tax consequences for one partner usually has unfavorable consequences for the other. pooling transactions (mergers) were greatly curtailed after June 30. business brokers. As observed in the preceding paragraph.” This letter actually will address each element in the binding agreement for purchase and sale of the business in question. except with regard to such matters as maintenance of confidentiality. Acquisition and divestment objectives may be expressed in many terms—including sales. The third step is to make contact with the most promising prospective transaction partners. most transactions are initiated through intermediaries. responsibility of each party for professional fees. Conversely. If there is a second gap. as explained earlier. cessation of further solicitations by the seller. earnings. and other intermediaries. the first step should be preparation of a comprehensive corporate or business strategy in which the acquisition or divestment in question will be an instrumental element. In part. The transaction may be structured as a purchase of stock. that is also because some brokers may attempt to restrict principals' awareness of potential transaction partners to those who are most likely to provide the broker with revenue generation opportunities. usually represented in a “letter of intent. 2001. There is a significant conflict here. Very often. However. The fourth step entails striking a deal and structuring the intended transaction. including (but not limited to) intermediaries such as acquisition consultants. acting as a sort of centerboard in the turbulence that arises when ownership is about to change. However. While exploiting such sources. there are often well-established networks of quasi-public information regarding active buyers and sellers in the acquisition market. a solid plan frequently provides directional stability to the management of businesses destined for divestment. and commercial bankers. Typically. when transaction . Some executives don't like letters of intent because they fear that such letters could create binding obligations. investment bankers. this work entails conventional industry and market research. many important transactions result simply from a telephone call by one chief executive to another. This information is cultivated and traded by investment bankers. among others. and technology. There are many channels for making these contacts. Nevertheless. To the extent that initial contacts are between principals. managerial skills. the form of transaction will depend on possible tax liabilities of each partner. then that strategic objective may be accomplished by an acquisition or divestment. Moreover. and it will serve as a sort of “scale model” that counsel for both sides may follow in drafting the substantialdocuments that usually must be prepared to effect acquisition and divestment transactions. this risk is minimal if the letter clearly declares that it is not a binding obligation of each party. Certainly.The purchase and/or sale of a business typically should be undertaken in twelve steps. Also. The fifth step is to create a non-binding agreement in principle. the corporate planning executive typically is best advised to conduct at least some of the research as a means of remaining intellectually independent of intermediaries. It is worth taking enough time to prepare a comprehensive letter of intent so that. as described earlier. businesses to be divested also should have comprehensive plans of business. Many other transactions result from overtures by one planning executive either to another planning executive or the prospective partner's chief executive. But. A strategic plan of business often is the best possible basis for demonstrating current and potential value to prospective buyers. and the like. But it is essential that the acquiring firm's management have a clear idea of how the intended acquisition will facilitate implementation of its more fundamental strategy. public accountants. later.

operations. Justice Department will be compelled by the Hart-Scott-Rodino Act. Correspondingly. and so forth. one or both parties are relatively large and already hold significant shares of the market. In the event that the transaction involves a purchase of production facilities. since numerous exhibits may be required to define the assets and liabilities that will and will not be conveyed. utilizing either private or public sources of funding. These filings may be quite numerous. pending and/or potential product liability. may lose their jobs if the new owner does not rehire them. Here is where the assistance of financial advisors such as investment bankers. this is especially likely in the event of a merger and. this is where the formal purchase/sale or merger agreement is drafted. employees who will and will not be transferred. and asset-based lenders may be needed. or regulators. Accounting for acquisitions. If the letter of intent prepared earlier was written well. the process can be long and burdensome. discipline.S. and mergers is a specialized. and any other liabilities that may survive the closing. liabilities. Clearly.terms are comprehensively understood at the outset. Nevertheless. depending upon the nature of each party to the transaction. various filings with environmental regulatory agencies also may be necessary. Those regulators will have between two weeks and two months to review the transaction for possible antitrust implications and either express objections or request additional information. The sixth step entails various regulatory filings. ultimately. commercial loans. albeit wellestablished. if they wish to inquire further. necessary financing—which should have been arranged previously—is committed if not actually put into place. If the transaction is substantial. various approvals will be required before the transaction can be closed. Depending upon the intended disposition of assets. among others. including assets. the likelihood of a successful closing is enhanced. Once again. Of particular importance here will be environmental issues. for instance. bonds.” Both parties—especially the buyer—are obliged to exercise diligence in examining the intended transaction. The eighth step again requires assistance of legal counsel. This may entail the issuance of stock. commercial bankers. The Worker Adjustment and Retraining Notification (WARN) Act (1988) requires that many asset purchase transactions (where 100 or more employees are affected) must be disclosed to employees at least sixty days before the intended closing date. other financial consultants. the seller is obliged to make full and complete disclosures. pending or potential litigation. disclosures to one or both firms' shareholders even may be required. In the tenth step. Economic Issues . competent legal counsel will be required at this stage. labor unions. Approvals may be needed from stockholders. If. and failure to disclose material facts can occasion severe legal penalties. In the ninth step. Depending on its size and complexity. subsequently. Competent legal counsel in dealing with these specialized regulatory requirements is mandatory. then employees in the acquired plant will be severed from their existing employer and. the advice and guidance of competent legal counsel are essential. The final two steps are the actual closing of a transaction and. a purchase of stock. the work in this step should not produce unexpected complications. of course. lenders. divestments. The seventh step usually is called “due diligence. the transaction may require a special review by independent auditors. then notification of the Federal Trade Commission and the U. and/or other debt. accounting for it correctly. and business conditions.

Thus.Changes in ownership of businesses through acquisitions. progressing from fragmentation to concentration. 1974). Conversely. In these cases. if a firm focuses on a very restricted line of business. rates of return tend to be characteristically low. thereby justifying higher prices. However. accelerated growth through acquisitions and mergers can provide organizations with opportunities to learn critical skills of production. with increasing competition. suppliers of machinery and materials often provide competing producers with access to successively improved versions of their products and technology. Finally. several suppliers may be differentiated and. cost advantages still may be realized by acquisitions and mergers as long as they do not increase capital investment and overhead faster than earnings or complicate operations to the point of inefficiency. while a very few others establish claims of superior quality or service. unit costs are likely to be lowered primarily as a result of increased scale. . in mature industries. such “learning effects” will be reflected in accelerated rates of cost reduction and growth. as industries mature further and their participants share a common technology. that is. distribution. The economic costs and benefits that reasonably can be expected from acquisitions will vary depending upon an industry's maturity and life-cycle stage. For these reasons. thereby providing organizations that learn the fastest with competitive advantages. In emergent industries. Very often. and mergers can create numerous economic issues that should be considered by planning managers before forming strategies that call for structural transformations. managers migrate between competitors in the same industry. opportunities for learning effects become fewer. It is generally recognized that there is a “U” relationship between industry concentration and profitability. is to diversify rather than continue to focus on current lines of business. In very fragmented industries. only a very few substantial competitors are likely to remain: these probably will have the most favorable cost structures (perhaps because they achieved scale economies through acquisitions and mergers) or uniquely different quality claims. As mentioned earlier. as an industry matures and later life cycle stages evolve. Abundant research has demonstrated that sellers tend to appropriate the majority of added value that stems from business combinations effected through acquisitions and mergers. transferring each other's “proprietary” practices. marketing. We will summarize here only some of the most important issues of which planning managers should be aware as they consider potential restructuring tactics. Similarly. The relative returns to be expected from acquisitions and divestments also pose important questions to planning executives. and the like. divestments. Let us now address the problem that arises when an industry's maturity and its prospects for consolidation offer relatively few opportunities for improvement in earnings through acquisition. thereby. potential learning effects eventually become negligible. a very small number of them (perhaps only one) will emerge as least-cost competitors. For instance. the relationship between rates of return and relative diversification seems to be best characterized by an inverted “U” function (Rumelt. As industries mature. Thus. As competition wanes in declining industries. rival firms' margins tend to narrow as economic rents are competed away. Then. This is because industries usually have efficient mechanisms for transferring learning effects between competitors during an industry's growth stage. While such diversification may be unavoidable in mature industries. of course. absorption of fixed costs and expenses by larger volumes of output. the fifth volume in this series is devoted to structural transformations: A significant portion of that volume is devoted to economic issues. One option. This apparently is simply the result of competitive bidding. offer customers unique features that permit premium prices to be charged. oligopolistic rents may emerge. it has been demonstrated empirically that excessive diversification into unrelated lines of business can result in relatively low rates of return on investment compared to returns that can be obtained from a portfolio of more-related businesses. However. Eventually. they also tend to consolidate. a planning executive clearly must understand the extent to which the industry is relatively fragmented or concentrated and the likelihood that consolidations of competitors will occur during the plan's term.

no matter how attractive otherwise. Weston and Chung. but minimize its risk. However. In these arrangements. again. Similarly. Thus. Salaries tend to be larger in bigger companies than smaller ones. Pinches and Narayanan. 1994:318. 1998. to the extent that future business conditions fail to meet buyers' expectations. it is often useful to appreciate that executives frequently prefer to pursue tightly “focused” acquisitions that increase the size of an enterprise. Senior management acts as an agent of the firm's shareholders.. But if growth doesn't add to shareholder value. Depending upon the form of their relationship. preservation of an economic infrastructure) may conflict with the interests of both shareholders and management. executives have incentives to pursue acquisitions simply for growth. To the extent that corporate growth increases executive paychecks. Shareholders typically prefer that corporate management take more risks because the relationship between equity risks and returns tends to be positive. Since such overpayments occur quite commonly. two or more firms agree to pursue the same business objective while remaining independent. the parties usually do not share ownership of any . there is an explicit or implicit contractual relationship between the parties to participate in a joint enterprise. Here. there are alternatives—including formal alliances and joint ventures. However. 754. empirical research provides some guidance and will be discussed in the next section of this chapter. Copeland and Weston. Certainly. Each still will pursue its own individual mission without threatening the other's mission. 1990. higher business risks tend to increase returns but reduce executives' job security— another “agency conflict. 1998. Sirower. charged with pursuing their highest returns. Given this conflict. Nevertheless.g. 1998. But in the enterprise that they share. Conflicting with that role is the manager's own self-interest. shareholders probably prefer to see balance sheets' leverage ratios higher than management prefers. 1992). in addition to conventional agency issues. more “agency conflicts” between executives' and shareholders' interests in growth may exist. their fundamental businesses and goals will continue to differ. Parrino and Pritsch. let it suffice to say that alliances and joint ventures typically produce higher returns than acquisitions and mergers.Typically. and each will contribute essential resources to it. they will share responsibilities for operations and governance of a joint enterprise. alliances and joint ventures may be preferred alternatives. shareholders prefer that surplus cash flows are dividended to the shareholders rather than used for executive perquisites or economically unjustified acquisitions. So. the “premium” in an acquisition price reflects nearly all of the additional value that can be anticipated by buyers. In an alliance. are likely to move the firm forward in the performance of its business mission and avoid regulatory complications. society's best interest (e. and internal business development. For the present. Datta. One last economic that which must be addressed here is the matter of “agency” relationships. SHARING RESOURCES AND RESPONSIBILITIES: ALLIANCES AND JOINT VENTURES Firms don't have to change their ownership or buy each other's assets to fill the second gap. planning managers and chief executives should pause to be sure that acquisitions. their physical and intellectual assets may be combined to enhance the competitive advantage of both partners. Moreover.” The point is simply this: executives' reasons for pursuing acquisitions and mergers may not necessarily be shared by a firm's stockholders. Koller and Murrin. Moreover. Rather. as often is the case. planning managers always should question whether acquisitions are appropriate vehicles to implement growth strategies. then buyers actually may pay premiums that exceed the value added by business combinations (Copeland. Byrd.

1993). Hamel. 1994). a firm formed with assets contributed by Siemens and Corning to form a very successful fiber optic cable company. Firms enter these arrangements to enhance their internal capabilities by learning from their partners and/or to strengthen their competitive positions by extending their access to broader markets (Harrigan. as well as resources and opportunities. 1998). Culpan and Kostelac (1993).enterprise assets. 1986b). But in no case should resource sharing arrangements dominate firms' strategies or overwhelm a firm's own core competence (Von Hippel. alliances and joint ventures also are attractive because. A separate corporate entity usually is formed and the allies become joint shareholders. For instance. For instance. a wide variety of structural alternatives may be observed in the literature and practice. Such relationships may be found in dedicated arrangements between suppliers and distributors. Hamel. resource-sharing arrangements. Doz and Prahalad. 1998). should be undertaken as one way to implement a higher strategy. 1991). 1993. Each firm may contribute capital and management. while Corning's expertise was in fiberglass. Firms must acquire and develop specific skills to participate in and manage resourcesharing arrangements effectively. as reported by Harrigan (1986b). they tend to be the most successful financially (Pekar and Allio. 1998). Harbison and Pekar. that it now is nearly impossible. Alliances and joint ventures have enabled advantageous combinations of resources to be assembled as a means of achieving growth while mitigating many risks. these arrangements may be vertical (between customers and suppliers) or horizontal (between partners from two different industries attempting to serve a similar market). which are intensely competitive (Culpan and Kostelac. 1988. the partners do share ownership of an enterprise and/or its assets. academic inquiries into their nature and effectiveness also have grown explosively (Zajac. The more experience a firm has in such arrangements. Paralleling the explosive growth of resource sharing arrangements. and Pekar and Allio (1994). Or. Sharing arrangements also are found frequently in financial service industries. In a joint venture. Alliances and joint ventures provide strategic options that are better suited to some firms than others. technology has progressed so rapidly. the more successful they tend to be (Bleeke and Ernst. All of this explosive growth is not difficult to understand. An example of a horizontal joint venture is Siecor. most alliances formed to conduct joint research and development programs tend to be contractual rather than equity-sharing arrangements (Hagedoorn and . The purpose of an alliance also will have a great deal of influence on the selection of a structure. and economic environments have become so turbulent. when compared to acquisitions and venture capital projects. like acquisitions. Among the most recent forms are alliances between competitors and several forms of cross-border alliances (Harbison and Pekar. However. even for very large firms. to acquire all of the vital resources needed to compete effectively. 1986b. By participating in several alliances and joint ventures. 1995). For instance. for instance. In any event. In recent years. Siemens had expertise in cable manufacturing. those benefits are not usually gained easily. as observed earlier. Harrigan. they are found most frequently in very asset-intensive industries with high risks of technical obsolescence and/or high entry costs. Harbison and Pekar (1993. firms can hedge against the turbulence of our times because it is possible for firms to share risks. while one contributes production capability and the other contributes marketing or distribution resources. Newstructures of alliances still are emerging. for instance. joint marketing relationships may be formed as when computer hardware and software producers collaborate. 1989. Structural Alternatives Since alliances and joint ventures are relatively new arrivals to strategic methodology. Resource-sharing arrangements—alliances and joint ventures—have experienced explosive growth in the 1980s and 1990s. Rather.

rather than organizational learning of new competences (Hagedoorn and Duysters. 1994. 1999: Ch. Prospects for success are much better when both partners approach the relationship as equals with comparable strengths. Resource-sharing arrangements also may differ dramatically on the basis of their expected lives. neither alliances nor joint ventures are likely to enjoy favorable outcomes (Bleeke and Ernst. contractual alliances are preferred. Conversely. then an equity-sharing arrangement—a joint venture—is the most appropriate form (Das and Teng. 2002) and in very concentrated industries (Kogut. 1993). Alliances tend to be preferred in high-technology industries. 1993). Of course. in the United States. However. most Chinese investments by U. But in Europe the typical alliance life is about twelve years (Bleeke and Ernst. 1. resource-sharing arrangements work best when each partner contributes a different form of technology. acquisitions seem to be moresuccessful than either alliances or joint ventures when firms participate in overlapping geographic markets. b). there are some circumstances in which alliances and joint ventures are not advisable. But alliances or joint ventures work better than acquisitions when markets are not overlapping (Bleeke and Ernst. contractual forms of alliances seem to be preferred. its strategy must be “resource based.S. Acquisitions and mergers tend to be preferred over alliances and joint ventures in lowtechnology industries (Hagedoorn and Duysters. as follows: • First.Schakenraad. Stages of Formation Alliances and joint ventures both tend to be established through a series of ten formative steps. while mergers and acquisitions tend to be preferred in low-technology industries and in all industries when core competences are involved. 33 percent for manufacturing. The typical term for an alliance is about seven years. Expected lives of joint ventures are longer. 1993). If the purpose of a resource-sharing arrangement is to mitigate performance risks that stem from uncontrollable marketing conditions (the hedging motive mentioned earlier). Situations Most Conducive to ResourceSharing Arrangements Some research into resource-sharing arrangements has begun to disclose business situations in which they are most likely to be productive. because of the proprietary nature of high technology and the competitive advantage that might ensue from appropriation of trade secrets). they represent about two-thirds (69%) of all resource-sharing arrangements (Culpan and Kostelac. Joint ventures also may be useful devices to mitigate international ownership risks.” • The industry and served markets are surveyed in order to identify firms whose resources and capabilities are complementary to those of the initiator. . a strategic plan is prepared. When one is stronger than the other or when both are weak. firms tend to be in the form of joint ventures (Mockler. in the early stages of labor-intensive industries' life cycles. When products are standardized. 1989). 1996a. Luo. late in the life cycles of all industries. joint ventures tend to be a preferred means of consolidating excess industry capacity (Harrigan. 1990). Hagedoorn. In high technology industries. 1999). For instance. 1986b). Resource-sharing arrangements between partners that are not equal in stature can come apart easily if one partner loses respect for the other or resents the other's dominant position. joint ventures may help to mitigate financial risks. For instance. and each side learns from the other in a contractual alliance (Osborn and Baughn. 2002). 1993). 1993). For example. When all joint ventures are taken as a whole. But if risks of resource-sharing arrangements stem from inabilities of the parties to trust each other enough (for instance. of course. the expertise of another partner simply may not be needed. and only 11 percent for research and development. Multinational alliances tend to be preferred when products or services are not standardized on a global basis. early in the life cycle stages of capital-intensive industries. About 41 percent of joint ventures are formed for cooperative marketing.

for instance. under protection and oversight of a U. 1998). persons who actually will be involved in operating the alliance should take part in drafting this plan. a perfectly sound business may be acquired by an overzealous conglomerate and burdened with unsupportable acquisition debt. 1994). and they should commence operations of the enterprise. alternatively. there should be regular assessment of the enterprise's progress. which. For another example. is its most likely explanation in most cases. . The results of these negotiations should be expressed in a letter of intent or a memorandum of understanding. Of course. • Both parties should participate in preparation of a formal plan of business for the enterprise so that each side understands how operations are to be conducted. The incidence of insolvency also is highest during recessions and in declining industries. a behavioral perspective traces the process of building trust across time and multiple ventures (Ring and van de Ven. the initiator conducts a search for prospective partners who not only possess the necessary resources. BANKRUPTCY REORGANIZATION On occasion. • The initiator next identifies and approaches the most preferred prospects and continues to do so until a willing collaborator is found. become shareholders of the reorganized enterprise. life-cycle perspective traces the enterprise's initial formation. a reorganization of the firm's capital structure. Other examples might include natural disasters and upheavals in foreign markets or even “dumping” practices by desperate international competitors. but are also qualified based on their cultural compatibility and other commercial circumstances. if a firm participates in a declining industry. In such cases. a long-standing excellent customer may fall into insolvency. according to Hotchkiss (1995). The evolution of resource-sharing arrangements from inception to maturity has been described by scholars from two other perspectives. First. Governance and operations of the arrangement then must be negotiated. replanning should be done. creditors usually must accept compromises in repayment plans or. Certainly. • With a memorandum of understanding. a classic. and eventual conclusion as objectives are reached (Das. Terms and conditions for dissolution of the arrangement after its objectives have been accomplished also are defined. • Finally. may be attempted. its business model may be fundamentally flawed and prospects for a successful reorganization will be minimized. • Then. Sen and Sengupta. enterprises become insolvent for reasons that do not reflect managerial incompetence or even weaknesses in the firm's business model. and managerial responsibilities must be defined. and when departures from the plan occur. For example. Second. When this step is taken.• Next. leaders of the enterprise should be selected from the team that constructed the business plan. In all of these cases.S. insolvency also may be the result of managerial incompetence. this has been a frequent occurrence in American business during the past two decades. the choice must be made between a contractual alliance or an equity-sharing joint venture. counsel for each side may draft an agreement— more elaborate in the case of a joint venture and less so in the case of a temporary alliance. bankruptcy court. • An alliance then can be structured so that maximum synergies and benefits may be derived. the firm's financial condition may fall into insolvency even though its fundamental economic logic and business mission remain sound. maturation. Each perspective is useful in framing the plan for a resource-sharing venture.

staff resources will be minimal. A balloting procedure informs the judge as to the approval or disapproval that has been registered by each class of creditors who are . Provided that financing arrangements are adequate. creditors must be provided with a “disclosure document” that explains the reasons for insolvency and rationale for expecting a reorganization to improve creditors' potential recoveries above those from a straightforward liquidation. the exclusionary period in which management alone may form.5 percent. only a third of the plans actually were confirmed.S.3 percent of filed plans were confirmed. creditors and the court should take some encouragement in the plan's feasibility and. bankruptcy court. • Shortly after the petition. Often.5 percent of cases filed in the Southern New York district during 1980-1989 succeeded in reorganizing. Trustee.S. Before a proposed settlement with creditors—in the form of a statutory “reorganization plan”— can be adopted.S. Flynn (1989) also found that only 17. Also included in this apparatus is a procedure for regular reporting of all material events. A formal plan of business structured according to principles found elsewhere in this volume can be an effective disclosure document. • Ultimately. various creditor classes will vote on the proposed settlement. As avoidable expenses must be eliminated. This apparatus will include at least one committee of creditors and various supervisory procedures provided in the Bankruptcy Code. Of course. If a disclosure document does take the form of a conventional plan of business. Better alternatives may include “work-outs” with creditors' participation in restructuring decisions. the planning executive's skills will be fully tested. Among those. critical managers may seek new employment. in its potential outcome. • After the necessary administrative apparatus has been established.S. because companies in bankruptcy must function under conditions of extreme duress. In the event that a reorganization under the U. draft. When the bankruptcy judge decides that a plan and disclosure documents are structurally adequate. Moreover. Bankruptcy Code in order to reorganize the company's capitalization and go forward on a more financially feasible basis. bankruptcy judges typically permit debtors to retain consulting assistance as an administrative expense of the bankruptcy estate.Assuming that the reasons for insolvency do not reflect the firm's fundamental infeasibility due to long-term industry prospects or managerial incompetence then management may choose to petition a federal court for protection from creditors under the U. this is an extreme measure. Jensen-Conklin (1992) found that only 7. a plan—whether proposed by management or by a group of creditors after management's exclusionary period has lapsed—will be assembled. because the likelihood of a successful outcome is very low. agreeing closely with Jensen-Conklin since a third of Flynn's confirmed cases would be slightly less than 6 percent—not much different from Jensen-Conklin's 7. an estate for the benefit of creditors is created when an insolvent company's management files a petition for protection from creditors in a U. Bankruptcy Code. including regular filing of mandatory financial schedules. Another alternative is to negotiate with creditors before invoking provisions of the Bankruptcy Code to confirm the most favorable treatments of their interests as well as those of current management and shareholders in a “prepackaged” arrangement. then the plan's principal objectives will include repaying creditors and regaining financial solvency. Bankruptcy Code is attempted. A strategy for achieving such objectives will be clearly defined and implementation elements of the plan will demonstrate that the strategy is feasible. Five procedural steps typically are taken in reorganization proceedings under the U. In short. Only when those options are not available or reasonable should a firm attempt to reorganize in bankruptcy. To facilitate their decision. they may be distributed to creditors with ballots.S. therefore. and propose a statutory reorganization plan will be extended several times by the presiding bankruptcy judge. For such reasons. Many vendors will refuse to ship supplies without prepayment. the chances of a successful reorganization seem to be less than one in ten. as follows: • First. management is provided a limited amount of time (at least 120 days) to prepare a proposed plan of settlements and the disclosure documents (such as a formal plan of business) mentioned earlier. an administrative apparatus is created under the supervision of a U.

Securities Laws . brief mention was made of regulatory filings required by the Hart-Scott-Rodino Act of 1970 and enforcement of antitrust laws by the Federal Trade Commission as well as the U. participation of legal counsel will be mandatory. the Federal Trade Commission Act (1914). economy and public investors from adverse impacts of monopolistic practices—stemming from the Sherman Act of 1890. In fact.affected. Antitrust Laws In the previous discussion of acquisitions. that is more substantially influenced by legal and regulatory considerations than matters of restructuring.S. and the HartScott-Rodino Act (1970). mergers. Planning managers should acquaint themselves with the relevant legal and regulatory issues that pertain to changes in ownership. However. a well-prepared plan of business with a strong implementation element may make a major difference in the outcome of any reorganization attempt. The “absolute priority rule” dictates precedence of some classes' claims over others'. Implementation of the reorganization plan is a highly risky undertaking. in accordance with the absolute priority rule. the Celler-Kefauver Amendment to the Clayton Act (1950). LEGAL AND REGULATORY CONSIDERATIONS It is hard to imagine any domain of strategic management. the prior shareholders. In most cases. a large body of law protects the U. if they retain any equity interest at all. Thus. or any aspect of the planning executive's responsibility. as mentioned earlier. divestments and mergers. resource sharing. this body of legislation and regulation is intended to avoid concentration of economic power in a small number of firms to an extent that oligopolistic pricing or even monopolistic pricing advantages might result. However. Justice Department. Typically.S. Subsequent legislation was established by Section 7 of the Clayton Act (1914). because the previous creditors likely will accept equity in exchange for their debt and the plan will call for extinction of previous shareholdings. acquisitions. and reorganization arrangements so that they can anticipate them and function effectively as they arise. Following such rules. business strategists should beware of achieving such dominant market positions that objections by the FTC or the Justice Department are triggered. The following paragraphs briefly summarize several legal and regulatory areas with which planning managers should gain working familiarity. the bankruptcy judge has great latitude in interpreting the Bankruptcy Code and departing from the wishes that creditors express in their ballots. Similarly. the bankruptcy judge ultimately will confirm a plan of settlements with creditors (the statutory “reorganization plan”). and even joint ventures that significantly increase industry concentration should be reviewed within the context of antitrust legislation. in each of the structural transformations addressed by this chapter. In its current form. will suffer severe dilution. • The Bankruptcy Code does limit a judge's discretion by imposing some definite requirements for recognizing creditors' claims. and the company will emerge from bankruptcy protection. Consequently. the emergent post-bankruptcy firm will have a capital structure very different from the structure that existed when the firm initially filed for protection.

This body of legislation is complex. These requirements do not apply to very small businesses (less than 100 employees) or to transactions where the buyer will retain liability for the seller's current collective bargaining agreement. the Resource Conservation and Recovery Act (RCRA) of 1976.Whenever a firm obtains financing from the general public or even from restricted segments of the public. CERCLA. and the LandrumGriffin Act (1959) all may be relevant. and the Comprehensive Environmental Response. The Malony Act of 1938 extended U. One purpose of the WARN Act. They also impose severe penalties on violators. The WARN Act requires that employees of operations that are to be closed or purchased be given advance notification at least 60 days before the closing date. which provide the foundation for disclosure requirements and public reporting by companies whose securities are distributed and traded in public exchanges. Criminal laws regarding insider trading and fraud were stiffened greatly by the Insider Trading and Sanctions Act (1984) and the Securities Fraud Enforcement Act (1984). securities laws to over-the-counter transactions and exchanges by associations of securities dealers (e. the union may be able to compel the new owner either to accept the existing contract. the Clean Water Act of 1972. the Worker Adjustment and Retraining Notification (WARN) Act of 1988 and the Occupational Safety and Health Act (OSHA) of 1970 may impose important timing limitations and liabilities on certain asset disposition transactions. the Labor-Management Relations Act (1947). The Trust Indenture Act of 1939 extended federal oversight to publicly exchanged debt instruments. reporting. the National Labor Relations Act (1935). Occupational safety and health liabilities—including past violations and related remedial orders —incurred by the existing owner of a facility must be disclosed to the intended new owner. While the buyer does not have to accept a pending labor contract. Employment Laws A host of legislation. Some of these laws also can affect the ways in which structural transformations can or cannot be effected. The Investment Advisors Act (1940) required disclosures by persons who effect public securities transactions. In particular. the National Association of Securities Dealers). planning managers should acquaint themselves with the Securities Acts of 1933 and 1934. protects workers' rights to be represented in collective bargaining and to work in a safe environment. as in a merger or stock purchase arrangement. Thus. securities laws place stringent requirements on registration. environmental laws. and related corporate behaviors. U. negotiate a new one. But. planning managers would do well at least to become aware of the securities laws' somewhat intricate and restrictive disclosure. In its present state. this legislation essentially compels management to bargain in good faith with a pre-existing bargaining unit. treatment or disposal sites to notify the Environmental Protection Agency of hazardous substances' discovery.g. was enacted in 1980 and amended by the Superfund Amendments and Reauthorization Act (SARA) of 1986.S. They required owners and operators of hazardous waste storage. bonds. established a federal authority to respond to hazardous substance emergencies and to clean them up. The Williams Act (1968) affected tender offers. . e. disclosure. These include the Clean Air Act of 1970. of course. or face the prospect of taking possession of idle facilities. is to enable labor unions to prepare for and initiate collective bargaining with the new owner. Thus.g. Responsibility for the fulfillment of any OSHA compliance requirements then may be negotiated prior to closing any acquisition/divestment transaction. at federal and state levels.. Compensation and Liability Act (CERCLA) of 1980. also known as the Superfund Act. CERCLA and SARA established stringent information-gathering and reporting requirements.S. and trading requirements. Environmental Laws It is hard to imagine that any other body of law has had a greater impact on the feasibility of acquisitions and mergers in recent years than U..S.

Indeed. Here. strategic objectives often can be achieved by bringing new resources into a firm or by unburdening existing resources by divesting unproductive assets. Tax Code that pertains to transformations of business structures. Financial institutions that may take security interests in facilities purchased with borrowed funds typically insist on a thorough environmental audit before agreeing to provide financing for acquisitions and mergers where security interests in real property are conveyed to the lender. restructurings should be viewed as tactics to implement a . Section 382 of the Internal Revenue Code also contains special rules that apply to buyers' utilization of sellers' prior operating losses for tax-avoidance purposes.1). This chapter begins by making a fundamental assertion that. with asufficient contingency allowance for probable error. such as new markets and new products. Chapter 9 explains that the benefits of more than one business strategy may be combined to achieve corporate-level strategic objectives in multi-business enterprises. This chapter considers the situation that arises when management is unable to achieve strategic objectives using internal resources.S. Imposedpenalties and liabilities under CERCLA and SARA have exceeded one billion dollars. as long as the economic mission of an enterprise remains tenable. CONCLUSIONS Strategy is management's approach to pursuing a firm's goals and its rationale for selecting the approach to be taken. When expected benefits of strategic projects and programs fill the gap between present performance potential and success standards. Thus. a bank would not want to take possession of collateral with a Superfund liability attached! Tax Laws The space and scope of this text are far too limited to accommodate even a summary of the U. Thus. strategy is considered to be satisfactory. in an acquisition/divestment proceeding. Critical limitations particularly apply when changes in control occur. However. and prior operating losses are less likely to be available to the acquiror when the acquiring and acquired businesses are in dissimilar industries and/or market segments. it will be important to address responsibilities for tax liabilities incurred as a result of purchase price allocations to the transferred assets. Such actions fall into two general categories: (1) ownership changes and (2) resource sharing. In Chapter 8 of this volume. More specifically. After all. and vice versa. rather than alternatives. but freedom from tax liabilities largely has been eliminated. goal-seeking work. thereby enabling additional strategy to fill the second gap (see Figure 11.created a trust fund to pay for removal and remediation of hazardous waste. how the resulting “second gap” can be filled. it must suffice simply to recognize that. and made persons responsible for hazardous substance releases liable for cleanup and restitution costs. As mentioned earlier.9). This is not to say that mergers cannot still occur. tax-free poolings of interest largely were eliminated at mid-year of 2001. a method for determining the amount of work required to implement strategy successfully (the strategic objective) is explained (see Figure 8. any property owner who is aware of the presence of hazardous substances and fails to disclose them to a buyer is liable under the Act. transactions that minimize tax liabilities of the buyer probably will maximize those of the seller. Strategy is implemented when managers conduct deliberate. Certain exemptions were provided by SARA for “innocent landowners” who acquire property without knowing that hazardous substances previously were deposited there. using external resources. they are always considered during due diligence proceedings when manufacturing facilities change hands. That method entails contrasting the firm's present performance potential to standards of success (goals) and inferring value additions that will be required from new sources not available at present. is the subject of this chapter. during any transaction negotiation.

Shareholders also tend to prefer higher returns on equity to faster growth in size alone. The acquiring and acquired management teams also may not be completely compatible. After exploring procedures for ownership changes. That is not the case with resource-sharing approaches. divestments. the industry's life-cycle stage. this chapter turns to resource sharing transactions—alliances and joint ventures. greater returns are expected. With business security comes job security. why this tenet—that restructurings only should supplement internal strategy —should be followed. Acquisitions and mergers also can be used as a means of diversification. are part of the deal. of course. but they benefit from certain economic advantages over ownership changes. they grow less profitable. In a typical acquisition or merger. Acquisitions are most appropriate in low technology and laborintensive industries. the initiator of a transaction usually must accept some products or assets that are less desirable than core assets. the low likelihood of a satisfactory return. and recovering premiums over an extended payback period becomes more difficult. But. or mergers—are described in this chapter. will tend to perform best. While these conflicts can be mediated and/or resolved. which may dilute returns. economic value tends to be added primarily through economies of scale. and human—that are appropriate for pursuing a stated objective will be contributed to such an enterprise. As industries mature. and management cohesion. But we have seen that the benefits of extreme concentration or diversification of a business portfolio typically are very limited. Buyers rarely earn back premiums that they pay for expected value added by an acquisition or merger. Aside from their administrative. resource- . with focused resources. now. these ownership transactions also engender several economic problems. then. but no less secure. The appropriateness of an acquisition or merger will differ in response to several contingencies—for instance. no excess assets. Even resource-sharing approaches—which incur lower risks than ownership changes—still incur higher risks than those usually associated with internal development strategies. Only the resources—capital. Compared to change-of-ownership transactions. Having reviewed the relatively low success rates of acquisitions and mergers. and management will have to be compatible. Not surprisingly. we can appreciate. and joint ventures all tend to add economic value through learning effects early in industries' life-cycle stages. Perhaps the greatest of these is.higher strategy by supplementing internal resources with new resources from outside the firm. very simply. Focused portfolios. resource-sharing procedures are relatively new arrivals to the arsenal of restructuring tactics. which are constructed by their partners in order to accomplish specific business objectives. management's fundamental interests still are served by controlling or minimizing risks associated with extending the scope of an enterprise so that it grows larger. commitment to a stated objective. alliances. For such reasons. But shareholders. because economic value then is likely to be shared efficiently between the businesses. physical. with only modest diversification of related businesses. With larger size. Acquisitions. When resources from outside the firm must be appropriated in order to accomplish strategic objectives. tend to accept higher levels of business risk because. legal. acquisitions and joint ventures typically are the preferred means for consolidating excess capacity during industries' declining life cycle stages. mergers. Complicating acquisitions and mergers are “agency” conflicts between the interests of shareholders and management. often because such expectations are too optimistic. But the undesirable assets. acquisitions and mergers usually must be “cleaned up” after their closings. is the well-known phenomenon of synergy. or the transaction won't be closed. This. on the other hand. with greater risk. while joint ventures and alliances tend to be more appropriate in high technology industries. companies tend to pay higher salaries. Nevertheless. a much higher level of risk is incurred than when draws upon internal resources. The somewhat lengthy procedures of conceiving and executing ownership changes— acquisitions. and regulatory complexities. in later life-cycle stages.

GENERALLY ACCEPTED PLANNING PRINCIPLES: RESTRUCTURING Definitions . such transactions are more likely to succeed when they are well planned and if they are implemented to accomplish a higher level of strategy than when they are implemented solely to seize a momentary opportunity. then an alliance makes most sense because asset commitments are less substantial and more revocable. Only when insolvency is the result of an exogenous shock to an otherwise viable firm—for instance. Adding to the difficulty of bankruptcy reorganizations is their very complex and costly administrative apparatus. Antitrust laws. and most of the enterprise's risk is related to its performance potential. if there is risk that one party might steal trade secrets from the other or that unintended advantages will be taken by either party for any other reason. mistrust then becomes a minor source of risk. This is one reason for the explosive growth of resource-sharing transactions during the past two decades. an industry analysis should confirm whether a restructuring will be undertaken to accomplish learning effects or scale economies. even after confirmation. Certainly. But when the parties' markets overlap. enterprises formed to pursue research and development projects tend to be alliances. this chapter addressed reorganization of the firm's capitalization under the U. environmental laws. burdening a firm with unsupportable debt in a leveraged buyout or when a major customer becomes insolvent—should reorganization in bankruptcy be attempted. if insolvency is due to a fundamentally flawed business model or managerial incompetence. legal and regulatory requirements should be addressed when planning such transactions. For these reasons. In any event. for instance. If the greatest source of risk in an enterprise stems from a likelihood that it may be unsuccessful due to factors in the external environment. enterprise restructuring procedures call upon the full scope of a planning manager's skills. Bankruptcy Code. securities laws. the chances that a reorganized firm will survive are less than 30 percent. alliances and joint ventures can be formed productively because each party contributes significantly to the enterprise. Certainly. management facing a reorganization should consider alternatives such as voluntary work-outs with creditors. Finally. chances of a successful reorganization are essentially nil. the likelihood of a successful restructuring in bankruptcy is quite low. while enterprises to produce new products in emergent industries tend to be joint ventures. resource-sharing transactions must be structured to fit their circumstances. This approach to restructuring is appropriate only when the firm's economic mission no longer is feasible for reasons of insolvency. However.S. then joint ventures tend to be preferable because both parties stand to lose committed assets if the arrangement comes unraveled. Like other restructuring transactions. then the discipline of formal business planning should enhance the enterprise's chances for success. Thus. if a bankruptcy reorganization is to be attempted. When two companies each serve different markets. Nevertheless. Another reason is the opportunity that resource-sharing approachesoffer their principals to mitigate risks—sharing them with partners and hedging them by participating in several such enterprises at once. resource-sharing approaches incur such high risks of mistrust that acquisitions or mergers (ownership changes) are more appropriate than resource sharing.sharing enterprises enjoy higher rates of return on investment than acquisitions and mergers. Surveys have suggested that the overall success rate is less than 10 percent and that. However. depending upon the lifecycle stage. Several economic issues must be addressed as well. However. These concluding remarks would not be complete without reacknowledging the importance of technical proficiency at several stages of any restructuring project. employment laws. and tax laws all will impose important limitations on the scope of permissible procedures.

01 Definition 11. A joint venture is the formation of a jointly owned corporation by two or more firms to achieve a stated purpose or goal. Assumption of off-balance-sheet liabilities is partially negotiable.14 Definition 11.11 Definition 11. A break-up is several spin-offs resulting in dissolution of the parent firm.31 binding relationship between two or more firms with complementary business interests. Definition Definition Definition Definition Axiom A secondary strategic objective emerges when management cannot reconcile the difference between a firm's goals and present momentum using existing. 11.03 Definition 11. by reorganizing the bankrupt firm's capitalization and then resuming operations under a plan to meet new creditor obligations. A bankruptcy reorganization is an attempt to form a plan for settlements with creditors under Chapter 11 of the U.12 Definition 11.13 Definition 11. Trustee's Office. 2001.S.53 U. . The subsidiary becomes a new legal entity. All assets and liabilities of the acquired firm are conveyed to the buyer. internal Axiom 11.52 Bankruptcy Code.41 Each party becomes a shareholder and participates in governance of the new corporation. An asset purchase is an acquisition effected by purchasing essentially all assets of the target business.01 Strategies that attempt to accomplish objectives through external resources result in “restructurings” of capitalization and/or the organization. A spin-off is a distribution of shares in a subsidiary to the parent company's shareholders.21 An acquisition is a purchase of the stock or assets in one business by another business or person(s).S. 11. administered under the direction of the U. As partial payment. Postulates Postulate 11.) Definition An alliance is the formation of either a contractual or non11.01 resources.02 Definition 11. Bankruptcy Code.S.51 partnership. Bankruptcy Code.S. A stock purchase is an acquisition effected by purchasing at least 80 percent of a company's issued and outstanding shares of stock. This new objective can be attained only by appropriating external resources or lowering the goal. A divestment is the reciprocal portion of an acquisition. An equity carve-out is the sale of stock in a subsidiary to new investors. the buyer may assume some or all of the seller's financial liabilities. A bankruptcy liquidation is a planned liquidation of assets. The subsidiary becomes a new legal entity. following rules and procedures set forth in Chapter 7 of the 11.Definition 11. (Mergers became rare in the United States after June 30. or individual with a petition for protection from creditors under the U. A merger is a pooling of two corporations' assets and liabilities to create a new corporation with no gain or loss by either party. A bankruptcy is a declaration of insolvency by a firm. 11.

06 Hypothesis 11. as in research and development enterprises. Bankruptcy reorganizations should be attempted only when reasons for Postulate 11.12 Joint ventures are preferred for minimizing risks of mistrust. Even after confirmation. Most of the value added by acquisitions is appropriated by sellers. as when two proprietary technologies are combined. Acquisitions. and employ compatible personnel. Each prefers cash .07 Hypothesis 11. mergers.09 Hypothesis 11. Management prefers lower risks than shareholders. tend to be relatively low when compared to resource-sharing transactions. Resource-sharing arrangements are preferred over ownership changes when the partners' markets do not overlap. Legal and regulatory limitations on the approach to any restructuring strategy Postulate 11. versus performance.10 Hypothesis 11. because they are more focused on specific objectives.10). Bankruptcy reorganizations' chances for success are very low (P <. avoid unproductive assets and acquisition premiums.05 Hypothesis 11.08 Hypothesis 11. Ownership changes include acquisitions. Alliances and joint ventures permit firms to share risks of a single business Postulate 11.03 Hypothesis 11. mergers.05 must be considered when they initially are planned. proportionate to investment.022 Resource sharing is accomplished by alliances and joint ventures. the probability of a reorganized firm's success is P <. rates of economic value added by acquisitions.01 Hypothesis 11. divestments. Resource-sharing transactions such as alliances and joint ventures have higher returns than ownership changes.02 Hypothesis 11. Those same transactions can be used to accomplish “scale economies” late in an industry's life cycle.021 bankruptcy.11 Hypothesis 11. Postulate 11. not buyers.04 insolvency do not stem from an infeasible business model or managerial incompetence. Acquisitions and mergers in pursuit of product or service diversification should avoid extremely concentrated or diversified portfolios.03 and/or hedge market risks through multiple commitments. “Agency conflicts” between the interests of executives and shareholders reflect their different incentives to accept risks and appropriate internal cash flows.30. Hypotheses Hypothesis 11.04 Restructurings are most successful when they are conducted to accomplish a higher-level strategy rather than to realize an unanticipated opportunity.There are two types of restructurings: (1) changes in ownership and (2) resource sharing. focused portfolios of related businesses are most profitable.02 Corollary 11. Hypothesis 11. A formal plan of business should be prepared for any restructuring as a means of improving its chances for success. Acquisitions are preferred when markets do overlap. and joint ventures can be used to obtain “learning effects” early in an industry's life cycle. alliances. divestments. Thus. and Corollary 11. Alliances are preferred for purposes of hedging relatively high performance risks.

strategies.e. Part V Summary The preceding eleven chapters describe procedural principles of strategic planning from four different perspectives: foundations of methodology. detailed lists of “generally accepted planning principles” (GAPP) are provided. Centralized planning approaches are most conducive to rational decision procedures. deductive or inductive. 2. a. However. This list of principles also can be used to structure internal auditing programs for assessing the soundness of a firm's planning procedures. 3. those principles are consolidated into a somewhat more general form. At the end of each chapter. The planning process may be either deterministic (making the “best” selections from alternative goals. the extent to which strategy results in objectives' accomplishment). Procedural rationality (deliberate. all of which were described in the previous chapters. and customary practices. BASIC APPROACH 1. preferences for one approach or the other determine top management's “style” of planning and policy-level decision making. decision making. and objectives based on available information) or incremental (making successive approximations toward “better” choices that are politically acceptable. but probably not optimal). The degree of line managers' autonomy in making planning decisions will determine the extent and locus of strategic innovation. .to flow in its direction.. High levels of autonomy and widespread innovation are easiest to achieve when a decentralized. Readers then may refer back to any individual chapter as necessary for the relevant particulars of a principle under consideration. current theory. as well as the appropriate choice of a centralized or decentralized planning style. Both types of process may be found within the same firm. logic) enhances the effectiveness of strategic decision making (i. These ninety principles represent conclusions from empirical research. administrative management. “top-down” style is employed. and implementation. 12 Generally Accepted Planning Principles: A Compilation Generally accepted principles of comprehensive planning procedures are summarized in the following paragraphs. In Chapter 12. The resulting compendium of ninety principles may be used by planning executives who require a quick reference to generally accepted principles without any supporting detail. “bottom-up” style is employed and are more difficult to achieve when a more centralized.

their evidential and administrative requirements were impractical. 7. The initiative in strategy formation (top-down. . a team approach also may be effective. this is especially true in smaller firms. including: Level of top management involvement Approval authority: board of directors Linkage of incentives to objectives Frequency of review Planning horizon or CEO The use of information technology GENERAL PLANNING MODEL 6. Top-down approaches work best where there is a centralized structure and a single line of business. bottom-up. focused on marketing conditions and/or acquisitions of proprietary resources. Each dimension —integration and adaptation—is vitally important. it no longer is infeasible or impractical to implement “classic” planning models in a dynamic mode—perpetually updating evidence and replanning as and when necessary. That is. While the two categories are closely interrelated. 11. There are two categories of commercial planning models: process models and content models. Firms' tendencies to realize the performance enhancement or impedance effects of comprehensive planning functions are contingent upon variables in their planning practices. and replanning as necessary. As a result of modern computing. Interactions of these two perceptions will produce a strategy that is more or less adaptive or integrative—that is. this volume is concerned primarily with process models and procedural principles. Management's choices of objectives. making decisions about standards for success and the approach to be taken in pursuing them.b. Bottom-up approaches work best in more diversified. this is especially true in large multinational corporations. Strategic decisions are made to develop and deploy internal resources in pursuit of competitive advantage and economic return. Effective planning procedures are both integrative and adaptive. a topmanagement “team” approach may be combined effectively with a top down style. In smaller diversified firms. team. 10. SELECTING A BASIC PROCEDURE 9. they seek balances between a firm's internal capabilities and external (environmental) conditions. Political influences on decision making tend to impede rational procedures and strategic effectiveness. albeit more time consuming and difficult to administer. decentralized. strategy. In very large corporations. This is the “neoclassical” approach. and/or complex firms. software. The latter describe the relevance of information elements to decision-making. 5. In larger firms with closely relatedlines of business. and communication technology. programs. data storage. The classic planning process model includes three stages: gathering evidence about internal capabilities and the external environment. and implementation of the selected approach through projects. or hybrid) should be selected on the bases of firm size and degree of centralization in decision making. and planning style will be determined by its perceptions of (1) environmental uncertainty or risk and (2) the firm's need for improvement of internal capabilities. 4. a “hybrid” approach—consisting of both top-down and bottom-up procedures—may be most effective. 8. When the classic models initially were developed. The former describe sequentially how information is obtained and processed.

Implementation effectiveness is greatly enhanced when the professional planning staff gives strong technical support to line managers in developing strategy and project/program management. product lines. strong support of the top management team and CEO is vital. However. The planning process must include an effective implementation procedure. failure to satisfy this requirement is the most frequent reason for planning functions' failure. frequent changes of small magnitude are preferable to infrequent changes of great magnitude. However. more often in dynamic markets and/or industries such as high technology and many consumer products or services. The typical planning horizon is five years. A quarterly or semi-annual review procedure may be preferable. . appropriate review frequencies differ between industries—less often in stable. risks. However. if not overt resistance. Implementation of strategy is an essentially integrative discipline in which decisions are made to deploy resources within units of the firm. and should be. Consensus of the management team on strategy is more important when a bottom-up or team approach to planning is taken than when a top-down or hybrid approach is taken. 13. Some discord on goals and objectives can be beneficial if there is sufficient “slack” in the firm's resources of capital and sufficient time to permit a thorough consideration of alternatives. when the environment is turbulent. The horizon should be longer in firms with complex structures and markets and for firms which are capital intensive. Plans typically are reviewed at least annually. higher than that.12. Then. each of whom must understand his or her role in implementing strategy. they also must be designed consistent with cultural realities. 18. 17. 20. the horizon should be shorter for small firms and even large firms. PERFECTING THE PROCEDURE 15. Every new planning procedure causes an anti-planning attitude. 19. an incremental approach probably is not practical. 16. 22. 21. they are impractical when a bottom-up approach is taken. 14. in a rapidly changing or turbulent industry or market. This fact of life must be taken into consideration when introducing new planning procedures. assetintensive industries. plans ultimately must be communicated to and carried out by line managers. Therefore. Optimizing approaches to objective setting are practical only when planning decisions flow from the top down. However. Since planning procedures must be accepted by an organization before they can be employed successfully. Effectiveness of the planning function and performance typically will be enhanced by consensus of the management team on a firm's external business conditions. divisions or subsidiaries. Agreement on means (strategy) is more important to a firm's success than agreement on ends (goals and objectives). Time permitting. and approaches to pursuing objectives. The firm's highest-level plan (the “corporate plan”) must include allocations of capital to competing investments within the corporation—that is. review frequencies often are. among the managers affected. Corporate culture influences the choice of planning procedures.

24. However. planning procedures should be most highly developed—for instance. the planning executive must be an accomplished administrator. to the chief executive a responsibility of selecting from strategic alternatives and proposing decisions to the board. Complexities of the planning system and business conditions should be inversely related. and the like. board involvement in planning procedures should be more extensive in asset-intensive industries. Such allocations must be carried through to business units' budgets. 25. acquisitions. organizing the planning function.or product-life cycle. ADMINISTRATION OF PLANNING PROCEDURES 31. However. 28. and delegating responsibilities for doing the work of planning. The firm's planning process must evolve in response to its practice in planning. a monitor of business conditions. the planning process always should be comprehensive insofar as scope of the General Planning Model is concerned. when there is competitive vulnerability of technology or when business conditions (internal and external) are volatile. The professional planning manager serves best as an internal consultant and educator on planning methods and strategic decisionmaking technology. 30. the appropriate involvement of these three management levels varies between industries. Therefore.the treasury (for dividends and debt retirement). and the planning function must be administratively sound. even at the division level. selecting planning policy. and changes in management style. 23. complexity and comprehensiveness should not be confused. while improving the quality of a CEO's (and other senior executives') strategic decisions. . As the firm's structural complexity increases. economic cyclicality. To be effective. For example. and to line managers a role of proposing operating plans to the chief executive. a provider of analytic services. When risk levels are high. an administrator. A typical division of top management strategic decision-making responsibilities and authorities assigns to the board of directors a role of reviewing/approving planning decisions. The chief executive's responsibilities for planning include being well informed on generally accepted planning principles. 26. 29. and a catalyst to strategic thinking throughout the management organization. changes of organization structure. so should the sophistication of its planning procedures. it is desirable to perform an independent annual audit of planning procedures. progression of the industry. A hallmark of administrative success in planning appears when detailed planning functions consume relatively little of the chief executive's time. ALLOCATION/DELEGATION OF PLANNING RESPONSIBILITIES 27.

intra-industry competition and market conditions. . replanning procedures should be perpetual and deliberate. including specific work products. and implementation programs is required. Usage of relevant information in making planning decisions and financial performance are positively correlated. the current situation and forecasts of the relevant economy. strategy. objectives. 36. The scope of environmental information assembled to support planning decisions should include trends. Accuracy of planning information with which to evaluate uncertainty of the economy. There is a natural tendency of managers to resist any significant change of goals and strategy. Feasibility of the corporate plan depends on feasibility of the individual business plans. The planning function must have stated objectives just like any other staff function. PLANNING FOR THE SINGLE BUSINESS 39. Companies with multiple lines of business. 42. following the guidelines in Chapter 6. divisions. a flexible method for updating assumptions. Long-range strategic planning and current operational planning processes should be closely integrated. The chief executive must be the chief planning officer. For all of these reasons. Effective execution of the planning function requires an evidentially demanding approach. departures from the general procedure should be permitted when changes in internal or external conditions warrant unscheduled replanning. It is the planning manager's responsibility to acquire sufficient evidence to support planning decisions. an inventory of critical success factors. and an inventory of the firm's strategically driving forces. While an annual planning calendar should be used to organize an otherwise unwieldy information flow and avoid administrative burdens. At the outset. Changing a plan can precipitate a crisis. industry. Initiation of a new or revised planning procedure itself should reflect careful planning. 37. but failure to keep the plan up to date can lead to a catastrophe. Strategic and operational plans should be more tightly linked when the planning horizon is relatively short. 33. Therefore. 35. However. Larger changes will be met by greater resistance. 34. Planning functions' most frequent flaws include two mistakes by the chief executive— overdelegation or underprioritizing of planning functions and failure to become adequately informed regarding planning principles. Each pitfall can result in poor direction of the planning function and a low likelihood of planning success. 41.32. and market (“the environment”) is positively correlated with financial results. a new planning manager's scope of administrative and technical responsibilities and authorities should be clearly defined. The typical strategic planning process follows an administrative schedule of activities that spans the entire year. 40. Companies with single lines of business require just one comprehensive plan. and/or subsidiaries require a plan for each business and one more for the corporation as a whole. 38. Since many assumptions regarding external business conditions will become invalid after the plan is prepared. planning must be a dynamic function. the planning process really should be perpetual at every stage.

The size of “gaps” between goals and “baseline” projections of most likely performance— before changes in strategy are introduced—is one measure of goals' difficulty/feasibility. But other competitive standards also may be defined. Thus. 49. is an essential input to planning decisions. 46. objectivity is critical. 52. Here. The scope of such a profile includes financial performance. Information describing the firm's operating capabilities. until some optimum share is reached. The gap's size also provides quantification of strategic objectives—that is. and its ability to attain or sustain competitive advantage may be impaired. and so on. 48. one example is permanence. costs. and long-term growth. Such a profile can provide objective “benchmarks” with which to evaluate a firm's relative strengths and weaknesses in sales. The planning manager should gain technical comfort with the firm's cost accounting practices and judge their adequacy for measuring contributions from lines of business. Competitive success standards are more difficult than financial standards to define: a simple market share goal may suffice. At that point. cash flow. The “loser's” business will suffer from under investment. incremental market share is likely to be accompanied by lower financial returns. 53. 45. There are four categories of business goals: level of risk. and diagnoses of product/industry life-cycle stages. Objectivity in gathering and assessing such information is difficult to achieve. and technological norms. The planning process should identify and clarify trade-offs between higher financial returns and higher market shares. . engineering standards. for that reason. compared to competitors' capabilities. Evaluations of internal capabilities should be based on an impartial list of the industry's critical success factors. two divisions each may require capital to realize their highest performance potential. Goals of corporate and operating management often conflict. when adequate funding can be supplied to only one of them. but they may be developed from industry performance norms. leverage. There is a positive correlation between market share and the rate of return on investment. the amount of improvement required from strategy to achieve goals. other industry attractiveness indicators. financial results. industry/market growth rate trends and potentials.43. Competence alone is not sufficient for competitive strength. competitive position. or “staying power” in an industry based on technological superiority. One approach to enhancing objectivity entails compiling a profile of performance norms for the firm's industry or segment. A competitive strength or weakness exists only when the firm's competence in a critical function is distinctively superior or inferior to that of competitors. operating. the firm's comparative ability to supply a product or service versus competitors' abilities. 50. Operating success standards are even harder to define. assembling benchmarks of best practices is highly desirable. 47. as well as marketing. forecasts of business sector prospects. a corporation's overall financial interest (and its shareholders' interests) may conflict with the interests of such “losing” divisions (as well as the interests of their employees. The planning manager should assemble and organize information with which to define success standards of each type. rates of return. suppliers. 51. The scope of information required for a competitive position analysis (using one of the matrix methods) includes competitors' and/or products' market shares. margins. For instance. and other stakeholders). Competitive and financial success are closely related. 44. and benchmarking studies. again.

Political/social considerations also will influence acceptance. The chief executive and corporate planning executive must decide how communications with line management regarding corporate strategy and operating objectives will occur—before or after individual business plans are proposed to corporate management by line management. But corporate complexity itself is an incentive to develop comprehensive planning functions and to realize their integrative benefits. Some environmental assessment functions may be performed most economically at the corporate level—for example. and altering the corporate structure through acquisitions. These include defining the concept and scope of corporate businesses. identifying synergies and possible combinations of portfolio businesses. Strategy selection entails diagnosing the relative merits of adaptive (market-positioning) versus integrative (resource-based) approaches. However. 62. The most typical approach to selecting strategy is “adaptive. it is not essential to centralize them. 60. industry. enhancing and cultivating core competences. and competing for future versus present markets and then making trade-offs in resource allocations. alliances. corporate goalsetting. least-cost versus differentiation approaches. these environmental assessment functions (among others) also may be decentralized. This is the resource-based view of strategy selection. ” that is. joint ventures. soundness of rationale. An alternative approach to selecting strategy entails an “inside-out procedure. then searching for markets where such competences are critical success factors. goals cannot provide strategic guidance to operating elements of the organization. economic. Administrative planning procedures may take longer and be more cumbersome in highly diversified and/or complex corporations. 59. and market analysis and forecasting. . and internal capabilities then are adopted for the best possible “fit” to those external opportunities. Corporate involvement in planning functions of divisions and subsidiaries may entail either direct participation. evaluating growth potentials and other attractiveness characteristics of new or existing businesses and markets. 61. divestments. Such analyses and forecasts may be shared with operating management.54. Some planning functions in multi-business corporations cannot be delegated to line management and must be performed only by corporate management. The chief executive and board of directors must decide on the level of goals' aspirations as well as timing and methods of their communication to the management team. although it may be desirable to do so. Until they are communicated. 57. or essential detachment. 56. thereby achieving uniformity of planning functions as well as economies. versus decentralized. allocation of capital to businesses in the portfolio. 55. The appropriate choice depends on the extent to which portfolio businesses are related versus diversified and the extent to which strategic decisionmaking is centralized.” Market opportunities are defined first. PLANNING FOR THE MULTI-BUSINESS CORPORATION 58. and suitability as a basis for defining strategy. procedural control. Technical acceptability of goals and objectives should be based on their specificity. and bankruptcy. evaluating strengths and weaknesses of the business portfolio and headquarters functions.

the ability to manage resistance to changes in strategy. 64. Strategy is not self-fulfilling. With practice. Factors that influence the design of planning procedures for multinational corporations include the following: concept of corporate structure: product versus geographically oriented acceptable levels of capital risk at corporate and foreign operating levels power relationships between corporate headquarters managers. as long as all ten implementation skills are employed. and vice versa. 67. it is usually best for all businesses in the portfolio to be closely related and within a common sector of industries and/or markets. degeneration in one category—either generic capabilities or implementation skills—will produce degeneration in the other category. Sources of difficulty in planning for multinational businesses may emanate either from headquarters or operating units. and management may employ as many as it likes. In order to acquire and develop proficiency in implementation skills. Effective implementation of strategy is a fundamental requisite for success of the commercial planning function. a deliberate implementation method is required to realize strategy. foreign business managers. the ability to identify and develop leaders and managers.63. industries. A firm's management must have ten skills to implement strategy effectively: the ability to set internally consistent objectives. Multinational businesses represent the most complex and diversified of strategic situations. Thus. the ability to sustain vigorous. the ability to budget and monitor progress. IMPLEMENTATION 66. but it also may impose a lower limit on financial performance potential reflecting corporate overhead costs. 69. the ability to achieve strategic awareness. risks associated with MNC business planning typically are very high and multinational business planning is especially difficult. the balanced scorecard. such as management by objectives. the ten skills build generic capabilities. Conversely. and the ability to realize when it's time to change strategy and replan. . The relationship between implementation skills and generic capabilities is reciprocally reinforcing. Implementation skills are converted to implementation competences by procedural routines. or techniques. For these reasons. and so on tax and profit repatriation policies of host governments a wide range of cultural complexities that influence effectiveness of planning and strategy implementation procedures 65. 70. governments' regulators. well-formed organization structure. and adequate motivation. or flaws in the planning system. and individual businesses. the ability to envision needs for future competences. a firm first must have sound fundamentals in the form of three generic capabilities: sufficient resources. the ability to conduct projects. cultural resistance. a strong. There are many such techniques to choose from. 68. focused effort. and zero base budgeting. the ability to align structure and strategy. Diversification of the business-portfolio may reduce financial risk. They may be manifested in managerial ability. the difficulty of accomplishing successful acquisitions and reasonable limits on corporate management's ability to understand a broad scope of markets.

” 76. mergers. the probability of a reorganized firm's success is less than 30 percent. RESTRUCTURING 72. 74. divestments. 80. and bankruptcy. Acquisitions. Thus. Practicing implementation techniques builds basic implementation skills. Those same transactions should attempt to accomplish scale economies. 73. focused portfolios of related businesses are most profitable. and employ personnel who are selected for particular competences. not buyers. There are two types of restructurings: (1) changes in ownership and (2) resource sharing. 81. Alliances and joint ventures permit firms to share their risks in a single enterprise and/or to hedge market risks through multiple commitments to shared enterprises. Resource-sharing transactions. The relationship between implementation skills and techniques is reciprocally reinforcing. alliances. 77. and strengthening implementation skills facilitates the future use of new techniques.71. if any skill degenerates through lack of practice. tend to be low. divestments. 82. . Joint ventures are preferred for minimizing risks of mistrust. Restructurings are most successful when they are conducted to accomplish a higher-level strategy rather than to exploit an unanticipated opportunity. because they are more focused on specific objectives. Acquisitions are preferred when markets do overlap. Resource-sharing arrangements are preferred when the partners' markets do not overlap. 84. This new objective can be attained only by appropriating external resources or lowering the goal. Alliances are preferred for purposes of hedging performance risks as in research and development enterprises. it will become more difficult to use some techniques. 78. A secondary strategic objective emerges when management cannot reconcile the difference between a firm's goals and present momentum using existing internal resources. in mature and declining stages of an industry's life cycle. Acquisitions and mergers in pursuit of product or service diversification should avoid extremely concentrated or very diversified portfolios. 75. rates of economic value added by acquisitions. Bankruptcy reorganizations' chances for success are very low (less than 10%). including alliances and joint ventures. avoid surplus assets and acquisition premiums. Resource sharing is accomplished by alliances and joint ventures. as in a combination of two proprietary technologies. mergers. Conversely. Even after confirmation. 83. 79. proportionate to investment. and joint ventures attempted early in an industry's life cycle should be intended to obtain “learning effects. versus performance. tend to have higher returns than ownership changes. Most of the value added by acquisitions tends to be appropriated by sellers. Ownership changes include acquisitions.

89. CONCLUSION This compilation of ninety principles. that no longer is true. reference also is made to this appendix for graphic illustrations of classical approaches to the three-stage process of assessing the firm's strategic capabilities and its external environment (i. Otherwise.85. PLANNING TECHNOLOGY 88. the evolution of classic process and decision models is described. To suggest that these principles characterize the total methodology of comprehensive commercial planning would be naïve. they will propose that more principles should be added—and perhaps that some should be deleted or changed. SPT facilitates both adaptive and integrative planning approaches even in very dynamic environments and complex firms. A collection of flow-chart illustrations in this appendix demonstrates how systematic. In that chapter. these principles provide a foundation upon which a more complete structure may be built. liquidation is mandated. . over time. 87. is only a first effort. industry. But. at best. Appendix Evolution of Classic Planning Models Chapter 3 of this volume provides an explanation of the “classic” approach to strategic planning. of course. In that chapter. firms that employ SPT proficiently to perform planning functions should exhibit more persistence (lower termination rate) and greater effectiveness (attainment of objectives) in CP functions than firms that lack SPT proficiency. In a given industry. information processing requirements of CP process models were prohibitive. 86. and markets). and electronic data communication.e. Surely. and formulating an approach to the deliberate implementation of strategy. The result has been a neoclassical approach to comprehensive planning. Until the 1990s. Bankruptcy reorganizations should be attempted only when reasons for insolvency do not stem from an infeasible business model or managerial incompetence. Strategic planning technology (SPT) includes a combination of four information technologies in performing the work of comprehensive planning: computing hardware. as others review these principles. 90. hopefully. rational planning models evolved during the formative years when classic strategic planning methodology emerged. Management prefers lower risks than shareholders. Most important. electronic data storage.. specialized planning software. making decisions to select goals and strategy. SPT has enabled the “classical” planning process models to be implemented more efficiently and effectively than when they first were articulated in the 1960s. “Agency conflicts” between the interests of executives and shareholders reflect their different incentives to accept risks and to employ internal cash flows. the mission of assembling generally accepted planning principles has begun. Each prefers cash to flow in its direction. economy. and specific reference is made to several models that appeared in the strategic management literature during the formative 1960s and 1970s. A formal plan should be prepared for any restructuring as a means of improving its chances for success.

In fact. Smalter's (1969) systematic approach (Exhibit A. one finds references to stakeholders other than the stockholders alone. In his model. Note. if not elaborateness. Steiner's model is “closed. 312). As actual results occur. ” assessment of the firm's comparative competences. Smalter was a practitioner. p. note that Ansoff recognized the importance of integrating long-range and short-term planning so that the end result was a “strategic budget” to guide management's current implementation priorities. EXHIBIT A. planning decisions may have impacts on other elements of the plan and elicit corresponding amendments. alliances and joint ventures—all of which would appear more prominently in subsequent models. in order to construct this composite summary of Professor Ansoff's highly influential model. we skip forward a full decade to Professor George Steiner's model (1979). (Ansoff's model evolved in his subsequent publications. it is heuristic in nature. unlike the other models in this appendix.The most elaborate illustration in this collection is taken from an important article published by Gilmore and Brandenburg over forty years ago. perhaps. which integrated essentially all elements of decision making in the strategic planning process (Exhibit A. For instance. About the only element missing from this model is a processfor supplementing the present scope of business through acquisitions and/or reinforcing returns through divestments—or. and his model is broken further into several elements that describe the work done at each stage of the planning process in his firm.) Since it would be awkward to present all of Ansoff's flow charts here. Finally.1). 311) is divided into the same three segments that is found in the general planning model discussed in Chapter 3 of this volume. which closely resembles process models in use today.” That is. Thus. unending process. Many current readers may be surprised by the completeness. Note. Igor Ansoff's elaborate model appeared in his textbook. 310) is a condensation of several schematic diagrams that appear throughout Ansoff's book. Exhibit A.2 (p. Steiner also distinguished “strategic” or long-range planning from “tactical” planning. California. Most important. Note that his model does incorporate a diversification strategy as well as an internal development strategy. further amendments of each element in the plan and the planning process also may be elicited. in the 1962 edition of the Harvard Business Review (Exhibit A. Finally. of this model. also.4. Steiner's model demonstrates that comprehensive strategic planning is a continual. he demonstrated that the two dimensions are simply at different extremes of the time spectrum and that they logically interconnect. his attention to decision making in order to select from alternative goals and strategies as well as action programs. Ansoff's attention to the resource requirements for competitive advantage—a focal point of the current strategic management literature. also. At each stage. the author collaborated with two principals of the Ansoff Institute at Escondido.3. p. and selecting from alternative strategic approaches to the firm's industry and market. This process of clarifying alternatives has become a fundamental mechanism for managing the risks that may be incurred when making strategic planning decisions. note the authors' attention to “economic mission. in the second and third stages of Smalter's model.1a Formulation of Economic Mission Notes: . first published in 1965. Also note throughout these exhibits the authors' attention to potential “synergies” and the pragmatic requirements of action programming. Here. perhaps.

A study of the capabilities and sources of synergistic strength of the leading firms in each field can provide a point of departure in estimating requirements for success. (h) Alternative combinations of several fields of endeavor may be evaluated with respect to feasibility by comparing resource requirements. (i) Also. The foregoing analyses are concerned with the problem of choosing a combination of fields of endeavor and objectives from an economic point of view. If integration or diversification appears attractive. stability and return on investment. F. Resource requirements will reflect the degree to which synergy is realized under each alternative. (f) The firm's performance potential in each field may be derived by matching the comparative capability profiles with inherent potential in each field with respect to growth. The performance of leading firms in the field offers some indication of the potential inherent in the field. Particular note should be paid to the degree to which synergy is realized under each alternative. (c) A normative capability profile is a composite statement in quantitative and/ or qualitative terms of what it takes to be successful in a field of endeavor. Or a company may be acting in several unrelated fields of endeavor and be thought of as diversified. ii) flexibility in relation to the uncertainties of technological change. finance and management.both rate of growth and outlook for continuance of growth. A larger firm may be active in several related fields of endeavor within an industry and be considered orientation. and iv) return on investment. iii) stability in resisting major declines in the business cycle. and it may be thought of as specialized. Measures are needed in such functional areas as research and development. (e) Relating the firm's capability profile to the normative capability profile for each field of endeavor will serve to develop comparative profiles which indicate how well the firm's capabilities match the requirements for success in each field. from“ Anatomy of Corporate Planning” by F. flexibility. It may be characterized by a common thread such as technology or product. stability and return on investment (g) It may be desirable for the firm to be active in more than one field of endeavor. (d) The firm's capability profile is a statement in quantitative and/ or qualitative terms of the firm's capabilities in the functional areas defined in the normative capability profile. possible combinations of the more promising fields should be formulated at this point. Source: Reprinted by permission of Harvard Business Review. flexibility. Gilmore and R. To this information base top management must add noneconomic considerations and business judgment in order to arrive at a final decision. production. . G. marketing. For a small company. Exhibit 1. (j) The final decision with respect to the combinations of fields of endeavor (together with associated performance goals) defines the economic mission of the enterprise. a segment of an industry may constitute its field of endeavor. alternative combinations of fields of endeavor may be evaluated with respect to growth. (b) Inherent potential defines the extent to which a field of endeavor offers the possibility of achieving objectives in four critical areas of performance: i) growth .(a) A field of endeavor is a sphere of business activity within which a firm operates.

Changes required for successful implementation of each alternative product. (c) Combining plans for the more attractive product. all rights reserved. 1962. thus providing the framework for development of a program of action. G. Gilmore and R. an analysis may be made of the firm's functional capabilities with respect to research and development. Brandenburg.EXHIBIT A. finance. will serve to develop alternative strategies for the firm as a whole. Copyright © 1962 by the Harvard Business School Publishing Company. opportunities with one another. Exhibit 1.1b Formulation of Competitive Strategy NOTES (a) Product. together with the functional goals necessary for their accomplishment. are specified. or with existing plans in fields of endeavor in which the company is already operating. G.December. F. (d) The decision as to the competitive strategy of the firm defines the directions in which the company will move toward its objectives in each environment included in the economic mission. Brandenburg. and opportunities (characterized by the significant features that are expected to influence their outcome) are specific combinations of sales approaches which define possible ways of exploiting a field of endeavor. EXHIBIT A. production.1c Specification of Programs of Action Source: Reprinted by permission of Harvard Business Review. The particular ways in which performance objectives will be pursued in each field of endeavor. all rights reserved. Gilmore and R. from “Anatomy of Corporate Planning” by F. marketing. from “Anatomy of Corporate Planning” by F. Exhibit opportunity may be defined as productmarket plans. Source: Reprinted by permission of Harvard Business Review. (b) Based on the information developed in the preceding three steps. F. Copyright © 1962 by the Harvard Business School Publishing Company. November-December. November. .

1d Reappraisal of Master Plan Source: Reprinted by permission of Harvard Business Review. 1962.EXHIBIT A. F. 1962. all rights reserved.1e Top Management Planning Framework Source: Reprinted by permission of Harvard Business Review. all rights reserved EXHIBIT A. Gilmore and R. Brandenburg. from “Anatomy of Corporate Planning” by F. Copyright © 1962 by the Harvard Business School Publishing Company. Gilmore and R. Brandenburg. Exhibit 1. November-December. Copyright © 1962 by Harvard Business School Publishing Company. from “Anatomy of Corporate Planning” by F. . G. F. November-December. Exhibit 1. G.

pp. . Patrick Sullivan at The Ansoff Institute (Escondido. 177 ** Includes resources' allocation and strategy implementation The author gratefully acknowledges contributions from Dr. “Anatomy of a Long Range Plan. 123. Copyright © 1969. ” pp. with per mission from Elsevier Science. J. EXHIBIT A. Peter H. 4-8. Antoniou and Dr. 173. 1. 34.2 Ansoff's Strategic Planning Model* * Adapted from Ansoff.EXHIBIT A. Vol. 1965. 172.3 A Strategic Planning System Source: Reprinted from Long Range Planning. Smalter. California) who participated in constructing this composite of Professor Ansoff's model. D.

Marwick. Inc. He is a recognized expert in strategic planning methods for cyclical industries. automotive components and construction equipment. and an associate professor of management at North Carolina Wesleyan College. implementing strategy and corporate restructuring.D. and the consulting staff of Peat.. will be released soon. (predecessor to KPMG). “What Every Manager Must Know. Professor Roney is currently completing four additional volumes in Praeger's Guidelines for Strategists series on strategic planning. His next book. Mitchell and Co.EXHIBIT A. Assessing the Business Environment: Guidelines for Strategists (Quorum Books) was published in December 1999. His previous book. materials handling equipment and vehicular running gear. Dr. Remaining volumes in this series will address methods for gathering strategic evidence. North Carolina. making strategic decisions. ” by George A. from Strategic Planning. Dr. Roney has been active in many industries and businesses of all sizes. building products. . About the Author CURTIS W. a division of Simon & Schuster Adult Publishing Group.. specialty chemicals. Steiner. All rights reserved. As a senior corporate executive. His professional career of over thirty years has been devoted to business planning. is a principal of Commercial Planning Consultants in Wilson. and vice president.. He also served on the internal consulting staff at PepsiCo. His present and recent clients include public companies that supply products and services to cyclical industries such as basic metals. strategic management and corporate development. Inc. Inc. Ph. a major producer of building components. RONEY. Roney's managerial posts have included corporate planning director at Holiday Inns.4 Comprehensive Strategic Planning: Structure and Process Source: Reprinted with the permission of The Free Press. planning and development at Philips Industries. Gathering the Evidence: Guidelines for Strategists. Copyright © 1979 by The Free Press. strategic planner and management consultant.

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