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Strategic Management Methodology: Generally Accepted Principles for PractitionersGuidelines for Strategists ; No. 1 Roney, C. W. 1567206298 9781567206296 9780313053788

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page_i Page ii This page intentionally left blank. page_ii Page iii Strategic Management Methodology Generally Accepted Principles for Practitioners C. W. Roney Guidelines for Strategists, Number 1

page_iii Page iv Library of Congress Cataloging-in-Publication Data Roney, C. W. (Curtis W.), 1942 Strategic management methodology : generally accepted principles for practitioners / C. W. Roney. p. cm.(Guidelines for strategists ; no. 1) Includes bibliographical references and index. ISBN 1-56720-629-8 (alk. paper) 1. Strategic planning. I. Title. II. Series. HD30.28.R6617 2004 658.4012dc21 2003053024 British Library Cataloguing in Publication Data is available. Copyright 2004 by C. W. Roney

All rights reserved. No portion of this book may be reproduced, by any process or technique, without the express written consent of the publisher. Library of Congress Catalog Card Number: 2003053024 ISBN: 1-56720-629-8 First published in 2004 Praeger Publishers, 88 Post Road West, Westport, CT 06881 An imprint of Greenwood Publishing Group, Inc. www.praeger.com Printed in the United States of America The paper used in this book complies with the Permanent Paper Standard issued by the National Information Standards Organization (Z39.48-1984). 10 9 8 7 6 5 4 3 2 1 Copyright Acknowledgment Every reasonable effort has been made to trace the owners of copyright materials in this book, but in some instances this has proven impossible. The author and publisher will be glad to receive information leading to more complete acknowl edgments in subsequent printings of the book, and in the meantime extend their apologies for any omissions. page_iv Page v Contents Illustrations Preface Introduction Part I. Foundations of Methodology 1. Historic Perspective 2. The Planning Process 3. The Classic Approach 4. Neoclassical Methodology Part II. Management of Planning Functions 5. Authorities and Responsibilities for Planning 6. Administration of Planning Procedures 7. Procedural Contingencies: How to Make Planning Fit the Firm Part III. Decision-Making Procedures 8. Planning Decisions in the Single Business 9. Planning Decisions in the Multi-Business Corporation Part IV. Implementation of Strategy 10. Making Strategy Happen: Required Capabilities 11. Restructuring the Enterprise page_v Page vi Part V. Summary 12. Appendix:

vii xi xiii 1 5 33 51 69 93 95 119 139 165 167 211 231 233 259

285 Generally Accepted Planning Principles: A Compilation Evolution of Classic Planning Models Bibliography Index page_vi 287 301 313 339

Page vii Illustrations Exhibits 1.1 Emergence of Formal Planning in Countries Other than the United States 1.2 Evolution of CBP Concepts in the Twentieth Century 1.3 Twenty Companies That Failed

10 16 19

1.4 Results of Planning-Performance Research in Specific Industries, 19701989 5.1 Pitfalls in Comprehensive Long-Range Planning 5.2 Qualifications of the Senior Planning Executive 6.1 Corporate/Division Planning Schedule for a Single-Business Corporation 6.2 The Product-Line Package 7.1 Factors Influencing Planning Process Formality 8.1 Scope of Business Conditions Assessment 8.2 Evaluating the Commercial Significance of Environmental Forces 8.3 Industry Trade Associations as a Source of Operating Benchmarks Figures 2.1 Comprehensive Planning: Length versus Depth 2.2 Comprehensive Planning: Height versus Depth page_vii Page viii 2.3 Comprehensive Planning: Height versus Length 2.4 Corporate and Business Planning: Length versus Depth 2.5 Departmental Planning: Length versus Depth 2.6 Comprehensive Planning: Three-Dimensional View 2.7 Strategic Planning Nomenclature 3.1 Conceptual Model for the Analysis of Planning Behavior 3.2 How Is Strategy Conceived? 3.3 The General Planning Model 3.4 Corporate Planning Process Model 3.5 Incremental Improvement Concept 4.1 Condensed History of Planning Technology 4.2 Strategic Planning Technology: Sources 4.3 The Availability of Electronic Data Systems to Support Strategic and Business Planning 5.1 Executives Influence on Planning Decisions 6.1 Planning-Programming-Budgeting Sequence 7.1 The Anderson and Paine Strategy Model 7.2 Appropriate Approaches to Decision Making in Firm Size/ Structure Combinations 7.3 Inter-Industry Differences in Long-Range Planning Incidence, 1995 8.1 Market Share/Growth Matrix: Cash-Flow Characteristics 8.2 Normative Cash Flows within the BCG MatrixAn Alternate View 8.3 GE/McKinsey Multifactor Portfolio Matrix 8.4 Product/Market Life Cycle 8.5 Product/Market Evolution Matrix 8.6 Directional Policy Matrix 8.7 ROI Relationships to Market Share and Industry Concentration 8.8 Hypothetical Relationship of Market Share and Return 8.9 Baseline Projection, Goal and Strategic Objective: Interrelationships 9.1 Strategic Objective of Acquisitions 10.1 The Implementation Competences Bridge 11.1 Measuring the Second Gap Tables 1.1 Incidence of Comprehensive Business Planning in Ten Industries 2.1 The Comprehensive Planning Process 5.1 Responsibilities for Identifying versus Approving Objectives page_viii Page ix 5.2 Levels of Plan Approval Authority 5.3 Approval of Plans by Individuals and Groups at Corporate and Division Levels 5.4 Appropriate Planning Skills: Impacts of Diversification and Breadth of Business Focus 5.5 The Strategic Planning Society: April 2002 Membership 7.1 Management Style versus Planning Approach 8.1 Industries Where Participants Typically Have Narrow Lines of Business 8.2 Scope of Forecasting Methods 8.3 Marketing Focus: Priorities 8.4 Purposes of Goals: Management Perceptions 8.5 Information Required for Goal Selection 9.1 Sources and Impacts of Pitfalls in Multinational Business Planning Appendix

23 102 114 125 127 161 171 179 192 37 38

38 39 39 40 42 54 55 59 62 63 71 76 91 104 126 141 143 147 181 182 183 184 185 186 196 197 198 220 245 260 11 41 96

98 99 107 110 156 167 177 190 200 201 228

A.1a A.1b A.1c A.1d A.1e A.2 A.3 A.4

Formulation of Economic Mission Formulation of Competitive Strategy Specification of Programs of Action Reappraisal of Master Plan Top Management Planning Framework Ansoffs Strategic Planning Model A Strategic Planning System Comprehensive Strategic Planning: Structure and Process page_ix

303 305 307 308 309 310 311 312

Page x This page intentionally left blank. page_x Page xi Preface This book was written for the commercial planning professionthe 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 firms planning procedures. This book is intended to be a source of methodological guidance for those managers. The focus of this text is on practicehow 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 of page_xi Page xii our firms 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 page_xii Page xiii Introduction 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. page_xiii

Page xiv ORGANIZATION OF THIS BOOK 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 Twos 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 planningperformance 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 firms 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 authors 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 are page_xiv Page xv comprised 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 cant 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 capabilitiesboth 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 dont 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. HOW GENERALLY ACCEPTED PRINCIPLES ARE STATED At the end of each chapter, readers will find an abbreviated list of generally accepted planning principles that apply to the chapters page_xv Page xvi subject 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: A statement that needs no proof because its truth is self-evident Definition: A semantic axiom Postulate: A plausible, but unproven, statement assumed to be true Corollary: A statement that must be true if the one that precedes it is true Hypothesis:A description of a natural phenomenon that can be tested empirically, stated tentatively to provide a possible explanation of the phenomenon under consideration CONCLUSION 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 practitionersand 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. page_xvi Page 1 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 dont do strategic planning in our firm; and we dont have a formal plan of businessno goals and no deliberate strategy. Instead, were opportunists: were 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 wouldnt be employed much longer. A large majority of senior business executives in fact do practice formal planning; as observed earlier, most page_1 Page 2 corporations 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 firms planning functions. In this, first of four parts, there are four chapters on the foundations of comprehensive commercial planninghistoric perspective; some basic methodological concepts; the classical approach to planning; and a neoclassical approach that exploits modern advances in information technology. Chapter 1 begins by summarizing the historic evolution of comprehensive planning into a formal management discipline. Military planning and strategy existed around 450 B.C.; but strategic planning, as we know it today, first was practiced in France during the late 1860s. General acceptance of commercial planning principles didnt emerge in North America until a century later, however. Benefits to be expected from commercial planning also are discussed in Chapter 1. More specifically, results of empirical research demonstrating that formal planning can improve the probability of a firms commercial successby either increasing upside performance potential or reducing downside riskare reviewed. The purpose of planning is to realize both of those benefits. A related discussion addresses the firms economic mission and the role that comprehensive planning can play in helping the firm to accomplish its mission successfully. Chapter 2 explores essential concepts of comprehensive planning and its methodological scope. In this chapter, some very important terms used throughout the remainder of the book are defined. Among those are comprehensive commercial planning, comprehensive corporate planning, comprehensive business planning, goal, strategy, and objective. A three-stage general planning modelalso a bedrock of the remaining chaptersis introduced here as well. Chapter 3 reviews the basic approach of strategic planning from two quite different perspectives. In one case, planning decisions are viewed as rationally deductive in nature. If management knows how to define standards of success, then, at any given time, it also should be able to describe the gap between the present performance potential and those standards. Planning should entail deducing actions to reconcile differences between the status quo and success. An alternative perspective may be taken, however. This is an inductive approach, by which planning decisions are made incrementally rather than deterministically. At any given time, management may discover opportunities to improve upon the status quo. Thus, a policy of continuous improvement is adopted without necessarily knowing what the firms highest potential page_2 Page 3

might be. Each approachdeterministic and incremental, deductive and inductivecan be effective. However, as the classic strategic planning models used most frequently today are deterministic and deductive in nature, the classic model of strategic planning as a decision-making process is described here in greatest detail. While the classic planning model has made a great impact on the practice of modern management and has influenced how corporations still are administered, that model nevertheless has been cumbersome and difficult to execute, primarily becausebeing so rational and deductiveit requires substantial evidence and analysis to support executives decisions. In an age of increasing turbulence, 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. In Chapter 4, 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. In fact, information technology has so facilitated execution of the classic models that a new, neoclassical methodology of strategic planning has emerged. Neoclassicism today represents the state of the planning art. In this chapter, readers will become familiar with a wide variety of electronic planning aids now available to facilitate strategic planning at all stages of the process. page_3 Page 4 This page intentionally left blank. page_4 Page 5 1 Historic Perspective Historic Perspective The ability to conjecture about the future and to formulate plans is an attribute that distinguishes humankind from other species. We cannot say when formalized planning began, but surely it was long before modern management theorists started to write about this subject. For centuries, military commanders have conducted operations according to battle plans predicated upon analyses of their forces capabilities, opponents capabilities, and battle conditions in the environment. Cummings (1995) reported that the earliest surviving volume on strategy was written by Aeneas, about 450 B.C. Pericles devised plans and strategies for war against the enemies of Athens around 425 B.C. That was when the terms strategos (military commander) and strategoi (a body of commanders alleged to be the wisest citizens of Athens) emerged. At about the same time, Sun Tzu authored a complete text on military strategy that mandated comprehensive planning (Chen, 1994:43). Houlden (1995:100) wrote as follows: Throughout history, whether it be Caesar, Hannibal, or Nelson, there have been examples of the art of strategy. [But,] 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. Indeed, as explained later, modern commercial planning has existed for only about forty years, although some formal business plans clearly were being prepared well over a hundred years ago. page_5 Page 6 EVOLUTION OF MODERN CONCEPTS The Pennsylvania Railroads management formed a corporate structure to perform long-range planning functions in the 1860s and the 1870s (Chandler, 1962:22, 23). DuPont also was among the earliest manufacturing concerns to form a corporate planning function, which it did in 1903 (Dutton, 1942:185, 186). 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. Using in-depth analyses of how those corporations managerial and administrative structures evolved, Chandler concluded that formal planning practices (among others) evolved in response to the increasing administrative complexity that accompanied corporate growth and diversification. Emergence of Comprehensive Commercial Planning Henri Fayol (1916), in one of the first texts on management principles, prescribed an elaborate system of well-integrated long- and short-range planning procedures and plans, which he used in actual practice from 1866 to about 1918. For fifty years, his French mining companies formulated comprehensive plans of business. They followed deliberate planning procedures, which included each essential element of current strategic planning procedures. Thus, many modern concepts of strategic planning unquestionably were initiated by Henri Fayol. Fayols most widely read work (1916) could be used as a strategic planning text, with principles not unlike many that appeared more than a half-century later. Remarkably, Fayols book on industrial management principles defined the comprehensive business planning process and plans contents, in a way very similar to the manner in which, more than eighty-five years later, they are practiced today! Fayol developed annual, two-year, five-year and ten-year plans that were updated on a rolling-revised basis. They had a full scope of objectives, approach to goals pursuit (strategy), and action programs. Fayol applied these planning methods with great success in his own mining companies. Fayols plans included formal business analyses, market analyses, ten-year forecasts, and very specific implementation programs, as well as progress monitoring procedures and contingency plans. Forecasts in Fayols plans were much more than simple quantitative exercises; they contained integrated strategy statements. The first year of a plans ten-year term was expanded into an operating budget. Ten-year objectives were revised every five years. Thus, there is always a line of action marked out in advance for five years at least (Fayol, 1916:47). All elements, from short term to long term, were carefully interconpage_6 Page 7

nected and updated regularly. Fayols methods were so novel and successful that he was appointed to the French Legion of Honor (Chevalier in 1888 and Officer in 1913). 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. Subsequent to Fayols work, further academic attention to planning functions developed slowly. Modern notions of comprehensive planning began to emerge again in the 1950s. Drucker wrote extensively on business planning principles in The Practice of Management (1954), a text that may have been one of the first to prescribe modern planning functions. Later, in Managing for Results (1964) and Management: Tasks, Responsibilities, Practices (1973), Drucker reiterated and refined these concepts. Development of comprehensive planning functions by industrial concerns accelerated after World War II for reasons explained by Fulmer and Rue (1973), Henry (1981), and Houlden (1985, 1995), among others. In part, this acceleration may have been due to the influence that military management methods and computing systems exerted in business. But, it also was due to the rapid growth in size and complexity of American businesses, which Chandler (1962) described in his definitive analysis of how strategy and structure jointly evolved. 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. Indeed, military planners have developed principles for devising strategy, assigning implementation tasks to operating units, and allocating resources to those units for many years. (For example, see the histories of Liddell-Hart, 1954 and Paret, 1986.) After World War II, planning skills allegedly were transferred from military to business organizations through management migration. Although this legend may have some truth, recall that Chandler (1962) documented the presence of planning departments and many of todays business planning functions in American corporations before the turn of the twentieth century and that Fayol had implemented planning practices in the late 1860swell before World War I. Therefore, the transference of military planning techniques to business may have strengthened American managements planning capabilities after World War II, but business planning functions surely existed long before then. During World War II, U.S. military planners developed some formal planning methodologies, which later were transferred to industry and given popular names such as Planning, Programming, and Budgeting page_7 Page 8 (PPB), reflecting a process of developing plans in progressively greater detail with closer proximity to the points of implementation in operations and in time. Military planners also developed the practical notion that success in plans implementation is closely related to the effectiveness of organization structure. Thus, command and control concepts evolved. When World War II ended, military veterans with planning experience often put the techniques that they had learned to good use, especially in the military-industrial complex, as Eisenhower called it in his farewell speech (1960). For example, Robert McNamara applied PPB and quantitative planning methods at Ford Motor Company before taking them to the U.S. Defense Department as secretary of defense. The first generation of postwar business planners benefited not only from lessons learned in military applications of planning, but also from a plethora of quantitative approaches to optimizing outcomes in complex systems and the arrival of the electronic computer. Igor Ansoff, after receiving his Ph.D. degree from Brown University in 1948, got his early experience in planning at RAND Corporation. He moved to Lockheed Aircraft Corporation in 1957, where he became a vice president for planning and programs (Hussey, 1999). Both firms were original members of the postwar military-industrial complex and early users of the first large-scale computing machines. Ansoffs brilliant academic career subsequently took him to Carnegie Mellon, Vanderbilt, and U.S. International University. He was a founder of classic strategic management methodology (Ansoff, 1965). Notwithstanding its uncertain validity, the military analogy unquestionably has been helpful to strategy authors (Harrigan, 1980, 1986a; Kotler and Singh, 1981; Fahey, 1985; Cohen, 1986; Peacock, 1984; Rogers, 1987; Parks, Pharr and Lockeman, 1994). Initially, concepts of business planning, like their military analogs, involved relatively static objectives. Generally accepted planning principles, early in their postWorld War II evolution, focused on selecting fixed goals (or objectives) and then defining the work required to bridge gaps between present positions and objectives (Argenti, 1969; Kami, 1969). Ultimately, the required work was broken down into manageable tasks that might be assigned to organizational units and individual managers. Gilmore and Brandenburg (1962) provided a graphic description of this classic procedural model; it will be found in the Appendix. During the 1960s and early 1970s, planning principles in business and the military did seem to evolve in parallel. For instance, as business conditions (and global military situations) became more dynamic and uncertain, it was necessary to plan for more than one combination of conditions on the competitive battlefield. In addition to prevailing assumptions regarding the environment, alternative scenarios were page_8 Page 9 formulated (Wilson, 1973; Downey et al., 1975; Edmunds, 1982; Hoffman, 1985; Schwartz, 1991; Mercer, 1995a,b). Strategic responses to alternative scenarios, or contingencies, initially may be prepared in less detail than strategy in the prevailing plan. Then, when environmental monitoring indicates that the probability of a contingencys occurrence is increasing, a strategy for responding to that contingency can be refined. Eventually, it may become appropriate to substitute contingency plans for corresponding elements in the prevailing planat which time the contingency plan will prevail and the predecessor will be discarded. 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. One study, 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, 1956). Ten years later, that proportion allegedly

had risen to over 90 percent (Brown, Sands and Thompson, 1969). However, most other studies results produced less spectacular growth rates. A survey by Business Management magazine in 1967 found that about half of 101 large corporations had begun to plan formally. Fulmer and Rue (1973) found that only 23 percent of 386 respondents to their survey of a broader sample, conducted for the Planning Executives Institute, had highly developed strategic planning functions, but that another 50 percent had long-range financial plans that were unsupported by strategy. In that studys results, manufacturers were twice as likely to have long-range financial plans as service firms. Surveys in other industrialized nations confirmed that the practice of comprehensive plans was widespread on a global scale (Exhibit 1.1). By the end of the 1960s, formal strategic planning had become an established management discipline. Some studies observed that the incidence of comprehensive business planning (CBP) practices was significantly influenced by firms sizes (Henry, 1981; Houlden, 1985). Other studies disclosed that planning propensities tended to differ between industries (Fulmer and Rue, 1973; Dess and Beard, 1984). Subsequent surveys tended to report that the incidence of formal CBP functions increased steadily both in the United States and in most industrialized nations (Houlden, 1995). Most recently, Rigby (2001) confirmed that the incidence of strategic planning had increased throughout the period of 19932000. In North America, the incidence rate had reached 89 percent in 2000. Satisfaction levels were reported to be quite high (about 89 percent). page_9 Page 10 EXHIBIT 1.1 Emergence of Formal Planning in Countries Other than the United States No. of Companies Incidence Region/Country Author(s) Survey Year N1 N2 RR Pct. ASEAN Region Foo Check-Teck 1988-89 1300 325 25% 100% P. H. Grinyer Peter McKiernan Belgium Filip Caeldries c. 1986 1000 124 12% 66% R. von Dierdonck Denmark Robert Ackelsberg c. 1987 NA 12 NA 100% William Harris France H. Schollhammer c. 1968 790 371 47% 15%- 70% Germany W. H. Strigel 1965 NA 1600 NA <20% I. Bamberger Eduard Gabele Werner Keppler 1973-74 289 181 62% 35% Greece D. N. Koufopoulos 1991 231 62 27% 69% Neil A. Morgan Japan Toyohiro Kono 1975 536 74 14% 57% Netherlands D. Jan Eppink c. 1974 20 20 100% 85% Doede Keuning Klaas de Jong Singapore C. H. Wee c. 1987 749 223 30% 56% Seok Kuan Lee John U. Farley United Kingdom B. W. Denning 1967 300 225 75% 33% M. E. Lehr Bernard Taylor 1969 27 27 100% 81% Peter Irving J. C. Higgins c. 1975 NA 71 NA 86% R. Finn N1: number of surveys N2: total response RR: response rate NA: not available c.: Approximate: actual date of survey was not reported. This is the publication date, less two years. In a survey conducted during 19941996, we found that 88 percent of 368 publicly owned firms in ten U.S. industries practiced comprehensive business planning and that this rate had increased steadily during the preceding decade (Roney, 2001). However, unlike the findings of Fulmer and Rue (1973) more than twenty years earlier, the incidence of formal planning practices was higher in two industrial service industries than in three fabricating industries, as Table 1.1 demonstrates. The page_10 Page 11 incidence of formal planning was highest of all in the most asset-intense industries. Since our response rates were quite high (85%) and our sample was relatively large, our findings probably are reliable for publicly owned firms in the industries that we studied. Emergence of Generally Accepted Principles As academic and professional interest in the practice and promise of comprehensive business planning accelerated, 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. Initially, attempts at codification were fairly broad in scope, providing guidance in integrating multiple management functions to implement planning procedures. Perhaps the first of these broad-scope texts was Melville Branchs (1962) The Corporate Planning Process. (Professor Branch received the first doctorate in planning awarded

by Harvard University.) Complete in its treatment of methodology, Branchs text discussed plannings theoretical bases, purposes, procedures, assumptions, analytic techniques, implementation, performance monitoring, and even the future of planning as a function of management. Although not nearly as widely heralded as Kenneth TABLE 1.1 Incidence of Comprehensive Business Planning in Ten Industries Percentage of Planners N 1983 1994 Change Process Industries 194 44% 93% 49 Basic Metals 30 70 90 20 Chemicals 30 57 93 36 Petroleum 60 42 88 46 Utilities 74 31 97 66 Fabrication Industries 98 60 77 17 Auto Components 26 58 77 19 Building Components 27 67 78 11 Machinery 45 58 76 18 Service Industries 76 57 91 34 Banking 47 57 89 32 Industrial Construction 16 62 100 38 Environmental 13 46 85 39 All Industries 368 51% 88% 37% Source: Roney, 2001 page_11 Page 12 Andrews theoretical work, The Concept of Corporate Planning (1971), Branchs textwhich is far more definitivepredated Andrews by nearly a decade. Immediately after Andrews text, two othersmore along the lines of Branchswere published by Ewing (1972) and Hussey (1974). 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. Systematic procedural approaches to performing specific tasks of comprehensive business planning also emerged fairly early. Among the most important of such works surely was Ansoffs first text, published in 1965 (followed by subsequent versions in 1979 and 1988). Even more systematic and procedurally definitive were Argentis two texts (1969, 1974). Particularly helpful was Argentis approach to preparing a baseline financial projection as a beginning point for quantifying strategic objectives in financial terms and demonstrating how incremental benefits of strategic objectives should be defined. 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), Rothschild (1979), Grant and King (1982), Sawyer (1983), and Marrus (1984). Ansoff also was instrumental in defining systematic approaches to implanting strategy (1984). As procedural planning principles emerged, their architects focused greater attention on practicalities. In particular, procedural principles were focused more intensely on implementation requirements. For instance, managers work could be prioritized by a hierarchy that connected objectives throughout the enterprise to corporate-level goals and strategic objectives (Granger, 1964; Pearson, 1979). Subsequent texts by Hrebiniak and Joyce (1984), Hamermesh (1986), and Lorange (1982) focused on strategy implementation. At the same time, several approaches to managing by objectivesfollowing Druckers (1964) work established procedural principles for harmonizing organizational resources in the implementation of goal-seeking strategy (Odiorne, 1961; Morrisey, 1977; Giegold, 1978). Borrowing from McGregors (1960) notion, 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. As academicians grew more interested in business planning and strategy, they focused research inquiries on the efficacy of alternative planning procedures. A virtual tidal wave of research into technical page_12 Page 13 planning practices followed. Some results of that research are summarized in a subsequent section of this chapter. However, illustrations include the initial study of its kind by Ansoff et al. (1970), which contrasted acquisition results of companies that had highly developed planning functions to those of companies that did not. When acquisitions were conducted to implement formal strategies in comprehensive plans, financial results were superior to those of firms in which acquisitions were not guided by comprehensive plans. At the same time, Thune and House (1970) reported results of a smaller but statistically more rigorous analysis: they found that planners in some industries outperformed nonplanners. Another groundbreaking research report was that of Rumelt in 1974, which focused on relationships between growth strategy, corporate structure, and financial performance. Firms that diversified into related lines of business out-performed firms that diversified into unrelated lines, as well as those that did not diversify at all. 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. For instance, the PIMS (profit impact of marketing strategy) studies, begun in 1960 at General Electric (Schoeffler et al., 1974; Buzzell and Gale, 1987), demonstrated

statistically that rates of return can be maximized in certain competitive circumstances by selecting specific approaches to marketing, new product development, quality management, advertising, and promotion that are best matched to the firms market position. For firms with multiple divisions, portfolio techniques to prioritize alternative investments in divisions were devised (Hedley, 1977; Robinson, Hitchens and Wade, 1978). By far the most influential of the modern competitive strategy theorists has been Michael Porter (1980, 1985b), who demonstrated the importance of understanding the structure of a firms industrial environment as a prerequisite to selecting competitive strategy. Approaches to the formulation of goals and strategy continue to emerge. For instance, a stream of research and methodology initiated by Rappaport (1981, 1986) and manifested in the methodological texts of Stewart (1990) and Copeland et al. (1994) has focused on the goal of maximum shareholder value. The merit of strategy, according to this view, should be judged by its economic value added to shareholders wealth (Stewart, 1990). On the other hand, Hamel and Prahalad (1994) argued that management must develop more ambitious and future-oriented strategies to improve their competitive market positions, based on the deliberate, sustained development of core competences to compete in emerging industries and markets. One manifestation of the emergence of generally accepted planning principles was a steady stream of management handbooks containing page_13 Page 14 comprehensive summaries of business planning principles. The first of those texts was Druckers The Practice of Management (1954). As noted earlier, Melville Branchs text (1962) also was a landmark. Ansoffs Corporate Strategy followed in 1965. Unquestionably, the most comprehensive methodological treatment of comprehensive planning principles to date was Steiners (1969a) three-volume work, Top Management Planning (updated in 1979 under a slightly different title). Steiners survey of pitfalls in planning (1972) isolated a variety of procedural reasons for lack of success from planning procedures. Whereas Steiners approach was from the practicing professionals point of view, the text by Schendel and Hofer (1979) was a landmark in the academic community. That text contained material developed from fourteen research papers delivered at a conference held at the University of Pittsburgh in May 1977, where nearly a hundred academicians addressed the subject matter of strategic management to be covered by graduate curricula on business policy and strategy. Several editions of the text by Thompson and Strickland (1978) followed; this was widely regarded as a landmark model for current college texts on strategic management. Ansoffs Strategic Management (1979) followed in the next year and his earlier paper (Ansoff, 1972) initially defined the term, strategic management. in Since 1980, there have been no significant new attempts to codify the body of knowledge regarding CBP principles and practices, although a few anthologies have been produced from time to time (for example: Allio and Pennington, 1979; Andrews, 1983; King and Cleland, 1987; Fredrickson, 1990) and new college texts on strategic management continue to appear regularly. Thus, by the early 1980s, a broad body of knowledge regarding methods and procedures for comprehensive commercial planning had been accumulated and, as such, represented generally accepted planning principles. Perhaps these principles, which existed in planning handbooks such as those summarized earlier (and a host of unmentioned others), were not yet as definitive or fully developed as generally accepted principles in more mature professional disciplines, such as accounting. But, taken as a whole, the theoretical literature and results of empirical research required for general acceptance of planning methodology were being accumulated rapidly. As turbulence of the economic environment increased in the 1970s and 1980s, fundamental concepts of planning nevertheless remained essentially unchanged; objectives still were static rather than dynamic. However, because there might be many contingencies, and plans complexity had grown as the structures of industrial enterprises grew more complex, it became increasingly difficult to perform all of the computations and record-keeping tasks involved in forming, mainpage_14 Page 15 taining, and monitoring plans. Moreover, if objectives still were static, environmental dynamism kept increasing. The replanning function became ever more important, and the importance of computers increased accordingly. By the late 1970s, computerized approaches to selecting from alternative goals and strategies, quantifying objectives, and monitoring progress began to be developed (Gershefski, 1969a,b; Naylor, 1977; Ackoff, 1981; Ansoff, 1986). But, in the 1970s and 1980s, the development of electronic planning aids still lagged the acceleration of business conditions turbulence. The result was an inability of classic planning models to keep up with the pace of change. Plans frequently became outdated soon after they were drafted. Consequently, in the early 1980s, the evolution of CBP principles suffered a severe setback and a decade of suspension, until the 1990s when the state of planning technology finally caught up. Classic Methodology Breaks Down From the mid-1970s through the 1980s, the U.S. economy was shaken by the Vietnam War (19641973), the Arab Oil Crisis (19741975), a stock market crash (1987), collapse of the savings and loan industry (1991), and two deep recessions, in 1982 1983 and 19901991. Critics of business planning chided the planning professions inability to anticipate and deal with those crises. Eventually, it became fashionable to discredit commercial planning and professional planners for a host of sinsfrom 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 19811982 and afterward. The very mission of commercial planning itself became unclear; and many professional planners lost their identities, as well as their jobs. page_15 Page 16 EXHIBIT 1.2 Evolution of CBP Concepts in the Twentieth Century Emergence of Business Planning 1860 - Pennsylvania RR forms a planning office ca. - H. Fayol uses comprehensive business plans to manage French mining companies 1865 1903 - DuPont forms Corp. Development Dept. 1916 - H. Fayols mgt. principles include business plans; CBP procedures: 5-10 yr. planning horizon Evolution of the CBP Concept 1945 - WWII ends 1946 - P. Drucker: Concept of the Corporation 1954 - P. Drucker: first text to include CBP methods 1959 - IBM commences formal corporate planning 1959 - E. Penrose: resource based view 1962 - A. Chandler: Co-relationship of Strategy and Structure 1962 - M. Branch: 1st text on corporate planning methods 1965 - I. Ansoff: Corporate Strategy General acceptance of planning 1965 - G. Odiorne: Management by Objectives practices 1969 - G. Steiner: Top Management Planning 1969 - J. Argenti: Systematic Corporate Planning 1970 - R. Ackoff: deterministic methodology 1970 - Ansoff et al. and Thune and House: first research demonstrating financial impacts of CBP functions 1972 - Ansoff: the concept of strategic management Generally accepted CBP 1970- - Many other empirical studies of principles planning vs. financial performance mainly 81 confirm CBPs benefits 1974 - R. Rumelt: strategy, structure and performance 1979 - Schendel and Hofer: state of the art anthology 1980 - M. Porter: Competitive Strategy 1981 - Steep recession begins 1984 - B. Wernerfelt: resource-based view of competitive advantage page_16 Page 17 Immediately after the 19811982 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 gunslingersinvestment 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 enterprises long-term well-being, became financial mechanics in search of the quick buck. In the late 1980s, low-quality acquisitions and divestmentsand the financing vehicle that enabled them, the undisciplined issuance of junk bonds to effect LBOscame 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 - A. Rappaport: shareholder value as a primary goal Dark Ages of CBP 1981-90 - LBOs and junk bonds. Corporate planning becomes corporate development. 1982 - Corporate Strategists Under Fire Fortune, 12/27/82 1994 - Mintzberg: The Rise and Fall of Strategic Planning Renaissance of CBP 1994 - Hamel and Prahalad: competing for the future with strategic intent and core competences 1992 - Emergence of Strategic Planning Technology

page_17 Page 18 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 industrys 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 principlesdeliberate and rational, as beforebut 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. THE MODERN MISSION OF COMPREHENSIVE PLANNING In a political system of free enterprise, private businesses choose to perform economic missions that would be assigned to them by the state page_18 Page 19 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 Fortunes 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 managers 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 Disposition 1955 Fortune 500 Rank Last Year Allis Chalmers Chapter 11 65 1987 American Motors Acquired by Chrysler 81 1987 Braniff Airlines Chapter 11 1989 Cities Service Acquired by Southland 90 1983 Fruehauf Acquired by Terex Corp. 165 1989 Greyhound Chapter 11 ** Intl Silver Chapter 11* 436 ** Intl Harvester Chapter 11 23 1986 Jones and Laughlin Steel Assets bought by LTV 42 1968 Kaiser Steel Chapter 11 255 1988 National Steel Corp Partial sale to Nippon Kakon 54 1984 Pan Am Airlines Chapter 11 1991 Penn Central Chapter 11 ** Philco Acquired by Ford and EMI 90 1961 RCA Acquired by Sony 26 1989 Republic Steel Acquired by LTV 21 1984 Studebaker-Packard Failed 75 1963 Uniroyal Liquidated 1986 Wickes Chapter 11* 1981 Youngstown Sheet and Tube Assets bought by Lykes Corp. 55 1969 * after LBO failure ** reorganized successfully in a new form page_19

Page 20 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 survivors 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, survivalat least in free enterprise competitionusually 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 firms 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 managements 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 firms economic viability. However, generating earnings and cash flow is not the firms mission. The firms mission is to perform an economic function with distinctive competence, whereupon earnings and cash flow should provide fundpage_20 Page 21 ing for renewal of resources with which to continue the mission (Drucker, 1954:76, 77; 1973:114117). The purpose of comprehensive commercial planning is to increase the probability of an enterprises long-term survival by improving its economic viabilitythat is, by improving the likelihood of mission success. Through the planning discipline, management matches internal resources and competences to current and anticipated demand, or need, for its present or potential competences. Management attempts to anticipate future business conditions and adjust to them, seeking the firms greatest competitive and economic advantage in doing so. Essentially, then, the planning function is driven by external forces. But resources are the means of performing economic missions; and it is not possible to formulate a corporate strategy for success without a viable operating strategy and a correct marketing strategy. Management plans to do things, not just to form creative ideas. The payoff of superior returns is only for superior competences and their conversion into successful performance of the mission. One corollary to this statement is that strategic planning, as the practical application of strategic management theory, can have life-defining consequences for a firm. 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. During 19701983, comparisons of planners versus non-planners financial results generally (but not always) confirmed favorable financial concomitants of planning. Descriptive summaries of that research have been provided by Roney (1976), Armstrong (1982), Rhyne (1986), Huff and Reger (1987), Capon, (1987), Dess et al. (1990), and, most recently, Miller and Cardinal (1994). 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, Fish and Smith, 1941; Sypher, 1957). Companies with exceptional growth in sales and earnings during 19391949 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 19491956, they again were more likely to have had formal planning programs than firms in which growth slowed down. Other management practices, besides formal planning, were examined in this study; and no attempt was made to treat the CBP function separately as an independent variable for purposes of statistical analysis. page_21 Page 22 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. Studies by Thune and House (1970) and Ansoff et al. (1970) discovered that planners outperformed non-planners in terms of conventional financial performance measures, such as profit margins and rates of return. For the next several years, comparisons of planners versus nonplanners financial results generally confirmed favorable concomitants of planning (e.g., Herold, 1972; Fulmer and Rue, 1973; Karger and Malik, 1975; Wood and LaForge, 1979; Welch, 1984; Rhyne, 1985, 1986, 1987). Whereas the majority of this research tended to be focused on larger, publicly owned industrial firms (because their performance data are published), several studies of small firms also were encouraging (Robinson et al., 1984; Orpen, 1985; Bracker and Pearson, 1986; Bracker, Keats and Pearson, 1988; Baker, Adams and Davis, 1993). Pearce, Robbins and Robinson (1987)

found financial benefits of formal planning in small manufacturers. Bracker, 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, but net income was unaffected. (Small, privately owned firms realize their earnings in owners take-outs, not on their tax returns.) Baker, Adams and Davis (1993) found similar benefits among small fast-growth firms on the Inc. 500 list. Bracker and Pearson (1986) even found strong evidence that dry cleaners tend to benefit financially from comprehensive planning. Throughout the research on relationships between planning and performance, inter-industry differences have been evident (see Exhibit 1.4). Thune and House (1970) found beneficial effects of planning in the drug, chemical, and machinery industries but not in the oil, food, and steel industries. Karger and Malik (1975) apparently found positive relationships in the machinery, chemical/drug, and electronic industries, as did Herold (1972) in the drug and chemical industries, albeit far less rigorously. As mentioned earlier, Bracker, Keats and Pearson (1988) found beneficial financial concomitants of formal planning in small electronics companies. Fulmer and Rue (1973) found that durables manufacturers, but not nondurables manufacturers, benefited from formal planning. Service firms results actually seemed to suffer impairment from formal planning (although differences were not statistically significant). In that study, small manufacturers also benefited from planning more than larger manufacturers. Curiously, Thune and House (1970) also found an inverse correlation between size, planning, and performance. Among planners, the smallest firms benefited most from formal planpage_22 Page 23 EXHIBIT 1.4 Results of Planning- Performance Research in Specific Industries, 19701989 Dates of Industries in Which Industries in Which There Measure of Planning Planning Improved Was No Benefit Authors Sample Pub. Study Sales* Returns** Sales* Returns** Size Thune & 36 19701958- Drugs Drugs Food Oil Food Oil Discrete*** House 65 Chemicals Chemicals Steel Steel Machinery Machinery Herold 10 19721962- Drugs & Drugs & Discrete*** 69 Chemicals Chemicals Fulmer & 314 19731970 Durables Durables & Nondurables Discrete*** Rue 72 Mfrs. Nondurables Mfrs. Mfrs. Karger & 38 19751964- Machinery Machinery Discrete*** Malik 73 Electronics Electronics Chemicals Chemicals Drugs Drugs Klein 58 19751970- Sm. Banks Sm. Banks Composite Scale 74 Kallman & 298 19781965 Trucking Trucking Composite Scale Shapiro 74 Burt 14 19781974 Aus. Composite Scale 76 Retailers Wood & 41 19791972 Lg. Banks 3 Categories of CBP LaForge 76 development Sapp & 302 1981 1980 Banks Banks 4 levels of CBP Seiler development Robinson & 38 19831977 Sm. Banks Sm. Banks Discrete*** Pearce 79 Fredrickson 27 1984 1979 (Sawmills) (Saw mills) Composite scale of & Mitchell comprehensiveness unstable industry page_23 Page 24 Fredrickson Whitehead & Gup Gup & Whitehead Bracker & Pearson Bracker, Keats & Pearson Roney 38 1984 1981 Paint & Coatings Paint & Coatings Sm. Banks Lg. Banks Composite scale of comprehensivenessstable industry Sm. Banks Discrete*** (Lg. Banks) 4 categories of CBP development 3 categories of CBP development Composite scale &

253 1985 1983 253 1989 1983 188 1986 1977Dry 81 Cleaners 73 1988 1979Sm 84 Electcs Cos. 157 2001 1994- Metals

Dry Cleaners Sm Elect'cs Cos.

Metals Auto Parts Bldg Comps Bldg Comps

95

Construction Envir. Services

Machinery

Machinery

Discrete***

LEGEND: * Refers to growth of deposits in banks, revenues in all other industries. . ** Refers to both profit margins and rates of return. *** 2 categoriesplanners and non- planners ( ) Refers to industries in which planning impaired sales and/ or returns; in all others, there were no significant differences. page_24 Page 25 ning and the largest firms benefited least. But, among non-planners, size alone distinguished the best performers: the largest nonplanners did better than the smallest. Banking, perhaps more than any other single industry, has been a popular domain for researchers seeking to discover financial correlates of formal planning. This probably is because financial institutions are required by regulators to disclose their financial results to public agencies, thereby providing long histories of valid data. Wood and LaForge (1979) and Sapp and Seiler (1981) found financially beneficial impacts of planning in banks, but Klein (1975) and Robinson and Pearce (1983) did not. Nor did Whitehead and Gup (1985) in an extensive study for the Federal Reserve. Results have been mixed, at best, in that industry. It is important to acknowledge that not all planning-performance studies have found beneficial concomitants of planning on financial results. Recall that Fulmer and Rue (1973) actually found that service firms with formal planning underperformed other service firms. Fredrickson and Mitchell (1984) found that greater comprehensiveness of planning in the Sawmill Industry actually was accompanied by slower growth in sales and returns. Whitehead and Gup (1985) found that rates of return were lower in large banks that had strategic plans than in those that did not. Several studies of regulated industries such as trucking (Kallman and Shapiro, 1978) and banking (Klein and Linneman, 1981; Robinson and Pearce, 1983) have failed to confirm the planningperformance hypothesis. There are several ways to interpret the negative findings of such studies. One explanation is that planning complicates managerial functions and/or otherwise renders them less effective. Another is that underperformers employ planning efforts to correct deficiencies and improve results. Conversely, better performers dont need the remedial benefits of planning as much as underperformers, and may not practice planning as often as underperformers in some industries. 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 1.4). The latter method is now preferred. As time has passed since the initial planning-performance studies were done in the 1970s, acceptance of comprehensive planning has grown to a point where very few companies now admit to being non-planners. Therefore, simple comparisons on the basis of presence or absence of planning are becoming increasingly difficult. Using a scaling technique that measures the relative development of planning functions largely resolves issues that arise when non-planners are hard to find. Non-planners still can be compared to planners; scale ratings of the former are zero. But among planners, impacts page_25 Page 26 of practice variablessuch as experience in planning, frequency of review, and linkage of incentives to objectivescan be measured. 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, 1979; Pearce et al., 1987; Roney, 2001). Notwithstanding occasional disappointments in planning-performance research, a meta-analytic compilation of such studies was reported by Boyd in 1991. In this exhaustive analysis, results from nearly 2,500 companies were aggregated. Beneficial impacts of formal CBP practices were reflected in statistically significant differences between planners and non-planners revenue growth, growth in earnings, and rates of return on investment. A later meta-analytic study by Miller and Cardinal (1994) produced similar results. Moreover, statistical variance was reduced significantly by accounting for differences in research methods. Dess, Ireland and Hitt (1990) also demonstrated that industry effects can influence the outcome of such studies significantly. Thus, the preponderance of evidence from planning-performance studies has been positive, especially when industry differences and research methods are taken into account. In 1994 and 1995, our firm conducted what may be the most recent series of empirical studies on this question (Roney, 2001). Companies that practiced comprehensive business planning could incur either of two beneficial consequences depending upon industry, asset intensity, phase of the economic cycle, and several planning practice variables such as the plans term, board versus CEO approval of plans, and linkage of top management incentives to objectives achievement. In some industries, CBP functions enhanced firms relative market shares; in others, CBP functions enhanced firms financial performance in terms of both profit margins and rates of return. In all industries, 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. Thus, CBP functions may bestow a benefit of risk reduction, rather than enhancement of performance potential, per se. These two types of benefit may be labeled, respectively, affirmative, and protective (Roney, 1976). All firms that practice comprehensive planning do not necessarily enjoy either affirmative or protective benefits, however. In some industries, the above-mentioned research findings also seemed to demonstrate that CBP procedures actually have impeded firms performance. Recall that impedance effects previously had been found in service industries (Fulmer and Rue, 1973), sawmills (Fredrickson and Mitchell, 1984), and large banks (Gup and Whitehead, 1989). In our study (Roney, 2001), we found impedance effects in the machinery and building page_26

Page 27 components industries. But, impedance effects typically occurred as trade-offs: in industries where CBP enhanced market shares, financial results were compromised; in industries where CBP enhanced financial results, market shares declined. Impedance effects of comprehensive planning are confusing, at best, and perhaps alarming to executives in industries that may be susceptible to such effects. To deal with these problems, contingency theories may help to explain how some planning approaches (rather than others) are indicated in specific industries and business conditions (Hofer, 1975; Kukalis, 1991). Important contingency variables (among many others) include the industrys life-cycle stage (Hofer, 1975), industry stability (Fredrickson, 1984; Fredrickson and Mitchell, 1984), corporate structure (Miller and Friesen, 1980), and industry turbulence (Miller and Cardinal, 1994). In any event, new planning methods that work better are needed in industries and circumstances where CBP functions have not proven to be financially beneficial. Taken as a whole, the findings of planning-performance research to date have been encouraging. They also present a major methodological challenge to both academicians and the commercial planning profession. Planning principles tend to be practiced uniformly between industries. 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. While it is intuitively logical that efficacy of the planning disciplineand approaches to maximizing its benefitsshould vary sharply between industries, that reality is not yet reflected in generally accepted planning principles. 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, that is the implication that one gets from reading standard strategic management texts. To the contrary, our research findings (Roney, 2001) strongly suggest that alignment of methods to industries (and even companies) special circumstances is a prerequisite for the success of comprehensive planning. CONCLUSIONS Comprehensive planning actually has been practiced for centuries. Twenty-five centuries ago (400 B.C.450 B.C.), leaders of Greek city-states and Chinese generals were formulating formal plans and strategies to accomplish military objectives. Henri Fayol (1916) used formal business planning methods, similar to those in practice today, to manage French mining companies beginning somewhere around 1865, when Americas Civil War was ending. But, comprehensive commercial planning, in its page_27 Page 28 present form, probably did not obtain general recognition in the United States until around 1955. Subsequently, planning methods were refined to a point where generally accepted principles of planning emerged in the early 1970s. The purpose of modern commercial planning is to increase the probability of a firms survival in free enterprise competition by improving its economic viability. There is a large body of empirical evidence to support the validity of that mission. Research demonstrates that in many (but not all) industries, formalized comprehensive planning functions are accompanied by enhancements of financial and/or competitive performance. However, uncontrollable conditions of economies, industries, and markets grew increasingly complex and volatile in the 1970s and 1980s, making business conditions so turbulent that classic planning methods evidential and administrative requirements became prohibitively burdensome. With the recessions of 1974 and 19811982, business literature challenged the efficacy of formal planning. After 1982, classic planning practices became much less common and planning departments often were disbanded. Many corporate planning departments were converted into corporate development departments, which were re-tasked to assist top management in searching for and effecting acquisitions, divestments, and mergers. When a wave of highly leveraged acquisition/divestment transactions collapsed at the end of the 1980s, a vacuum was left: generally accepted planning principles either no longer were relevant to current business circumstances or had been largely forgotten. Fortunately, 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. Consequently, a renaissance of neoclassical planning methodology seems to have begun. In the 1990s, interest in classical business planning practices, aided by information technology, was revived. In part, 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, strategizing as it goes (Mintzberg, 1994a). Peters and Waterman (1982) called this management by walking around. Popular business theorists have promoted various other strategic nostrums. But in their more sober moments, most senior managers realize that such undisciplined methods do not provide a satisfactory way to run any business. It is fortunate that, throughout the 1980s and 1990s, academic research into the efficacy of strategic management and planning functions continued, notwithstanding relative silence of the business planning profession during those years. Indeed, a large body of empirical evidence and theory that may guide planning managers in selecting methods and page_28 Page 29 procedures appropriate for the specific circumstances of their firms continued to accumulate during those two decades. The result is a rich body of methodological knowledge. The remainder of this volume contains a condensation and application of that methodology. A summary of the generally accepted planning principles discussed in this chapter follows. GENERALLY ACCEPTED PLANNING PRINCIPLES: BASIC CONCEPTS Axioms Axiom1.01Comprehensive commercial planning (CP) is a management discipline, indigenous to modern business administration. It evolved, as firms grew in size and complexity, in response to simultaneous requirements for firms managers to integrate specialized functions, adapt to a dynamic external environment, and anticipate needs for future changes in those requirements.

Axiom1.02The purpose of CP is to discover how a firms resources should be deployed in future environments so as to maximize its competence to perform a stated mission for society and, thereby, its long-term survival. Postulates Postulate1.01The classic model of comprehensive business planning (CBP) is essentially rational, syllogistic, and evidential. It seeks evidence regarding internal capabilities of the firm and its external environment. Then, goals are selected to define success in performance of the firms mission, and strategy is defined as an approach to attain goals supported by a rationale for selecting the approach. Finally, strategy is elaborated for implementation as deliberate, intentional, objective-seeking work. page_29 Page 30 Postulate 1.02 Due to its insistence on evidence and syllogismand the dynamism of business information in turbulent economic environmentsthe classic model can be administratively impractical because of the limited amount of external information that a firm can attain, process, and interpret. Postulate 1.03 Business planning decisions are made partly to develop and deploy internal resources in pursuit of competitive advantage and maximum economic return. Postulate 1.04 Business planning decisions are made partly in pursuit of favorable positions in economies, industries, and markets where the firm is or may be located. Those environments change continuously, however. Corollary1.041A realistic range of potential significant changes in the environment (contingencies) can be described. Alternative strategies can be defined for each contingency. Corollary1.042As the number and complexity of contingencies increase, so do the number and complexity of possible contingent strategies. Corollary1.043As the number of contingent strategies increases, a threshold of administrative infeasibility is approached. Corollary1.044The threshold of CP administrative infeasibility is a function of the firms information technology and its administrative management abilities. Hypotheses Hypothesis1.01Comprehensive business planning (CBP) can exert any of three impacts on revenue, market share, profit margins, and return on investment: Performance enhancement in stable or expanding markets page_30 Page 31 Resistance to industry/market downturns or recessions (risk reduction) Performance impedance in either of the above conditions Hypothesis1.02Firms tendencies to realize enhancement, risk reduction, or impedance impacts of CBP functions are contingent upon the following internal, firm-specific variables: Firm size Financial condition/resources The firms relative level of asset-intensity Management experience in planning functions The level of senior management involvement in planning functions Hypothesis1.03Firms tendencies to realize performance enhancement (affirmative), risk reduction (protective), or impedance impacts of CBP functions are contingent upon the following variables in the external environment: The industrys economic structure Relative stability of the industry and its markets Relative uncertainty of the firms industry and markets Complexity of the firms industry and market structures Phase of the economic cycle (expansive or recessive) Hypothesis1.04Firms tendencies to realize performance enhancement or impedance effects of CBP functions are contingent upon variables in their planning practices, including: Approval authority: Board or CEO Planning horizon Frequency of review Linkage of incentives to objectives The use of information technology page_31 Page 32 Hypothesis1.05Affirmative benefits of CBP functions are most likely to occur in the most asset-intensive industries, i.e., those in which asset values are relatively high in proportion to revenues. Hypothesis1.06Affirmative benefits of CBP functions are most likely to occur in stable (versus unstable) industries and markets. Hypothesis1.07Protective benefits of CBP functions are most likely to occur in intensely cyclical industries and markets characterized by the greatest uncertainty. Hypothesis1.08Impedance effects of CBP functions are most likely to occur in industries and markets with unstable (versus stable)

structures. Hypothesis1.09Negligible impacts of CBP functions on financial performance are most likely to occur in highly regulated industries. Hypothesis1.10In a given industry, firms that employ information technology to perform planning functions will exhibit more persistence (lower termination rate) and greater effectiveness (attainment of objectives) in CP functions. page_32 Page 33 2 The Planning Process This chapter has two objectives: to explain some basic concepts of comprehensive commercial planning and to describe a threestage procedural model in which those concepts are applied. Both objectives are critical because they will reappear throughout the following chapters. The notion of comprehensive commercial planning is addressed first. Commercial planninglike planning done in the public sector by government agencies or military organizations, for exampleattempts to discover how all of the firms capabilities and resources can be deployed within the foreseeable external environment, so that the firms mission is conducted with a high likelihood of success. After describing the basic concepts of comprehensive planning conceptually, the discussion will take a more practical perspective by explaining how evidence is gathered, selections of goals and strategies are made, and implementation procedures are prescribed in a typical planning process. BASIC CONCEPTS OF COMPREHENSIVE PLANNING In this volume, the term comprehensive planning refers to a systematic procedure for selecting goals and strategies that define, respectively, standards for the future success of a business or corporation and the deliberate pursuit of those standards through objective-seeking work. page_33 Page 34 Comprehensive planning (CP) for an enterprise may be conducted at either of two levels: comprehensive corporate planning (CCP) or comprehensive business planning (CBP). As their names suggest, the formers scope includes all units in a multi-business enterprise, while the latters scope includes just one business or a single-business enterprise. This volume addresses the methodologies of both CCP and CBP. But, greatest emphasis is placed on CBP principles because, even in a multi-business enterprise, which has unique planning requirements, each business within the enterprise must form and implement plans effectively for the entire enterprise to realize its highest performance potential. Both CCP and CBP are conducted in three basic stages, which are described in the second half of this chapter. Assumption of a Pre-existing Mission Both CCP and CBP methodology presuppose that the firms management has selected a mission before these procedures begin. Mission refers to the economic function that a firms management chooses to perform for society. A mission may be redefined after any of the three procedural sequences has been completed; but that is not typically the case. When management selects a firms mission, it enters into a sort of social contract to deliver certain benefits to stakeholders in exchange for a license to exist. 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. CP procedures provide an effective means of greatly enhancing the likelihood of this contracts fulfillment and renewal. Three-Stage Process Model Comprehensive planning is a system of ongoing managerial procedures, which include three types of activities: Gathering evidenceAcquisition and interpretation of the evidence regarding internal capabilities of the enterprise and external business conditions needed to make planning decisions; Decision makingSelecting from alternative mission success standards (goals) and approaches for pursuing them (strategy); and ImplementationDefining instrumental action projects or programs, monitoring their progress, responding to departures of results from intentions, and performing all three elements of this procedure continuously. All of these procedural elements are necessary to perform comprehensive planning, but none is sufficient by itself. Each element will be explained further in the second part of this chapter. page_34 Page 35 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. Thus, CBP is not limited to the analysis of a firms individual operating strengths and weaknesses, financial analysis, market or industry analysis, forecasting, goal setting, resource allocation, budgeting, or project management. Rather, the planning concepts and methods found in this book embrace all of those techniques. It is a system of interrelated methods and procedures that deal with the whole enterpriseall of its resources and all of their functionsto predefine the firms highest performance potential in its economic, industry, and marketing environment. The terms planning and strategy have been defined very differently by various authors. For instance, Chandler (1962:13) and Andrews (1971:28) used the term, strategy to include an enterprises fundamental goals as well as its approach to their accomplishmentessentially, the entire scope of what we refer to as planning here. On the other hand, Mintzberg (1994b,c) describes planning as a process primarily of scheduling work after the more creative process of forming strategy has been

accomplished. Mintzbergs concept has a much narrower scope than the comprehensive methodology in this volume. Much closer to the concepts in this volume are those articulated by Drucker (1954, 1964, 1973), Ansoff (1965, 1988), Steiner (1969a, 1979), Argenti (1969, 1974), Hofer and Schendel (1978), 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, the firms performance capabilities, available resources, and likely consequences of deliberate actions chosen rationally from alternatives. Although reasonable persons have differed, over the years, regarding the scope and content of strategic planning, the position taken here is most compatible with the group of authors just mentioned, that is, that commercial planning is a comprehensive, systematic, and perpetual process. It cannot be performed effectively on a once-a-year or piecemeal basis. Rather, adjustments must be made to any part of a plan as and when changing circumstances require. For this reason, CP should be an integral element of a firms management style. Comprehensive Planning Is Neither Long-Range nor Strategic Planning A sound plan is founded on a solid understanding of the firms present capabilities, as much as it is on an appraisal of future requirepage_35 Page 36 ments. Comprehensive planning is not long-range planning. Indeed, a plan for the future is not feasible if it cannot be implemented in the present. The often heard assertion that there is a fundamental difference between long-range and short-range (or operational) planning simply is not logical. Instead, these are two extremes of a procedural continuum. To be useful, longer range strategies must provide managers with guidance for current action. Conversely, operating plans for the near term must be consistent with longer term strategy and objectives. A sound plan consists of both short-term and extended elements: both must exist in the same strategy without contradiction. One does not leave off where the other begins: rather, each provides a different perspective on the timing of strategy and the relative immediacy of consistent objectives. It also has been argued that long-range planning entails a relatively simple extension of current strategy into the future. In that argument, strategy formulation is distinguished from planning as a much more creative pursuit. Planning, then, essentially amounts to work programming, or scheduling (Mintzberg, 1994b). Only when a strategy already exists, it is argued, can planners prepare programs for long- or short-range implementation. This concept of strategy places it primarily in a realm of abstract rationale, without the necessity or benefit of justification by intended outcomes or goals, let alone operational validationan impractical proposition that most experienced senior managers surely would reject. Such a dichotomous view of strategy and planning is not generally accepted (Ansoff, 1984, 1988, 1991, 1994; Hofer and Schendel, 1978). The term strategic planning is not a very helpful one, either. Although it is used widely, the term is redundant. Strategy formulation is one very important element of the CP discipline, but certainly no more important than the others. Comprehensive planning requires management to evaluate internal and environmental business conditions, to select from alternative goals and strategies, to decide how strategy best can be implemented, and to perform these functions continuously. This is hard work; there are no shortcuts. Strategic insight in the abstract, no matter how brilliant, does not satisfy any standard for good planning or a good plan. Strategy must be appropriate for prevailing and potential business conditions, as well as for an enterprises goals and capabilities. Reliable implementation of strategy also must be feasible. When business conditions change, strategy must change. Perpetual replanning is essential, because no plan remains viable for very long. Indeed, any single plan of business that is not modified from time to time and implemented long enough probably will lead to a firms eventual failure, simply because internal and external business conditions change continually. page_36 Page 37 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. In either case, the key word is comprehensive. 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. Since then, however, terms such as strategic management, strategic planning, longrange planning, business planning, and corporate planning have been used more frequently. As none of their definitions is universally accepted, Steiners more descriptive term has been adopted in this volume. This confusion over semantics often complicates discourse on planning topics, as demonstrated in the previous section, when differences in the term strategy were discussed. Here it will be useful to define the term comprehensive planning more rigorously. One reason for misunderstanding such terms is our preference for visualizing concepts in only two dimensions. For example, consider Figure 2.1, which contrasts the depth of plans detail to the length of their terms. The shaded areas signify concepts that have no correspondence to actual practice or are simply invalid. For example, mission is a long-term concept; there is no shortterm element in its definition. A mission is a long-term social contract between the firm and its stakeholders, if not with the whole of society. Similarly, there is no such thing as a long-term budget: a budget should be the short-term representation of a longer term plan. While strategy (the work by which management intends to pursue objectives) tends to be longer term in its nature than implementation tactics, strategy often has short- and mid-term elements. We never think of tactics as occurring in the long term.

Figure 2.1 Comprehensive Planning: Length versus Depth page_37 Page 38

Figure 2.2 Comprehensive Planning: Height versus Depth Now consider Figure 2.2, which contrasts the depth of planning to the level (or height) in the organizations structure where planning takes place. Corporate and single business plans are prepared at all four levels of depth: the economic mission, strategy to achieve the missions goals, tactics to accomplish strategy and achieve its objectives, and budgets to control the current use of resources. We dont usually think of departments as having missions and strategy; rather, they are the vehicles by which tactics are implemented and resources are employed to enact tactics. Many people equate corporate planning to strategic planning and business planning to tactical planning or budgeting. Those persons are mistaken, as Figure 2.2 demonstrates. A single business, by itself or within a corporation consisting of several businesses, has a mission, strategy, tactics, and a budget. So does a multi-business corporation. (Later in this volume, we will consider the difficulties that arise when corporate and division missions conflict.) Now consider Figure 2.3, which contrasts the plans length to the organizational level at which it is prepared. At each level, plans terms extend from the current to long termswith one exception. We dont typically think of departments as preparing long-term plans. Rather, department plans must respond to corporate and business strategies that prescribe implementation by the various departments.

Figure 2.3 Comprehensive Planning: Height versus Length page_38 Page 39

Figure 2.4 Corporate and Business Planning: Length versus Depth Here again there are some misperceptions. Some people mistakenly equate corporate-level planning to the long term and many relegate business planning to the short term: each perception is wrong. In fact, corporate and business planning usually should be done for the same terms. Finally, let us put Figures 2.12.3 all together in three dimensions: length, depth, and height. The result is an odd-looking structure, indeed. The corporate and business levels each have a floor plan, as shown in Figures 2.4, 2.5, and 2.6. For graphic purposes, we will reverse the scale of organization levels: corporate plans will be on the lower, ground floor and departmental plans will be on the top floor. (The reason for this switch is graphic convenience.) The top floorwhere department plans resideis smaller than the floors where corporate and business plans reside, as Figures

2.5 and 2.6 disclose. That is because the scope of departments plans is more restricted than the others. Putting together a structure with all three floor plans results in the odd-shaped edifice depicted in Figure 2.6. With a semantic structure this complex, its 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, comprehensive planning rather than more common but imperfect substitutes. However, one distinction must be made between comprehensive corporate planning (CCP) and comprehensive business planning (CBP). The two methodologies may be very different, as Part III of this volume demonstrates.

Figure 2.5 Departmental Planning: Length versus Depth page_39 Page 40 THE THREE-STAGE PLANNING PROCESS Before proceeding further, it will be helpful to define some more terms. As explained earlier, the process of comprehensive planning proceeds in three stages: assembling a foundation of evidence, making essential decisions, and defining the work required for deliberate, orderly implementation. Table 2.1 summarizes the elements of each stage. The following paragraphs explain these terms and stages in greater detail. Stage I. Gathering Evidence: Forming a Foundation for Decision Making Stage I includes two elements. The first element is an appraisal of competitive problems and opportunities in a firms external environment. Usually, the scope of such an appraisal includes relevant aspects of global, national, and/or local economies; structural characteristics of the companys industry (including the nature of competition, regulation, technology, etc.); and an assessment of demand for the companys products or services in relevant markets. None of theseeconomy, industry, or marketis within managements control; but management still can understand their impacts on the firms performance potential and prepare for foreseeable changes in them. Also in this first phase, management conducts a critical analysis of the firms capabilities, including its physical and intellectual resources in each internal function, and forms conclusions regarding competitive

Figure 2.6 Comprehensive Planning: Three-Dimensional View page_40 Page 41 TABLE 2.1 The Comprehensive Planning Process: Three Stages, Six Elements Stage I. Assemble a Decision-Making Foundation INTERNAL: Diagnoses of firm competences, resources, competitive EXTERNAL: Diagnoses of problems and opportunities in the strengths, and weaknesses. present and foreseeable economy, industry, and markets. Stage II. Make Essential Planning Decisions GOALS: Predefined descriptions of success: level of risk, financial STRATEGY: Managements approach to achieving goals and results, market position, and long-term growth. rationale for selection from alternatives; contingency planning. Stage III. Deliberate, Orderly Implementation PROGRAMS OR PROJECTS: Statements of intended action to CONTROLS: Monitoring and assessment of progress implement strategy, including responsibility assignments, schedules, toward strategic objectives and programs completion; costs, and benefits. perpetural replanning. strengths and weaknesses. Only elements of the business under managements control and only those that are relevant to competitive success or failure are included in such an analysis. In essence, we are interested here in taking an inventory of competences and limitations that might influence the firms competitive position favorably or unfavorably and managements ability to implement strategy effectively. (The second volume in this series will be devoted to the methodology of meeting evidential requirements in strategic planning.) Stage II. Making Decisions

In Stage II, management selects from alternative goals and strategies. Goals are pre-defined descriptions of commercial success for an enterprise. Such definitions fall into four broad categories: level of risk, financial results, competitive position, and long-term growth. Strategy is managements general approach to accomplishing its goalsthe scope of work required and a rationale for selecting the approach to be taken rather than alternatives. (The third volume in this series is devoted to the methodology of strategic decision making.) The interdependence of goals and strategy is essential. Goals are the intended end results of strategy. Strategy includes all of the work that management should perform to achieve goals. This work usually appears in clusters of interrelated activities. Such clusters of goal-oriented activities often derive their interrelationships from common association page_41 Page 42 with vital functions of an enterprisesuch as marketing, a line of business, operations, or administration. We call those activity clusters, and the rationale for their selection, marketing strategies, product strategies, operating strategies, or, generically, functional strategies. We call the end objectives of those clusters strategic objectives. The intended result of any individual activity or program is simply an objective. These concepts are depicted graphically in Figure 2.7. Of course, the model depicted in Figure 2.7 is entirely hypothetical and describes the structural elements of a plan only at a particular point in time. 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, as progress is made and new goals or strategic objectives later are cast over an ever-extending horizon.

Figure 2.7 Strategic Planning Nomenclature page_42 Page 43 Stage III. Implementation Stage III consists of devising and executing procedures to implement managements strategy in a deliberate and controlled manner. Strategy is divided into tasks of work, which are assigned to individual managers. In addition, the pursuit of objectives is monitored closely enough for departures from planned progress to be detected as early as possible and corrected when necessary, thereby maximizing the probability of objectives achievement, as planned. In this way, management continuously exerts influence on the outcome of planned activity. Like the first two phases, the third has two separate elements. The first element includes formulation of ongoing programs (with no specified endpoints) or projects (with specific endpoints). In either case, the responsibilities of individual organization members to supervise or conduct planned work should be defined; schedules of activities accomplishment should be developed; and cost/benefit estimates should be prepared when possible. Ideally, cost/benefit estimates are converted into more detailed budgets for at least the current year. Defined in this manner, action programs and projects give management an ability to guide the organization deliberately toward its strategic objectives. If progress departs from the intended schedule or results deviate from the budget, discovery of significant variances should occur quickly enough to make adjustments while there is still time to influence the outcome. Adjustments in response to departures from planned progress may be required, even if variances are favorable. But, especially if variances are unfavorable, adjustments may be needed even beyond the program or project under consideration, because ripple effects of variances can occur. An entire strategy may have to be changed when program variances are severe. Occasionally, even goals must be amended simply because a vital project or program fails to proceed as expected, demonstrating that strategic objectivesand therefore goalsare infeasible. The second element of implementation includes traditional progress reporting and assessment. Within the context of business

planning, controls should be focused on objectives rather than financial statement accounts. Whatever tracking device management may choose, it is important that the most significant causes and effects be monitored. Typically, this means that progress should be tracked by sources of profitlines of business, management responsibility, marketing region, manufacturing category, and the like. Beyond the usual financial reporting measures, progress should be assessed in terms of long-term value drivers such as quality, market participation, and strength of internal resources in comparison to competitors. Good progress assessment also page_43 Page 44 monitors actual, versus expected, outcomes of strategic action programs and projects. Although perpetual monitoring of external business conditions is a Stage I function, a Stage III function is to assess those conditions trends and potentials, as well as their consistency or inconsistency, with the prevailing plans assumptions. This control function provides an especially valuable early warning system, which can trigger replanning efforts in time to take effective action. Such efforts may entail substituting a previously prepared strategy better suited to emerging business conditions than the prevailing but inappropriate strategy. Preparing new strategies for possible alternative futures is commonly called contingency planning (Roney, 2003); this important function will be discussed in a later chapter. CONTENTS OF A COMPREHENSIVE PLAN While many comprehensive business plans are elaborate and lengthy, they need not be. To be complete, however, a sound plan must contain the following three elements. Business conditions assessment: External: analyses of trends in and forecasts of the firms relevant economy, industry conditions, and markets for its products or services; Internal: assessments of critical capabilitiesfunctional competences and competitive strengths and weaknesses Planning decisions: Goals: intended levels of financial and competitive risk, financial results, competitive position, and long-term growth; 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 Replanning methods and procedures All these items are results of the three-stage process described previously. Thus, planning documents should provide a model of the process. An executive summary of the entire plan is nearly mandatory as well, because most plans contain a detail that may distract executives from the plans primary theme. COMMERCIAL PLANS MANY USES The most common use of comprehensive business plansand the one to which we will refer most in this volumeis as a decisionmaking page_44 Page 45 guide regarding allocation of valuable resources in pursuit of strategic objectives during the conduct of intended managerial functions throughout a firm. However, the number of usesand usersof plans is larger than most observers might suppose: Corporate plans are reviewed, approved, and even formulated, with increasing frequency, by boards of directors, who repeatedly are reminded of their governance duties to oversee corporate strategy, if not strategic management functions themselves, as the stockholders agents. Corporate-level plans also are developed to facilitate the rational allocation of resources among operating business units, to focus managerial attention at all levels on corporate goals, to concentrate the organizations efforts on achieving objectives, and to choose rationally from alternative actions in implementing corporatelevel strategy through operating units. Business plans of divisions and subsidiaries and of jointly owned enterprises are employed, and demanded, by corporate management as means of both reducing investment risk and maximizing potential returns. Business plans are required by most banks and lending institutions before large investments in new and/or continuing enterprises are considered. This common practice attests to lenders perception of business planning, and business plans as effective vehicles for reducing risk. Business plans are prepared in bankruptcy cases reorganization proceedings. As elements of reorganization plans and disclosure statements to creditors, business plans help to clarify the relative feasibility of achieving financial goals by fulfilling obligations to creditors. The need for sound plans and skillful planners is pervasive and growing. Boards of directors, chief executives, chief operating officers, general managers, individual business owners, lending officers, and even bankruptcy judges must make decisions involving large amounts of capital in conditions of increasing commercial complexity and uncertainty. Comprehensive business planning typically is viewed by all of those persons as one means of increasing a firms performance potential while controlling its risk. SUMMARY Comprehensive plans have three essential ingredients: evidence regarding internal and external business conditions upon which to predpage_45

Page 46 icate planning decisions; planning decisions themselves, including predefined descriptions of success (goals) and managements approach to achieving success, along with a rationale for selecting the approach to be taken rather than alternatives (strategy); and, finally, a deliberate, orderly approach to implementing strategy through clearly described actions with assigned management responsibilities, schedules, costs, and benefits as well as a procedure to monitor progress toward objectives and initiate replanning efforts when they are needed. Comprehensive planning (CP) is an integrative discipline by which all of the firms resources are focused on achieving objectives. As CP also is adaptive to the firms external environment, it must be performed continually because environmental conditions change perpetually. A summary of definitions and generally accepted planning principles discussed in this chapter follows. DEFINITIONS Definition2.010Comprehensive A systematic procedure for selecting goals and strategies that predefine the future success Commercial Planning of an enterprise and for making current decisions to implement strategies deliberately (CP) though predefined, goal-oriented work. Definition2.020Comprehensive Business CP principles and procedures for individual business units within multi-business Planning (CBP) enterprises (MBE) or for single-unit enterprises in their entirety. Definition2.030Comprehensive CP principles and procedures applied at the corporate level of a multi-business enterprise Corporate Planning (MBE). (CCP) Definition2.040Goal A predefined description of commercial success for an entire enterprise (MBE or single business). page_46 Page 47 Definition2.050Strategy An approach, that includes the directed, coordinated work required to pursue one or more goals, supported by a rationale for selecting the approach to be taken. Definition2.051Instrumental Activity A single task required to implement a portion of a strategy. Definition2.052Objective The intended result of an instrumental activity. Definition2.053Functional Strategy A collection of instrumental activities that share common association with a specified function of the enterprise, such as production, distribution, sales, or research. Definition2.060Strategic Objective The intended result of a functional strategy. Corollary2.061 Goals are the ultimate objectives of a firms entire strategy. Definition2.070Comprehensive A documented result of the CP process, including a firms goals, strategy, and Commercial Plan implementation elements, supported by evidence from internal and external business conditions assessments. Definition2.081Implementation Project A collection of interrelated instrumental activities with an ultimate chronological objective. Definition2.082Implementation A collection of interrelated instrumental activities with no ultimate chronological objective. Program page_47 Page 48 Definition2.090Contingency Predefining alternative strategies to replace a prevailing strategy if and when business conditions Planning (internal or external) render the prevailing strategy less appropriate than a contingent strategy. GENERALLY ACCEPTED PLANNING PRINCIPLES: PURPOSES AND POSSIBILITIES OF PLANNING Axioms Axiom2.01The firms mission, in free enterprise, 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. An informal contract between the firm and society is renewable as long as the firm meets the contracts performance requirements. Axiom2.02The CP process includes assembly of relevant decision-making information, selection of intended success standards (goals) and approaches to goals accomplishment (strategies), definitions of deliberate actions to implement strategies, and perpetual reiterations of this process. Axiom2.03CP treats the firm as a whole entity in which individual functions are vitally interrelatednecessary but not, by themselves, sufficient elements of the firm or its plan. Axiom2.04CP principles are unique to the private sector. Planning principles that are appropriate in government organizations (civilian or military) and government-owned enterprises are not necessarily applicable in the private sector, and vice versa. Postulates Postulate2.01Comprehensive commercial planning (CP) increases the probability of a firms survival by effectively matching internal resources and com page_48 Page 49 Postulate 2.02 Over time, goals degenerate into strategic objectives, strategic objectives into simpler objectives. Eventually, all objectives are replaced by others. This perpetual degeneration and renewal of goals and objectives continues for the

life of a firm. Postulate 2.03 The CP process is focused on making decisions, based on evidence, regarding standards of success (goals), approaches to reaching goals (strategy), and actions to implement strategy (projects and programs). Because CP is a rational process, it employs objective evidence wherever that is possible. The evidence considered describes a firms internal capabilities and resources as well as its external environmentin both the present and the likely future. Postulate 2.04 The CP process can occur at two levels: planning for single businesses (CBP) and for entire corporations (CCP) within which multiple business units exist. Corollary2.041CBP (comprehensive business planning) goals include acceptable levels of risk, financial return, market position, and long-term growth for a single business. Corollary2.042CCP (comprehensive corporate planning) goals include acceptable levels of risk, financial return, and long-term growth of shareholders equity in a portfolio of business investments. Postulate 2.05 There is no assurance of consistency between CCP and CBP goals. page_49 Page 50 This page intentionally left blank. page_50 Page 51 3 The Classic Approach The Classic Approach It was acknowledged in the previous chapter that theorists have differed fundamentally in their most basic, conceptual notions of planning and strategy. Classic concepts that evolved over many years perceive the planning process as essentially deductive in nature. They begin with general premises regarding the firms economic mission. Next, they consider evidence regarding internal resources and environmental conditions. Based on the firms mission and the evidence that is assembled, decisions are made to select goals, strategy, strategic objectives, and implementation actions. That is primarily the approach that readers will find in this text. However, fundamental differences do exist, especially with respect to basic approaches that can be taken in strategic decision making; and some alternatives are discussed in the first section of this chapter. In the second section, the classic process model of comprehensive planning will be described in greater detail and some illustrations of classical models will be surveyed. TWO VIEWS OF STRATEGIC DECISION MAKING A debate has existed within the planning literature, over the years, regarding deterministic versus incremental approaches to selecting goals and strategy. The deterministic approach seeks a single, best decision within the context of imperfectly known business conditions at any given time. Incrementalists argue that there really cannot be a page_51 Page 52 best selection because business organizations are prohibitively complex and dynamicand because political constraints complicate nearly every business planning decision of importance. In this view, goals and strategies typically are selected in a process of logical incrementalism (Quinn, 1977), wherein objectives and strategies evolve over time as political and other opportunities to articulate them arise. The term strategy is used far differently by authors who espouse incremental theories than by those who follow deterministic models. Mintzberg (1994a) sees planning as occurring only after strategic decisions have been made, while the classic model sees strategy selection as occurring within the planning process, after goals and/or strategic objectives have been defined. According to most incrementalists, strategy usually is something that occurs intuitivelyspontaneously, insightfully, and opportunisticallybut neither deliberately nor necessarily rationally. Strategy formation is an essentially inductive process for the incrementalist. Conversely, the deterministic model is much more rational and deductive, taking account of internal capabilities, external opportunities (or problems), and alternative means of reconciling the two so as to accomplish a mission successfully. If widely used texts on strategic management (e.g., Miller, 1999; Thompson and Strickland, 2003; Hill and Jones, 2004) are a valid indication, the classic, deductive model is still generally accepted. The classic model does not require that deductive assessments of internal capabilities and external problems or opportunities be painstaking; and firms surely differ in the thoroughness with which these tasks are performed. But, success standards (goals) and approaches to pursuing them (strategy) are believed by the classicist more likely to represent a firms highest performance potential when they are selected rationally (i.e., based on a logical assessment of the evidence) and free from political influences than otherwise (Dean and Sharfman, 1996). Upon comparing the intrinsic philosophies of these two approaches to planning and strategy, the classical, deterministic model surely is more optimistic than the incremental model. The classic model assumes that, through deductive logic, it is possible for management to understand a firms business conditions and to influence the outcome of competition and/or the search for value. Through comprehensive planning, the classicist actually undertakes to create a favorable future scenario, which otherwise never might have occurred. The pure incrementalist is more fatalistic, taking fortune as it comes, willing to realize opportunities, one step at a time, without necessarily having any notion about where or when the next opportunity (or problem) will arise. The debate between deterministic and incremental approaches to strategy formulation may have been stimulated initially by the work of Cyert and March (1956), who argued that the traditional economic page_52

Page 53 notion of firms pursuing goals of maximum profit usually does not accurately describe real-life behavior. Instead, they argued for a concept of acceptable profit. According to more recent versions of this concept (Bourgeois, 1981, 1985), firms generate more or less slack in the form of retained earnings and other surplus resourcespermitting managers to negotiate selections from affordable alternative allocations of resources within a feasible solution space. What is optimal for one negotiator may not be so for another, but a firms surplus (slack) resources afford some latitude within which objectives that are acceptable to all negotiators may be found. The amount of a firms slack determines managements latitude in selecting acceptable strategic objectives, in this view. It is widely believed that concepts of slack and acceptable profit do provide an accurate description of managers strategic decision-making behavior. In budgeting, for instance, a host of political and technical factors influence managements selection of operating objectives, which rarely reflect optimal solutions on any single dimension. This is probably true of longer range planning decisions as well. 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. In an early attempt to formalize a model of planning, Friedmann (1967) argued that planning decisions are made in two principal modes, which he called adaptive and developmental. These two modes are at opposite extremes on an hypothetical continuum of autonomy (greatest and least, respectively). Adaptive planning is highly innovative, and unlikely to be incremental. Developmental planning responds less radically to shifts in the firms environmental circumstances. In the latter approach, allocation of resources to alternative uses (a basic function of strategy) employs functionally rational methods. But, when planning is adaptive according to Freidman, entirely new goals or strategic objectives may be discovered (see Figure 3.1). In developmental planning, options are limited by the specific business conditions to which management responds; rationality thereby is bounded. Friedmanns paper is seminal reading for the planning professional who wishes to understand the nature of planning decisions as a cognitive construct. In that paper, readers will find an abundance of critical concepts defined, including developmental versus adaptive planning modes, bounded versus non-bounded rationality, environmental determinants of planning decisions, determinants of planning effectiveness, the nature of innovation in planning, and the mechanism of control in page_53 Page 54

Source: J. Friedmann, Administrative Science Quarterly, September 1967. Figure 3.1 Conceptual Model for the Analysis of Planning Behavior implementation. Thirty-five years after their publication, Friedmanns conclusions regarding the structure and content of enterprise planning remain remarkably applicable. Carter (1971), elaborating on the model of Cyert and March (1956), proposed that strategy itself can stimulate search behavior, leading to new strategy, which then elicits new search behavior, and so on. Later, Burgelman (1983) referred to this as induced strategy. (Friedmann had dubbed such cognition substantially rational thought.) Based on an analysis of decisions made in a

growing high-technology firm, Carter formed several conclusions regarding the sometimes-spontaneous nature page_54 Page 55 of objectives and strategic decision making. He hypothesized that greater uncertainty of business conditions should lead to formulation of more detailed objectives, which serve as sign posts during implementation, permitting adjustment of implementation efforts and replanning along the way. Subsequent empirical research has demonstrated that Carters prescription for responding to uncertainty and complexity through more comprehensive planning, was correct (Grinyer et al., 1986; Kukalis, 1991). Surely, strategy is conceived both developmentallythat is, as part of a formal processand adaptivelythat is, spontaneously at different times in the same firm. When strategy is formed developmentally, planning decisions are most likely to be made deterministically. However, adaptive, spontaneous strategy making is most likely emitted outside of formal deliberation procedures; thus, it must occur mainly in the incremental mode (Figure 3.2). As experienced executives will confirm, most planningincluding strategy conceptionoccurs in formal procedures. That is simply the way corporations function from day to day. Indeed, if strategy always were to erupt spontaneously throughout an enterprise, the result would be chaos, at best. But some developmental procedures do, as Burgelmann (1983) observed, elicit spontaneous strategy as well. Similarly, some incremental approaches to planning and strategy conception make use of routines, as Quinn (1978) acknowledged. As the hypothetical rendering in Figure 3.2 suggests, most planning is done, and most strategy is formed, in a deterministic, developmental mode where objectives are selected and problems are solved in a deliberate manner.

Figure 3.2 How Is Strategy Conceived? (A Hypothetical Rendering) page_55 Page 56 Incrementalism Is Relative Quinn (1977, 1978, 1980a,b) articulated the concept of logical incrementalism, which formed a basis for subsequent debates on the nature of goal setting and strategy selection processes. He studied the strategic decision making behaviors of managers in ten large corporations over several years, ultimately publishing a series of three papers to express how, in his view, 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. He defined a series of incremental stages through which the CEO acts as an architect of organizational goals, including need sensing, building awareness, broadening political support, creating pockets of commitment, crystallizing focus, obtaining organizational commitment, and continuing this process as new goals evolve. A similar process exists, according to Quinn, in the evolution of strategy. By proceeding gradually in articulating goals and politically promoting their acceptance, CEOs seemed to create favorable political climates within which organizations could, and would, adopt the desired new goals. Quinn believed that goals first are articulated in general rather than specific terms, where possible, in order to avoid polarization of the management team for and against the proposed new goal. Gradually, the goals concept becomes crystallized by commitments to action, and management team cohesion is maintained, while strategy evolves. Even when major shifts occurred in business conditions, Quinn observed that organizations tended to react incrementally (for instance, when developing new lines of small cars in response to a Mideast fuel crisis) rather than abruptly. Thus, senior executives seemed to follow deliberately incremental processes leading ultimately to adoption of their preferred strategies. Those strategies might not have been accepted until the organization proceeded, step-wise, through CEO-guided stages of gathering information, developing alternatives, legitimizing new views, taking initial steps, gaining political support, proceeding though zones of indifference, the emergence of champions to take charge of new strategies implementation, and so on. Quinn believed that these stages of goal setting and strategy selection occurred in all ten companies he observed. Without any broader sample or statistical rigor, he concluded that logical incrementalism describes the way in which goals and strategy really are selected by successful chief executives. However, Quinn himself acknowledged that strategic decision making really is quite rational: the significance of his logical incrementalism concept is in the CEOs timing of implementation, rather than the logical process by which goal selections occur. page_56 Page 57 Mazzolini (1981) elaborated on the concept of strategic incrementalism. He argued that management is unable to obtain adequate

data with which to determine optimal goals. Instead, goals allegedly result from perpetual bargaining, but conflicts over goals selection never are fully resolved. Rather, variances between expected and observed results elicit unending searches for resolutions that provide new goals. Management takes any or all of three roles in developing strategy: initiating the process, shaping it, or deciding (usually through political means) on the objectives ultimately to be adopted. Unlike Quinn, Mazzolini opined that strategic selections occur in five classically rational stages: decision-need identification, search for alternatives, investigation of alternative actions, reviews and approvals, and implementation. The deterministic nature of strategy selection thus was affirmed. In Mazzolinis view, the goal/strategy selection process proceeds both continuously and incrementally. Burgelman (1983) provided a theoretical basis for further rationalizing the two basic views of strategy formulation (deterministic and incremental). Strategic activity, he argued, can be either elicited (induced) by strategy itself (to modify previous strategy) or emitted autonomously within the organization. Induced strategy easily can be elicited in a top-down fashion. But autonomous strategy usually is emitted in a bottom-up fashion, he argued. Both types can exist at once. Burgelman acknowledged that most strategic activity is induced (or elicited). Entrepreneurial activity within an organization (internal venturing) typically is emitted autonomously, however. Top management can influence autonomous strategy by framing its context and linking its products to existing strategic processes. Consequently, the potential degree of strategic autonomy can vary widely and may be cultivated, if not directed. Rational versus Political Strategic Decision Making: An Empirical Test Until very recently, these two views (deterministic and incremental) on the nature of strategy formulation and strategic decision making were largely untested by rigorous empirical investigation. However, Dean and Sharfman (1993a, 1993b, 1996) have developed a rigorous but pragmatic method for measuring both the effectiveness of strategic decisions (viz. the extent to which objectives were realized after decisions were made) and impacts of rational versus political decision making methods on strategic effectiveness. In a study of 24 industrial firms, it was found that when procedural rationality (i.e., the classically rational model) characterized decision-making processes, strategic effectiveness was enhanced. But political influences on strategic page_57 Page 58 decision making impaired effectiveness. Environmental munificence and quality of implementation were controlled statistically in this study; both of those factors also were positively related to decisions effectiveness, as should be expected. Contingencies The degree of formality or rationality with which planning should be pursued surely depends on a great many variables within the firm. For instance, 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. But when Fredrickson (1984) then studied 38 other firms in a stable industry, comprehensiveness and formality of planning were directly related to financial performance. Other theorists have observed that appropriate planning methodology differs between stages of an industrys life cycle (Allio and Pennington 1979; Hambrick and Lei, 1985). Many other planning contingencies, stemming from sources that are both endogenous and exogenous to the firm, will be discussed later in this volume. The point to be made here is that the planning managers challenge is to develop an approach that fits the firms specific needs and circumstances (Steiner, 1979:5379; Michael, 1980). This approach has been called the contingency view of strategic planning by Hofer (1975). Of course, actually diagnosing the method that is most appropriate for a given firm is more easily said than done. A Conceptual Resolution It really is not difficult to rationalize these opposing views of strategy formulationthat is, deterministic versus incremental, rational versus political, elicited versus emittedwithin a classical framework. The determinist argues simply that logical incrementalism well may define the autonomous cognitive processes by which goals and strategies evolve in their framers minds, over time. But, at any given moment, some collection of business conditionsincluding internal capabilities and external problems or opportunitiesis known by management. At that point in time, 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 firms highest performance potential. Failure to make such basic decisions probably would be viewed by many as dereliction of top managements duty (Lauenstein, 1986) becausewithout goals and strategya firm lacks essential direction and functional cohesion. As time passes, however, new approaches to objectives and new goals will evolveusually, incrementally. Thus, for the classipage_58 Page 59 cist, logical incrementalism adequately describes one of the principal ways in which goals, strategies, and objectives can evolve, but not the only way, nor even the best, necessarily. Management always has an option to take the initiative and elicit change on its own terms, rather than waiting for uncontrolled events to occur before responding. CLASSIC PLANNING MODELS As explained in the previous chapter, the classic and most generally accepted approach to business planning is deductive, proceeding in three stages. First, evidence describing the firms internal capabilities and external business conditions is gathered. Second, selections are made from alternative goals and strategies. Finally, strategy is broken into its instrumental activities and an ongoing process of progress monitoring, environmental scanning, and perpetual replanning is pursued. That general process is summarized graphically in Figure 3.3. This model and several variations are discussed in the following paragraphs.

Figure 3.3 The General Planning Model page_59 Page 60 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. However, in practice, planning activities really are much more complicated than Figure 3.3 suggests. 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. One of the first comprehensive process models was published by Gilmore and Brandenburg in 1962. Their model is provided in an appendix at the end of this volume as a series of five diagrams (Exhibits A.1aA.1e). It demonstrated that planning procedures can be defined in sufficient detail to provide guidelines for planning throughout a firm. The degree of intricacy in formulating an economic mission (Exhibit A.1a), competitive strategy (Exhibit A.1b), programs of action (Exhibit A.1c), and performing reappraisal functions (Exhibit A.1d) are quite obvious. Note, particularly in Exhibit A.1e, how functional contributions throughout the firm can be blended into a procedural whole. As complex as this model may seem, it actually is somewhat abbreviated, as it deals only with planning for a single business. Planning for structural changes such as acquisitions and divestments is omitted. This model thus neglects the common procedure of integrating more than one business in a more complex corporate structure. Nevertheless, Gilmore and Brandenburg did provide a process model for planning a single business that remains valid today. A year after Gilmore and Brandenburg published their model, Stanford Research Institute published a similar model (Stewart and Doscher, 1963), which did recognize diversifications, acquisitions, and divestments. Corporate-level and line-operating functions also were separated in that model. Ansoffs (1965, 1968) elaborate models also extended the scope of strategic management and planning into diversification, including acquisitions and even internationalization. Like Gilmore and Brandenburg (1962), Ansoff (1965) incorporated concepts of synergy, resource assessment, and competitive advantage in his models. A composite of several schematic drawings that appeared in Ansoffs first text, Corporate Strategy (1965), appears in Exhibit A.2 of the Appendix. Note that, in this model, objectives were defined before assessments of internal capabilities and the external environment were performed, thereby constraining the relevant scope of those assessments. In that one respect, Ansoffs original model is no longer generally accepted. However, in many other respects, Ansoff pioneered strategic management page_60 Page 61 methodology; indeed, he is widely credited with first defining the term strategic management (Ansoff, 1972). Smalter (1969) provided an especially pragmatic procedural model, which he used as a planning officer. His model divided planning into three stages of needs research, systems analysis, and programming. It is depicted in Exhibit A.3 of the Appendix. Smalters three phases correspond to the three phases of the general model depicted in Figure 3.1. Needs research entailed gathering evidence regarding internal capabilities, external problems, and opportunities. Systems analysis entailed selecting goals and strategy from alternatives. Programming included developing and scheduling action programs. Contrary to Ansoffs (1965) model, Smalters placed the definition of goals and objectives after assessments of internal capabilities and the external environmenta much more informative arrangement, which now is generally accepted. Smalters article also is important because it explained how, in one company, separate plans should be prepared for each line of business while another, comprehensive plan is prepared at the corporate level. In Smalters model, long-range and short-range planning are integrated. The pragmatism of Smalters approach to developing projects for implementation also is impressive. Managers who seek guidelines for developing a new plan of business for a multi-division corporation would do well to consider

Smalters approach, which, more than three decades later, remains valid and useful. Hargreaves (1969) provided another systematic, deductive approach to planning; it is portrayed in Figure 3.4. His sequence of six steps closely resembled current methodology. Hargreavers article is recommended reading because it defines each element quite neatly. Grinyer (1971) provided a comprehensive review of the principal process models for comprehensive business planning that had been published prior to 1971. In his own version, Grinyer emphasized the complex interrelationships of planning work products and dependencies of decisions at each stage of the process on those at other stages. Evolution of Decision Models Steiner (1969a,b, 1971, 1972a,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. Steiners models are essentially rational and define several management decision-making steps in the planning process. Exhibit A.4, in the Appendix, taken from Steiners text (1979:17), is perhaps the most succinct and complete of several versions that he published. Steiners model is important for several page_61 Page 62

Source: Reprinted from Long Range Planning, Vol. 1, No. 3, D. Hargreaves, Corporate Planning: A Chairmans Guide, p. 34. Copyright 1969, with permission from Elsevier Science. Figure 3.4 Corporate Planning Process Model reasons. First, it acknowledges that planning is a procedure requiring its own administrative plan-to-plan. Second, it acknowledges the interests of outside stake holdersa factor not included in prior models. Third, it demonstrates that mediumrange and short-range plans are interconnected by successive refinements from a master long-range plan to implementation elements. Finally, it indicates that information flows between individual elements of the model provide for continuous, pervasive feedback. Master strategies stimulate programs to be implemented over shorter terms, and themselves may be amended as a consequence of feedback from those programs results. Similarly, short-range plans may be amended in response to feedback from implementation. Thus, Steiners model is a heuristic one. His text (1979) also provided several diagrammatic representations of how planning procedures unfold at levels of top corporate page_62 Page 63 management and line operations. Similarly, roles of the corporate planning department and division planning staffs are portrayed in Steiners diagrammatic models. Ansoff (1965, 1988) offered the most systematic approach of the early methodologists. His approach recognized the complex nature of decision making when diversification, acquisitions, and divestments are included in the strategy-making process. Indeed, Ansoffs texts are full of detailed diagrams that define strategic decision making, they look very much like a computer programmers flow charts. Perhaps the latest refinement of classic decision models was provided by Grinyer (1971). Grinyers model is interesting because it portrays the previously described information gathering and processing steps, in both planning for business units operations and corporate level planning for expansion, diversification, and the like. It also includes a search for strategic resources and comparing the firms current financial potential to objectives in order to identify planning gaps. Earlier, Argenti (1969) had articulated this concept as the difference between objectives and a baseline or momentum forecast of financial results. By contrasting a baseline

projection with goals or objectives, management is able to calculate the amount of incremental improvement to be demanded of strategy (i.e., the strategic objective). This concept is illustrated in Figure 3.5, which is excerpted from Kami (1969).

Source: Reprinted from Long Range Planning, Vol. 1, No. 4, M. J. Kami, Gap Analysis: Key to Super Growth, p. 46. Copyright 1969, with permission from Elsevier Science. Figure 3.5 Incremental Improvement Concept page_63 Page 64 The Importance of Strategic Adaptation Since Gilmore and Brandenburg (1962) published their model, methodological differences in comprehensive planning models have been enormous. Equally impressive is the general lack of empirical research addressed to the relative merits of alternative planning system designs. However, Ramanujam et al. (1986) did demonstrate that such research is possible. They collected data from a sample of 93 companies. In those firms, 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. Planning procedures supported by the highest levels of staff resources also characterized firms with relatively high earnings and rates of return on investment. Rhynes (1985) study of information usage in planning led him to a similar conclusion. He found that systematic acquisition and usage of evidence enhanced effectiveness of the strategic planning process. These findings subsequently were confirmed by the extensive studies of Capon et al. (1988), which examined performance differences between firms that emphasized externally adaptive versus internally integrative planning methods (among several other procedural variables). Similar findings were obtained most recently by Dean and Sharfman (1993a,b, 1996). Feasibility of the Classic Model In the 1950s and 1960s, when the classic planning models and methods initially were developed, economic and market conditions were not as volatile as they became in the early 1980s and international competition was not as intense. Even then, however, those models called for the assimilation of information that, in large corporations, could become quite massive and administratively burdensome. Later, as the pace of economic, industry, and market changes accelerated, it became increasingly difficult to meet classic models evidential requirements because keeping plans current required burdensome administrative and technical efforts. Not only were continuous amendments to each operating business plan required, but those amendments impacts on corporate plans feasibility (and new alternatives) had to be evaluated, as well. The physical burden of all this information processing very frequently rendered classic procedures impractical. So, the classic models often were abandoned and/or their procedures were pared so dramatically as to render them ineffective. In a few companies, large mainframe computers did support on-line decision systems and dynamic planning methods (e.g., Gershefski, 1969a,b; Naylor, 1975). But most companies lacked such capabilities and page_64 Page 65 classic procedures fell into some disreputenot because they lacked fundamental logic, but because their information processing requirements were administratively slow, burdensome, and impractical. Today, those same requirements are neither too burdensome nor impractical, thanks to personal computers, data storage technology, data communications, and a wide variety of electronic planning aidsall of which may be characterized as Strategic Planning Technology (Roney, 2002). This new technology is discussed at greater length in the next chapter. In the 1960s, it was nearly impossible to monitor and perpetually update all of the variables that might be included in a comprehensive plan of businessincluding economic, industry, and market conditions, as well as operating conditions throughout the firmor to monitor more than a few action programs progress. In the 1970s, it became apparent that advances in information technology eventually would enable, if not compel, the evolution of much more dynamic, adaptive planning methodologies, consistent with the faster pace of change in a more complex, turbulent, and risk-laden world economy (Naylor, 1976a,b, 1977; Roney, 1977b). Indeed, by the early 1990s, 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. Now, all of the classic models inputs and planning products can be assembled and kept current with relative ease and at great speed. Consequently, the classic models today are no longer impractical. It is easy, now, to keep a plan up to date and replan as necessary. 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 twowith far greater accuracy, analytic quality, and comprehensiveness. 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. In the same fashion, market shifts can be monitored electronically, analyzed at headquarters, and communicated to line managers with modest administrative effort. Indeed, the whole plan can be stored in a computer and updated perpetually. The hard copy is available at any appropriate location for consideration by top management, on short notice. Hence, dynamic business planning, following the classic model, now is technically feasible, 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. CONCLUSION Comprehensive business planning may proceed both deterministically and incrementally, at the same time. Different combinations of emphasis page_65 Page 66 will be appropriate depending upon the firms unique circumstances. As Burgelman (1983) pointed out, combinations of relatively high or low levels of induced and autonomous planning activities exist in all firms; the combination selected surely influences managements style of strategy formation. A chief executive must choose the relative degree to which autonomous strategy formation from within the organization will be encouraged, and the extent to which strategy first will be determined in a more formalized way at the top. There is no correct answer here. As Mintzberg (1994b) has observed, and Fredrickson and Mitchell (1984) demonstrated, excessive planning formality can impede strategic effectiveness. On the other hand, as Quinn (1980b) observed (contrary to his own thesis in 1977), expeditious planning procedures occasionally are compelled by a need for immediate decisions and actions; in those cases, there is no time for logical incrementalism. Most firms planning approaches will be found somewhere between these two extremes. Moreover, the degree of autonomy, formality, and determinism in each firm is likely to fluctuate over time with its external conditions and internal capabilities. The chief executive must choose a firms essential approach to planning. If strategy evolves completely autonomously, the firm will be like a ship without a rudderwithout a stated purpose, lacking a clear course, and carried wherever the economic current takes it. However, if strategy is too strictly constrained by top management edicts, intellectual productivity will be stifled. The firm then may be unable to detect, let alone exploit, changing business conditions; and it may follow an outdated strategy for so long that it suffers serious misfortune. Therefore, before choosing from the procedural planning principles to be found in subsequent chapters of this volume, the chief executive and the planning manager should consider their fundamental options and decide exactly what the firms basic approach to strategic planning will be. Deterministic or incremental? Elicited or emitted? Rational or political? From this decision, all of a firms other planning methods will flow. Process and decision models, such as those depicted in the Appendix, 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, making planning decisions, and implementing strategy. To be effective, however, comprehensive business planning must be a continuous process. No plan can be left unchanged for long and remain valid. Any plan that is implemented long enough without change surely will lead to misfortune. With modern, electronic planning aids, this requirement is no longer prohibitive. page_66 Page 67 GENERALLY ACCEPTED PLANNING PRINCIPLES: PRINCIPLES OF CLASSIC PLANNING MODELS Definitions Definition3.01Adaptive planning methods are environmentally focused. While they do not deny the efficacy of resource-based methods, they are more concerned with positioning the firm advantageously to exploit opportunities and minimize problems in foreseeable economic, industry, and market conditions. Definition3.02Integrative planning methods are primarily resource based. They seek to develop capabilities and other resources that are so valuable, inimitable, and invulnerable to environmental uncertainty that they invest the firm with sustained competitive advantage in multiple environments. Postulates Postulate 3.01 The CP process is both integrative and adaptive: it draws analytic evidence from the enterprise and its external environment about the adequacy of internal capabilities, and then implements strategic decisions by developing new capabilities and deploying resources. Postulate 3.02 CP is essentially a rational process in which management attempts to achieve a favorable balance between the firms internal capabilities and its environment. Corollary3.02.1CP is a deterministic discipline. Management selects from alternative uses of resources and selects actions that it believes will maximize the likelihood of desired future outcomes. Corollary3.02.2Because business conditions within and outside the firm evolve continually, plans also must change continually. No plan will remain appropriate for a firms business conditions indefinitely. CP is therefore a continuous process of rational decisions to form and implement new strategy. Corollary3.02.3Because it responds to analytic evidence about problems and opportunities in an evolving ex page_67 Page 68 Postulate3.03Strategy induces search behavior as managers take action to implement strategy. In that process, entirely new concepts of goals and strategy may be discovered. Such selections of new goals and strategies to replace their prevailing counterparts should be made rationally, i.e., after a clarification of alternatives has occurred.

Hypotheses Hypothesis3.01Strategic planning processes that are the most adaptive will be found in firms that are commercially more successful than other firms. Hypothesis3.02Rational, deterministic approaches to strategy are more effective in improving performance potential than are political, intuitive, and/or incremental approaches. Hypothesis3.03To fulfill its missions of minimizing risk and maximizing performance potential, the CP process will differ between firms based on their intrinsic resources size, slack, uniqueness, and permanence, on one hand, and, on the other hand, economic, industry, and market conditions. page_68 Page 69 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. Following that discipline, rational selections could be made from alternative success standards and approaches to attaining them. The early strategic planning models of pioneers such as Ansoff (1965), Steiner (1969), Argenti (1969) and Ackoff (1970) were essentially syllogistic; and they were very systematic. They also perceived the nature of strategic planning to be both integrative and adaptive, 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. Thus, Steiner (1969) coined the term comprehensive planning. The classic planning model, portrayed by Figure 3.3, is procedurally straightforward. After considering evidence regarding internal capabilities (viz., resources strengths and weaknesses) and the external environment (viz., opportunities and threats in the economy, industry, and markets), managers make selections from alternative goals (success standards) and strategy (the approach to pursuing goals attainment and a rationale for its selection). Strategy then is broken into activities instrumental in achieving intermediate performance objectives, perpetual progress review and evaluation procedures are implemented; and replanning steps are taken as needed. page_69 Page 70 Although the classic model appears to be procedurally straightforward, it has been difficult to implement, because of administrative burdens and delays incurred in gathering evidence, making decisions collaboratively and keeping plans current. This chapter traces a fifty-year process in which information technology (IT) has facilitated the work of comprehensive planning so that, today, the classic model is fully feasible and much more practicalno longer impaired by informational impediments. 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. HISTORICAL PERSPECTIVE The rapid evolution of information technology is a constant source of amazement to professional managers, 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. Information technology radically has changed nearly all financial management functions; market analysis, research, and forecasting; production planning and materials management; engineering and other technical management functions; and the management of complex administrative systems. Those transformations often have been acknowledged for their fundamental impacts on managerial methodology. Less widely appreciated is the impact of IT on managers abilities to perform the work of comprehensive planning. Yet, information technology has had a fundamental impact on planning methodology at virtually all stages in the process. 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. Evolution of Information Technology Figure 4.1 provides a graphic summary of the information technology evolution that occurred after World War II, when computing systems first were developed. As that figure demonstrates, the evolution of electronic computers passed through five generations. The first, developmental generation occurred during 19431956. In that generation, each new computers design was fundamentally different from others designs. The architectures of internal devices for storing data and executing programmed instructions were unique to each new system. By 1956, a second generation of computing systems had begun; in this generation, designers developed architectures for the mass production page_70 Page 71

Source: Roney 2002. Figure 4.1 Condensed History of Planning Technology and commercial use of computer systems. Computer models such as the IBM 1401 gained widespread acceptance among larger corporations. Other mass-produced systems such as the IBM 650 and IBM 1620 models were used more often for scientific applications. Scientific and business software languages (primarily FORTRAN and COBOL) also were introduced during this second generation. The third generation of computing systems (19641974) was characterized by larger computers and the ability of computing machines to perform multiple processing tasks simultaneously. Examples included the IBM models 7090, 7094, System/360, and System/370. In a reversal of that trend, the fourth generation of computing equipment (19751985) was characterized by integrated circuits and semiconductors; the result was a drastic downsizing and cost reduction in computing systems, as mini, micro, and eventually personal computers were introduced. In the current, fifth generation, computer systems are becoming linked to other computer systems and storage devices in networks that share vast amounts of data and function, almost as if they were parts of a single organism. Paralleling the evolution of computing hardware, programming languages and system software evolved to facilitate the use of computers information processing capabilities. In the 1950s and 1960s, programming languages first enabled business and engineering computing page_71 Page 72 systems to be used by non-technicians. FORTRAN was developed in 1957 to facilitate the use of computers by engineers. COBOL and BASIC were introduced in 1959 and 1964, respectively, primarily for use in business applications. The application of large-scale computer systems to economic forecasting and mathematical processing was facilitated in 1977 by Oracles development of its database management system, DBMS. In 1979, the first spreadsheet software system, VisiCalc, became commercially available. Lotus 1-2-3 became available in 1983, providing several features designed largely for business planning applications. The more advanced Microsoft Excel was announced in 1987, and a version of Excel with several enhanced features was announced in 1992. As Figure 4.1 also demonstrates, ever-larger data storage and communication devices appeared continually during the past fifty years. While large-scale random access devices had been available for many years, storage of large data files and multimedia records, using devices such as compact discs, was not introduced commercially until 1985. Although wide-area communication networks, modems, and timesharing also have been available for a quarter century, the Internet became available for commercial use only in 1991 (Abbate, 1999). The Internet greatly facilitated data communications and, thereby, collaborative approaches to strategic planning. Early Systems Models of Strategic Planning The classic strategic planning methodologists often included elaborate flow charts in their publications. These flow charts probably reflected the authors relationships with technology-oriented enterprises and major corporations that recently had gained access to large-scale computers. This was Igor Ansoffs background, for instance. Ansoff was a pioneer in developing classic strategicplanning methodology. After receiving his Ph.D. degree in applied mathematics from Brown University in 1948, Dr. Ansoff joined RAND Corporation. He went to Lockheed Aircraft Corporation in 1956 and became vice president for planning and programs. Later, he was vice president and general manager of the Industrial Technology Division at the Lockheed Electronics Company. In 1963, Ansoffs academic career began at Carnegie Mellon. Subsequently, he went to Vanderbilt, the Stockholm School of Economics, the European Institute for Advanced Studies in Management, and U.S. International University (Hussey, 1999). While he was at RAND and Lockheed, Ansoff must have been impressed by the arrival, rapid development, and potential planning benefits of computer systems that were being installed in those institutions at the time. In this light, it is not surprising that flow charts are used abundantly as illustrations of page_72 Page 73 strategic planning processes throughout his writings (Ansoff, 1988), as well as those of other early methodologists such as Gilmore and Brandenburg (1962), Hargreaves (1969), Smalter (1969), and Steiner (1969b).

In a few large corporations, mainframe computers were used in the 1960s and 1970s successfully to support integrated decision support systems and strategic planning models (Gershefski 1969a,b; Naylor, 1975). But, most companies lacked the ability and/or willingness to commit the necessary resources. Even with the benefit of mainframe computers, many large corporationsand most smaller oneswere unable to follow the classic syllogistic model of strategic planning and keep up with the rapidly changing pace of business. By the time a strategic plan was completed, it already could be out of date! Classic procedures also often were rejected, because firms simply could not afford them. Thus, executives judged formal planning to be more costly than the benefits it was thought to provide, even though evidence was, and still is, accumulating to demonstrate that planners tended to have better financial results than non-planners. (See Armstrong, 1982; Boyd, 1991; Huff and Reger, 1987; Miller and Cardinal, 1994; Roney, 2001.) The classic models were largely abandonednot because they were conceptually wrong, 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, 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. More specifically, the information technology impediments that planning managers had to overcome primarily were as follows: Physical separation of planners from information processing resources. Planning managers (like others) were dependent on data processing departments and data processing specialists to process their information in batches, 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. Restrictive programming requirements. Although programming languages were growing more flexible and user-friendly (e.g., P/L-1 and RPG), considerable technical training was required to write page_73 Page 74 application programs that could be compiled on mainframe computers. While programming languages such as BASIC and FORTRAN subsequently could be compiled on some small computers and, later, personal computers, planning managers typically were not trained in the use of programming languages, which made them dependent on computer programmers for access to the benefits of electronic computing and the benefits of electronic planning aids. Inconvenient data storage and access. Essential sources of data, often voluminous in nature, still had to be retrieved, analyzed, and synthesized before they could be employed in strategic planning applications such as computations of economic, industry, and market forecasts. (Similar shortcomings existed in data storage and retrieval technology that could be applied to internal operating functions such as process control, materials requirements planning, and production planning, albeit to a lesser extent). Data retrieval and transmission impediments. Diversified organizations could use telephone lines and slow modems to transmit some information between computers at remote locations (if they could bear the costs). But available technology limitations prohibited most companies from easily exchanging plans, projects, and progress reports on a flexible, perpetual basismaking their planning managers dependent on off-line data transmission devices such as facsimile machines, courier services, and even the postal service. These four impediments to comprehensive commercial planning imposed by prior IT generations typically prohibited management from clarifying a complete range of strategic alternatives, implementing strategy effectively, and replanning as often as necessary. 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, 1969b; Naylor, 1976b). However, those early models were narrowly focused on the firms financial statements, and they were not very flexible. Large econometric models also were developed for environmental forecasting applications in the mid-1970s. Without large-scale data storage and transmission devices, however, environmental assessment and forecasting systems could not be utilized by the majority of planning professionals or effectively integrated into their firms strategic planning procedures. In the 1960s and 1970s, planning managers could do some simulation and calculate objectives using complex mathematical algorithms and page_74 Page 75 programming languages such as SIMSCRIPT or GPSS. They also could assemble detailed budgets. 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. Computer-assisted budgeting systems, in the early generations of planning software, simply employed accounting codes and computing machines to develop pro forma financial statements. That kind of planning fell far short of the comprehensive evaluation of alternatives, perpetual assessment of progress, and analyses of variances that characterize the state of the art today. Information technology began to support exploration and clarification of alternatives when computers with user interfaces, flexible I/O channels, and high processing speeds became available to the majority of companies, rather than to just a few very large ones. This concept change occurred gradually, with the introduction of remote computer timesharing around 1970, the IBM PC in 1981, 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 they propelled the planning art toward its current state. Even after the arrival of personal computers, however, managers still needed access to large quantities of data where vital planning resources resided. 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. All of these data classes have grown exponentially with the continued progress of computing technology. Storage technology has been hard pressed to keep up with the demand. Random access storage devices were commercially available as early as 1956. But it wasnt until the introduction of high-density CD-ROM discs in 1984, high-density flexible disks in 1989, cartridge drives in 1994, and storage area networks very recently that small and mediumsized businesses could gain access, on an affordable basis, to large-scale data resources where vital sources of information about the economy, industries, and marketing conditions reside. Software developments typically paralleled developments in hardware and data storage. Thus, Oracles database management system, DBMS, was announced in 1977; VisiCalc was announced in 1979 (before the personal computer); Lotus 1-2-3 was announced in 1983; Microsoft Excel was announced in 1987; the first Internet browser was announced in 1991; and the first Internet browser with a graphical user interface was released in 1993. All of those developments made it possible to page_75 Page 76 exploit the full potential of computer hardware and data storage devices that were being developed at the same time. A final brick in the foundation of strategic planning technology was modern data communication. By 1987, high-speed modems had provided the technology for wide area data communication networks to be operated on a restricted basis between designated network terminals. With commercial inauguration of the Internet and the World Wide Web in 1991, wide area networking, distributed computing, and virtual storage all became available even to smaller businesses. Strategically significant data residing in one location now can be retrieved on demand for immediate processing at another location, thereby relieving users from custodial burdens of large-scale data storage at the local level. In the early 1990s, the classic model of strategic planning, as a rational, perpetual approach to decision making, finally became technologically feasible. A sort of critical mass was reached when all four of the necessary piecescomputers, software, data storage devices, and data communication systemsfell into place. Each was necessary, but none was sufficient by itself for the complex work of classic strategic planning to become practically feasible. It was the combination of all four evolutionary developments that enabled comprehensive strategic planning technology (SPT) to emerge (Figure 4.2). 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, 1982; Molloy and Schwenk, 1995; Stamen, 1990). Nevertheless, tangible results for practitioners have been abundant. The following paragraphs summarize these results in functional terms.

Source: Roney 2002. Figure 4.2 Strategic Planning Technology: Sources page_76 Page 77 Several types of electronic planning aids will be described later, in the next section of this chapter. Affordable personal computing. Small, 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. PC-based software products with a remarkable array of sophisticated features enable planning managers to assess trends and potential changes in the external environment, internal operating functions, and performance measures. Low-cost data storage devices permit planners to gather large quantities of diagnostic information; 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. Assessment of the external business environment. Large files of demographic, economic, industry, 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. Forecasting software has enabled economists to form models of entire economies, individual industries, and specific markets. Comprehensive analysis. Large-scale databases and statistical software have enabled analysts to discover a wide range of corelationships between a multitude of variables in the firms external and internal environments. Based on those relationships, alternative scenarios of outcomes from a broad range of strategic decisions can be explored and selections can be made therefrom. Variances between actual versus expected environmental phenomena and the firms performance can than be monitored and assessed. These large databases and elegant analytic software finally have enabled managers to bring the full scope of relevant evidence to bear on planning decisions. (See Ashmore, 1989; Bidgoli and Attaran, 1988; Holloway and Pearce, 1982; Reimann, 1988; Stamen, 1990.) They also have enabled planners to formulate models of economic value added to firms by managers strategic decisions (Rappaport, 1986; Reimann, 1989a; Stewart, 1991). More effective strategy implementation. The models of shareholder value mentioned earlier aid managers in allocating corporate resources to business elements where returns are likely to be highest. Then, projects to implement strategies are formulated,

evaluated, and monitored with the aid of electronic data communication systems. Strategy now can be page_77 Page 78 realized with greater reliability than could have been attained before data communication, data storage, and spreadsheet systems were combined into modern project management and control systems. Operating units throughout large corporations can share information with each other and their corporate headquarters in minutes rather than days or weeks. Business alliances of multiple corporations regularly are formed to share data between suppliers, distributors, and end-users through a multitude of electronic data interchanges all along the value chain. Rapid feedback, response, and adaptability. As business conditions change in the economy, industry, or markets where a firm competes, and as marketing results are realized, they too can be communicated from many locations to executive managers at corporate and individual business locations (Huseman and Miles, 1988). Plans can then be modified heuristically. Thus, it is no longer true that plans must be outdated as soon as they are completed, because they can be kept continuously current. Wide area telecommunication networks, including the Internet and the World Wide Web, have enabled diversified corporations with multiple divisionseven those operating in several countriesto gather plans and progress reports from remote locations and to consolidate them as they are received. No longer must planning managers wait for days or weeks until such materials arrive through the mailand even longer for corporate-level consolidations of division data to be completed. These tasks are now accomplished in hours or even minutes. Before such information technology aids were available, weeks would be required to accomplish similar results, at levels of accuracy and comprehension far below those which now can be achieved. Similarly, the same data communication devices enable managers throughout a corporation to resolve uncertainties, coordinate their planning decisions, and achieve cohesive, effective implementation. Better re-planning. 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, 1977b; Tyson, 1998). Until the advent of modern electronic planning aids, however, 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. Today, that criticism no longer is valid. With the aid of data transmission technology, classic planning methods can and do keep up with changes in the environment very well. Conclusion Perhaps without realizing how far Strategic Planning Technology has progressed, planning managers today have rediscovered the feasibility page_78 Page 79 and power of classical strategic planning models. By finally enabling classic methods to be implemented effectively, information technology renewed the promise of classic strategic planning models first proposed by pioneers such as Ackoff (1964, 1981), Ansoff (1965), and Steiner (1969a). Today, firms routinely employ modern, dynamic versions of the classic strategic planning model, exploiting a host of electronic planning aids. That neoclassicism represents strategic plannings state of the art hasnt been generally acknowledged; nevertheless, that surely is the case. CURRENT SCOPE OF STRATEGIC PLANNING TECHNOLOGY Strategic planning technology (SPT) applications now are available to managers in nearly all enterprises, regardless of their size. Most of these electronic planning aids are relatively inexpensive. Thus, the new determinant of a firms strategic planning capability is not how much computing machinery it can afford but, rather, the ingenuity and proficiency of those who employ SPT applications. The scope of electronic planning aids now used to facilitate strategic planning may be divided into ten types. The following paragraphs describe and illustrate each type of SPT application. They are listed in approximately the same sequence in which they first would be invoked within a classic planning procedure. Databases Business planners often need to assess trends in environmental drivers of commercial problems and opportunities. Such drivers will be found in all three domains of the business environment: economy, industry, and market. For a comprehensive explanation of how these domains are assessed in strategic planning procedures, readers may consult the authors text on that subject (Roney, 1999). Large files of data describing trends in each of those domains are available. For example, demographic databases include age, income, and geographic densities of populations throughout the world. Many databases containing economic and demographic variables are provided, free of charge, by the U.S. government. These large databases now can be retrieved across the Internet with ease. Quasi-public agencies including not-for-profit industry associations also maintain large collections of data describing most industriesespecially those that are relatively mature, such as construction, steel, chemicals, and forest products. In addition, numerous privately owned databases are offered commercially; these can be page_79 Page 80 used to assess individual companies as well as entire industries and markets. Well-known vendors of economic and industry data include Standard & Poors, Value Line, and DRI-WEFA. Data from other sources have been compiled into portable compact discs. For example, lists of nearly every manufacturing facility in every state, including employment and a variety of other characteristics, now can be purchased relatively inexpensively from Manufacturers News, Inc., or Dun and Bradstreet Corporation. D&B data also are available online; Manufacturers News data are only on compact discs. Similarly, 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, Inc.

Benchmarking and Competitive Intelligence Systems For several years, strategic management methodologists have understood the importance of identifying industries critical success factors as focal points for environmental assessment (Leidecker and Bruno, 1984, 1987). Moreover, with the increasing prominence of resource-based theories of competitive advantage, 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. CSFs may be unique to each industry and often must be identified through applications of theory or empirical research. Once such factors are identified, electronic planning aids can be very helpful in evaluating a firms competitive standing in its industry, using CSFs as benchmarks. Benchmarking systems enable the management of one firm to measure its performance against others. These comparisons may be made on the basis of operating characteristics such as employee productivity, manufacturing capacity utilization, product quality, operating practices, or unit costs. 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. Comparisons also may be made on the basis of financial performance measures; of course, these are the most common. Financial reporting services such as Standard & Poors and Value Line can be used for such benchmarking applications. Rigbys (2001) recent survey of 214 North American firms concluded that benchmarking procedures are among the most widely used (76.2%) formal planning techniques and that practitioners are relatively satisfied with their results. page_80 Page 81 One large database that contains long-term financial performance and operating characteristics of more than 3,000 business units is PIMS (Profit Impact of Marketing Strategy), operated by the Strategic Planning Institute (SPI). PIMS is somewhat of a misnomer, since the database includes non-marketing variables describing asset intensity, relative quality, R&D expenditures, and vertical integration, as well as marketing variables such as advertising expenditures. In fact, more than twenty-five strategic drivers of performance are included among the independent variables evaluated by PIMS linear regression models. Users of the PIMS database can identify potential impacts of changes in those driver variables on typical rates of return. PIMS users also can receive par reports that compare them to strategically similar firms in the same industries. (Regrettably, SPI no longer updates the PIMS data base which, therefore, is becoming less relevant to current business conditions as time passes.) In recent years, a new category of systems has begun to emerge for purposes of gathering competitive intelligence. Competitive intelligence systems are, necessarily, secretive, and it therefore is difficult to evaluate the state of their evolution. However, it is generally recognized that competitive intelligence systems now provide significant inputs to strategic planning decisions of many large corporations. (See Jones, 1988; Fuld, 1991; Ettorre, 1995; Crock et al., 1996; Kahaner, 1996.) The Society of Competitive Intelligence Professionals (SCIP) (Alexandria, Virginia) has been formed to promote the development of this growing profession. Market Analysis and Forecasting Systems By its nature, planning is forward looking. Thus, forecasting methods and procedures are among the most basic in any planning managers repertoire. Fortunately, forecasting system developers have been prolific throughout the evolution of planning technology. An incredibly wide variety of forecasting systems now exists; their prices range from nothing to about $10,000. About half cost less than $500. Uses of forecasting systems and procedures in strategic planning have been described by the author in a separate text (Roney, 1999). Demographic projection devices are perhaps the most readily available of all forecasting systemsand the most reliable. By definition, 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). Somewhat less precisely, forecasts of population in metropolitan areas also can be measured and prepared with reasonable confidence. Online databases can be used to obtain numerous other demographic trends page_81 Page 82 and forecasts for specific purposes. Many of these are maintained by the U.S. government, and accessible at little or no cost to the user. The U.S. Census Bureau even maintains demographic trend and forecast data for several foreign countries. Statistical descriptions of many nations highway systems and various other infrastructure characteristics also can be obtained using data maintained by the U.S. Central Intelligence Agency. Statistics Canada, an agency of the Canadian government, maintains comprehensive demographic and economic information for that country, its provinces, and metropolitan markets. In addition, commercial forecasting and marketing research services such as MapInfo Corporation, Environmental Systems Research Institute, DRI-WEFA, and NPA Data Services also offer demographic forecasts for many countries and precisely defined U.S. metropolitan areas. Such forecasts are particularly useful to suppliers of consumer products, transportation services, banks, retail chains, construction contractors, and other firms in any industry where marketing opportunities are location dependent. Econometric forecasting models are now widely available. The Bureau of Labor Statistics (BLS) publishes long-range demographic and econometric forecasts biannually, every other November. Manylike the BLS forecastare even obtainable at little or no cost from public agencies, universities, and private financial institutions. For another example, excellent forecasts and analyses may be obtained across the Internet from financial institutions such as Wachovia Securities Economics Group. Economic forecasts even can be produced by planning managers themselves, using commercially available forecasting software and the economic databases mentioned earlier. A particularly encouraging development in recent years has been the refinement of input-output models that achieve structural links between econometric models and individual industry supply chains. 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, defense, travel, or banking. Input-output tables allow analysts to assess such interactions. Conversely, a change in domestic or international capacity to produce crude oil, chemicals, or some other basic commodity will have differing ramifications in other industries; and they, in total, will have an impact on the overall economy. Input-output (I/O) models enable analysts to assess such inter-industry dependencies and industry-specific relationships to general economic conditions. Econometric models are available from commercial economics firms; and basic input-output tables can be obtained from the Commerce Departments Bureau of Economic Analysis (BEA). Whereas the BEA updates its I/O tables very infrequently, economic consulting firms are more likely to update their tables regularly. page_82 Page 83 Electronic Spreadsheets Prior to the availability of electronic spreadsheets, large numbers of accountants often were required just to consolidate business units forecasts and budgets. Changing budgets or financial forecasts after they had been consolidated was frowned upon simply because so much work was involved. 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. Now, consolidations are accomplished with relative ease, sometimes in minutes. Most planning professionals are quite familiar with electronic spreadsheets. But, it is noteworthy that spreadsheets basic characteristics have been improved dramatically in successive generations. The current version of Excel, a highly popular spreadsheet software system offered by Microsoft, provides a sort of planners toolkitincluding simultaneous solutions of equations in a simplex format, linear regression, and curve fitting, as well as a host of graphic aids that facilitate not only objective setting but assessment of a firms progress in pursuit of its objectives. Financial Analysis and Forecasting Systems Using the power of enhanced electronic spreadsheets, computing systems have been developed to perform every conceivable financial analysis and forecasting function. These systems perform all of the calculations required to budget and analyze the financial performance of individual firms and complex corporations. Budget Maestro may be the most highly developed of these systems, presently; and its authors were assembling an enhanced version of that successful system as this manuscript was being drafted. Budget Express is a similar product. Financial models have been constructed for at least thirty years to emulate the firms financial statements and project them according to the individual analysts forecasting parameters regarding costs, selling prices, working capital turnover, asset productivity, mix of capitalization, and the like. Among such pre-programmed financial forecasting products are Ultimate Financial Forecaster, Strategic Focus, Cash Focus, Pro Forma for Professionals and Winforecast. Systems such as @Risk also enable the analyst to establish the realistic range of outcomes through Monte Carlo simulation techniques. However, for straightforward financial statement projections, 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. page_83 Page 84 Recently, financial analysis and forecasting systems have been developed to aid planners in assessing strategic alternatives impacts on shareholder value. These systems, such as Alcar for Windows, Finanseer, and the software included with a text by Copeland et al. (2000) employ discounted cash flows for measuring the present value of forecasted future earnings. They make critical assumptions regarding anticipated growth rates and post-projection valuation parameters, which subject them to serious criticisms of external validity. Nevertheless, because these models tend to be used by stock market analysts, they often have the characteristics of self-fulfilling prophecies. Since stock market analysts use these models to evaluate companies for purposes of equity valuation, corporate executives can influence shareholders equity values by employing the same models that stock analysts employ in their own planning. 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. The best-known of such graphic devices are the growth-share matrix first used by the Boston Consulting Group (Hedley, 1976, 1977), the directional policy matrix (Hofer, 1977), the life-cycle market position matrix (Robinson et al., 1978), Porters (1980) industry mapping technique, gap charts such as the one shown in Figure 3.5, and innumerable other graphic devices that communicate concepts of competitive advantage and market positioning strategies. Several electronic graphic aids now are available to aid planners in communicating these strategic analysis concepts. Perhaps the most effective of these software devices are offered by British firms: Market Modeling, Ltd. (Matrix) and Strategic Dynamics, Ltd. (Gensight), although the latter is available only to that firms clients. 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. Graphing functions in Microsoft Excel are especially useful for portraying industry matrices and maps, as well as in monitoring a firms progress in the pursuit of its objectives. Since the data to be graphed usually are immediately accessible from these spreadsheet systems tables, their graphics functions are especially convenient. Strategic Decision Systems Earlier in this section, the PIMS system was discussed as a benchmarking device. In addition, PIMS has been used as a strategic decision page_84 Page 85 support system (DSS) because it enables managers to identify operating changes and investment decisions that may enhance

financial performance. Comprehensive DSSs, including PIMS, have attracted increasing attention in recent years because they are believed to offer the promise of enhancing the speed, comprehension, and quality of decision processes (Bidgoli and Attaran, 1988; Holloway and Pearce, 1982; Orsini, 1986; Stamen, 1990). However, empirical evidence on DSS results so far has been somewhat mixed. Aldag and Power (1986) found no improvement in students abilities to solve business cases with DSS assistance, in a laboratory study. But, Goslar, Green and Hughes (1986) found that their sample of 72 marketing executives from 19 companies who received DSS training considered larger numbers of alternatives. Alavi and Joachimsthaler (1992) subsequently found success rates to improve 20 percent to 30 percent with users greater familiarity, training, and experience in DSS use. In the most recent study of its kind, Molloy and Schwenk (1995) found that DSS effects did not include better performance. However, better decision-making processes were manifested by more rapid problem definition, higher quality of evidence, consideration of more alternatives, shorter decision times, and more comprehensive approaches. Over time, better decision-making processes should be followed by better decision outcomes. Perhaps DSS techniques most frequent application, in recent years, has been to support selections of strategies aimed at maximizing shareholder value using discounted cash flow models (Reimann, 1988), as mentioned earlier. But, increasing attention also is being directed to the potential uses of non-quantitative DSS methods. In particular, a great deal of attention has been directed to translating the knowledge of experts, or established strategic management theory, into decision rules. These expert systems or knowledge-based systems purport to enhance decision makers logic in selecting from strategic alternatives. Examples of such cognitive logic DSSs include AliahThink!, ANSPLAN-A, Best Choice, Business Insight Crystal Ball, Expert Choice, and PathMaker 3.0. Case histories of such systems have begun to appear in the strategy literature as well as in the marketplace (Ashmore, 1989; Dennis et al., 1990; Leonard-Barton, 1987; Leonard-Barton and Sviokla, 1988; Orsini, 1986). Documentation Aids A rather unique form of business planning system has become available to small business managers in recent years. In essence, these systems include templates and guidelines for preparing and documenting complete business plans. Their word-processing modules are used page_85 Page 86 to produce complete drafts of planning documents. However, their financial, analytic, and graphic aids often provide managers with satisfactory toolkits for preparing plans analytic contents. Most important, some of these packages also serve as decision support systems; their leading questions and prompting sequences thus may be at least as valuable as their documentation elements. Managers not trained in strategic planning thus receive a sort of first course by using these systems to prepare initial drafts of their plans. In so doing, they can gain facility through guided practice. Some versions are intended to support venture financing proposals, while others are used in strategic planning for ongoing operations. 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. Project Management Systems A major step forward, recently taken by software developers to enhance the state of the planning, art, has been the creation of project management systems that can be operated by non-engineers on personal computers. Project planning and management techniques, including PERT and CPM, initially were conceived even before large-scale computers were availableand certainly before personal computers were invented. Nevertheless, with the advent of personal computing systems and software to operate project management systems, corporate and business planners gained powerful new tools to provide greater reliability in implementing strategic projects and programs. Initially, formal project management systems were designed to aid in scheduling the hours of work, availability of resources, and costs of very large projectsfor instance, the construction of oil refineries, chemical plants, manufacturing facilities, electric power plants, ships, and even aircraft fleets. All of those industries commonly use project management systems, which are vital for effective scheduling of operations. However, strategic planning managers typically dont need the level of project management sophistication required to build rocket ships, jet aircraft, or refineries. Simpler devices are preferable. In response, several smaller project management systems that are more user-friendly and pragmatic have appeared. 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. 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. page_86 Page 87 Since it is generally recognized that implementation is often the weakest link in strategic planning methodology, the advent of costeffective, practical project management systems represents a significant step toward enhanced feasibility of most firms planning efforts. Happily, many PC-based project management systems are priced quite modestly. Progress Review and Evaluation Systems As mentioned earlier, many project management systems now provide remote, distributed computing features so that team members throughout an enterprise can receive project managers instructions, report progress, and converse about problems. Illustrations include Microsoft Project, Primavera Enterprise and Milestones Professional. Lotus Notes and PathMaker 3.0 also offer Internet-based progress reporting capabilities. At the executive level, it now is commonplace for remote business units and corporate headquarters to exchange data with which to report, review, and evaluate business conditions and performance via the Internet. Spreadsheet systems into which such data are funneled generate graphic and tabular presentations of variances between actual and planned results. Projecting variances forward then discloses the likelihood of achieving objectives and/or targets for

remedial action. 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. This fact is portrayed by Figure 4.3 (p. 91), 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. CONCLUSIONS In the 1960s, when classic strategic planning models first appeared, it was nearly impossible to assemble and perpetually update all of the elements that should be included in a comprehensive business planincluding assessments of economic, industry, and market conditions, as well as operating capabilities, goals, and strategies. Likewise, it was difficult to monitor the progress of more than a few implementation programs. But, with modern information technology, it usually is easy to assemble, assess, and rationalize the evidence to support a compage_87 Page 88 prehensive plan, keep it up to date, and replan as often as necessary. Indeed, the state of the planning art is characterized by perpetual replanning. Personal computers, a wide range of planning software, remote data communication, 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 strategic planning technology is a relatively new arrival, having emerged in the early 1990s from a confluence of the four IT development streams discussed in this chapter. More specifically, after the classic strategic planning model was articulated and had become generally accepted in the 1960s, the evolution of strategic planning technology followed a path of four steps: First, operating systems that could perform multiple tasks, and simultaneously support multiple users, evolved in the late 1960s. Managers gained increasing direct access to computers processing abilities with commercial timesharing services in the 1970s, when the IBM PC was introduced in 1981, and when the independent personal computer with a GUI was introduced commercially in 1984. Second, user friendly software emerged to exploit impending advances in mainframe computers and personal computers during the 1970s and 1980s, respectively. Eventually, software emerged to facilitate each stage of the planning process. Barriers that previously blocked planning managers from using electronic computing first hand were thus lifted. Third, 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. This capability emerged on a cost-effective basis during 19841989. Fourth, wide area networking systems emerged in the early 1990s. Now, in distributed systems, multiple users are able to share largescale data resources and participate collaboratively in solving strategic problems. 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. As a result, operations in multiple remote locations can be planned and managed simultaneously, nearly as if they are all in the same place. page_88 Page 89 The confluence of these four technology streamscomputing hardware, software, data storage, and data communication technologyprovided a new, composite IT resource that, in turn, enabled strategic planning Technology (SPT) to emerge. 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. Because those four streams converged during 19911993, that also seems to be when SPT emerged. The emergence of SPT, in turn, gave birth to a neo-classical generation of strategic planning methodology, which currently represents the state of the art. GENERALLY ACCEPTED PLANNING PRINCIPLES: PLANNING TECHNOLOGY Definition Definition4.01Strategic Planning Technology (SPT) is a combination of four information technologiescomputing hardware, specialized planning software, electronic data storage, and electronic data communicationthat facilitates both adaptive and integrative planning approaches even in very dynamic environments and complex firms. Postulates Postulate4.01Until the 1990s, information processing requirements of CP process models were prohibitive. That no longer is true. Strategic planning technology has 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. Postulate4.02Benefits of SPT include: (1) the planner has direct access to computing resources; (2) the planner can frame difficult questions and obtain immediate answers, using models and data processing; (3) convenient storage and access to large volumes of data; (4) transmission and immediate retrieval of planning data. These benefits removed many evidential impediments to CP. Postulate4.03Ten categories of electronic planning aids are available: page_89 Page 90

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 Hypothesis4.01In a given industry, firms that employ information technology to perform planning functions will exhibit more persistence (lower termination rate) and greater effectiveness (attainment of objectives) in CP functions than other firms. page_90 Page 91

Source: Roney 2002. Figure 4.3 The Availability of Electronic Data Systems to Support Strategic and Business Planning page_91 Page 92 This page intentionally left blank. page_92 Page 93 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. Each chapter deals with a different aspect of the planning managers job. Chapter 5 begins with a review of the responsibilities and authorities for preparing and approving plans of business. Ultimately, it is the chief executives responsibility to assure that planning functions are performed satisfactorily. However, many elements of this responsibility can be delegated to professional planning managers; and they usually are. However, the authority to approve plans often resides at an even higher levelthe board of directors. Should this always be the case? In some industries, the answer is yes. In other, faster-paced industries, performance can be impaired if plans approval must await a board review. Thus, a contingency approach to planning methodology is recommended. This chapter also delves into the responsibilities for planning at operating levels, including mid-management. Finally, roles of the professional planner and possible roles of outside professionals are considered. The chapter concludes with a discussion of the commercial planning profession and a summary of planning executives required qualifications.

page_93 Page 94 Chapter 6 delves more deeply into the administrative functions of planning. Beginning with procedures for initiating the planning function, this chapter examines several administrative issues, including scheduling planning activities, keeping the plan current, adjusting planning functions as the firm evolves, and integrating long-range with near-term planning functions. The chapter concludes with guidelines for keeping the planning process practical and avoiding some wellknown pitfalls. Chapter 7 addresses several procedural contingencies that can arise to complicate the planning managers life. After a brief review of general planning procedures, this chapter examines how planning procedures can be tailored to manage commercial risks; how to adjust procedures in response to differences in organization size and structure; how to select the planning horizon and forecast period; how to determine the frequency of progress reviews; and several behavioral issuesincluding methods for arriving at participation and consensus, corporate culture, management style, and resistance to planning. page_94 Page 95 5 Authorities and Responsibilities for Planning Comprehensive planning (CP), more than any other management discipline, requires that each element of a business organization and each managers contribution be integrated rationally into the whole enterprise. CP procedures define how individual managers and business units must contribute to making and implementing strategic decisions in a coordinated, integrated fashion. The adoption of comprehensive planning methods has encouraged more participative approaches to directing, organizing, and controlling the firms business. In this chapter, an overview of planning roles at several levels will provide a perspective from which to appreciate managers interrelationships in the planning process. APPROVAL AUTHORITY Comprehensive business planning is a top management function that reflects decision making at the highest level of an enterprise. It is self-evident that boards of directors and chief executives should be intimately involved in reviewing and approving plans of business, if not in their actual preparation. But the most appropriate roles of directors, chief executives, and their planning staffs have not been very well defined through empirical research or even theoretical writings. However, it is generally accepted that the firms mission, goals, and strategy must be authorized at a high level of management (Pearce and Zahra, page_95 Page 96 1991; Judge and Zeithaml, 1992; Stiles, 2001). Whether that level should be the board of directors or the firms chief executive remains an open question. 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. Table 5.1 summarizes their results. Corporate objectives were identified (i.e., formulated) at the board level in 42 percent of these companies, versus 48 percent at the chief executives level. They were identified by planning executives in 29 percent of these firms. (Percentages dont total to 100 percent because objectives of a single firm could be identified at more than one level). Objectives were approved by the directors in more than 80 percent of these firms, whereas chief executives had approval authority in less than 30 percent of the sampled firms. These results demonstrated that, in large 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, but that approval authority usually rests with the board. This arrangement is consistent with the views of many practitioners who hold that the board must be involved in planning but that the plan, and the planning function, must be a creature of top management (Drucker, 1981:114). Indeed, some observers have concluded that boards actually should take a much more active role in developing goals and strategy (Aram and Cowen, 1986; Pinnell, 1986). Capon et al. (1987:8185), in their extensive study of 113 large industrial corporations during 1980, found that boards of directors typically exerted relatively low levels of influence on planning procedures. The roles of CEOs and line executives tended to be far more influential. Planning executives also were quite influential. Chief executives, quite appropriately, were found to be the most influential in determining corporate-level planning procedures. But senior line executives influenced missions and goals of operating units the most. Planning executives also were highly influential at the corporate level, and TABLE 5.1 Responsibilities for Identifying versus Approving Objectives Incidence (%) Identify Approve Board of directors 42% 81% Chief executive 48% 29% Planning executive 29% 0% page_96 Page 97 even more so in firms with the most highly developed planning functions. Chief executives also exerted relatively strong influence on the planning processes of firms with the most highly developed planning functions. These findings demonstrated the different roles of planning managers and operating executives, respectively, in forming and conducting planning processes. Planning executives tend to be influential as architects of the process, but operating executives are the ultimate deciders.

With respect to plans content, CEOs in more than 60 percent of the firms studied by Capon et al. (1987:8185) set corporate goals, but they selected corporate strategy in less than 30 percent of those firms. Companies with the most highly developed strategic planning functions reported much lower levels of goal setting (33%) and strategy selection (15%) by their CEOs. Thus, the most highly developed strategic planners approaches were more delegative than others. However, the chairpersons of those firms played more significant roles in determining plans final contents. Among those firms with the most highly developed planning functions, chairmen and vice chairmen were significantly more influential in determining the contents of corporate plans than in other firms. Chief executives, chief operating officers, and executive committees also were influential, but to a much lesser extent (Capon et al., 1987:83). 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, 2001). Our studys scope included planning practices by corporate and division management of 324 companies in ten industries during 19941995. Corporate plans were approved most often by the board (59%) and only half as frequently (28%) by the chief executive. An executive committee of Top Management (probably under the CEOs direction) approved plans in 34 (11%) of these firms. Division plans were approved most frequently by the chief executive (42%) and by either the CEO or COO, in 56 percent of these firms. The Board of Directors retained authority to approve division plans in only 27 percent of these corporations; and either the Board or an Executive Committee, rather than a single officer, approved division plans in 40 percent of them. Thus, even at the division level, boards of directors often influenced fundamental planning decisions; and the CEO or COO alone did not necessarily make final planning decisions in many of those cases (Table 5.2). Board approvals of division plans were most frequent in the basic metals and chemical industries. 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) page_97 Page 98 TABLE 5.2 Levels of Plan Approval Authority Corporate Plan Division Plan No. Pct. No. Pct. Board of directors 189 59% 52 27% Executive committee 34 11 25 13 Chief executive officer 90 28 82 42 Chief operating officer 6 2 28 14 Group executive 7 4 No approval 3 1 1 1 Total 322 100% 195 100% before committing to projects potentially involving hundreds of millions of dollars. Presumably, line management at both corporate and division levels also would want the boards backing (and plans approval) before making very large capital commitments and taking commensurate risks with shareholders equity. During the recession of 19901991, financial performance was best, in the basic metals industry, when plans were approved by the board (or an executive committee), rather than the chief executive or the chief operating officer. However, in the troubled machinery industry (plagued by increasing competition from imports), performance was much better during the 19831990 boom, when the chief executive, rather than the board, was invested with approval authority. Thus, investing authority to approve plans in the board or the CEO can influence performance differentially depending on the industry in question. Our results, in general, suggested that boards of directors should give CEOs the most strategic planning autonomy in fast-paced and/or turbulent markets, especially when competition is intense. 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, deciding to build new processing facilities or not to do so has such far-reaching consequences that the boards backing (and its approval of the plan) probably is essential, regardless of whether the plan is for a single division or the entire corporation. 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, directors are taking a keener interest in corporate and business plans. Directors either review and approve plans before plans are adopted or when they receive final drafts from chief page_98 Page 99 executives, after they have been adopted. Clearly, the former arrangement is preferable to most directors, but perhaps not to management. In the study conducted by our firm that was mentioned earlier (Roney, 2001), we found that nearly two-thirds (63%) of 324 companies in ten industries required corporate plans to be approved by their boards of directors. (This matched the 63 percent rate of participation in strategy by British firms boards reported in 2001 by Stiles.) Only 30 percent of those firms authorized their CEOs or COOs to approve corporate plans. But CEOs, group executives, and COOs individually approved divisions plans in 60 percent of the sample; executive committees, 13 percent; and boards, only 27 percent (Table 5.3). Remarkably, very little theoretical or empirical work has been done to discover the most appropriate roles for directors in corporate planning. Typical, perhaps, is the detailed report of three case histories written by Aram and Cowen (1988), to illustrate how shareholder value can be pursued with greater assurance when directors are involved in selecting goals and strategies with

senior management. Norburn and Schurz (1984), in recapitulating the writings of others on this subject, concluded that boards should take an active role in establishing goals and high-level strategies. Pinnell (1986) also took this position quite specifically by providing directors with several guidelines for their participation at each stage in the planning process. Research regarding performance effects of roles in corporate planning has begun to emerge only recently. Pearce and Zahra (1991) studied 139 large corporations (69 manufacturers and 70 service providers), finding that firms had superior earnings per share when their boards participated most in policy formation, selection of long-term goals and corporate strategy, making decisions about capital expenditures, future acquisitions and divestments, and planning for top leadership succession. Judge and Zeithaml (1992) studied the relationships of board characteristics to firms rates of return in three specific industries (hospitals, biotechnology, and textiles) and one general category, finding in all TABLE 5.3 Approval of Plans by Individuals and Groups at Corporate and Division Levels (%) Individual Group N Group Exec COO CEO Total Exec Cmte BOD Total Corporate 324 NA 0 30 30 7 63 70 Division 198 4 14 42 60 13 27 40 Source: Roney, 2001. page_99 Page 100 cases that board involvement in strategic decisions was positively related to financial performance. Board involvement, in turn, was directly related to smaller board sizes, lower levels of diversification, and fewer insiders on the board. Involvement also was highest in larger firms. In our research, financial results of companies which do and do not require board approval of corporate and/or division plans were compared (Roney, 2001). The results indicated that director approvals in asset-intensive industries were associated with the best financial results. In such cases, board approval seemed to enhance growth and profitability. That was not true in less assetintensive and service industries, however. This is another illustration of the contingency approach to planning methodology that was discussed in a previous chapter. Role of the Chief Executive For many years, the CEOs appropriate role in planning has been the subject of extensive deliberation. Edward Wrapp (1967) chronicled his observations of effective CEOs planning policies as a management consultant, corporate director, and educator. 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. However, effective CEOs become involved in relatively few strategic programs at a time, selecting those wherein they will have the greatest impact. CEOs often practice successive approximation in articulating goals, but with a much more definite purpose than Quinn (1977) probably intended to convey. Rather, they often avoid over-specificity in defining strategy so that flexibility is maintained. Thereby, they encourage comprehensive strategic planning while preserving pragmatism in implementation. Malcolm Pennington (1972) also observed CEO involvement in strategic planning functions, as a management consultant. He suggested that the clich, planning will not be effective unless the chief executive is involved, is misleading. Instead, he proposed that planning succeeds when it consumes relatively little of the CEOs time. The effective planning manager should help the CEO to stay in control of the planning function. But the CEO should be involved only at key points of initiating the planning function, defining issues, reviewing progress, and making pivotal decisions. Planning should require much more time from those responsible for formulating and implementing strategy in line operations. The planning executive, as a technician and an administrator, should facilitate planning functions at several levels in such a way that the chief executives intensive involvement is not required. Thus, a good planning procedure actually will relieve the chief execupage_100 Page 101 tive of time burdens in strategic deliberations while, at the same time, improving strategic decisions quality. While Penningtons observations certainly answer the frequent objection of chief executives with regard to excessive time requirements imposed on them by strategic planning, it nevertheless is true that responsibility for a sound planning function still rests squarely with the chief executive. The CEO ultimately is accountable for assuring the quality of planning functions. There is no other place in the organization for that accountability to rest. Therefore, a chief executive must be well informed about generally accepted planning principles. Unfortunately, that rarely is the case. Since chief executives do not typically rise to their positions through planning, acquiring vital new planning skills is a critical but often overlooked necessity. In a classic paper, Mace (1965) cautioned that there are at least three duties which the CEO cannot delegate: selection of missions, selection of goals or objectives, and vigilance over progress in order to initiate replanning as necessary. That is still good advice. Roney (1977a) suggested the addition of a few more planning obligations to the CEOs list, including personal acquisition of strategic planning skills, assurance of planning staff persons competence, assignment of management responsibilities for planning functions, assuring the top management teams ability to implement the plan, and actually using the plan to make operating decisions. Pennington (1972) earlier had made a similar argument that many of these conditions are necessary to avoid the planning functions failure. Indeed, such a prescription even appeared in the writings of Fayol (1916:50, 53) more than eighty-five years ago. Planning roles of the chief executive, chief operating officer, and line officers who oversee divisions or subsidiaries also have been the subject of surprisingly limited inquiry. Several practical discussions of this subject have been authored, by Wrapp (1957), Mace (1965), Eastlack and McDonald (1970), Pennington (1972), Roney (1977a), and Taylor (1988), for example. However, empirical

investigations into effects of alternative CEO roles in the CCP process are much scarcer. This is a glaring void in the planning professions body of methodological knowledge, because the planning function is uniquely within the chief executives span of authority and responsibility. Intuitively, it seems reasonable that alternative CEO roles in planning should have major impacts on the financial results of a firm. Steiners 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 5.1). Ramanujam et al. (1987) also demonstrated that high performance companies tend to have CEOs who participate more in the planning process than others. Lieberson and OConnor (1972) demonstrated that page_101 Page 102 EXHIBIT 5.1 Pitfalls in Comprehensive Long-Range Planning: The Ten Most Important Pitfalls to Be Avoided as Ranked by Respondents (N=159) RankDescription 1 Top managements assumption that it can delegate the planning function to a planner. 2 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. 3 Failure to develop company goals suitable as a basis for formulating long-range plans. 4 Failure to assume the necessary involvement in the planning process of a major line personnel. 5 Failure to use plans as standards for measuring managerial performance. 6 Failure to create a climate in the company which is congenial and not resistant to planning. 7 Assuming that corporate comprehensive planning is something separate from the entire management process. 8 Injecting so much formality into the system that it lacks flexibility, looseness, and simplicity, and restrains creativity. 9 Failure of top management to review with departmental and divisional heads the long-range plans which they have developed. 10 Top managements consistently rejecting the formal planning mechanism by making intuitive decisions which conflict with the formal plans. Source: Steiner 1972a. changes in firms top management can be shown statistically to account for significant portions of variance in their results. More recently, Shen (2000a, b) demonstrated that CEO succession by insiders can influence both a firms performance and subsequent turnover as well as post-succession cohesion of top management team members. Succession by outsiders, versus insiders, was accompanied by lower financial performance, largely due to higher post-succession turnover of other officers. With extended CEO tenure and restabilization of the management team, results improved. In the same research mentioned earlier (Roney, 2001), our firm also addressed impacts of the CEO on planning-performance relationships more directly. We found that, in several manufacturing industries other than those with heavy capital investments in fixed assets, performance was best when the chief executive, rather than the board, had authority to give final approval to plans. The implication here is that planning functions work best, in some industries, when they serve as devices to manifest the CEOs management style and as aids to directing operations. This does not necessarily imply that the CEO must spend inordinpage_102 Page 103 ate time in planning functions, however. To the contrary, Pennington (1972:4, 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. Moreover, Pennington argued, domination of planning functions by CEOs disenfranchises other officers from their vital roles. CEOs must resist the temptation to get too involved in the details, but the CEOs leadership role in planning never can be relinquished. Lauenstein (1986) criticized American executives for dereliction in the 1980s. He argued that strategic planning in the United States was often mismanaged by top corporate management who over-delegated vital planning functions to subordinates. In a compelling discussion, he proposed that excellent strategic planning really cannot be conducted as a bottom-up procedure even though it frequently is done in that manner. 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 then becomes very difficult for corporate management to reject, change, or even influence proposals that have gained political force after going through several reviews and approvals before reaching the top level. At that point, top managements approval often becomes nearly obligatory. Instead, Lauenstein argued that top management must accept its responsibility to formulate an integrated structure of corporate goals and strategy. Only thereafter should plans to implement top-level strategy be formulated in detail by operating management. Sidestepping its responsibility to make essential corporate planning decisions well may amount to dereliction of duty by top management, in Lauensteins view. After all, 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 firms size and structure, the CEOs management style, the industrys culture, and so on. Thus, it is difficult to provide categorical guidelines for planning roles of senior executives, other than the chief executive and the planning executive. However, it will be demonstrated in a subsequent chapter that participation of management team members in planning is likely to facilitate strategy implementation; that their consensus on strategy is likely to enhance financial performance; and that some discord on goals and objectives probably facilitates a broader examination of alternatives and, therefore, enhances performance as well. Notwithstanding the beneficial effects of managerial collaboration and consensus, Capon et al. (1987) page_103

Page 104 demonstrated that even senior management team members influence on the corporate plans contents drops dramatically at stations below the COO, as Figure 5.1 demonstrates. Grinyer and Norburn (1975) found an inverse relationship between performance and consensus on objectives. Bourgeois (1980a) also found a negative relationship between consensus on goals and performance, but the relationship was positive when there was consensus on strategy. Hrebiniak and Snow (1982) found a positive relationship between consensus on strengths and weaknesses and firm performance. Hall (1983) also found a positive relationship between consensus on strategy and performance. Thus, consensus on strategybut not goalsseems to enhance performance. Participation of Middle Management Regardless of whether the firm is centralized or decentralized, Vancil (1976) proposed that strategy should become something personalformulated by managers at all levels, corporate, division, and departmental. Thus, each manager must have some strategic responsibilities. In Vancils view, complex organizations actually may have hundreds of strategic programs. This view often is challenged by practitioners who observe that keeping track of such a complex informational structure is procedurally cumbersome, at best. Vancil probably would answer that, while the planning discipline is essential for good management throughout an organization, only a small portion of

Source: Adapted from Capon et al. 1987. Figure 5.1 Executives Influence on Planning Decisions page_104 Page 105 lower-level planning products with substantial impacts realistically should flow up to the next higher level. Through a process of successive generalization, then, the detail of implementation information can remain manageable. Researchers have inquired frequently as to whether or not participation of middle and lower-level management in planning really is effective. Results have not been entirely satisfying. Schilit (1987) surveyed 60 middle managers involvement in planning. 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. When decisions carried higher risks and/or returns, mid-level managers involvement was much less prominent. Middle managers involvement in planning was more prevalent during implementation phases than in the actual formulation of strategy. Several studies by experimental psychologists also have found that participation in setting objectives does not enhance actual performance (Latham, Erez and Locke, 1988; Leifer and McGannon, 1986; Vanderslice, Rice and Julian, 1987). Several meta-analyses have confirmed this generalization (Wagner, 1994; Wagner and Gooding, 1987; Miller and Monge, 1986; Schweiger and Lena, 1986). A reasonable argument can be made that greater participation of mid-level managers occurs only after the firms competitive position and/or financial condition create sufficient slack resources to afford participative management. Thus, greater participation of line managers in planning cant be said necessarily to be the cause of firms greater commercial success. Indeed, it may be an effect. Deeper organizational participation simply may tend to occur when the firm can afford it. Then, participation may enhance commercial success further. However, this is another of those hypothetical questions that remain to be resolved empirically. Roles of the Professional Planner There is abundant literature regarding the professional planners role in conducting and/or supporting planning functions. Classic articles on this subject were authored by Steiner (1970), Burnett et al. (1984), Leontiades (1989), and Mintzberg (1994c). In general, these authors concur that planning professionals should not be the primary decision makers who select from alternative goals or strategies, but they can make valuable inputs to such decisions with other executives. The planning professional is both an administrator and a technical expert in planning methodology, charged with assuring that technical functions of CBP and CCP processes are conducted effectively. The planning executive serves as a technical advisor to the chief executive page_105 Page 106 and other senior executives, assisting them in acquiring planning skills, gathering and interpreting evidence which is necessary to make planning decisions, providing assistance in making decisions and administering progress assessment functions (Steiner, 1970). Lorange (1973) surveyed 60 large manufacturing businesses (sales at least $100 million) to ascertain differences in results attributable to planning executives reporting relationshipsthat is, to top line management (e.g., the CEO) versus senior staff

management (e.g., the CFO). The findings were provocative. When planning executives had linereporting relationships, they tended to receive more support from the CEO, exert more influence in goal setting, and focus more attention on plans contents than the process. A top-down procedure tended to be preferred. At the same time, goals tended to lack specificity. However, when planning executives had staff reporting relationships, goals were more specific; a bottom-up procedure tended to be preferred; planners work was focused on the process, versus substance of planning; implementation programs were a more important part of planning; and, most important, perhaps, planning seemed to have a greater impact on operating results. Clearly, then, two completely different approaches to the planning function were disclosed: the procedural and the substantive. The former seems to be best suited to multi-division corporate planning, while the latter may be suited to single-business planning. This generalization remains an unconfirmed hypothesis, pending empirical replication in more current business conditions. A survey report by Burnett, Yeskey, and Richardson (1984) reported that the planners role was evolving into one of giving closer support to the CEO and focusing more on competitive market analysis (substantive functions). Ramanujam et al. (1987) reported results of extensive research, during 19841986, into planning trends of 207 large companies. They confirmed that greater emphasis was being placed on marketing functions. Basic market analysis and forecasting functions were emphasized even more than sophisticated methodologies such as the use of PIMS models. 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, related, diversified) and breadth (broad or narrow). Each of the six resulting combination situations requires one or more sets of planning skills provided by traditional staff (budgeting, capital projects evaluation, variance analysis, etc.); technical specialists in planning, marketing, financial analysis, etc.; or generalists, who are both planning technicians and substantive innovators, able to solve strategy problems by going outside traditional substantive and procedural boundaries. (Traditionalists and specialists, by necessity, stay within page_106 Page 107 prescribed boundaries.) Representing those types as T, S, and G, respectively, Leontiades proposed that the types of planners and planning skills a firm requires can be summarized as in Table 5.4. Over time, firms tend to move around within the six-cell matrix in shown in Table 5.4. As firms diversify, their greater complexity may compel them to acquire more specialized planning skills. If the scope of planning is broad and expansive, versus narrow and integrative, a more generalized, versus specialized approach to planning is indicated. Subsequently, if the firm refocuses on a more narrowly constrained group of core businesses, less complicated methods may be more appropriate. Indeed, with recent trends toward corporate restructuring, dramatic shifts in required planning skills may be occurring. Thus, planners skills that were appropriate for their firms in the past may be inappropriate in the present or future. Mintzberg (1994c) has acknowledged the existence of these same dichotomies. He relegates most planners to Leontiades traditionalist role, simply calling them analysts. Most planning analysts, he argues, are not involved with the creative process of strategy making. Instead, they codify, elaborate, and convert already-formed strategies into programs for implementation. Mintzberg allowed that planners can be creative thinkers, as well. Such rare executives (Leontiades generalists) can stimulate other executives creativity and facilitate the strategy-making process, in Mintzbergs (1994c: 27) view. Houlden (1985, 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. Planning units tended to be formed in response to increases in firms size, increased complexity of business conditions, environmental turbulence, and the style of top corporate management. In each study, the need for planners services was found to evolve; with greater experience in planning procedures, CBP functions became simpler, more TABLE 5.4 Appropriate Planning Skills: Impacts of Diversification and Breadth of Strategic Focus Planning Scope Level of Diversification Broad Narrow Diversified G+S S Related Products G + (T or S) T or S Single Product G+T T Source: Reprinted from Long Range Planning, Volume 3, J. Leontiades, What Kind of Corporate Planner Do You Need? pp. 3139. Copyright 1989, with permission from Elsevier Science. page_107 Page 108 qualitative (versus quantitative), more line-driven, more focused on market conditions, and more involved in devising competitive strategy. In 1995, Houlden explored challenges faced by planning professionals resulting from the recent European recession. Some planning departments had been disbanded and others reduced in size. More had begun than had ended, and the number of planning professionals had increased. Some of the principal differences and similarities from 1985 to 1995 included the following: More planners had staff reporting relationships (from 8% to 22%). A surprisingly small portion of planning executives had MBA or MS degrees in management (21% versus 23%). Surviving planning departments often went through a two-stage process of downsizing (during the recession) and subsequent expansion. Surviving planning executives operated their departments like service firms: to survive in the downturn, they had to demonstrate an ability to give top management good value as internal consultants. Paralleling Steiners (1972a) pitfalls in American firms planning practices, Houlden (1995) also offered a very similar list for firms

in the U.K. during 19831993. First on the list (like Steiners) was the CEOs abdication of his or her responsibility for strategy. Roles of Outside Professionals Of course, only sufficiently substantial corporations can afford the full-time services of resident professional planners and supporting staffs. However, smaller firmsand occasionally even large onesoften 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. Bracker and Pearson (1986) endorsed the potential benefits of external planning professionals for small firms during their study of small firms planning practices. However, Delanys (1995) empirical study of the financial benefits that might be derived from the services of strategic planning consultants was inconclusive. THE COMMERCIAL PLANNING PROFESSION The body of knowledge regarding technical and administrative disciplines used in (1) acquiring evidence for decision-making in planning; (2) making planning decisions regarding goals, objectives, and strategy selections; and (3) implementation of strategy has reached the point where a legitimate profession has emerged. Further evidence of a maturing planning profession is the emergence of professional societies page_108 Page 109 that are dedicated to commercial planning. Societies of planning professionals have several thousand members. Moreover, in the academic community, the Academy of Managements Business Policy and Strategy Division also boasts a rapidly growing membership. Remarkably, this profession is most highly developed outside the United States. In the United States, 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). Until 1999, the Strategic Leadership Forum (SLF) was the leading American management organization focused on business and corporate planning, with nearly 6,000 members. It issued a steady stream of publications on technical planning topics and a professional journal. Regrettably, the SLFs central management staff was disbanded in 1999 and the corporate charter then was abandoned, due to financial insolvency. Consequently, the U.S. planning profession was unrepresented by a formal society when this volume was drafted. The Strategic Planning Society, headquartered in London, England, publishes Long Range Planning, a leading international journal in the field of strategic planning, which features articles focused on planning concepts and techniques for planners in both the public and private sectors. The society also conducts a large number of technical seminars for planning executives continuing professional education. Table 5.5 summarizes the societys membership composition and is suggestive of the various vocations where planning professionals currently are located. Without question, SPS currently is the worlds pre-eminent association for practicing planning professionals. SPS has collaborative relationships with other strategic planning societies throughout Europe. The Strategic Management Society was founded in London, England, in 1981 with 459 founding members. Today, the society is headquartered in Lafayette, Indiana, at Purdue University and has about 2,000 members in 45 countries. According to the societys staff, about two-thirds of the members are academicians. The remaining third are consultants and other professionals. The Strategic Management Society publishes The Strategic Management Journal, which is the worlds leading academic journal for reports of empirical research related to strategic management theory. Taken as a whole, these professional societies, their memberships, their common (albeit fragmented) body of knowledgeheavily supported by academic research, journals, and other extensive literaturecomprise a true profession, albeit a relatively small one. Moreover, when one considers that about 90 percent of publicly owned industrial firms practice formal strategic planning (Rigby, 2001; Roney, 2001); that these practices extend into thousands of those corporations business page_109 Page 110 TABLE 5.5 The Strategic Planning Society: April 2002 Membership Number of Members Industrial Manufacturing/Construction 220 Utilities 227 Telecommunications 192 Retail 78 Printing/Publishing 40 757 Professional Services Consultants 692 Education 339 Other 127 1,158 Other Services Financial 355 Transportation 46 Charities 70 Other 153 624 Public Service

Pct of total 7.4% 7.7 6.5 2.6 1.3 25.5 23.4 11.4 4.3 39.1 12.0 1.6 2.4 5.1 21.1

424 14.3 TOTAL 2,963 100.0 % Source: Strategic Management Society. units; and that strategic management is taught in most business schools, it seems likely that the U.S. community of commercial planning professionals is very much larger than Table 5.5 suggests. Further evidence that the commercial planning profession is larger than Table 5.5 suggests may be obtained from a sample of mailing lists. For example, one mailing service that we consulted in 2001 included more than 5,500 managers who are engaged in strategic planning and corporate development. Another mailing list source listed more than 6,400 management consultants who practice business planning. Finally, it must be recalled that a very large portion of public accountants provide business planning services to their clients, rather than performing certified audits. By a recent count, there were over 330,000 members of the American Institute of Certified Public Accountants. Of those, about 54,000 had expressed a professional interest in budgeting and business planning, while more than 42,500 others expressed a professional interest in strategic planning. As commercial planning functions have evolved and the number of planning professionals has grown, questions naturally have been raised page_110 Page 111 regarding the generic role that those professionals should play in management. Opinions have varied between extremes. Some have foreseen the emergence of planning experts as a unique profession (Steiner, 1972b). 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. Thus, as senior executives acquire strategic planning skills in their academic training, fewer will require assistance from staff experts. As early as 1972, 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, 1972). However, this certainly has not been the fate of other professions; nearly all business administration curriculae include requisite courses in accounting and economics. But a few introductory courses do not qualify one to claim professional expertise as an accountant or an economist. That may also be true with the emerging commercial planning profession. Regardless of the planning professions ultimate fate, there is widespread demand for it. As explained earlier, nearly all substantial U.S. corporations have formal planning functions today (Rigby, 2001; Roney, 2001). There also is a large and growing body of technical knowledge that professional planning managers can employ to their firms advantage. Unfortunately, however, this body of knowledge remains to be codified to a point where the planning professions technical discipline is generally accepted. Moreover, there is some evidence that professional planning managers often are not very well informed about their own art. Capon et al. (1987:6364) found that, in very large corporations, chief corporate planners average experience in their jobs was only about four years, although their total experience in these firms averaged fifteen years. Their typical backgrounds were in marketing, finance, and operations. More than 80 percent had graduate training, and more than half had MBAs. But only 28 percent had specific training in planning! Chief planners were less well trained in planning principles than average planning staff persons, and few said that they saw the planning profession as a career path. Rather, most of them saw their planning assignments as temporary stops on the way to other career objectives. There have been differences of opinion over the years regarding the planning executives most appropriate mode of operation. As observed earlier, some have preferred that the planner serve in a purely technical, advisory capacity; others have preferred the planner to become more involved in operating matters and participate actively as a member of top management. Bernard Taylor (1976b) opined that the planning professional should be a technical expert, able to assist line executives page_111 Page 112 in their decision-making functions. Remarking on the corporate planners changing role, Steiner (1972b) observed that corporate planning professionals should function as experts on the process of planning, capable of functioning at a very high level of management and drawing upon an expanding array of highly specialized tools and methodologies. Accordingly, professional planners must perform as technicians, administrators, and coordinators rather than holding positions of authority from which to make strategic decisions themselves. Consistent with this view were the findings of Ramanujam et al. (1986), 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. Steiner (1972b) also observed that professional planners are likely to become involved in operational decision-making when longrange and short-term plans are interconnected. Pennington (1972) made a similar observation, from which he took encouragement because, by becoming more involved in day-to-day decision making, planning professionals would have an opportunity to make their skills more available to line management. Knoepfel (1973), reporting on the planners role at Solvay American Corp., concluded somewhat differently: He believed that when corporate planners actually were involved in forming a corporations objectives and strategy, the planning function was fundamentally flawed because planners do not have the authority or responsibility to implement strategy. As previously mentioned, 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. Surprisingly, when planning managers reported to other staff officers, planning procedures seemed to be the most effective. Plans were more substantive, and planners had more influence on goals, when they reported to line officers. In this light, it is interesting that Capon et al. (1987:89) found 44 percent of chief corporate planners reporting to the chairman or president; 28 percent reporting to an executive vice president; and only 5 percent reporting to a financial officer. Two-thirds of the planning managers in divisions and subsidiaries

reported to senior line officers. Unfortunately, most generally accepted conceptions of planning professionals roles have emanated from sources such as those cited in the previous paragraphs, that is, opinions of observers, unsubstantiated by very much formal research. However, Grinyer et al. (1986) demonstrated that, when risk levels increasebecause of vulnerability of core technology or complexity of the firms structureplanning functions analytic sophistication (and the role of professionals for this purpose) increases, as well. They also found that, when the firms market share page_112 Page 113 is high (reducing risk) or when the firm is devoted to serving one or a very few customers (reducing competitive uncertainty), planners status in an organization tends to decrease. Perhaps the most recent pronouncement on professional planners appropriate roles was published by Mintzberg (1994a), who opined that planning professionals really have three roles. First, they should be in a position to recognize strategy, as it emerges within an organization, and promote its development. Second, they should have the skills and ability to perform conventional analytic functions and evaluate strategic issues as they arise. Planners third and perhaps most important role for Mintzberg is actually to contribute to strategy, both by stimulating conceptual thinking throughout the management organization and by proposing their own ideas (pp. 35190). QUALIFICATIONS OF THE PROFESSIONAL PLANNING EXECUTIVE Exhibit 5.2 summarizes the preparation, formal training, skills, and typical responsibilities of professional planning executives. Several universities offer formal academic programs in strategic management at the graduate level, including both M.B.A. and Ph.D. degrees. Many of the same universities also offer concentrated training for senior executives in strategic management methodology. Aspiring planning executives certainly should take advantage of these technical training opportunities. CONCLUSIONS Eight principles regarding responsibilities of the directors and top corporate management have been developed in this chapter. They are as follows: Approval of corporate-level plans, in larger corporations, is most often a prerogative of the board of directors, while approval of division-level plans most often is delegated to the chief executive. However, there are important exceptions to this norm. Most important, in very asset-intensive industries, the board tends to retain authority to approve both corporate and division plans, 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. Approval procedures can influence performance. There is some evidence that board approval of strategic plans enhances profitability in asset intensive industries, especially during recessions, page_113 Page 114 EXHIBIT 5.2 Qualifications of the Senior Planning Executive: Typical Profile 1. Business Experience a. Minimum of 15 years b. Broad exposure to operations, marketing, and finance 2. Planning Experience a. Direct experience in preparing comprehensive business plans b. Direct experience in preparing forecasts and analyses of industries and markets c. Direct experience in preparing financial projections d. Direct experience in acquisitions, divestments, mergers, joint ventures, or financial alliances 3. Academic Preparation a. Masters degree in business administration or an equivalent degree b. Training in business planning methods, through conventional and/or professional education 4. Personal Aptitudes a. Adroit in quantitative analysis b. Skillful in both written and verbal communication c. Able to render advice and counsel to board members, the chief executive, the chief operating officermature in bearing, diplomatic, articulate, trustworthy with confidential information d. Objective and independent in judgment, able to separate factual evidence from opinion e. Flexible in approach, able to deal on many levels 5. Typical Assignments a. Constructs, coordinates, and administers procedures for performance of comprehensive planning functions by line and staff persons b. Depending on centralization/decentralization and size of the firm, this executive may supervise other planning professionals who specialize in the planning process and/or technical functions such as operations analysis, industry/market analysis and forecasting, financial analysis and forecasting, project/program management, computer applications to planning c. Maintains surveillance over external business conditions relevant to the firm: economies, industries (including competitors, technology, regulations, etc.) and markets for the firms products and/or services d. Provides technical advice to senior officers on methods and procedures of planning, alternative objectives and strategies, proposed plans merits, performance potentials of existing and prospective new businesses

e. i. ii. iii. iv. v. vi.

Administers the corporate development function: Assists top management in developing acquisition, divestment, and merger stragtegies Conducts searches for prospective buyers, sellers, merger partners, joint venture partners, and alliance partners Evaluates prospective acquisition candidates' performance potential Works with outside professionals (accountants, lawyers, consultants) to implement transactions May make commerical financing arrangements (with internal financial officers, investment bankers, etc.) Prepares proposals to the CEO and board of directors for approval of proposed transactions page_114

Page 115 while CEO approval of plans enhances profitability in volatile industries. The chief executive is responsible for staffing and directing comprehensive planning procedures, but should not become so involved that the organizational integration benefits of comprehensive planning or the CEOs ability to exercise objective decision making are lost. Influence on planning decisions tends to decline with managerial distance from the chairmans office. There is little evidence that participation of mid-level management in forming strategy greatly affects strategic outcomes or enhances performance. Planning professionals roles are best played as internal consultants, process experts, analysts, and administrators who, as members of the top management team, also contribute to strategy formation. Reporting relationships of planning professionals typically are to the CEO, but staff reporting relationships may be more likely to enhance plans quality and impacts on performance. Procedures in which the corporate planning staff supports line managers planning tend to enhance acceptance of planning by the latter. This is especially true in high-risk businesses. This chapter also has considered the evolving, but as yet uncertain, status of commercial planning as a formal management discipline and profession. Certainly, the wherewithal of a true profession is readily available to those who wish to practice the planning art professionally. A large body of strategic management knowledge can be found in several excellent academic and professional journals as well as in scores of textbooks. Many academic institutions offer graduate-level training in strategic management, and professional societies are devoted to the dissemination of strategic management knowledge to practitioners. All that remains for a legitimate profession to emerge, it would seem, is more widespread recognition of these facts and codification of generally accepted planning principles that will be found in the strategic management literature. There is general concurrence that only the chief executive ultimately can direct a companys strategic planning function. The CEO must be sufficiently knowledgeable in planning principles to fulfill that responsibility effectively. As the chief planning officer, 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 persons availability and/or other executives are disenfranchised from their planning functions. page_115 Page 116 Remarkably, not much research has been done on the CBP roles that are, or should be, played by directors, chief executives, and professional planners. Certainly, directors growing accountability for corporate governance suggests that their role in planning functions will grow in the future. Empirical evidence seems to demonstrate that, in some industries, when the CEO, rather than the board, is invested with authority to approve plans, performance is enhanced, suggesting that one benefit of CBP functions can be to facilitate the CEOs leadership role. On the other hand, in very asset-intensive industries, board approval seems to engender greater success than when the CEO has that authorityprobably due to the heavy financial commitments required to implement strategy and decision-makers commensurate political risks. Board involvement can inject conservatism into the planning process. In asset intensive industries, that effect can be beneficial, but the same conservatism can impair performance in industries that are faster paced and less asset intensive. The successful planning executive has a broad range of professional skills and aptitudes. As an administrator, this executive helps to design and coordinate the planning function. The same executive also is a technical specialist who provides substantive input into all three stages of the planning processserving as an advisor to the directors, CEO, COO, and other top managers as well as a catalyst to aid them in their evaluations of strategic issues. The senior planning executive also may be called upon to manage a firms corporate development function, wherein procedures leading to acquisitions, divestments, and mergers are initiated and administered. Thus, the professional planning executive must possess considerable academic training, technical skill, and maturity of judgment, which can be obtained only through experience in a variety of business settings. Eventually, 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, based on a common body of knowledge such as that found in this volume. GENERALLY ACCEPTED PLANNING PRINCIPLES: PLANNING RESPONSIBILITIES Axioms Axiom5.01The chief executive has ultimate responsibility for CP functions design, staffing, and direction. However, elements of this responsibility may be delegated to subordinate managers. page_116 Page 117 Corollary 5.011 The chief executive must have at least a basic understanding of generally accepted planning principles.

Postulates Postulate5.01Professional planning managers perform two completely different roles: (1) administration of the planning process (procedural) and (2) technical support of actual planning functions (substantive). Postulate5.02Skills required of the planning manager are determined by the diversification versus concentration of a firms lines of business, its experience with planning, and top management style. These requirements evolve with the firms development over time. Hypotheses Hypothesis5.01Board approval of strategic plans enhances profitability in asset-intensive industries, especially during recessions. Hypothesis5.02CEO approval of strategic plans enhances profitability in non-asset-intensive and/or volatile industries. Hypothesis5.03Participation of mid-level managers in making planning decisions does not enhance profitability (although it may enhance job satisfaction). Hypothesis5.04Influence on planning decisions tends to decline with management distance from the chairmans office. Hypothesis5.05Reporting relationships of planning professionals typically are to the CEO, but staff reporting relationships may be more likely to enhance plans quality and impacts on performance. Hypothesis5.06Procedures in which the corporate planning staff closely supports line managers planning tend to enhance acceptance of planning by the latter. This is especially true in high-risk businesses. Hypothesis5.07Effective implementation of a comprehensive plan requires direct leadership by the chief executive. If such leadership is not present, performance benefits of CP functions will be minimal. page_117 Page 118 This page intentionally left blank. page_118 Page 119 6 Administration of Planning Procedures Administration of Planning Procedures Comprehensive planning entails both administrative and substantive functions. Substantive functions (assessment of internal and external business conditions, decision making, and strategy articulation) have attracted more attention in the literature than administrative functions. Nevertheless, experienced practitioners readily will acknowledge that sound administration is vital to the successful management of planning functions. The intellectual efforts and administrative work products of many managers in an organization must be coordinated to assemble decision-making evidence, select from alternative goals and strategies, and, ultimately, to implement strategy. Moreover, the large amount of information that must be acquired, assimilated, and disseminated in planning for all but the simplest of organizations demands that administrative procedures be soundly conceived and skillfully performed. Otherwise, substantive planning functions (no matter how elegant) may process poor evidence and/or be executed ineffectively. For all these reasons, 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. It is to those administrative procedures that we now turn our attention. The following paragraphs are devoted to specific administrative issues that are likely to be encountered by planning managers in most firms. Guidelines for dealing with those issues are provided to assist page_119 Page 120 the planning manager in performing the responsibilities of his/her office. 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 firms planning needs Integration of long-range and near-term planning Avoiding common procedural pitfalls GETTING THE PLANNING PROCESS STARTED Vancil (1967) wrote a humorous, but insightful, article that gives the expectant CEO some pointers on conceiving and rearing a new planning department. Although the metaphors in this often-quoted article are quite humorous, the author nevertheless provides sage advice for the chief executive who intends to launch a new planning department. Some of the maxims found in Vancils article include the following: The CEO is a planning departments only legitimate father. The CEOs most important initial decision is to select a bride (planning executive). Its often best not to look outside the company for this manager, but rather to select a matron of proven domestic abilities from withinin order to improve acceptance of planning initiatives. The new bride and president must be completely compatible. The gestation period for a planning department (unlike that for humans) can be controlled: essential preparations can and should be made, for example, location of the new department within the organization. Sex determination (active or passive) will depend on the CEOs style and level of involvement in rearing a new planning department.

 In the planning departments early years, CEOs should not spoil the child with too much praise or favoritism, which would elicit resentment from peers. It may take two to three years for the planning department to grow up. Early success depends on the ability of a new planning executive to show peers that he or she can make a real contribution. Various diseases of childhood and adolescence, some of which can be fatal, are discussed, along with possible remedies. Shortly after Vancils article appeared, Von Allmen (1969) also published guidelines for setting up corporate planning, emphasizing the page_120 Page 121 importance of initial priorities for the new function. They include correctly evaluating the organizational climate and producing tangible results as quickly as possible. He observed that the planners potential scope of responsibilities and tasks is so broad that initial priorities are vital. It is essential to assess what is possible in terms of a companys stress tolerance, flexibility, and so on. Above all, the planner must produce a tangible product as quickly as practical, in order to gain credibility. But planners also must have a high frustration tolerance and a great deal of patience in dealing with cultural resistance. Von Allmens list of priorities for setting up a corporate planning function includes the following: Quickly determine where real corporate power lies. Articulate tentative corporate objectives (with the CEO) as early as possible and use them as focal points in discussions of strategy. Produce a tangible planning product as quickly as possible. Initiate early efforts to teach planning skills to top executives. Do not spend excessive time in the office; instead, work with line management on site, as much as possible. Begin quickly to monitor the competitive environment and begin to test for important changes. Use the planner interview and transcribe approach to documentation. Establish a solid working relationship with the Chief Financial Officer. Do not start with a process that is too complex. Stay in control of the planning process. Von Allmens prescription of the planner interview and transcribe approach warrants special attention, here. It is no secret that many line officers hate the administrative work of planning and the preparation of planning documents. Yet, line officers must make essential planning decisions and/or determine the level of effort to be exerted in implementing strategy. Clearly, if a planning manager had to wait until line officers provided all of the inputs required for completion of planning procedures and documents, most plans never would get done. The planning manager therefore must act as a personal consultant, advising line officers on planning methods, and even as a ghost-writer. After coaching line officers and eliciting decisions at all stages in the planning process, planning professionals can return to their offices to finish technical tasks, including the preparation of drafts. Then, line officers can review the drafts, make changes, or consider new alternatives in consultation with the planner. Eventually, documents that have good technical quality, as well as line managers commitment, page_121 Page 122 can be produced by following this procedure, which we use routinely in our firm. Malcolm Pennington (1972), drawing on his experience as a strategic planning consultant, proposed that firms must learn to plan and that the planning function must start small and earn its acceptance. The scope of planning can be increased as success and managers familiarity with planning increase. This is a never-ending process. When internal capabilities or the external environment change, so must planning techniques, in order to satisfy the changing needs of an organization as it evolves. Kraushar (1976) offered some further suggestions regarding priorities for the fledgling planning department and its manager. Most important, he argued that the planning department should be staffed by senior people who are committed to obtaining tangible results, early. Specifically, Kraushars guidelines were as follows: The planning department should be kept small. It is better to keep overheads low with options to obtain supplemental resources from within or outside the firm as needed. The few people involved should be senior in experience and capabilities. Planning department professionals backgrounds should reflect a full scope of functional disciplines. At least some members of the planning department should have had line experience in implementing plans as well as formulating them. The initial emphasis should be on relatively quick payoff projects in order to enlist enthusiasm for, and acceptance of, the department. External development functions, including acquisitions, joint ventures, etc., should be included within the departments scope of responsibilities because of their close relationship to corporate strategy. International corporate development functions are extremely difficult to undertake at an early stage; in part, this is due to international operations remoteness and the difficulty of assuring reliable implementation. The new departments performance should be monitored and communicated; it must be demonstrated that the department is an asset rather than a drain on the companys resources. The new department should attempt to quantify and communicate its contributions to the firm in terms of financial results. Four themes seem to be shared by the well-established guidelines of these practitioners. First, the comprehensive planning (CP) function

page_122 Page 123 must be ordained by high authority from the board and the CEO. Because it is imposed on an organization, line managers and other staff members may resist both the CP function and the planning manager. High-level support must be sustained sufficiently to assure that the CP discipline is installed permanently. Second, new planning procedures must be pragmatic; they must produce early results and avoid imposing burdensome workloads on line managers. 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. Third, the CP function must be conducted competently; planning managers must be knowledgeable both about planning principles and the firms business, and they must be politically sensitive. Finally, planning products should evolve from basic to advanced over time; planning managers should make only those initial promises that they can keep. 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 with strategic planning by a team of corporate and line managers. The process concludes with issuance of a budget as the first years implementation element of an extended plan. The plan should be assembled in two loose-leaf volumes: a strategic plan and an implementation manual containing detailed action programs. A list of contents for both volumes is provided in the next section of this chapter. Large, Diversified Firms How planning activities are scheduled during the year will differ between firms depending primarily on their centralized or decentralized structures, levels of diversification, size, and complexity. Procedures of course are lengthier in larger, complex, diversified, and/or decentralized organizations. Vancil and Lorange (1975) provided an illustrative schedule for planning activities in very large, multi-business corporations. A quarter-century later, this schedule remains typical; and Vancils explanation of the procedural sequence still is one of the most articulate in print. Spanning ten months, from February through November, its principal elements are as follows: Early February: initial corporate/division dialogue, mission review, acknowledgment of preliminary corporate goals and resource allopage_123 Page 124 cation policies, preliminary corporate level strategy, beginning of division-level planning. Mid-March: review and/or restatement of business units charters and tentative proposals of division/subsidiary goals and strategy. Mid-May: proposals of business units strategic plans, including revised charters, tentative goals, strategy, objectives, and preliminary programs. Mid-June: draft of the corporate strategic plan and articulation of issues defining interrelationships (including conflicts) between business units plans and the corporate plan. Mid-August: proposals of amended business plans, including more detailed strategy and programs, are submitted and approved. Mid-September: corporate allocations of capital and other resources are made to business units, subject to approval of budgets. Mid-November: budgets for the coming year are submitted and approved. Note that, in Vancil and Loranges procedure, strategic long-range plans are completed in August, three months before budgets are submitted. Shank, Niblock, and Sandalls (1974) confirmed that this procedure is typical. They studied the long-range planning and budgeting practices of six industrial corporations. There was a six-month delay between long-range planning and the budgeting procedure of Cincinnati Milacron; a 23 month delay at General Mills, Quaker Oats, Warnaco, and Toro. Only at Raytheon were budgeting and long-range planning done simultaneously. 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, such as steel producers and firms in other process industries. In Wilsons procedure, formal strategic planning functions are conducted throughout the entire year at both corporate and operating levels of management. Wilsons 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. This procedure is interesting, as well, because long-range plans and budgets are completed at the same time, unlike the procedure of Vancil and Lorange (1975), and because mid-year amendments to annual operating plans are an integral part of the procedurean unusual but page_124 Page 125 very pragmatic step. The chronology of planning milestones in Wilsons procedure is summarized in Exhibit 6.1. Smalter (1969) condensed a similar process into a six-month period. His procedure placed much greater emphasis on financial planning. Nevertheless, it still was functionally comprehensive. About half of the planning schedule (90 days) was devoted to strategic planning; the second half (90 days) was focused on financial planning (Figure 6.1). That Smalters procedure was truly comprehensive is demonstrated by Exhibit 6.2, which portrays the contents of a typical division planning package that was submitted to corporate management sixty days after the planning procedure began. Although Smalters schedule is somewhat compressed, the architecture of his administrative work products was excellent. EXHIBIT 6.1 Corporate/Division Planning Schedule for a Single-Business Corporation

Milestone

Target Date Corporate Planning Department prepares Top Corporate Managements proposed 5-year financial objectives and (after 2/28 approval) distributes them to line management. Divisions reply, concurring or submitting counterproposals and proposed changes to prevailing strategy. 4/30 Headquarters issues corporate and division objectives. 5/31 Divisions propose revised second-half budgets. 6/30 Headquarters issues approved second-half budget; 7/31 Divisions submit five-year sales forecasts, two-year cash flow projections with status quo assumptions, P&L estimates 7/31 for the next year, and capital expenditure proposals. Planning Department reports proposed capital projects and estimated free cash flow to Top Corporate Management. 8/31 Top Corporate Management notifies divisions of capital project approvals. 9/30 Divisions submit their 5-year plans and next years detailed operating budgets, which are reviewed and approved. 11/30 Planning Department issues next years budgets and revised corporate five-year plan. 12/31 Source: Adapted from Wilson 1971. page_125 Page 126 KEEPING THE PROCESS PRACTICAL Simmons (1972) provided a chronicle of his experience as a planning executive at IBM. He observed that, to be effective, a planning program must be highly implementation oriented. Therefore, it must be conducted by line management, with the support of planning staff. Another of Simmons success requisites was a programs flexibility and amenability to change. When decisionmaking evidence was not available, it often was useful to obtain the needed evidence by conducting brief, pragmatic research of internal operations and/or markets. Small research projects were conducted, for instance, to identify potential improvements in the sales force structure; personnel qualifications required to increase performance; and the potential market appeal of proposed new products. A planning staff is often well suited to perform such projects and thereby to add valuable evidence upon which planning decisions may be based. Houlden (1980) also found the planning staff to be an excellent resource for performing ad hoc studies of strategic issues, and providing evidence upon which to base choices from strategic alternatives. Thus, planning managers and departments with applied research skills are likely to be more successful than others. Pennington (1972) suggested that planning systems flaws usually were the results of impracticality. He emphasized that the planning

Source: Reprinted from Long Range Planning, Vol. 1, D. J. Smalter, Anatomy of a Long Range Plan, pp. 48. Copyright 1969, with permission from Elsevier Science. Figure 6.1 Planning-Programming-Budgeting Sequence page_126 Page 127

EXHIBIT 6.2 The Product-Line Package Source: Reprinted from Long Range Planning, Vol. 1, D. J. Smalter,Anatomy of a Long Range Plan, pp. 48. Copyright 1969, with permission from Elsevier Science. page_127 Page 128 process somehow must be integrated with daily decision making and operations. He argued that planning should become an integral part of the corporate management style to gain relevance in the organizations culture, through regular involvement. Steiner (1974) provided several procedural maxims for improving the planning functions chances for success. His often-quoted guidelines included the following: Senior management must understand the planning process. Successful planning programs emphasize finding good strategies more than formalized documentation. The procedure should fit the company; over-planning should be avoided. Objectives should be specific and pragmaticnot vague or idealistic. Long-range planning should not be neglected simply because short-term problems exist. Stress should be placed on results rather than elegant procedures. Formalized planning procedures should not be allowed to impair managers informal working relationships. Results of extended planning should be reflected in current operating decisions and the current years budget. 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. Gray (1986) conducted research aimed at finding out why planning systems break down. Eighty-seven percent of the 300 firms in his survey reported some form of disappointment with planning. The most frequent (59%) causes of malfunction were related to implementation difficulties. About 70 percent of the companies in this study did not even define how strategy would be implemented, and two-thirds of those firms difficulties could be traced to the planning systems design. After further scrutiny, 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 page_128 Page 129 On the other hand, Ramanujam et al. (1986) explored reasons for managers satisfaction with the planning function as well as planning functions success in developing strategy effectively. They studied 93 companies selected from the Fortune 500 and Inc. 500 lists. Using discriminate analysis, they found that different measures of planning effectiveness were associated with different planning procedure design factors. What was desired from the planning functionimproving financial performance or increasing market share and growthdetermined the best-suited style of planning: Financial performance was enhanced when line managers received adequate support from planning professionals as well as top management. Market share and sales growth were enhanced when the planning system paid greater attention to external business conditions; but then, there were no discernible differences in rates of return or other financial results. Technical proficiency of planning functions was enhanced by the planning systems capability to support strategy formulation by line executives. 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. Success of a formal planning function can be defined in at least three ways: willingness, if not enthusiasm, of managers to participate in the planning process; accomplishment of technically sound planning products; and accomplishment of commercial success, defined in terms of financial and/or competitive performance. Depending on the success criterion, planning functions may be structured to achieve that standard, but not necessarily others. Consequently, 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. KEEPING THE PLAN CURRENT Very little appears in the professional planning literature with regard to means for keeping plans current. Simmons (1972) observed that a well-conceived plan can become out of date after only six months. Roney (1977b) also observed that plans routinely fall out of currency. When the prevailing plan no longer is appropriate for realizing commercial success, it becomes useless or even counterproductive. For page_129 Page 130 example, plans loss of relevance occurs when actual business conditions depart from those that are assumed in the plan. Unfortunately, such departures may not be recognized until after serious problems have arisen. Managers naturally are reluctant to admit that their plans no longer are valid, because this can be an anxiety-provoking disclosure. Moreover, most planning functions are not set up to meet the requirements of replanning; and a crisis can occur when management realizes that the plan is invalid. A firms ability to change its plan can be a test of the planning functions survivability. At least two substantial risks stem from the loss of planning assumptions validity. First, implementing a plan that no longer is appropriate for its internal or external business conditions can lead a company to a commercial setback, or worse. Second, managers compensation incentives often are based on objectives in the plan; if these objectives no longer are realistic, then the manager loses a reason to believe that incentive compensation payments are fair and based on effective effort. In either case, the result will be a rejection of the planning function. Keeping the plan current may add to managers workloads; but it also increases the probability of a firms effective response to changes in business conditions, and it increases the probability of a planning functions survival. Since most business conditions assumptions ultimately will become invalid and must be replaced eventually, flexible techniques for updating planning assumptions, strategy, action programsand, occasionally, even goalsare needed. Accordingly, procedures such as scenario forecasting and contingency planning are very helpful; they enable management to identify potential shifts in business conditions that are within the realistic range of possibilities, although not as likely as assumptions in the prevailing plan. As alternative scenarios probabilities increase, contingency plans can be elaborated untilwhen the contingency in question becomes more realistic than the assumptions in the prevailing planthe contingent strategy can be substituted for its prevailing counterpart in the current plan (Roney, 2003). The best approach to replanning, then, is a continuous one, wherein assumptions and strategies are updated in a perpetual, rolling fashion. EVOLUTION OF THE FIRMS PLANNING NEEDS Two natural forces of evolution can change a firms planning needs over a long term. First, industries and markets have life cycles (Polli and Cook, 1969). Consequently, environmental problems and opportunities usually change fundamentally, over time. Second, as firms accumulate more or less experience and intellectual resources, their page_130 Page 131 competitive capabilities naturally change (Boston Consulting Group, 1970). More experienced firms in growth industries often can exploit accumulated cost advantages, while others must prospect for smaller targets of more limited opportunity based on differentiation and focus of their business models (Porter, 1980). Several practitioners and theorists have attempted to describe how the evolution of a firms planning needs is manifested in real life: Pennington (1972) observed that a firm must learn to plan and that, when the firms environment changes, so must its planning techniques. As this process unfolds, a firms structure typically undergoes fundamental changes that impose significant new planning requirements (Chandler, 1962). Henry (1977) observed this same evolutionary process, albeit from a different perspective. He observed that many firms planning programs, begun in the 1960s, either were discontinued or dramatically curtailed. In most of those same firms, comprehensive, formal planning returned in the 1970s. However, those new planning functions bore little resemblance to their predecessors. Chaffee (1985) proposed that the way in which strategy-making occurs also evolves through stages. She dubbed these types as the linear, adaptive, and interpretive modes. Essentially, firms begin with largely financial and forecast-based planning methods. Later, they add strategic analysis and eventually may achieve full-scale strategic management capabilities. As Smith, Mitchell and Summer (1985) observed, top managements implementation priorities also shift between stages of the firms life cycle. There is a high priority on organizational coordination of implementation during early stages, whereas political support for strategic alternatives seems to become more important during later stages. Leontiades (1989) developed a model by which firms planning requirements evolve as a function of the firms size, diversity, and breadth of strategic focus. Those dimensions, of course, are not static, but subject to continuous change. Financial technicians, planning specialists, and strategic generalists roles vary in importance depending on firm size and complexity, at different evolutionary stages. Leontiades hypothesis was especially important because it acknowledged that a firms evolution is not necessarily linear. After growing in size and complexity, the firm may regress on either scale. This can occur, for instance, when a corporation grows in size and diversity through acquisitions and, later, divests unsuccessful acquisitions in order to focus on a more limited line of related businesses. Planning skills needed to conceive, implement, and integrate acquisitions, and those that are appropriate at higher levels of diversification or complexity, may become inappropriate as this process extends into the consolidation stage. It is especially important to review the fundamental assumppage_131 Page 132

tions of a firms planning methodology from time to time, to be sure that it remains consistent with the firms environmental circumstances and internal needs. INTEGRATION OF LONG-RANGE AND NEAR-TERM PLANNING Several methodologists have called for the integration of long- and short-range planning. Vancil and Lorange (1975) defined their planning procedure as a continual one, leading from long-range planning into annual budgeting. They called for a definite linkage of long-range plans and budgets (Lorange and Vancil, 1976). Henrys (1977) survey then identified firms failure to link strategic and operational planning as a critical pitfall. Opinions certainly are not universal on this subject. Steiner (1971) opined that strategic and operational planning eventually must diverge because the focus of each is so different from the others. 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. Shank, Niblock, and Sandalls (1974) studied the incidence and techniques of linking long- and short-range plans in six large industrial firms: Cincinnati Milacron, General Mills, Quaker Oats, Raytheon, Toro, and Warnaco. They found that the extent of short-rangelong-range linkage seemed to reflect the firms planning horizon. Shorter horizons, they opined, encourage tighter linkage and longer horizons encourage less linkage. On balance, theorists and practitioners probably have tended to favor close linkages of strategic/long-range plans to their near-term counterparts, if only to achieve greater pragmatism of each. Thus, 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. Thereby, plans and the planning function will be most relevant to how a firm actually is managed. Similarly, Steiner (1974) wrote that, to attain relevance, planning products must be employed in current decision making and executives must have incentives to plan beyond the near term, as well as the current term. In light of those theorists opinions, it is very interesting to consider the findings of Capon et al. (1987:78). Among 113 large industrial corporations, 32 percent did not link long- and short-range plans. An equal portion (32%) first prepared long-range plans and then prepared short-range plans from the former, while 17 percent followed the reverse sequence and 15 percent prepared both plans simultaneously. Firms with fully developed strategic planning capabilities were equally page_132 Page 133 likely to prepare the two documents independently (42%) and to prepare short-range plans as extensions of long-range plans (42%). Remarkably, 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. PITFALLS During the 1970s, three surveys were conducted to identify specific flaws of planning functions that could jeopardize their continued existence. All three surveys results were similar. Steiner (1972a) surveyed 159 companies and published a report on the most important pitfalls to be avoided by architects of planning procedures. The three most important pitfalls occurred when top management attempted to delegate its planning responsibilities to a staff; when it routinely disregarded long-range planning functions in favor of temporary priorities; and when goals were not developed specifically enough to serve as a basis for formulating longrange strategy. Three years later, Steiner and Schlhammer (1975) extended the same survey to 460 multi-national firms. The same three pitfalls just mentioned again were ranked highest. The most important pitfalls did not differ between sizes of firms, but they did differ between countries. Planning tended to be the most formalized in the United States and Australia, but least formalized in Japan and Italy. Planning procedures tended to be documented most frequently in Australia but least frequently in Italy and Japan. Very low documentation levels were most frequent in Italy (but not Japan) and least frequent in Australia and England. Thus planning practices, as well as pitfalls, can differ significantly between nations. Two years later, Henry (1977) also reported a survey of planning pitfalls. This is the same report discussed earlier, which found many planning programs to be discontinued or curtailed. Thus, these pitfalls should be especially important to planning executives. Many of Henrys results corresponded to those of Steiner (1972a) and Steiner and Schollhammer (1975). However, Henry also observed several pitfalls that were not reported by the two prior studies. Those pitfalls seem to reflect the way in which planning functions are managed. Some of Henrys additions to the pitfalls list include: Top management does not reward systematic planning. Top management gives inadequate direction to line management by failing to define missions, goals, and strategy specifically enough. There is a failure to link strategic planning and operational planning. page_133 Page 134 Operating managers are not adequately prepared before formal planning is introduced, and they are not trained to use the planning system. Henry also observed one final pitfall, which warrants a particular note. 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. In those cases, as the plan was manifestly of small importance to top management, line managers paid less attention to it. CONCLUSIONS In many respects, comprehensive commercial planning is an administrative discipline. Several administrative procedures are required to make the planning function operate effectively. Therefore, successful planning executives typically are proficient administrators. The following eighteen postulates and twelve hypotheses are addressed specifically to administrative functions of strategic management.

GENERALLY ACCEPTED PLANNING PRINCIPLES: ADMINISTRATION Initiating the Planning Process: Five Postulates Postulate6.11A new planning function must be ordained by the Board and CEO. 6.12Upwards of two years are required to install initial planning procedures. 6.13Implementation of the new process should be pragmatic. Initial success in producing benefits to the firm must occur soon after implementation and be widely acknowledged. 6.14The planning manager must establish supportive working relationships with line units and become integrally involved with line management. 6.15Sophistication of planning procedures should grow only as the organization becomes more competent and confident in planning. Scheduling of Procedures: Six Postulates Postulate 6.21 Planning activities should be scheduled through out the entire year in order to maintain strategic page_134 Page 135 awareness and avoid managerial strain from conducting the process in a more limited period of time. 6.22The process re-initiates at the outset of each year, with corporate-level reviews of fundamental mission-related issues, sources of return on investment, the firms structure, successes and failures of the current corporate and business plans, and primary strategic issues. 6.23Strategic plans of business units and/or the single business corporation are prepared during the first half of the year. 6.24Business units strategic plans are consolidated and a corporate-level strategic plan is drafted at mid-year. 6.25Conflicts and uncertainties between corporate and business unit plans are assessed and resolved in the third quarter. During this time, capital projects are approved, based on anticipated corporate cash flows, and other implementation projects/programs are approved. Strategic plans then are completed and approved. 6.26Operating plans and budgets to implement the first year of the strategic plan, including approved projects, are prepared and approved in the fourth quarter. Keeping Planning Practical: Five Postulates Postulate6.31The planning staff should be an internal consulting resource, able to perform analytic projects to facilitate decision making by line management. 6.32Planning managers should lend active support in line management functions, primarily as business analysts and consultants. 6.33The operating plan and budget must be linked to longer range plans. 6.34Management incentives must be based partly on formulation and implementation of extended strategy. 6.35Implementation elements of the plan must be fully developed so that they can be executed reliably. page_135 Page 136 Replanning: Three Hypotheses Hypothesis 6.11 Most firms are unprepared for replanning and do it badly, if at all. 6.12 Plans can be seriously outdated within six months of preparation. 6.13 A sound plan implemented long enough, without replanning, is either worthless or a prescription for failure. Evolution of a Firms Planning Skills: Three Hypotheses Hypothesis6.21Firms learn to plan and improve at it over time. 6.22Firms planning requirements evolve with their life-cycle stages and experience in planning. This process passes through identifiable stages. 6.23As firms evolve in complexity or simplicity and size, required planning skills also evolve. For instance, when a firm is growing through acquisitions, certain planning skills will be needed. When its industry stabilizes and the firm focuses on a more limited scope of business, a different set of planning skills will be needed. Integration of Short- and Long-Range Planning: Postulate 6.41Comprehensive planning, as a decision-making and resource allocation process, spans both long and short terms. Postulate 6.42Budgeting is at one end of the time span covered by comprehensive planning. Long-range planning is at the other end. These two disciplines are inextricably related. Hypothesis6.31Failure to link strategic and operational (long-and short-range) plans is a primary reason for the failure of plans and planning functions. Pitfalls: Six Hypotheses Effectiveness of planning functions will be impaired if any of the following principles is violated: Hypothesis 6.41 Ultimate responsibility for planning functions performance must not be delegated by the CEO to others. page_136 Page 137 6.42 Goals must be sufficiently specific to serve as a basis for forming strategy. 6.43 Senior corporate and business unit mangers must understand essential planning principles. 6.44 Strategic and operational planning must be linked. 6.45 Executives compensation must reflect their contributions to strategic planning.

6.46 Capital allocations to businesses must be consistent with the corporate plan. page_137 Page 138 This page intentionally left blank. page_138 Page 139 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 3.1) may be applied in actual practice. These contingencies, which must be recognized in crafting a planning process that fits the individual firms particular needs and circumstances, include the following: Level of risk Organization size and structure Structural complexity The planning horizon Frequency of review Participation and consensus Corporate culture Management style Resistance to planning Any of these eight contingencies may compel planning procedure adjustments. page_139 Page 140 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, it has been acknowledged that planning procedures must deal with business risk. Several researchers and theorists subsequently have addressed the need to select planning procedures appropriate for a firms level of environmental risk. There is no generally accepted view on how environmental risk should be defined, let alone measured. But, the definitions offered by Dess and Beard (1984) and by Dess and Origer (1987) are, at least, very helpful. In particular, three dimensions of environmental assessment are proposed: munificence, dynamism, and complexity. Whereas the latter two dimensions are fairly self-explanatory, the concept of munificence may not be: it refers to an industrys accommodation of the firm in its attempt to accumulate slack resources. When munificence is low, dynamism is high, and/or complexity is high, environmental risk also is high. Ansoff (1988:136, 173ff) discussed strategic risk in terms of environmental turbulencea concept that subsequently became increasingly popular. Presumably, turbulence is most severe in highly dynamic industries. Assuming that ones concept of environmental risk is at least generally consistent with that in the preceding paragraph, 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. Hence, the planning function, in this context, is one means by which management attempts to manage exogenous risk. Anderson and Paine (1975) hypothesized, very convincingly, that managers adjust their planning approach to perceived levels of environmental uncertainty (risk) and the relative need to change their businesses internallypresumably reflecting the extent to which operating capabilities are satisfactory or unsatisfactory. These two factors combined influence on managements selection of a planning approach is represented in the matrix portrayed in Figure 7.1. This model accomplishes a great deal. It demonstrates, in terms of methodology, how comprehensive planning rationalizes internal capabilities to the external environment, depending on the level of risk in each dimension. Lindsey and Rue (1976) studied the relationship between environmental turbulence and sophistication of planning practices in 198 firms during 1973 and 1975. They found that planning practices sophistication increased with environmental turbulence. Moreover, strategic objectives were defined with shorter terms and progress reviews were page_140 Page 141

Source: Reprinted from Academy of Management Journal, Vol. 18, C. R. Anderson and F. T. Paine, Managerial Perceptions and Strategic Behavior, pp. 811823. Copyright 1975, with permission from Academy of Management Journal. Figure 7.1 The Anderson and Paine Strategy Model more frequent when turbulence was highest. Khandwalla (1976) similarly studied planning practices in 79 firms: when managers perceived their environment to be dynamic and uncertain, they tended to develop more comprehensive and multifaceted strategies. The accuracy with which managers perceive environmental uncertainty also can be important. Bourgeois (1980b) found that the accuracy with which twelve firms managers estimated environmental uncertainty (compared to objective measures of actual environmental volatility during 19711976, when a deep economic recession occurred) was positively correlated with financial results. Taking a somewhat different view of risk, Grinyer et al. (1986) found that vulnerability of firms core technologies led to more sophisticated analytic techniques in planning among 48 British firms. Greater complexity, in the forms of diversification and divisionalization, also was Perceived Need for Internal Change page_141 Page 142 associated with a broader scope and more formality of planning practices. Firms with high market shares (lower risk) gave relatively low organizational status to staff planners. Moreover, when firms were highly dependent on a few major customers (greatly increasing competitive vulnerability, but not necessarily risk), neither corporate planners nor chief executives were as involved in making strategic decisions as otherwise; instead, strategic decision-making responsibilities were delegated to business units dealing directly with critical customers. In the most recent study of its kind, Kukalis (1991) studied 115 large manufacturing firms and found that planning extensiveness, horizon and review frequency all were significantly correlated to environmental complexity. However, environmental complexity (not the firms structural complexity) also seemed to be associated with less involvement by the planning staff in actually formulating strategy. In this study of large manufacturing firms, 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. 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. In a recent, unpublished longitudinal study of 368 publicly owned firms, 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 19811982 recession that were experienced by firms without formal planning functions or those with planning functions that were less well developed. In this study, the tangible benefits of strategic planning as a risk management mechanism were clearly apparent. On balance, these studies seem to demonstrate that comprehensive business planning performs an important risk-management function. However, as might be expected, there have been exceptions to this rule. 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). However, 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). When considering these two studies, we must be reminded that, as in dealing with most planning principles, rules have exceptions.

However, the weight of evidence obtained from studies discussed in this section leads to a general conclusion that environmental risk, the level of planning functions development, and financial performance tend to be closely related. Planning functions can mitigate downside business risks; they page_142 Page 143 tend to be found more often in complex, dynamic environments; and financial performance tends to benefit from CP practices in such environments. However, when planning functions become too comprehensive they actually may impede adaptation to unstable markets (Fredrickson and Mitchell, 1984); special care must be taken to avoid that pitfall. ORGANIZATION SIZE AND STRUCTURE Practitioners long have recognized that different organization structures require different approaches to planning (Lorange and Vancil, 1976; Steiner, 1971, 1979). When there is only a single line of business, management authority probably will be centralized and organizational responsibilities will be divided along functional lines (e.g., manufacturing, sales, distribution, etc.). Centralized structures permit top management to select goals and strategy unilaterally. In this top down mode, only, it is possible to employ quantitative methods for optimizing selections from alternative goals or objectives. In that mode, also, responsibilities for formulating implementation programs may be delegated from the top to line managers (Figure 7.2). As the corporation grows in size, allowances for a broader spectrum of informational inputs must be made. In a large centralized firm, for instance, corporate goals and strategy well may be formulated by a team of corporate and line executives, perhaps assisted by technical specialists. One of the teams unique purposes is to consider how organizational units can combine forces best to accomplish a single mission. Team arrangements are most suitable for larger centralized organizations that are still engaged in limited lines of related business. As the firms authority structure becomes even more decentralizedusually because lines of business are diversifieda single framework

Source: Adapted from Vancil and Lorange 1975. Figure 7.2 Appropriate Approaches to Decision Making in Firm Size/Structure Combinations page_143 Page 144 of goals and strategy is more difficult (if not impossible) to hand down to all business entities. Optimizing approaches to selecting goals or objectives are very difficult, if not infeasible, in such structures. Consequently, a bottom-up approach to planning is more practical. Very large decentralized organizations, with multiple lines of business, also may employ hybrid arrangements in which individual businesses planning approaches are either top-down or team-based, but their proposals flow to corporate management in a bottom-up fashion. Thus, a hybrid procedure consists of both bottom-up and top-down approaches. Top corporate management provides operating management with the corporations goals, preliminary strategic objectives, capital allocations, and expected rates of return. Operating management submits preliminary forecasts of market conditions, financial performance potential, and preliminary statements of its own objectives. Differences between corporate and operating expectations then may be resolved; where necessary, objectives can be amended before more detailed planning begins. Subsequently, in a series of further exchanges, back and forth, objectives and strategy may be successively refined and elaborated (Vancil and Lorange, 1975). Impacts of centralization/decentralization and divisionalization on appropriate planning styles (based on performance priorities) were studied by Horovitz and Thietart (1982). Using factor analysis, they found significant structural differences among 52 European firms with high/low growth rates and high/low profit margins. Companies that grew fastest tended to be the most divisionalized and decentralized. Their planning styles were participative, but with considerable intervention by top corporate management. Top managements approach was comprehensive and highly coordinated, in those cases. But line managers had strategic autonomy. Corporate control systems were more likely to be anticipatory (i.e., to use forecasts versus post hoc approaches). Companies with the highest profit margins had the most formal management structures and were less decentralized. Top management involvement in planning was less intensive than in faster growing firms, but their control structures were more stringent. Hart and Banbury (1994) discovered that there may be a limit on the attainable benefits of planning in smaller firms. They studied the extensiveness of planning and strategy making practices in 720 Midwestern industrial firms, seeking to discover relationships between breadth of planning capabilities and measures of performance in terms of sales growth and return on assets. The capability to form strategy was significantly correlated to performancebut only in larger firms, not smaller ones. That study was reminiscent of another, by Robinson and Pearce (1984), who also addressed smaller firms planning practices. They found that formal planning procedures were much less frequent in page_144

Page 145 these companies and that shorter planning horizons prevailed. Informal rather than formal planning practices were preferred most often in these firms. Formal planning in small firms also seemed to be most beneficial when objective outsiders (consultants and directors) were involved. Several case histories have appeared in the literature to describe alternative planning arrangements in actual practice. For instance, Knoepfel (1973) described the role of planning professionals at Solvay American Corporation, a large, complex corporation. The political and organizational skills required of a professional corporate planner were emphasized. Getting objectives and strategy communicated, delegated, and accepted by the organization were among the planners primary tasks. Another task was to promote continual adaptation of plans to a changing environment, even though line management was prone to resist significant changes. The planning professional at Solvay was a technician as well as a facilitator. However, if a corporate planner were to take on the role of actually making strategic decisions, Knoepfel opined that the planning function would have been fundamentally flawed, since that domain must be reserved to directors, chief executives, and line officers. The approach to planning at Solvay American Corporation was in direct contrast to that of Estel, a large steel producer in Germany and Holland that in the early 1970s had sales of more than DM 8 billion and 75,000 employees. Although Estel was huge by most standards, it actually was engaged in only a few closely related lines of business. Thus, its planning approach unlike that in more diversified companies, such as Solvay American, was highly centralized; and the planning staff was integrally involved with top corporate management in defining goals and strategy. The advantages in this arrangement included planning procedures uniformity, consistency of operating plans with central strategy, close linkage of corporate and line management, strategic flexibility, and integral direction of planning procedures by top corporate management (Friedrich and Land, 1974). STRUCTURAL COMPLEXITY Leontiades (1983) hypothesized a relationship between planning skills required in different combinations of corporate size and complexity. He also opined that planning skills requirements are likely to change perpetually as the firm evolves. Research seems to have confirmed the first of those expectations at least. Grinyer et al. (1986), in a study of forty-eight large British companies, found that greater diversification and divisionalization resulted in plans broader scope and more formal planning page_145 Page 146 procedures. They conjectured that their findings reflected a growing need for top-level control and coordination of operating units as a corporations size and complexity increase. 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. He studied 89 of the 1972 Fortune 1000 companies (out of 210 initially contacteda response rate of 42%). Internal complexity was associated with higher development of planning functions and higher involvement of top corporate management in initiating planning procedures. Firms with greater perceived organizational complexity tended to have more sophisticated planning systems, implying that complex operating systems may need the integrating benefits that comprehensive planning can provide to process information and/or revise strategy effectively. Rhyne also found a strong inverse relationship between environmental volatility and internal complexity during periods of fundamental change, implying that organizational complexity tends to be perceived as an impediment to adaptation during periods of fundamental changes in the external environment. In essence, 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, thereby serving as a risk management device. Thus, formalized business planning mitigates potentially adverse impacts of disorder, imparted by internal complexity and diversification (Rhyne, 1985; Grinyer et al., 1986), and of extreme environmental uncertainty (Kukalis, 1991). However, it would appear that these risk reduction benefits are more demonstrable in large companies than in small ones (Hart and Banbury, 1994; Robinson and Pearce, 1984). THE PLANNING HORIZON Selecting an appropriate planning horizon is a perennial problem for which planning professionals rarely find satisfactory solutions. In 1979, Boulton et al. (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. In a similar survey, five years earlier, that proportion had been higher, at 83 percent. The difference was attributable to a shift toward longer horizons. Capon 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. Extended horizons, beyond five years, were uncommon. Since that report, not much further empirical inquiry has been made into the length of firms planning horizons. However, Roney (2001) did page_146 Page 147 investigate the planning horizons of 324 companies in ten cyclical industries (auto components, building components, basic metals, chemicals, machinery, petroleum, industrial construction, environmental services, banking, and electric utilities) during 1994 and 1995 (Figure 7.3). More than half (59%) of these large public corporations had planning horizons of five years or longer. Planning horizons were five years or longer in 74 percent of petroleum companies and 74 percent of electric utilities, but only 33 percent in the banking industry, suggesting that the planning horizon and asset intensity may be related. Indeed, 69 percent of firms in the process industries, 49 percent of firms in the fabrication industries and 42 percent of firms in the service industries had planning horizons of more than five yearsfurther suggesting an asset intensityplanning horizon relationship. Thus, the vast majority of asset intensive firms prepare plans with horizons of at least five years. This is not to say that companies

necessarily choose their planning horizons rationally, but rational grounds for selecting a planning horizon are available. For example, payback periods on strategic programs probably are a lot longer in asset-intensive process industries than they are in service industries. Wilson (1972:69) proposed that the planning term should be based, in part, on turbulence in the competitive environment. There is a connection between turbulence and the distance into the future which a company should look, he argued. Thus, the horizon should be shortened when turbulence increases and be lengthened during calmer periods. More-

Source: Roney 2001. Shaded bars denote asset-intensive industries, N=324. Figure 7.3 Inter-Industry Differences in Long-Range Planning Incidence, 1995 page_147 Page 148 over, in any companys future there is usually one thing, or set of connected things, which looms large, say two or three years out, or maybe seven or eight years out. The planning system, like the radar screen, should be scanning the future at a distance ahead which will allow the company time to spot, plan for, and handle these events. Whereas, the flexibility of the foregoing viewpoint makes intuitive sense, Friedman and Segev (1976) offered a more doctrinaire approach to selecting the plans term. They argue that there is a horizon beyond which planning effectiveness will not be improved. Planning beyond that point is fruitless because projections further into the future are irrelevant to performance potential. Accordingly, criteria for selecting the planning horizons 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 The lead time from formulation of strategy until its realization Thus, firms with short product life cycles also should have short planning horizons. Similarly, short payback periods should be accompanied by shorter planning horizons, and vice versa. Moreover, from a pragmatic point of view, the number of available projects will decline during recessions, as should the planning horizon. But the number of possible projects (and planning horizon) will increase with the size (and complexity) of an organization. Robinson and Pearce (1984) came to a similar conclusion after conducting research into planning practices of small firms; they concluded that, for small firms, the planning horizon should be no more than two years. Kukalis (1991) studied 115 large manufacturers and found that planning horizon was significantly correlated to environmental complexity. In more complex markets and industries, planning horizons typically were longest. Kukalis findings must be tempered by those of Lindsey and Rue (1976), however, who had found that environmental turbulence (versus complexity) was inversely correlated to the planning terms length. It therefore may be hypothesized that the implications of complexity and volatility of business conditions for an appropriate choice of planning horizons are opposites. FREQUENCY OF REVIEW Another procedural issue that often concerns planning executives is the frequency with which strategic plans should be reviewed. In the page_148 Page 149 study by Kukalis (1991) mentioned above, it also was found that the frequency of review, like the planning term, was significantly correlated to environmental complexity. Lindsey and Rues (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. Kudla (1978) surveyed 323 large U.S. corporations (58% of the 557 companies initially contacted). Two hundred seventy-two of those firms (84%) reported that they had a formal plan covering at least three years. The most common review frequency was annually (40%) followed by quarterly (26%) and monthly (18%). It is not at all surprising that annual reviews were the most frequent. But it is remarkable that long-range plans were reviewed at least quarterly almost half of the time. A survey by Boulton et al. (1982) of 142 U.S. and Canadian firms in 1979 disclosed similar results. Only 33 percent of respondents reported that plans were reviewed annually, while 34 percent reported quarterly reviews and nearly a quarter of the respondents (24%) reported monthly review frequencies.

On the other hand, Ang and Chua (1979) reported that 71 percent of 113 large U.S. corporations updated their plans only annually; that result differed sharply from Kudlas findings. Moreover, Capon et al. (1987:94) found that two-thirds of the 113 large industrial firms reviewed their plans annually; 16 percent bi-annually; and 16 percent monthly. Thirty percent of firms with the most fully developed strategic plans reported biannual reviews (about twice the total samples average). Most recently, Roney (2001) also found that 65 percent of 324 industrial firms reviewed their plans no more frequently than once per year. In conclusion, long-range plans of business are reviewed at least annually, and often twice per year. Firms that experience high levels of environmental volatility and/or complexity tend to review their plans most frequently. There also seems to be a suggestion that the incidence of frequent reviews has declined over the years that these surveys were conducted. PARTICIPATION AND CONSENSUS It is conventional wisdom that participative approaches are most conducive to successful planning procedures. Thus, it is believed, a higher level of participation in the planning process should elicit a higher level of acceptance, within a management organization, of the strategy that ultimately is adopted. For this reason, broad-scope involvement of the management team in planning procedures typically page_149 Page 150 is viewed as desirable. Moreover, concurrence of management team members on strategy should result in a higher level of their commitment and willingness to implement strategy. Similarly, resistance of managers to the planning process should be lessened (Ewing, 1969:4456, 2024; Taylor, 1976:67, 68). According to this conventional wisdom, 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, 1972). More participative approaches became popular during the early 1970s (Humphrey, 1974). Combinations of topdown and bottom-up methods also were devised (Berschin, 1973) and became popular in large corporations (Vancil and Lorange, 1975). Taylor (1976:67), in summarizing the state of the art, concluded that if quality of the plan is more important than acceptance, then a non-participative approach is appropriate. But if acceptance of a decision is more important than quality, a group decision is desirable. In the 1980s, a higher preference also was placed on consensus building (not just participation) as an element of strategy formulation. To a great extent, 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, 1982:22027). However, most observers seem to have missed the point here. Japanese management structures in fact are highly authoritarian and usually centralized (Kono, 1976). They adopted Western management organization structures and planning procedures, but they did not follow Western decision-making and implementation methods (Ohmae, 1982:220, 221). In the past three decades, a considerable amount of empirical study has been directed to questions of consensus and participation in planning. Consequently, it is now possible to test the foregoing conventional wisdom objectively. A history of this research and theory that stems from it are traced in the following paragraphs. Lawrence and Lorsch (1967) first studied structural integration and consensus in ten manufacturing companies. They found that higher levels of integration characterized the best performers. The lowest performers were least integrated. In this early study, organizational integration did seem to encourage higher performance levels. Similarly, 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. Grinyer and Norburn (1975) subjected the consensus question to a more rigorous statistical test by studying 21 British companies during 19661970 and interviewing 91 of their officers. Surprisingly, they were page_150 Page 151 unable to demonstrate a correlation between consensus on objectives and rates of return on net assets. In fact, consensus actually was inversely related to performance. This finding stimulated a great deal of interest in the possibility that discord, rather than consensus, might permit an organization to explore a broader range of alternatives before making ultimate selections. Indeed, Bourgeois (1978) later demonstrated that disagreement on goals was positively correlated to performance when management had accurate perceptions of environmental risk. Later still, Bourgeois (1980a) reported on a study of twelve non-diverse companies in the northwestern United States. Highest performers were distinguished by managers disagreement on goals but agreement on means (or strategy) for their accomplishment. Managers of the lowest performers agreed on goals but disagreed on means to their accomplishment. Other groups (agreeing on both goals and means, or disagreeing on both goals and means) exhibited about the same moderate levels of performance. Performance was highest of all when management agreed on very narrow objectives of strategy (but disagreed on broader goals) and agreed on means for goals achievement. Consensus on strategy always resulted in higher performance than when there was disagreement on strategy. Somewhat at odds with the foregoing studies were the results of DeWoot et al. (1978), who found that successful firms in Belgium were more likely to manifest disagreement on alternative means to reaching goals of technological innovation. However, Kloeze et al. (1980) observed that planning in European companies often is much more participative than in U.S. companies for cultural reasons. Thus, regional and/or national culture is yet another contingency to be considered when designing the participative dimension of a planning procedure. A study by Hrebiniak and Snow (1982) produced results more along conventional lines. 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. Hall (1983) demonstrated that high levels of consensus regarding strategy among members of the top management team resulted in a shared understanding, which in turn facilitated implementation. In a study of planning practices in ten U.K. organizations, Dyson and Foster (1982) attempted to correlate participation and thirteen measures of planning effectiveness. Using cluster analysis, intercorrelations of planning expertise variables were found. Planning expertise was inversely correlated with the level of participation, perhaps suggesting that when firms had achieved technical planning expertise, participation levels were less necessary. page_151 Page 152 Bourgeois and Singh (1983) attempted to resolve the disparate findings of studies regarding participation and consensus theoretically, drawing on the concept of slack resources. As slack resources are increased, the top management team should be more able to resolve conflicts regarding goals and strategy. This is because, with more slack, a broader scope of objectives may be pursued by managers who have divergent views, without exhausting the firms resources. Bourgeois (1985) examined the matter further by studying disagreements between executives goal preferences and their accuracy of perceived environmental uncertainty (PEU). Goal diversity still was positively correlated with performance. But, as PEU and actual environmental volatility measures diverged, performance decreased. Conversely, as accuracy of risk assessments (PEU) increased, so did performance. Dess (1987) studied the planning behaviors of 19 paint manufacturers. Managers consensus on goals was associated with higher performance when consensus on strategy was held constant. While that finding disagreed with the studies mentioned earlier, Dess reasoned that this may have been because his study included primarily small companies and employed subjective performance assessments of respondent companies top managers. One of the most recent studies on this issue was conducted by Wooldridge and Floyd (1990), who examined 20 banking organizations. Mid-management participation in formulating strategy was correlated positively with performance. Participation of mid-level managers may have enhanced consensus, but consensus itself did not enhance performance in this study. 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. They observed that consensus probably is more important in incremental versus deterministic planning approaches. They also observed that deterministic approaches tend to be found more often in centralized (versus decentralized) organization structures. Deterministic (or synoptic) approaches, they argue, can develop consensus that is limited to the top management team, where shared understanding of strategy should be high. Incremental approaches, on the other hand, must achieve broader consensus beneath the top management level. Comprehensive analysis of alternatives is less likely when the planning approach is incremental. Still, some understanding of a strategys rationale among the organizations members obviously is required before their full commitment can be achieved. Notwithstanding the foregoing attempt, it is difficult to summarize the lessons of research with regard to roles that participation and page_152 Page 153 consensus can play in enhancing the effectiveness of planning, strategy, or a firms performance. Credible studies actually have produced results on both sides of the ledger. Thus, 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 teams PEU assessment Dess (1987)consensus on goals Moreover, Wooldridge and Floyd (1990) found that mid-management participation (but not consensus) enhanced performance. Notwithstanding the foregoing research findings, 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 al. (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. On balance, the weight of evidence from these studies results seems to support a conclusion that consensus of the management team on a firms business conditions (internal strengths and weaknesses and environmental uncertainty) and on means to achieve goals and accomplish strategy serves as a strong performance enhancer. Even Bourgeoiss study (1980a) concluded that, while disagreement on goals may have enhanced results, agreement on means surely did so. More troublesome, however, are the findings by Bourgeois (1978, 1980a) that disagreement on goals might enhance performance. It would be helpful if researchers other than Bourgeois had confirmed his findings. So far, those studies seem to stand alone. If they were replicated and confirmed, Bourgeois findings would present a troublesome page_153

Page 154 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! Perhaps the economic concept of managers satisficing vs. optimizing behavior in decision-making (Cyert and March, 1956) ultimately will help to resolve this confusion. That slack resources can serve as facilitators of strategy formulation (Bourgeois and Singh, 1983) may explain why top management conflicts on goals can exist but still be resolved to a point where consensus on strategy is achieved. However, these are hypothetical conjectures. At this point, we can conclude only that consensus on goals may not be necessary for excellent performance, while consensus on strategy usually is. Mid-management participation in the strategyforming process may be helpful in this respect (Wooldridge and Floyd 1990), but not necessarily (Dyson and Foster, 1982). More important, a management teams mutual understanding of strategy probably facilitates the implementation and therefore accomplishment of results (Hall, 1983; Hambrick, 1981). CORPORATE CULTURE In his first text on strategic management, 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. 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 institutionand who probably contributed to the firms prevailing strategywill be threatened. There have been many subsequent observations regarding the forces and limitations that corporate culture can exert on strategy. Perhaps one of the most important was contributed by David Ewing (1969); his text on the human side of planning still is seminal reading for planning executives. Indeed, failure to diagnose and deal with cultural issues can shorten the life expectancies of both the planner and the planning function (Knoepfel, 1973; Pennington, 1972). The corporate culture also can perpetuate strategy. Miles, Snow and Meyer (1978) described this phenomenon by explaining how strategies may become self-reinforcing. For instance, when marketing management adopts a prospecting strategy, managers with new account development skills are needed. As managers with those skills are hired and succeed, they gain prominence in the organization because of their skills importance. In turn, they hire other managers with whom they share technical skills and preferences. Thus, the selling organization page_154 Page 155 gains even more political strength within the firm, and corporate strategy formulation takes on a bias favoring sales and growth even when that no longer may be appropriate. An illustration of this syndrome, on an industry-wide level, 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. Thus, the railroad industrys slow growth rate had affected the type of executives who were found in railroad firms. Their common traits created an industry culture that also influenced corporate strategies. Hambrick and Mason (1984) formulated several hypotheses to explain how such cultural phenomena operate. They observed that senior executives are recruited in response to directors requirements that reflect the directors own backgrounds and strategic views. Not surprisingly, such executives then recruit team members who share those same views. The result of this process easily can determine a firms culture. MANAGEMENT STYLE The chief executives management style also will have a determining impact on corporate culture as well as the planning functions approach and effectiveness. In fact, the arrivals and departures of chief executives have been shown to make a significant difference in firms financial performance (Lieberson and OConnor, 1972; Shen, 2000a,b). It is widely recognized that there can be dramatic differences in styles of chief executives (Molz, 1987; Nutt, 1987, 1998; Shrivastava and Nachman, 1989). 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 corporate culture including management structure, direction of decision authority, normal levels of participation and consensus. There have been very few studies of management styles impacts on plannings effectiveness. Goold and Campbell (1988) surveyed 16 large British firms, interviewing between five and twenty senior executives in each firm, nearly always including the CEO. They found three styles of management in these firms: strategic planning, strategic control, and financial control. Each style represented successive steps toward decentralization of decision making and greater autonomy of line managers in performing planning functions. In this study, 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 page_155 Page 156 Long-term versus short-term objectives Tight control versus flexibility The choice of a management style will determine how these five tensions are resolved. Such style choices typically reflect executives personal histories and social expectations (Downey, Hellriegel and Slocum, 1975; Hambrick and Mason, 1984). Ultimately, management style is defined by the way in which a chief executive relates strategy to the organization. Molz (1987) defined three management styles, each of which seems to be associated with a different approach to selecting strategy (Table 7.1). While these three styles labels are self-explanatory, it is important to note that either of the first two styles can be successful. But the third style, lacking basic consistency, will not be successful. It is amusing but informative to read Golightlys (1977) small book, in which ten CEO management styles are described. Golightly formulated these characterizations based upon an extensive consulting career. Readers surely will recognize chief executives whom

they have met in these brief but vivid profiles. Golightly labeled his ten styles as management by inaction, detail, invisibility, consensus, manipulation, rejection, survival, despotism, creativity, and leadership. More modern contributions to the literature of organizational psychology well may add to or delete some of Golightlys archetypes. However, the point remains the same: Planning procedures must be compatible with the predominant style of a firms top management, particularly the chief executive. Having diagnosed management styles of the top management team and the chief executive, a planning executive presumably will be better prepared to select an appropriate planning procedure. Quite remarkably, however, there has been very little empirical research or even theoretical writing on methods and impacts of matching planning approaches to management style. Thus, it is somewhat disconcerting that guidelines for achieving such a match do not exist. The research by Molz (1987), mentioned earlier, is a step in the right direction. Unfortunately, his inquiry has not been followed by other researchers. It would be helpful if researchers could identify the propensities of chief executives with different styles to adopt specific approaches to planning. It would TABLE 7.1 Management Style versus Planning Approach Management Style Typical Planning Approach Charismatic/extroverted Top down/authoritarian Indigenous/introverted Logical incrementalism Disjointed/ad hoc Inconsistent, rivalrous page_156 Page 157 be even more helpful if the interactions of management styles and planning styles were evaluated in terms of their impact on consensus, corporate performance, and/or survival of the planning function. Eventually, such studies probably will be done. But, on this matter, at least for the time being, planning professionals are left to their own devices. 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, especially because there seems to be a natural tendency for managers to resist planning. Ansoffs (1965) observation, that changes in a firms strategy probably will encounter at least some organizational resistance, was noted earlier. David Ewing (1969:203) studied the tendency of managers to resist planning initiatives. He concluded that there is a perpetual conflict of intellectual interest between planners and line managers, 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 Ewings hypotheses have not been put to any systematic empirical test, they are consistent with the experiences of many planning professionals. Psychologists have offered several reasons why managers naturally resist planningincluding anxiety, authority conflicts, fear of uncertainty, fear of failure, indecisiveness, and need for control over their environment (Reichman and Levy, 1975). Whether or not any of Ewings theories ultimately can be proven empirically is almost beside the point, however. What has been known by experienced planning professionals for many years is that Ewings fourth law of planning, (1969:202) regarding the tendency of a planning initiative to elicit an anti-planning response, indeed is an accurate characterization of how managers behave. Miller and Friesen (1980) demonstrated empirically that the tendency of managers to resist changes in strategy really does exist. Studying 20 continuous years of history in each of 26 firms, they analyzed runs in strategy-making behavior (e.g., risk taking, product-market innovation, adaptiveness) and organizational behaviors (e.g., scanning, control, centralization of strategy-making authority, differentiation) in dynamic, hostile, and/or heterogeneous environments. With an elegant page_157 Page 158 application of binomial probability analysis, they demonstrated organizations resistance to reversals, changes in structure, and strategy making. 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, (2) cognitive limitations that cause models of reality to resist reformulation, or (3) reluctance to disturb the delicate balance among structural, environmental, and strategic variables. Ewing (1969:62) also observed that planners tend to overestimate the logical appeal of planning, as well as their own persuasive skills, and to underestimate the difficulty of making strategic change in an organization. Thus, special consideration should be given to psychological inertia by the planning manager, when revising the planning procedure or designing a new one. The amateur relies on enthusiasm and zeal to get planning done. The professional, he says, relies on good organization (1969:175). SUMMARY AND CONCLUSIONS This chapter has explained several contingencies that must be considered when designing a comprehensive planning procedure. 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. Because of their broad scope and far-reaching implications, however, planning procedures must be appropriately designed and aligned with the firms individual 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, this chapter discussed several contingencies that may compel refinements of the general model to fit a firms particular circumstances. These contingencies include the following: page_158 Page 159 The firms size and structure (centralized versus decentralized) will determine how planning authority and information should flow between top and line management. Complexity. Planning functions should be most fully developed when the firms structure and/or its environment are most complex. Risk. Planning functions development should be increased commensurately with the level of environmental uncertainty. Environmental stability/turbulence. The plan should be comprehensive and detailed when marketing conditions are stable, but less so, when marketing conditions are unstable. Accuracy of the management teams risk-perception increases financial performance potential, but there must be team consensus on risk before this benefit accrues to the firm. Consensus of the management team on the nature of external business conditions and strategy should result in better financial and competitive performance than otherwise. Consensus on strategy is most beneficial to performance in firms that practice incremental/bottom-up planning than those that practice definitive/top-down planning. Discord regarding goals and objectives may enhance the firms performance potential when surplus resources (slack) give management time to deliberate and the opportunity to plan for strategic contingencies. The planning horizon and forecast period should be selected on the basis of a firms size, complexity, asset intensity, and environmental stability. Shorter terms are more appropriate for smaller firms, those with short product life cycles, short investment payback periods, and volatile marketing conditions. Longer planning horizons are appropriate for large and/or complex corporations, asset-intensive firms, and those doing business in relatively stable markets. The frequency of review should be most frequent for small businesses in volatile markets, and least frequent for large, assetintensive firms in stable markets. As a general rule, quarterly or mid-year reviews are believed preferable to annual reviews; 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 plans vital assumptions no longer are valid. The importance of perpetual replanning cannot be overemphasized. Modern computing, data storage, and communication technology have made perpetual replanning feasible for nearly all firms. Corporate culture can exert a powerful but often invisible influence on strategy selection and management style: its nature therefore is page_159 Page 160 difficult but important to diagnose before the planning process is designed. The chief executives style of management also should be diagnosed before a planning process is designed because a CEOs style will determine the flow of authority in decision making, as well as acceptance of the planning function itself. There is a natural tendency for managers to resist any new strategy or planning procedure, thereby imposing a premium on the planning managers political and diplomatic skills. 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 firms planning procedures accordingly. Of course, a change of chief executive, an acquisition or divestment, and/or a significant shift in the firms financial or competitive fortune (and slack) will cause a significant change in some or all of these contingencies. The planning process may need to be amended when these contingencies shift. Indeed, it is a good idea to conduct an annual checkup of planning procedures, just to be sure that they still are appropriate. Bearing in mind that managers naturally resist new planning procedures, it is prudent to introduce small changes gradually, from time to time, rather than large changes less frequently. 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); it is provided in Exhibit 7.1. Few of Steiners conclusions in that table have been confirmed empirically, but they are generally accepted by professional practitioners. GENERALLY ACCEPTED PLANNING PRINCIPLES: PROCEDURAL DESIGN CONTINGENCIES Risk Postulate 7.1 Environmental risk is a function of dynamism, complexity, and industries accommodation of slack resources or munificence. Postulate 7.12Planning methods should be adjusted to rationalize environmental uncertainty, or risk, and strengths or weaknesses of internal functions. Hypothesis7.11Comprehensive planning operates as a risk reduction device. Hypothesis7.12Accurate assessment of environmental uncertainty enhances profitability.

page_160 Page 161 Hypothesis7.13Comprehensive planning functions enhance firm profitability where the environment is complex, in asset intensive and mature or declining industries. Hypothesis7.14Comprehensiveness of planning functions is more likely to enhance profitability in stable versus unstable industries. EXHIBIT 7.1 Factors Influencing Planning Process Formality MORE FORMALITY LESS FORMALITY ORGANIZATION Large companiesSmall, one-plant companies MANAGEMENT STYLE AuthoritarianDemocratic-permissive PolicymakerOperational leader Intuitive thinker Inexperienced in planningExperienced in planning COMPLEXITY OF ENVIRONMENT Stable environmentTurbulent environment Modest competitionSevere competition Many markets and customersSingle market and customer COMPLEXITY OF PRODUCTION PROCESSES Long production lead timesShort production lead times Capital-intensive Labor-intensive Integrated manufacturing processesSimple manufacturing processes High technologyLow technology Long market reaction timeShort market reaction time NATURE OF PROBLEMS Novel, complex, tough problems with long-range aspects Tough short-range problems PURPOSE OF PLANNING SYSTEM To coordinate division activitiesTo train managers Source: Adapted from Steiner 1979, 54. page_161 Page 162 Organizational Contingencies Axiom 7.21 The chief executive is the senior planning officer. Hypothesis As firms structural complexity increases, the sophistication of their planning procedures also tends to increase. 7.21 Hypothesis Comprehensive planning, as an integrative discipline, enhances cohesion of complex organizations. 7.22 Hypothesis Firm size and structure (centralized, decentralized) determine appropriate planning and decision-making procedures 7.23 (top down, team; bottom up, hybrid). Hypothesis Required planning skills also are determined partly by a firms complexity. 7.24 Hypothesis To the extent that planning decisions are made rationally, rather than politically, planned results are more likely to 7.25 occur. Hypothesis Formal planning is less beneficial to small firms than large firms. 7.26 Hypothesis Profitability is enhanced by planning procedures formality. 7.27 Hypothesis Growth is enhanced by decentralized versus centralized planning procedures. 7.28 Planning Horizon Hypothesis The most common planning horizon, for industrial firms, is three to five years. 7.31 Hypothesis Extended planning horizons (beyond five years) are most prevalent in asset-intensive industries and least prevalent in 7.32 service industries. Hypothesis Planning horizons of small firms tend to be about two years. 7.33 Hypothesis For best results, environmental scanning should be focused on a few critical variables. The scanning horizon should 7.34 be consistent with the planning term. Hypothesis The planning term should vary inversely with environmental turbulence. 7.35 Hypotheses Planning horizon limits are defined by the point where discounted cash flows present values approach zero, the

7.36

ROI payback period, the pro page_162

Page 163 Hypothesis 7.37 Environmental complexity is positively related to the planning horizons length. Hypothesis 7.38 Environmental volatility is inversely related to the planning horizons length. Review Frequency Hypothesis Review frequency tends to increase with both environmental complexity and volatility. 7.41 Hypothesis Typical review frequencies are at least annual, but many industrial firms review their plans more often than once per 7.42 year. Participation and Consensus Hypothesis Participative approaches to planning enhance consensus but not necessarily the plans technical quality or the firms 7.51 performance. Hypothesis Consensus can enhance the integration of an organization, which in turn can enhance performance. 7.52 Hypothesis Discord over goals and objectives can enhance performance by extending the scope of alternatives considered. 7.53 Hypothesis Consensus on strategy, environmental complexity, and firm capabilities enhances performance. 7.54 Cultural Contingencies and Management Style Hypothesis There is a natural resistance to both initial strategy and changes in strategy. 7.61 Hypothesis Strategies can become culturally autonomous and ingrained in management style. 7.62 Hypothesis A change of the CEO can have a major disruptive performance effect. 7.63 Hypothesis The chief executives management style greatly influences the firms procedural approach to planning. Planning 7.64 procedures are most effective when they are compatible with the CEOs management style. page_163 Page 164 This page intentionally left blank. page_164 Page 165 Part III Decision-Making Procedures The third part of this volume reviews procedures for making planning decisions. More precisely, 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). Planning managers rarely have the authority or responsibility to make ultimate planning decisionsselecting goals and strategy. Rather, 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. In Chapter 8, decision-making procedures for the single business enterprise are discussed. In fact, 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. Management of each individual business should follow the procedures in this chapter in order to arrive at sound planning decisions. Several techniques for gathering the evidence with which to make planning decisions and to analyze that evidence are described in this chapter. Procedures for selecting performance standards and stratpage_165 Page 166 egy also are explored. (Incidentally, 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.) Chapter 9 addresses decision-making procedures for multi-business corporations. Corporate-level planning functions that are unique from single-business planning functions are discussed here. Also discussed are some of the administrative complexities that must be dealt with as corporate structures grow more diversified. Particular attention is paid to scheduling of planning activities in complex firms. page_166 Page 167 8 Planning Decisions in the Single Business In this section, procedural steps for making planning decisions in firms with narrow lines of business are reviewed. These steps include selecting goals and strategies for their accomplishment, based on the relevant evidence that is available. Most small and

medium-sized firms are engaged in limited lines of business. Such firms typically are structured functionally rather than divided into separate business entities. Many large firms in several industries also are engaged in relatively narrow lines of business; and they also are structured functionally (see Table 8.1 for examples). In these firms, a single, comprehensive plan should be prepared. Of course, many large corporations consist of several divisions and/or subsidiaries that are engaged in multiple lines of business. In those firms, each subsidiary or division requires its own comprehensive plan, and the consolidated corporate plans feasibility rests on feasibility of its individual business plans, as well as corporate-level strategy. Thus, in multiple business corporations, individual businesses plans TABLE 8.1 Industries Where Participants Typically Have Narrow Lines of Business (A single plan is prepared) Airlines Beverages Food Service Railroads Autos/Trucks Chemicals Hotels/Motels Textiles & Apparel Banking Electric Utilities Insurance Vehicle Parts Basic Metals Food Processing Petroleum Vehicular Equipment page_167 Page 168 are the corporate plans building blocks. In either casesingle business firm or multiple business corporationplanning for the individual business is a fundamental requisite whether a corporate-level plan also is needed or not. Hence, we turn now to an overview of decision-making procedures for the sole business. In the next chapter, procedural complications presented by a multiplicity of businesses will be addressed. THE IMPORTANCE OF GOOD DECISION-MAKING EVIDENCE It is the planning managers task to acquire sufficient evidence with which to support sound decisions regarding selections of goals and strategy. For this reason, theorists often have described business planning from a perspective of information systems and decision making. Certainly, sound decisions, either to select standards of commercial success (goals) or to make selections from alternative approaches to goals attainment (strategies), should be predicated on relevant evidence to the extent that it is available. In many respects, therefore, planning methodology entails collecting and interpreting information that is relevant to assessing the firms internal capabilities or the opportunities and threats in its external environment. That the effectiveness of planning decisions is related to the soundness of evidence upon which those decisions are predicated actually has been demonstrated empirically. 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. They interviewed 91 officers of those firms and found a positive correlation between information utilization rates and rates of return on net assets. A positive relationship between quality of decision-making information and rates of return also was found; and rates of return were reduced when top managers were dissatisfied with the information used in decision making. Empirical researchers also have begun to demonstrate the benefits of rational and evidentially based decision-making methods. Fredrickson (1984) found that formality of planning can enhance the effectiveness of strategic decisions in a stable industry. However, Fredrickson and Mitchell (1984) demonstrated that excessive formality can impede strategic effectiveness in an unstable industryraising a serious question regarding the efficacy of excessively formal decision-making procedures in such industries. Rhyne (1985) investigated the relationship of information usage characteristics to planning systems sophistication. In a study of 89 large companies, he related types of information used, their sources, environmental complexity, and managements role in planning to the page_168 Page 169 level of planning functions development. The number of information sources used increased with development of firms planning functions. Moreover, both internal and external complexity were significantly related to planning functions development. Unfortunately, however, Rhyne discovered that more than two-thirds of respondent firms did not develop the adaptive (versus integrative) functions of planning. Thus, he concluded that true strategic planning was rare because most firms did not employ information about the external environment sufficiently in their planning procedures. Later, Rhyne (1987) again studied planning methods in 66 high, medium, and low performance companies selected from the Fortune 1000 during 19801984. Their performance was measured in terms of total return to shareholders. High performers emphasized adaptive planning methods and used more information to make decisions than did low performers. While high performers also employed integrative methods, they avoided excessively complex planning systems. Low performers tended to emphasize integrative planning methods alone. A similar but much broader study by Capon et al. (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. Ramanujam et al. (1986) studied alternative planning system designs in 93 firms, finding that approaches that made the best use of environmental information (adaptive approaches) tended to result in the best financial and competitive performance. Moreover, firms with more formalized planning functions also enjoyed higher performance than others, apparently supporting Fredricksons studies (1984). Most recently, Dean and Sharfman (1993a,b, 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. These studies demonstrate that success of the firms 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. Accordingly, the following paragraphs discuss the scope of decision-support information that planning managers should attempt to assemble in the single-business firm. ASSESSMENT OF THE ECONOMY, INDUSTRY, AND MARKETS

We may conclude, from findings of research described in the previous section, that a well-conceived commercial planning function should page_169 Page 170 provide for the adaptive requirements of strategy formation. Findings from Bourgeois (1985) study of 20 manufacturing firms confirmed that requirement. When executives perceptions of environmental uncertainty (in the economy, market, and industry) were the most accurate, financial results tended to be superior. Thus, management must be able to monitor, interpret, and respond to important changes in relevant sectors of the economies, industries, and markets where the firm conducts its business; this is the environmental assessment function. The following paragraphs provide an overview of environmental assessment procedures. For a more detailed treatment, readers may wish to refer to the authors previous text on environmental assessment for strategic management (Roney, 1999). Scope of Assessment The scope of environmental assessment may be described by a two-dimensional matrix, as portrayed in Exhibit 8.1. A vertical axis represents the chronological continuumthe present situation, most likely future, and alternative futures or contingencies. The horizontal axis describes the environmental domaineconomy, industry, or market. 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 8.1. The remaining paragraphs in this section are divided according to the three chronological dimensions of Exhibit 8.1analysis of the present situation, conventional forecasting, and assessment of alternative futures. Before launching into a discussion of each dimension, however, it is important to acknowledge at the outset that the number of variables included in an environmental assessment could become overwhelming. For this reason, it is important to identify those few variables in the external environment that can have the greatest impacts on performance potential of the firm. These relatively few critical success factors should receive the preponderance of analysts attention, thereby making assessment procedures cost effective. 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. Economic Analysis A great abundance of information, available from agencies of the U.S. government, describes trends in just about every dimension of the U.S. economy. Similar data are available from the Canadian government and, to a lesser extent, from the government of Mexico. Thus, the U.S. page_170 Page 171 and other North American economies usually can be analyzed by planning managers who make use of data resources that are accessible through the Internet.1 With those resources, planning managers can assemble complete trend and forecast information describing the economic aggregates and their components in the consumer, manufacturing, government, and finance sectors. In addition to economic data, demographics should be included in the scope of variables considered here. Fluctuations in age groups sizes can have substantial direct impacts on consumer economics and secondary impacts on industrial economic activity. Trends in several critical economic variables may influence the firms industry and markets. Thus, in a consumer products company, trends in employment, personal income, saving rates, and installment debt may be relevant. Data with which to perform analyses of all those variables are abundantly available from government sources. In the industrial sector, the analyst may be interested in longterm patterns of capacity utilization, labor availability, producer goods prices, interest rates, and so forth; these also are readily available from public sources. Abundant data are available to describe both recent trends and long-term cyclical patterns in general economic activity as well as many EXHIBIT 8.1 Scope of Business Conditions Assessment Economies Industries Markets Scope Analysis National income accounts, Performance norms, Sources of demand: Diagnosis of the present historical business cycles, structural factors, rivalry, consumer, industrial, situation, trends and long-term trends input/output tables, public. Purchase decision critical success factors competitor intelligence dynamics, demographics Forecasting Time series extension: Analogies, growth curves, Demographic forecasts: Prognosis of most likely trend/cycle models, input-output simulation, socio-psychological future business conditions econometric models, expert technological forecasting, models, industrial opinions cycle forecasting purchasing models, econometrics, hybrids Contingencies Systemic threats, impacts of Potential impacts of Potential impacts of shifts instyles, work styles and Alternate structural shifts due to structural shifts consumer needs, industrial Scenarios describing Futures regulation, geocompetitors entry/exit; new requirements, life impacts of changes in demographics, resources technology; new materials; fundamental forecasting availability, etc. new regulations assumptions Scope Economic aggregates of Industry attractiveness, Buyers willingness and The Commercial nations where the firm does suppliers: competitive ability to purchase. Environment business behavior, industry performance, regulation, technology

Source: Roney, 1999. page_171 Page 172 specific components of the economic aggregates. Numerous software systems as well as consulting services may be employed, using these data resources, to develop economic forecasts for strategic planning purposes. Moreover, complete forecasts can be retrieved from the U.S. government and several large banks Web sites (Roney, 1999:220222). Industry Analysis Economists frequently have demonstrated differences between industries intrinsic performance potentials. The relative importance of industries indigenous economic characteristics as determinants of firms performance potentialsversus the influence which management exerts through strategyhas been studied at length by Schmalensee (1985), Roquebert et al. (1996), Rumelt and Wensley (1981), and McGahan and Porter (1997), all of whom demonstrated that industryversus firmeffects on performance potentials differ dramatically, depending upon the industry in question. In the manufacturing sector, for instance, firm effects seem to be much more important than industry effects. But in services industries, industry effects apparently determine at least half of the variance in firms profitability. The point is simply this: an industrys structure and its intrinsic competitive dynamics can have a significant impact on a firms performance potential, but such impacts differ significantly among industries. Where firm effects predominate, an internally focused resource-based strategy may be most appropriate; but where industry effects predominate, a positioning approach may be more appropriate. Porters Five Forces Porter (1980) proposed that an evaluation of five forces in an industry will reveal the intensity of its competition and, therefore, its attractiveness for strategic development. In brief, those five forces are: present rivalry of direct competitors, potential substitute products, potential new industry entrants, customers bargaining leverage, and suppliers bargaining leverage. Thus, 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? page_172 Page 173 How easily can present customers purchase products or services offered by the firm from other suppliers, on equally favorable terms? How easily can suppliers of essential materials, labor, and overhead sell their goods and services to rival firms on favorable terms? Porters profile is appealing in its ease of application and comprehensiveness. But, in fact, few industries actually are free of competitive rivalry; and when the analysis is complete, analysts may wonder what to do about the result. Nevertheless, planning managers should be knowledgeable enough to provide answers to these five questions if only because they typically add considerable insight into an industrys business conditions. The following guidelines may assist the planning manager in gathering evidence regarding Porters five forces. Contributors to current rivalry. When evaluating the current level of competitive rivalry in an industry or market segment, Porter advises the analyst to take an inventory of nine 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 industrys 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 firms 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, Porters 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 page_173 Page 174 Inaccessible distribution channels Regulatory limits (e.g., licenses) International trade restrictions The planning manager should compile an assessment of such entry barriers in a firms 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 know-how 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) page_174 Page 175 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 Hambricks 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 industrys 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 methodsfor instance, the U.S. Commerce Departments 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 othersas well as the economic aggregatesalso 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 firms external environment, market assessment is addressed to demand factors. At the broadest level, such analyses may page_175 Page 176 be 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 firms products or services. With an accurate understanding of such driver variables, planning managers then can proceed to undertake the forecasting procedures discussed next. Forecasting 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 firms 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 firms 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). page_176 Page 177 TABLE 8.2 Scope of Forecasting Methods Logic Short (<1 yr.) Medium (1-3 yrs.) Long (3 yrs.) Judgmental Market research Market research Visionary (Mainly qualitative) Expert panels Bayesian Delphi Decision mapping Delphi Analogy PERT Analogy Cross-impact studies Extrapolation Moving average Decomposition Decomposition (Pattern persistence) Exponential - trend Business cycle smoothing - season Kondratiev cycle ARIMA - cycle Growth curves Leading indicators ARIMA Explanatory Econometric Regression Econometric (Structural/Causal) models Econometric models Simple I-O simulation I-O models correlation models Life-cycle and regression simulation 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 domainseconomy, 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 life-cycle 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 page_177 Page 178 can design the forecasting techniques best suited to a firms 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 structuresthat 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 firms 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 that can alter the firms performance potential a great deal warrant the preparation of contingency plans. High-impact environmental shifts that are either very likely or inevitable should be included in

the prevailing plan. Low-impact conpage_178 Page 179

EXHIBIT 8.2 Evaluating the Commercial Significance of Environmental Forces Vital Success Factors (VSFs): inevitable environmental conditions with high impact. Distinctive core competences for dealing with VSFs is required for long-term commercial success. (Examples: increasing scarcity of important raw materials; imminent regulatory ban on use of HCFCs.) Potential Success Factors (PSFs): contingencies which, if realized, could change the way an industrys or markets participants do business, but whose emergence is uncertain. (Examples: perfection of low-cost fuel cells for autos; entry/exit of important competitors; a significant shift in distribution channels.) Contingent strategies must be available for implementation if/when PSFs likelihood becomes sufficiently high. Routine Business Conditions and Occasional Irregularities: the firms operating resources and managerial functions should be sufficient to deal with those forces comfortably and competently. Source: Roney 1999. tingencies dont warrant the time, cost, and effort of contingency planning, even if they are relatively likely. There is a rich literature on the methodology of scenario forecasting, commencing with the work of Kahn and Weiner (1967), followed by Zentner (1982), Wack (1985), and Schwartz (1991), among others. A scenario simply describes a shift in the firms future environment that may influence its performance potential significantly. Forecasting techniques described in the previous section may be employed in developing scenarios to describe alternative futures. Subsequently, responses may be developed for appropriately adjusting strategy to each scenario. A classic contingency planning approach is to trace the evolution of alternative futures from the present to their conjectured outcomes (Schwartz, 1991). However, an alternative approach is to describe some future state of affairs and then identify the chain of events that would page_179 Page 180 have to occur preceding the conjectured outcome (Mason, 1994). By assessing the feasibility of event-chains that would be necessary for end-state scenarios to occur, analysts objectively can assess the likelihood of those scenarios. The most likely scenarios of course will warrant planners greatest attention. Moreover, by reviewing the likelihood of scenarios event-chains at regular intervals, it should be possible to assess emerging changes in their probabilities. Scenarios that are growing more likely of course will warrant development of more detailed contingent strategies. Conversely, those that seem to be declining in likelihood will not warrant much more attention. Eventually, the likelihood of one contingency scenario may become so high that it elicits a change in the prevailing plan. This is precisely the payoff intended from contingency planning. By gaining visibility into likely shifts of economic, industry, and market forces sufficiently before they occur, management can prepare to influence the outcome more successfully than otherwise would be possible. For example, a scenario prepared at Shell Oil Company in the early 1970s correctly anticipated the Arabian Oil Crisis of 19741975. Shell was more prepared than other Western petroleum firms because it employed the kind of contingency planning procedures described in this section (Wack, 1985). ASSESSMENT OF INDUSTRY POSITION Having assembled satisfactory information regarding the firms comparative capabilities and environmental conditions, 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. One dimension describes the firms relative competitive strength or functional capability, while the second dimension describes the industrys or markets attractiveness. The following paragraphs discuss five such approaches to evaluating a firms strategic situation. Market Share/Growth Matrix The Boston Consulting Groups four-celled market share/growth matrix (Figure 8.1) demonstrates a classic technique for comparing competitors positions on an industrys battlefield. The high ground of this battlefield is held by competitors and products with high shares of rapidly growing markets. However, firms with high shares of slower-growing markets can enjoy positive cash flows that may be invested in faster-growing markets. Ideally, the firm should have a balanced mix of products with high shares of fast- and slow-growth markets. Surplus page_180

Page 181 cash flows from products or services where market shares are high but growth rates are low (e.g., in mature market segments) should be directed toward faster-growing businesses that require increasing levels of capital (Figure 8.1). 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, new products in emerging markets). Some surplus cash also may be required to fund profitable products with high shares of fast-growth markets. (Such stars will be the primary sources of earnings, as opposed to cash flows.) Products with low shares of slow-growing markets theoretically do not offer strategic appeal in any respect and are candidates for divestment or liquidation. Hambrick, MacMillan, 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, using the PIMS database. Businesses did differ in performance and strategic attributes largely as expected, thereby confirming the models general provisions. However, dogs (firms with low shares of slow-growth markets) actually were not as unsuccessful as expected and, like the cows (high shares of slow-growth markets), also provided positive cash flows. Consequently, these researchers proposed that cash flow expectations of the matrix model should be modified, as portrayed in Figure 8.2. A study by Woo (1984a) of 40 successful firms with low shares of mature markets obtained similar results. She found that a selective

Source: Reprinted from International Studies of Management and Organization, Vol. 7, Issue 2, D. F. Channon, Strategy Formulation as an Analytical Process, pp. 4155. Copyright 1977. Figure 8.1 Market Share/Growth Matrix: Cash-Flow Characteristics page_181 Page 182

Source: Adapted from Hambrick, MacMillan, and Day 1982. Figure 8.2 Normative Cash Flows within the BCG MatrixAn Alternative View focus strategy enabled these 40 firms to generate satisfactory rates of returnthereby raising a fundamental question regarding the BCG models validity for firms with low shares of mature markets. In order to employ the share/growth matrix, 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. However, experienced planners and marketing professionals also know that obtaining such information often can be quite difficult, especially in fragmented industries. In such cases, assumptions must be made. Of course, as such assumptions are subject to significant error, it is not possible to overemphasize the importance of obtaining the best possible information regarding competitors market shares and industry/market growth rates, before using the market share/growth matrix. An important part of the firms strategic planning function must be to obtain and maintain this information. Multifactor Matrix The GE/McKinsey multifactor portfolio matrix (Figure 8.3) provides a way to evaluate competitors, products, and market segments when specific information regarding market growth rates or market shares is not available. Even when such information is available, other factors may enter into judgments of industry attractiveness and/or a firms page_182

Page 183

Source: Adapted from Allen 1979. Figure 8.3 GE/McKinsey Multifactor Portfolio Matrix competitive strength in an industry segment. Such factors were discussed earlier in this chapter. For instance, an industrys attractiveness may be based on any one of Porters (1980) five forces or the analysts assessment of several driving forces. The formulators of this approach (see Allen, 1979) have provided detailed guidelines for evaluating industry attractiveness and applying weights to factors entering into that determination. Moreover, business strength is not based solely on market share, but also on operating capability, technology, distribution, and profitability. Product Life-Cycle Stage The life cycle may provide a useful perspective for evaluating growth potential of a business. Products, industries, and market segments simply cannot grow rapidly forever. They all seem to follow a natural evolutionconception, infancy, growth, maturity, decline, and eventual demise (Polli and Cook, 1969). Therefore, it is important for a planning manager to identify the life-cycle stage of each product, industry segment, or market segment in which the firm participates, as portrayed in Figure 8.4. Thorelli and Burnett (1981) studied 1,148 industrial businesses in the PIMS database during 19701979 and confirmed that lifecycle effects indeed could be discerned. Market growth rates declined with firms and products ages. Moreover, research and development, marketing expenditures, and other innovation indices declined as life-cycle stages advanced. Correspondingly, gross margins also declined. But pretax margins, rates of return on investment, and cash flow did not decline because operating expenses declined in parallel with gross page_183 Page 184

Source: Reprinted from Corporate Planning: Techniques and Applications, R. J. Allio and M. W. Pennington, AMACOM Publishing. Copyright 1979, with permission from AMACOM and Arthur D. Little, Inc. Figure 8.4 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. Using the PIMS database of records for 1470 businesses and complex statistical methods comprised of both factor

analysis and linear regression analysis, they found that economic sector (industrial vs. consumer) and a products purchase frequency (i.e., regularity of usage) had even more significant impacts than life-cycle stage among the ten variables that they studied. Life-cycle stage was the third-most important and still very significant statistically. Since a firms economic sector and products purchase frequencies are relatively fixed, life-cycle stage may be the most important of these three for purposes of anticipating longrange shifts in strategic problems or opportunities. page_184 Page 185 Smith, 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. Those investigators found that managements priority ratings for technical efficiency, organizational coordination, and political support of management (structural integrity), respectively, increased as the life cycle passed from one stage to the next. 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. Otherwise, managements selection of strategy may not be appropriate for the industrys growth potential. Extensive guidelines for fitting strategic and tactical planning to the product life cycle have been prepared by Rink and Swan (1987). In addition to general strategy, the scope of these guidelines includes priorities for selling, advertising, physical distribution, transportation, purchasing, and financial management. Product/Market Evolution Matrix Hofer and Schendels (1978) product/market evolution portfolio matrix employs the life-cycle concept in an interesting and generally underappreciated combination of the previously mentioned methods. In this portfolio, circles sizes refer to markets or market segments in which the firm competes. Shaded wedges reflect the firms (or products) shares of those markets. Competitive position reflects the firms relative functional performance compared to competitors. In Figure 8.5, product A is an emerging star, poised for rapid growth

Source: Adapted from Hofer and Schendel 1978. Figure 8.5 Product/Market Evolution Matrix page_185 Page 186 and, therefore, strong future earnings; so, the firm should invest in improving its capability in that line of business. With a low share of a growing market, product C is in the questionable segment of a growth/share matrix. But, product B is a candidate for divestment, unless it can be developed relatively soon to a point of competitive strength. Products D, E, and F probably are cash cows capable of funding the development of Products A and C. Absent some kind of technological renewal, Product Gs prospects are not very encouraging, since its market is declining and the firms share is low. This evolution matrix also can be used in a somewhat different manner, to display trends in individual products positions across an industrys historyand to project it into the future. Thus, this matrix can be used as an excellent long-term planning device. Directional Policy Matrix The directional policy matrix (Hedley, 1977; Robinson et al., 1978; Hussey, 1978) draws upon managers judgment more heavily. In this case, the two matrix dimensions are business sector prospects and the firms competitive capabilities (Figure 8.6). To formulate a directional policy, it is not as important to evaluate the market or industry, at present, as it is to form a point of view regarding its performance potential, in the future. Similarly, the firms abilities to develop critical competences in an industry or market of the future matter more than present strengths or weaknesses.

Figure 8.6 Directional Policy Matrix page_186 Page 187 Of course, to use the directional policy matrix effectively, the planning manager must be able to express a point of view with regard to business sector prospects and functional performance potential. In other words, credible forecasts and strategies are necessary. An essential requirement for the effective use of this matrix, therefore, is to assemble and maintain forecasts of economic, industry, and market segments relevant to the firms lines of businessand to assemble a realistic estimate of the firms comparative ability to perform the functions of its industry in the future. Unfortunately, Capon et al. (1987:6465) found that forecasting capabilities in most of the firms they studied were not very highly developed. Capon and Hulbert (1985) earlier had summarized the scope of strategic forecasting challenges. They observed that shifting environmental forces often require forecasts, and therefore strategies, 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. In any event, the directional policy matrix takes an essential step from situational assessment to strategic prescription. Like the lifecycle evolution matrix, this one also is a very useful device for strategy formation itself. ASSESSMENT OF THE FIRMS CAPABILITIES All of the matrix methods discussed in the previous section require an assessment of the firms situation within two dimensions: (1) market or industry position/attractiveness and (2) the firms ability to perform, relative to its competitors, in given industry or market segments. Approaches to assessing industry or market attractiveness (the first dimension) were discussed earlier and are explained more completely, in another text by this author (Roney, 1999). Regarding the second dimension, recall that the product/market evolution matrix requires an assessment of the firms relative competence; the McKinsey/GE matrix requires an assessment of the firms strength on the basis of various objective measures; and the directional policy matrix requires a judgment of the firms future functional capabilities on the basis of more subjective criteria. In each case, the planning manager must assemble evidence for assessing the firms operating capabilities in comparison to its competitors. 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. 3 The Problem of Analysts Bias Achieving objectivity is the first problem. Diagnosis of internal operating strengths and weaknesses should be, and usually is perceived as, page_187 Page 188 an objective exercise. However, that is not always the case. Individuals perceptions of a firms strengths and weaknesses are strongly influenced by the evaluator rather than the organizations actual capabilities, alone (Stevenson, 1976). For instance, the individuals position or status in an organization can influence the results of such a diagnosis significantly. Thus, Ireland et al. (1987) confirmed their research hypothesis that perceptions of strengths and weaknesses vary predictably between managers levels within an organization. Critical Success Factors One way to reduce bias in evaluating a firms operating capabilities is to make maximum use of objective criteria. Leidecker and Bruno (1987) provided a rationale to aid in defining objective evaluation criteria by clarifying the concept of critical success factors. These are internal characteristics, or competences of a firm, that can have significant impacts on its potential for commercial success. Each industry or segment has its own collection of critical success factors. If empirically diagnosed, such factors can provide unbiased criteria with which to evaluate the firms strengths and weaknesses and to formulate objectives for competitive improvement. Of course, critical success factors are likely to change over time; thus, they must be reviewed periodically. Regardless of the scope of information employed to describe the firms operating strengths and/or weaknesses, one essential guideline should be observed. That is, a firms 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. Whether or not a functional competence exists may be immaterial; however, if all firms in an industry are equally competent in a particular respect, then no competitive strength or weakness exists. Indeed, the function in question probably is a critical failure factor; firms that lose proficiency in it will be

unqualified to compete for competitive advantage in other respects. On the other hand, if most competitors lack a certain competence and the firm is strong in that respect, then a distinctive competitive competence probably does exist. Such advantages can be exploited strategicallyespecially if the distinctive competence is relevant to one or more critical success factors. Critical success (and failure) factors probably can exist in five domains: the financial, marketing, operating, technological, and administrative, although Snow and Hrebiniak (1980) claim to have found ten categories in just four manufacturing industries. It is inappropriate to explore here competence assessment standards in all domains. However, the following paragraphs will provide planning managers with page_188 Page 189 some procedural illustrations that suggest the scope of approaches that may be taken. Assessing Comparative Financial Success Sources of benchmarks that can be used in comparing a firms financial performance to industry norms and individual competitors results are abundant. For publicly owned firms, such sources include investor services such as Standard & Poors, Moodys, and Value Line, as well as many online data retrieval services such as the Securities and Exchange Commissions EDGAR system, among others. For privately owned firms, contracted survey services such as Dun & Bradstreet and Risk Management Associates may be used. Certainly, any satisfactory description of a firms internal strengths and weaknesses must include a complete and accurate description of costs incurred by products, operations, and elements of the management structure. Therefore, 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. Often, some degree of difficulty is encountered in making a selection from alternative cost-accounting conventions. For example, results of a comparative cost analysis probably will be much different if fully absorbed cost accounting is elected, 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). Assessing Marketing Competences Day and Wensley (1988) provided guidelines for evaluating a firms marketing strengths and weaknesses from two alternative points of view: customers versus competitors (Table 8.3). In their view, marketing strategy should be aimed at exceeding the capabilities of competitors when three conditions exist: market conditions and demand are predictable; the competitive structure is concentrated and stable; and there are very few buyers with disproportionate power. However, in more dynamic markets, with shifting demand parameters, many competitors, and/or a fragmented structure, marketing strategy should be more customer oriented. Evaluation of the firms marketing capabilities similarly should be approached specifically from one or both of these perspectives. A marketing capabilities analysis, done from the competitor perspective, entails direct comparisons of competing suppliers functional capabilities. The beginning point in making such comparisons is to define each competitors distinctive competences. Then, evaluations of the page_189 Page 190 TABLE 8.3 Marketing Focus: Priorities Strategic Focus Evaluation Criterion Competitors Customers Market/ Demand Predictable Dynamic, Uncertain Industry Structure Concentrated, Stable Fragmented, Unstable Buyers Discretion Few buyers with much discretion in vendor selection Multiple buyers with less discretion in vendor selection Source: Adapted from Day and Wensley 1988. firms relative capabilities may be made in each functional area. A preferred approach, here, is to compare competitors on the basis of critical success factors. In doing so, it is helpful to compare winning versus losing competitors and to identify critical functions that distinguish winners from losers so that a firms strategy to enhance internal capabilities can be focused on gaining distinctive competence where it matters most. When analysis begins from a customers perspective, the approach of Day and Wensley is to assess customers beliefs about suppliers performance, based on attributes that correspond to their buying-decision criteria. Evaluation scores may be multiplied by the relative importance of each attribute, then summed, to obtain a composite score. In this model, attributes must be defined as precisely as possible. A different analysis is required for each product category or market segment where the customer (or customer group) is served, unless, of course, criteria are uniform across categories. With each type of analysis, the purpose is to set objectives for correcting weaknesses and exploiting strengths so that the firms competitive advantages are maximized and deficiencies are minimized. However, each of these two approaches has limitations. A customer-focused approach initially may disregard some of the firms particular strengths or weaknesses in an attempt to set benchmarks that are focused on end-users demands. On the other hand, the scope of a competitor-focused perspective can become too narrowly limited to existing functional capabilities: The firm attempts to outperform competitors, on the basis of presently delivered products or services, but it may neglect customers emergent needs for different benefits. First-initiative opportunities then may be overlooked. The best analysis, of course, will include both perspectives. Assessing Operating Competences Whereas there are numerous sources of standardized data for assessing firms financial performance (as explained earlier),

standards for page_190 Page 191 assessing firms operating capabilities are harder to obtain; but they do exist. In processing and fabricating industries, for example, industry associations such as the American Iron and Steel Institute (AISI), American Welding Society (AWS), American Petroleum Institute (API), and the American Pulp and Paper Institute (TAPPI) all provide their members with processing standards and numerous technical studies of best practices. Equipment manufacturers also publish engineering standards for their products operating rates: if it is known that a competitor has a particular manufacturers equipment, then the competitors operating capabilities should be estimable (see Exhibit 8.3). In any industry, it is possible to identify the best practices of particular functions, albeit with some difficulty, by conducting benchmarking studies of how excellent practices are conducted by the most successful firms. The first such formal studies appear to have been done by Xerox Corporation in the U.K. (Glavin, 1984; Camp, 1989; Kearns and Nadler, 1992), which contrasted operating practices in several divisions: underperformers soon closed the gaps between their performance and the best performers. Benchmarking studies are also performed between several firms rather than within just one corporation (Drew, 1997). Participants in a study need not even be in the same industry. For example, excellent order service functions may be found in several industries. The same is true of many functions outside of operations, including those in administration, research and development, and marketing. When benchmarking study participants are in different industries, of course, they are not competitors; disclosure and secrecy concerns then are less troublesome. Numerous guidelines for conducting benchmarking programs will be found in the literature. For example, planning managers may wish to consult Camp (1989), Watson (1993), Drew (1997), or Murray, Zimmerman and Flaherty (1997). Since numerous benchmarking success stories have appeared in the literature (Glavin, 1984; Camp, 1989; Kearns and Nadler, 1992; Watson, 1993; OToole, 1996), this approach to assessing and elevating internal competences is worth serious considerationespecially as one element of a continuous improvement program (Watson, 1993; Feltus, 1994). How to Attain Objectivity of Comparisons The best way to assure objectivity in analyses of internal strengths and weaknesses is to employ unbiased parameters, which typically are quantitative measures. Thus, comparisons of a firms financial, marketing, and operating performance indicators to those of comparable firmsthat is, firms in the same industryoften are made. Sources of industry norms for such benchmarking exercises are abundant. As page_191 Page 192 EXHIBIT 8.3 Industry Trade Associations as a Source of Operating Benchmarks Illustrations Association Industry Norms Reports American Forest and Paper Annual and historical operating data including production, shipments, capacity and international trade Association of major grades. Also reports energy usage, raw material consumption, wages and compensation, www.afandpa.org capital investment, financial performance and industry structure. American Iron and Steel Statistics on steel industry operations in the U.S. and Canada; steel imports and exports; and world Institute production of pig iron and raw steel by countries. Weekly capacity utilization reports. www.steel.org American Petroleum Numerous practice standards including capacity utilization, quality control, worker training, etc. Institute www.api.org Association of Business Industry production standards for business support such as word processing, desk-top publishing, Support Services graphic design, etc. International, Inc. www.abssi.org Collision Repair Industry- Financial and operating statistics of automobile collision repair shops INSIGHT www.collision-insight.com National Automotive Compiles and publishes average automobile dealer financial operating performance measures Dealers Association www.nada.org Semiconductor Industry Analyses and operating performance for U.S. semiconductor firms including productivity measures, Association sales per employee, wafer fabrication facilities utilization, and worldwide employment figures www.semichips.org The Society of the Plastics Financial and operating norms of plastic processing companies Industry www.socplas.org Valve Manufacturers Industry financial and operating ratio and salary Association of America surveys www.vma.org mentioned earlier, these include trade associations; statistical compilation services such as those provided by Risk Management

Association (formerly Robert Morris Associates), Dun and Bradstreet, Standard and Poors, Moodys Industrial Services, the Value Line Survey, and EDGARthe Securities and Exchange Commissions electronic data gathering analysis and retrieval system. Another excellent source is the Strategic Management Institutes highly developed PIMS program. Subscribers to the PIMS program are able to obtain reports on par ratings for firms in their industries bearing similar characteristics of page_192 Page 193 size, market share, and the like. They also may receive reports defining optimum strategies for improving performance potential. The PIMS program was begun in 1960 at the General Electric Company. In 1972, the Strategic Planning Institute was formed to extend the PIMS program beyond GE and into a broader scope of industries. SPI maintains a database describing relationships between 37 strategic variables (such as market share, research and development, asset intensity, relative quality, and advertising expenditures) and two dependent variables: cash flow and ROI. The database recently reflected long-term results of more than 3,000 businesses. Regretably, SPI has discontinued updating the PIMS database, which therefore may lose relevance to current business conditions with the passage of time. Another useful technique, which requires more effort but can be especially effective, is to gather annual reports published by publicly owned companies in a specific industry segment or to tabulate their performance using a commercial data source. Studying the performance of firms in a more limited segment may be preferable to using industry-wide norms, because results are more valid and comparisons to the firms performance are more meaningful. However, in some industries only rudimentary public data can be obtained. Moreover, many analytic data sources, such as Standard and Poors Compustat files, contain records only of firms whose securities are traded publicly. Those firms are unlikely to be representative of privately owned competitors, whose financing includes greater portions of debt versus equity and who tend to be relatively small in size. In order to achieve a truly representative sample, therefore, original, empirical research may be required. IDENTIFYING GOALS AND OBJECTIVES The reader should recall that this volumes purpose is not to explain in detail how planning decisions actually are to be made. (That is the subject of the third volume in this series.) Here, we focus on the planning managers responsibility to install methods and procedures for supporting strategic decisionmaking. Thus, it is the planning managers responsibility to identify success criteria that may be used in developing goals, competence benchmarks, and strategic objectives. 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. Thus, in a survey of planning practices, Boulton et al. (1982) found that objectives most frequently are stated in terms of rates of return on investment and market share. Most texts on strategic planning (e.g., Thompson and page_193 Page 194 Strickland, 2003:4145) concur on this dichotomous scope of goals or objectives. However, two other strategic success criteria may be an acceptable level of risk and long-term growth (Krijnen, 1977; Blankenship, 1977; Abouzeid and Weaver, 1978; Shetty, 1979; Doyle, 1994). For example, a severely indebted firmperhaps one emerging from bankruptcymay view success from the perspective of risk reduction and financial solvency rather than profit margins or market shares. On the other hand, a successful firm in a mature industrysuch as automotive, basic metals, or chemicalsmay be more concerned about the industry life cycle and achieving competitive competence in emerging markets to support long-term growth. The third volume in this series examines these four categories of success standards at length. For the present, therefore, we will dwell only on the first two categories: financial and competitive. Financial Success Standards It was mentioned earlier that the firms financial performance trends should be contrasted to those of competitors and the industry as a whole. Of course, industry performance norms regarding profit margins, rates of return, and sales growth are not themselves acceptable as objectives, but they do provide useful frames of reference. Certainly, the firm that does not seek strategically to exceed normal industry performance levels has no right to anticipate competitive success (or even survival), in the long term. Although the most frequently employed financial success standard is a firms rate of return on invested capital (Boulton et al., 1982), that is not necessarily the most useful standard available. Substantial attention has been directed in recent years to the concept of shareholder value as a means of defining the firms financial success more effectively than simpler accounting measures such as ROI (Rappaport, 1986; Copeland, et al., 1990; Stewart, 1991; Tully, 1993). According to the shareholder value concept, 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. 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. (Several software packages are available commercially to perform the actual computations.) The discount hurdle should reflect rates of return that investors can realize in the same industry at comparable rates of risk. When a firm elects to define goals in terms of economic value added by strategy to shareholders wealth, the planning manager of course must assemble sufficient data to monitor rates of return on invested capital and shareholders equity obtained by page_194 Page 195 comparable firms in the same industry, as well as relevant costs of debt financing. Competitive Success Standards Defining competitive success standards is more difficult than defining financial success standards. That is partly because, unlike

financial measurements, competitive measures cannot be assembled by following generally accepted principles. Moreover, relevant data regarding the markets size and competitors sales may be very difficult, or impossible, to obtain. Nevertheless, some principles regarding competitive success standards have begun to emerge. At the most basic level, surveys, such as those by Blankenship (1977), Abouzeid and Weaver (1978), Shetty (1979), and Boulton et al. (1982), have demonstrated that firms competitive goals typically include measures of market share. Porter (1980, 1985a) broadened the idea of competitive success with his notion of sustainable competitive advantage. Although the specific concept of a competitive goal as the endpoint of strategy never does appear in Porters writings, it is implied that his guidelines for strategy are focused on holding a high share of market segments that management deems to be desirable. Hamel and Prahalad (1994) have gone the furthest in defining the nature of competitive success by challenging management to determine, well ahead of time, exactly what future competitive success will be like. After all, in present industry and market settings, rivals already have probably staked out their preferred positions of competitive advantage; and it would be difficult to alter the current structure. According to these theorists, competitive goals are statements of strong positions in emerging industries and markets that will be attractive in the future. Thus, goal setting requires management to predict future business conditions, and strategy formulation requires a prescription of core competences that will be needed to achieve future competitive advantages. Interrelationships of Competitive and Financial Success It is interesting to observe that financial and competitive successes can be closely related, although there may be several intervening variables to complicate the interpretation of this principle. Other factors being equal, competitive success tends to be accompanied by financial success. Early in an industrys life cycle, 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, 1970; page_195 Page 196 Buzzell et al., 1975; Hedley, 1976), as long as production technology remains relatively unchanged. Presumably, firms with competitive cost advantages are more likely than others in the same industry to achieve high market shares. Moreover, 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, at least in the growth stage of an industrys life cycle. Shepherd (1972) studied relationships between rates of return, market share, and market concentration during 19601969 in 231 publicly owned firms. He built ten regression models to determine the sensitivity of returns in several groups of firmsfor example, 181 young industry firms; 50 old industry firms; 113 consumer goods firms; 118 producer goods firms. The most significant model explained more than 60 percent of the variance in consumer goods firms returns. The producer goods model explained more than 50 percent of the variance in those firms returns. In each regression model, market share was the most significant and first-entered independent variable (see Figure 8.7). Gale (1972) obtained similar results using firms shares of industry employment as a proxy for market share. The effect of share on profitability was largest in industries characterized by high concentration and moderate (versus rapid) growth. Buzzell, 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, Volume 54, W. G. Shepherd, The Elements of Market Structure, pp. 2537. Copyright 1972, with permission from MIT Press. Figure 8.7 ROI Relationships to Market Share and Industry Concentration, N=231 page_196 Page 197 beginning market shares during 19701972. As market shares increased, firms were more likely to have higher profit margins and rates of return, lower proportionate material costs, lower proportionate marketing costs, higher quality, and higher prices. These advantages were most pronounced for businesses in fragmented markets that supply infrequently purchased products. But, they also were quite robust, notwithstanding industry concentration or frequency of products purchase. Indeed, the degree to which these principles may be generalized across industries is quite impressive. For instance, Hedley (1976) demonstrated that they apply in the life insurance, materials processing, electronic equipment, electronic components, railroad, turbine generator, and automotive industries.

Competitive versus Financial Success: Trade-Offs As the previous section explains, a longstanding line of empirically supported theory has held that a direct relationship exists between market share and profitability. (See Buzzell and Gale, 1987:70102 for an excellent explanation of this theory.) However, a substantial amount of other research has raised serious questions about the fundamental market share-return relationship (Jacobson and Aaker, 1985; Rumelt and Wensley, 1981; Woo, 1984b; Woo and Cooper, 1981, 1982; Anterasian and Graham, 1989; Armstrong and Collopy, 1996). As every seasoned marketing executive knows, the relationship between market share and profitability really isnt linear. Eventually, it must take the shape of an inverted U, as depicted in Figure 8.8. After a certain share has been achieved, further increments must be bought by lowering price or (more likely) adding value that cant be recovered by higher pricesfor example, new features, a wider variety, broader distribution, advertising and promotion.

Figure 8.8 Hypothetical Relationship of Market Share and Return page_197 Page 198 Some would argue that the firms goal should be to maximize return on invested capital and not necessarily to maximize market share. Armstrong and Collopy (1996) have shown convincingly that, contrary to conventional wisdom, strategies to achieve these two goals may be in sharp conflict. A longitudinal study of 20 large firms, across 45 years, disclosed that those which attempted to increase market shares suffered from significantly lower financial results. Similar findings were obtained by Anterasian and Graham (1989), thus supporting the hypothesis that strategies aimed at market share may conflict with those aimed at financial returns. 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 firms likely performancethat is, if no changes in internal capabilities or competitive strategy are made. The resulting gaps between baseline projections and goals enable management to measure the amount of improvement required of strategy for goals achievement. The value of such a gap is a strategic objective. For instance, 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, then the objective of that firms marketing strategy is $50 million of revenue from sources that presently do not exist unless management improves, or adjusts, its competitive strategy (see Figure 8.9). A firm typically has strategic objectives for most functionsmarketing, operations, administration, financeand often for combinations of functions, for example, in plan-

Figure 8.9 Baseline Projection, Goal and Strategic Objective: Interrelationships page_198 Page 199 ning acquisitions and divestments or launching new lines of business. More detailed discussions of such strategic gaps have been provided by Ansoff (1965), Argenti (1969), and Kami (1969). Inductive Definitions of Goals and Objectives Throughout this chapter, we have made an assumption that goals definition precedes strategy formulation. This principle is exemplified in Figure 8.9, where a strategic objective of $50 million in revenue from new sources was needed to achieve a sales goal of $250 million. But what should be done if the firms 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. Sometimes, however, such procedures are so conjectural as to undermine validity of the goal-setting process. In such cases, an inductive approach is the preferred alternative. Management simply assembles all of the performance-improving projects that it can, allocating resources to those with the greatest potential. Program benefits are added to a baseline projection

and the total is adjusted for a contingency allowance. That adjusted total becomes the goal. 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. In fact, the inductive approach is used very commonly, especially by managers of small businesses in very fragmented industry segments where neither market segment sizes nor market shares are easily estimated. Criteria for Goals Acceptability It is generally recognized that success standards must be, at a minimum, both financial and competitive; defined clearly enough to permit objective assignments of managerial accountability; sufficiently challenging to elicit vigorous effort; focused on worthwhile results; and specific with regard to timing of interim accomplishments (Morasky, 1977; Steiner, 1974; Steiner and Schlhammer, 1975). In their broad-scope investigation of 113 publicly owned firms planning practices, Capon et al. (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 8.4. Of course, success standards will vary, depending upon where they are defined within the management structure. As Berg (1965) first observed, conflicts of interest often arise between corporate and operating management because there usually is competition for investment funds between business units. Thus, it may be in the best interest of a page_199 Page 200 TABLE 8.4 Purposes of Goals: Management Perceptions 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. 1987, 97. 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, because of the levels of funding that might be required by other divisions. When that situation arises, an optimum solution at the corporate level will be sub-optimal at the division level. Chief executives and planning managers alike must be prepared for the consequential political tension that surely will arise. Gaining acceptance of corporate goals throughout a management organization is not necessarily a straightforward matter of top management decision making. Quinn (1977) observed that the goal setting and approval process can differ considerably depending upon where it occurs in the organization. At the top level of management, successful chief executives may formulate goals privately but not announce them to the organization, as a whole, until considerable preparations are made, in order to avoid the appearance of excessive authoritarianism, political opposition, undesired centralization of decision making, or even alerting competitors to the firms competitive direction. Until the CEOs goal is announced to the management team, however, it certainly cannot provide directional guidance to line managers for their planning purposes. 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. That information includes the ten items in Table 8.5. page_200 Page 201 TABLE 8.5 Information Required for Goal Selection 1. Financial performance trends of the industry and principal competitors 2. Rates of return realized by investors in competitors and the firms equity versus costs of borrowed capital 3. Market and industry growth rates: trends and forecasts 4. An assessment of the products or industrys life-cycle stage 5. Competitors and the firms market shares 6. Core competences of the firm and its competitors with similar missions, including competitors principal product claims 7. Estimates of competitors costs of production, marketing, and administration 8. An assessment of Porters five forces of industry competition 9. A list of driving forces or critical success factors that seem to determine success or failure of firms seeking to perform a mission similar to that of the firm 10.An assessment of conflicts of interest and timing within and between business units insofar as standards of success and strategy are concerned The ten input factors for defining commercial success standards (financial and competitive) shown in Table 8.5 all are subject to change in every firm. Consequently, they must be monitored regularly. However, maintaining a close watch over such a broad scope of vital information may be a difficult, albeit critical, task. Thus, there should be a deliberate managerial function with responsibility for assembling and maintaining this information. In a large corporation, specific staff personnel may be assigned to do this work. However, in medium-sized and smaller firms, the burden and difficulty of obtaining and maintaining all of this information

can be prohibitive. In those cases, external staff resources may be obtained from consulting and accounting firms on a part-time basis so that this need does not go unmet. SELECTING STRATEGY Numerous theories and methodologies for selecting an approach to goals accomplishment (strategy) have been proposed over the years, albeit rarely with the benefit of replicated empirical confirmation. The extensive subject of strategy selection will be addressed at length in the third volume of this series. However, the following paragraphs address seven popular approaches, so that the planning manager may prepare to facilitate strategy formation procedures and assemble the required evidence. page_201 Page 202 Least-cost versus Differentiation Porters (1980) essential methodology includes three generic operating strategies for attaining competitive advantage: least cost, differentiation, 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. Of course, these prototypical strategies imply that the planning manager is able to discover competitors costs (in order to set objectives that represent the lowest costs); to define and evaluate competitors principal claims with regard to customer satisfaction (in order to differentiate the firms products or services from others); and/or to identify segments of the industry or market that are not well served (in order to focus the firms competitive resources on them). In his two treatises, Porter (1980, 1985a) attempted to guide practitioners in implementing such generic strategies, within a host of industry-specific circumstances. Adaptive versus Integrative Approaches The selection of strategic objectives, and strategy itself, may be either adaptive (focused primarily on the environment) or integrative (focused primarily on internal capability). Capon et al. (1988), in their extensive study of 113 Fortune 500 manufacturing companies, were able to distinguish these two approaches to strategy, quite clearly, through factor analysis. Firms typically tend to emphasize integrative strategies and de-emphasize adaptive strategies. Boulton et al. (1982), in a survey of 142 Canadian companies during 1979, 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%) Research and development (41%) Advertising (40%) Arguably, strategies calling for new products, research and development, and even advertising may be adaptive in nature. However, plant expansions and recruiting are more integrative than adaptive, and most acquisitions tend to extend lines of business rather than modify them in response to changing markets. Even new products tend to be line extensions rather than strategic adaptations. page_202 Page 203 Hambrick, 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. Such a model clearly is adaptive in nature. While this studys results did confirm some of the models expectations regarding relationships between strategy and performance, 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, productivity, capacity utilization, and product quality. Performance of firms in the two growth quadrants reflected rates of industry growth more than choices of strategy. Thus, this studys results seemed to suggest thatin industrial firms at leastintegrative (or resource-based) strategies are employed most frequently and can be more effective than adaptive strategies. On the other hand, Rhynes (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. Firms with the lowest total returns to their shareholders tended to emphasize integrative planning methods. Thus, the planning manager is left with a mandate to prepare evidence equally well to support the formation of both integrative and adaptive strategies. Comparative data for selecting internal operating strategy (e.g., best practices and benchmarks) typically are harder to collect than data to support selections of adaptive strategy (e.g., market shares and pricing trends). Accordingly, a special effort should be made to acquire and maintain diagnoses of competitors operating capabilities as well as shifts in marketing conditions. Inside-Out Approach Throughout the literature of commercial planning, strategists have been instructed to develop strategy by adapting the firms internal capabilities so that they fit market conditions. The economy, industry, and market are assessed first, and critical success factors are defined. Then, internal strengths and weaknesses are assessed. Strategy entails exploiting strengths and correcting weaknesses so that the firms capabilities most closely fit critical market/industry success factors. But the reverse sequence also is possible. Planning can begin with a searching analysis of the firms present and potential functional strengths. Then, the strategist attempts to exploit those strengths by finding market and industry segments where the firms strongest abilities can be exploited to the greatest advantage (Ewing, 1969:80, 91). In essence, management seeks out industry/market segments with critical success factors that match the firms strongest capabilities and resources. page_203

Page 204 This approach has a certain intuitive validity. Management may not know the entirety of its competitive environment perfectly, but it certainly should know its own competitive capabilities and how they can be employed most effectively. Moreover, in some situations, markets for the firms distinctive competences do not exist yet. There were no markets for portable tape players, personal computers, or beepers before their initiators created those products. The classic, deductive model of strategy formulation does not fit such situations, but the inductive model does. In recent years, this model of strategy formation has been called the resource-based view of competitive advantage (Wernerfelt, 1984; Rumelt, 1984; Barney, 1986b, 1991; Collis and Montgomery, 1995); and it has gained wide acceptanceespecially in fastpaced high-technology industries. Competing for Future Leadership Hamel and Prahalad (1994) declared that the planning executives 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. 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. Unfortunately, research has shown that very few firms are skilled in industry/market analysis, forecasting, and environmental scanning (Fahey and King, 1977; Capon et al., 1987). While Hamel and Prahalad may have challenged managers to accomplish excellent strategic concepts to compete for the future, they unfortunately did not prescribe a methodology for doing so. Nevertheless, their thesis is incontestable: if you can foresee future opportunities, you should prepare to exploit them! The PIMS Approach The PIMS industry research program was discussed earlier in this chapter. PIMS is an acronym for profit impact of marketing strategy, coined by founders of the Strategic Planning Institute in 1972. Since then, more than 3,000 businesses strategic profiles and financial results have been correlated in order to develop par performance standards for firms in different market and industry positions. Several rules of strategy (for maximizing return on investment) emerged from this program in the late 1970s (Schoeffler et al., 1974) and have been codified since then by Buzzell and Gale (1987). They are illustrated by the following excerpts: page_204 Page 205 High productivity is most rewarding in fast-growth industries. Differentiating product quality, versus competitors Usually increases market share, and Can enhance ROI even when market share is low. New products tend to Increase ROI the most, in slow-growth markets, and Increase ROIs of firms with low market shares. Research and development expenditures tend to Decrease ROI when market share is low, Increase ROI when market share is high, and Increase ROI most in slow-growth markets. These are the kind of principles that professional planners and other strategists long for, but that really are too equivocal and rudimentary to form a doctrinaire basis on which to build strategy. Still, the fact that such principles indeed can be developed empirically should encourage planning managers to watch the professional literature for further developments like these. Unfortunately, very little new information has emerged from the PIMS program in recent years; and the PIMS database no longer is being replenished steadily by subscribers data. Thus, this program may soon become outdated unless it can be revitalized. It is encouraging that the PIMS approach of relating competitors traitssuch as quality, asset intensity, vertical integration, and advertisingto their market shares and rates of return now is within most planning managers abilities, thanks to the availability of large databases and user-friendly statistical software. With modest effort and the aid of information technology, planning managers can compile their own PIMS-like protocols. Identifying a Driving Force Roberts (1993) ten driving forces comprise another list of strategic themes. According to Robert, a firms management should select from his list of ten alternative themes (driving forces) as a foundation for its strategy. The ten alternatives are (1) product leadership, (2) customer focus, (3) market focus, (4) maximizing production volume, (5) exploiting technological advantage, (6) exploiting a sales/marketing methodology, (7) focusing on a distribution channel, (8) exploiting natural resources/materials, (9) maximizing growth, and (10) maximum (versus acceptable) return. A firms strategy might pursue industry leadership in any one (or more) of the first nine categories. However, 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. Roberts list may not be exhaustive; page_205 Page 206 for instance, it seems to omit political and regulatory forces. Through applied industry research, the planning manager may identify other critical success factors (CSFs) that characterize the firms industry or market segment. If those CSFs are not on Roberts list, they still must be addressed by a firms strategy. Responding to Crises Crises and sudden environmental irregularities provide special challenges to both the integrative and adaptive functions of strategic management. Jauch, Osborne and Glueck (1980) studied short-term strategic reactions of 358 large corporations to such challenges in their environmentsfor example, adverse changes in government regulations, distribution channels, and technology

during 19701974. Using content analysis of case histories in Fortune magazine, they found characteristic tendencies in strategic responses to each type of crisis. For instance, technological crises tended to be answered by either adjustments to the product mix or fundamental mission changes. Distribution system changes typically were paralleled by reductions in rates of return and met by attempts to improve either costs or market share. Adverse governmental legislation or regulations typically elicited exit strategies such as divestment. While these findings should be confirmed by more rigorous research, 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. Strategic planning procedures must be flexible enough to accommodate such exigencies. Smart and Vertinsky (1984) studied the attempts of 94 firms to deal with crisis during 1980. They believed that they discerned four types of response based on the degree of environmental uncertainty and the long- or short-term nature of required responses. Strategic reactions differed between stable environments and unstable, riskier environments. Long-range planning responses occurred in uncertain environments, while formation of more immediate strategies occurred in relatively certain environments. Similarly, Anderson and Paine (1975) proposed an adaptive model for strategy, based on interactions of managers perceived needs for functional change (integrative challenge) and their perceived environmental uncertainty or risk level (adaptive challenge). Their model is depicted in Figure 7.1 of this volume. CONCLUSIONS This chapter addresses procedures that must be followed by a single business enterprise and its planning manager to support strategic decipage_206 Page 207 sions effectively. The following lists provide a summary of principles that apply to such procedures in a single business. GENERALLY ACCEPTED PLANNING PRINCIPLES: SINGLE-BUSINESS PLANNING Axiom Axiom8.01Goals may be established on any of four dimensions: level of risk, financial results, market position, long-term growth. Goals at least must define criteria for competitive and financial success. Postulates Postulate8.01There are interrelationships between goal types. A requirement of goal setting is to find a combination of acceptable results on all four dimensions. Postulate8.02Strategic objectives express differences between a firms present performance potential or position and the firms 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. Postulate8.03Strategic objectives can be defined either deductively (goals versus baseline projection) or inductively (the sum of identified program benefits). Postulate8.04Management 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 firms circumstances), adaptive (market focused), and integrative (resource based). Postulate8.05Each 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 page_207 Page 208 advantage. This theme must be articulated before a strategy can be fully developed. Postulate8.06Objective evidence regarding the firms industry position and internal capabilities is required for well-balanced strategic decisions. Postulate8.07Critical 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. Postulate8.08Benchmarking systems such as the PIMS program may be helpful in diagnosing a firms competitive strengths and weaknesses in CSFs, according to objective criteria. Postulate8.09While 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. Postulate8.10Porters (1980, 1985a) five forces are essential elements of a strategic assessment; they form an effective frame of reference for gathering evidence about industry attractiveness. Postulate8.11At least one matrix technique to jointly assess the firms 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. Hypotheses Hypothesis 8.01 Assembling sound evidence for strategic decisions enhances firms rates of return. Hypothesis 8.02 The quality of environmental evidence is directly related to planning outcomes. Hypothesis 8.03 Objective evidence regarding the firms internal capabilities enhances planning outcomes. Hypothesis 8.04 Analyst bias impairs objectivity in gathering evidence about internal capabilities. page_208

Page 209 Hypothesis8.05Firms that form both integrative and adaptive strategies will perform better than those that prepare strategies emphasizing only one dimension or the other. NOTES 1. See the authors forthcoming book entitled Strategic Planning Technology for a thorough discussion of electronic planning aids. Also see Chapter 4 of this volume for a summary of electronic planning aids that are available. 2. See Chapter 7 of this volume for a more detailed explanation. 3. The next work in this series, Gathering The Evidence, provides more detailed guidelines for assessing both the strategic environment and functional capabilities. page_209 Page 210 This page intentionally left blank. page_210 Page 211 9 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 beor how many businesses exist within itthe 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 corporate-level planning managers in multibusiness firms. CORPORATE-LEVEL PLANNING FUNCTIONS 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 page_211 Page 212 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 companys mission? The more diversified a corporation becomes, the more difficult it also becomes to define that corporations 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 companyproviding 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 leveloften with substantial difficulty. page_212 Page 213 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 corporate-level 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 organizationboth its capabilities and structure. Market Analyses This dimension of analysis typically receives a great deal of attention from corporate-level planning managementespecially 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 page_213 Page 214 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 businessfor example, those in the basic metals, petroleum, chemical, textile, and food-processing industriesare able to formulate consolidated competitive goals based on market shares or other indicators of competitive position. But highly diversified enterprises cant establish market-share goals at the corporate level. When corporations diversify, their goals typically emphasize either growth or earningsone 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 firms goals and objectives can have a determining impact on the appropriate method of planning, as well as the strategy to be selected. page_214 Page 215 Strategy Selection In the multi-business corporation, top-level corporate strategy largely entails decisions regarding allocations of corporate resources between lines of business. Typically, a portfolio approach is taken to allocate capital investments between business units. Thus, the planning procedure must include evaluations of individual units major capital spending projects, and their acceptance or rejection must be based on the merits of business units strategic plans. Otherwise, the planning procedure will not be meaningful or worthwhile for those units top managers (Wilson, 1971:66, 67). In Chapter 8 of this volume, matrix approaches to assembling portfolios of business investments are discussed. Just as competitors in a single industry can be evaluated using matrix methods, the same techniques can be used when a portfolio includes several businesses in different industries or markets. In that case, all of the corporations businesses are represented on a single grid, such as the market share/growth matrix. The corporate strategists 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. To support such decisions, the planning manager must accumulate adequate information with which accurately to represent each business in the portfolio.

In more complex corporations, 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. In such cases, more subjective criteria must be employed. The multi-factor matrix (Allen, 1979), the directional policy matrix (Hedley, 1977; Robinson et al., 1978; Hussey, 1978) or a life-cycle matrix (Hofer and Schendel, 1978) may be preferable in such cases. All of those techniques are described in the preceding chapter. 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. When multi-business corporations investments are diversified in several unrelated industries, they are called conglomerates. One purpose for forming conglomerates initially was to minimize risk by balancing investments between industries and markets with asynchronous cycles. Businesses market cycles might offset one another, and diversification should act as a hedge against over-dependence on a single industry or market. Ideally, with positions in multiple page_215 Page 216 markets, corporate management should be able to concentrate resources where prospects for growth and earnings are currently highest, and shift allocations between portfolio businesses as their market opportunities shift. But, from the outset, it has been unclear that hedging approaches actually can be effected successfully (Burck, 1967). During the 1960s and early 1970s, several conglomerates were formed. However, with onset of a steep recession in 1974, increasing skepticism was raised regarding the effectiveness of diversification as a risk-management strategy. Rumelt (1974) reported results of extensive research spanning the 20 years of 19491969, 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. Rumelts research was so broad in scope and highly developed that his conclusions were widely accepted, even after Bettis and Hall (1982) discovered a flaw in Rumelts sample. Several confirmations of the argument that highly focused corporations tend to outperform others have appeared since Rumelts research was published. Such investigations have extended beyond the United States (Calori, 1988) and gone beyond simple accounting definitions of financial success, to include measures of shareholder wealth creation (Lehn and Makhija, 1996). Prior to Rumelts report, other researchers also had been examining the financial effectiveness of diversification (or conglomeration) as a corporate strategy. For instance, Weston and Mansinghka (1971) found that conglomerates grew faster during 19581969 than other companies (as did Rumelt, 1974). Conglomerates rates of return on equity were a little higher than other companies, mainly because of increased leverage. More important, conglomerates seemed to succeed in raising the performance of acquired firms with depressed earnings back up to industry averages (but not much more). 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; the other 45 did not. Conglomerates performed as well as the other companies, but no better. It was concluded that conglomeration was beneficial primarily as a defensive strategy but not effective as a means of obtaining superior returns. Holzmann et al. (1975) obtained similar results. Conglomerates rates of return on assets were lower than those of other firms; but variability of the returns also was lowerthereby implying a lower level of risk. Thus, it again was concluded that conglomeration serves primarily as a defensive strategy, which is not likely to achieve above-normal returns. Varadarajan and Ramanujam (1987) later tested the effects of diversification on performance more extensively. They assembled a sample consisting of the ten largest firms in each of the 25 largest industries page_216 Page 217 in 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, but, this still was one of the largest studies of its kind. Performance variablesincluding the rate of return on equity, return on capital, sales growth, and growth of earnings per sharewere obtained from the Forbes Annual Report on Industry for 1984 and reflected five-year averages. Results partially supported Rumelts (1974) findings: narrow diversifiers tended to outperform broad-scope diversifiers. But differences between average performance of corporations with extremely low levels and extremely high levels of diversity were not statistically significant. Indeed, 16 percent of companies with very low rates of return were related diversifiers, and 17 percent of those firms were unrelated diversifiers. Bettis and Hall (1982) also tested Rumelts (1974) findings by studying rates of return on assets and risk (as reflected in returns variance) among 80 diversified corporations during 19731977. Firms were classified according to Rumelts scheme as relatedconstrained (N=31), related-linked (N=25), and unrelated (N=25). All businesses in a related-constrained portfolio must have some significant functional trait in common. In a related-linked portfolio, each business must share a significant trait with at least one other business in the portfolio. Thus, a constrained portfolio contains businesses that are more strongly related than those in a linked portfolio. The related-constrained and related-linked firms in this study included all of Rumelts original sample for which data were available in Standard and Poors Compustat files. The unrelated category of additional firms were drawn randomly from the Fortune 500 lists. Corporations with related-constrained portfolios out-performed those with related-linked portfolios, which in turn out-performed those with unrelated portfolios. However, these researchers noticed that four of the six highestperforming firms in the related-constrained category were major participants in the pharmaceutical industry and that two other pharmaceutical firms also were in that category. Accordingly, they recalculated their statistical analyses without pharmaceutical firms included in the sample. When pharmaceutical firms were removed, statistically significant differences no longer existed. Thus, the researchers concluded that Rumelts original findings reflected inter-industry differences more than diversification strategy. Linear regression models also disclosed statistically significant relationships between risk and return for corporations with unrelated portfolios. For the related-constrained firms, there was no significant relationship between risk and return. For firms with

relatedlinked portfolios, there was a statistically significant negative relationship between risk and return, implying the possibility that higher risk page_217 Page 218 may not necessarily be required for higher return in a synergistic portfolio. Whether or not diversification (or conglomeration) really is effective as a hedging or risk-reducing strategy remains an open question. The study by Bettis and Hall (1982) found that variability (risk) of returns did not differ between categories of diversified firms. It was concluded that risk reduction is not a valid rationale for selecting a strategy of unrelated diversification rather than related diversification. Bowman (1980) had obtained similar results in a study of 1,572 companies rates of return on equity and variability of returns in 85 industries covered by the Value Line Survey during 1968-1976. In 56 of those 85 industries, the relationship between risk and return was negative; but the relationship was positive in 21 other industries. (No significant differences could be discerned in eight industries.) Thus, there seem to be important interindustry differences in risk-reward relationships. Therefore, 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. On balance, 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. 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. Documented reasons for underperformance of conglomerates have included corporate managements inability to master more than a limited number of industries and markets; extra administrative costs required at the corporate level to oversee groups of unrelated businesses; and the generally poor record of acquisitions long-term financial results (Burck, 1967; Salter and Weinhold, 1978, 1979:3646; Copeland et al. 1990:319321). Corporate-level expenses, in particular, can punish diversified firms rates of return severely. Copeland et al. (1990:259) estimated that such expenses, when capitalized, represented upward of a third of the equity value in 22 of the 25 largest American industrial corporations at the end of 1986. In conclusion, corporate-level strategy in the multi-business corporation requires top management to adopt some form of a portfolio management approach. Fundamental to this approach is a two-step process of (1) deciding upon a portfolios scopethat is, the level of diversificationand the industries in which to participate and (2) allocating corporate capital to portfolio businesses. If managements objective is to reduce risk, a hedging strategy of diversification (conglomeration) may be helpful; but it probably will not enhance returns above industry page_218 Page 219 averages. Indeed, unless the scope of diversification is constrained sufficiently to provide some synergy, returns may be sub-normal due to the burden of corporate-level expenses. As a very general rule, the most related, or focused portfolios are likely to enjoy the highest financial performance potentials. However, there are significant inter-industry differences in risk-reward relationships and, therefore, in opportunities to benefit from diversification as a corporate strategy for reducing risk. The planning manager therefore must assess such relationships in industries where corporate investments have been made or may be made. Acquisitions, Divestments, and Restructurings A specialized element of strategy implementation is addressed to the conduct of acquisitions, divestments, joint ventures, and other large reallocations of capital resources that modify the corporate structure. While some of this work can be done at the division/subsidiary level, responsibility for the policies directing these functions almost always rests at a high corporate level. This is because significant alterations of corporate structure and large allocations of capital always require the directors approval and sometimes require shareholder approval. In a landmark study of about 300 transactions, Ansoff et al. (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, that is, without the benefit of a corporate-level strategy to guide them. However, Birley (1976) observed that acquisition investments typically are not guided by corporate strategy. Thus, it is not surprising that a large portion of acquisition investments do not turn out well (Salter and Weinhold, 1979; Porter, 1987; Copeland, Koller and Murrin, 1994; Rappaport, 1998). The corporate planners task in formulating strategic objectives for acquisitions and divestments is similar to that discussed in the previous chapter (see Figure 8.9). However, rather than just one gap between the baseline projection and goal, there now are two, as portrayed in Figure 9.1. 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. However, in this case, the corporate goal still is unreachable. A supplemental acquisition strategy, with its own objective of Os2, is then devised to resolve the deficiency. Argenti (1969:16164) seems to be the first to have defined this second strategy gap. The importance of conducting an acquisition program as just one means of implementing a broader corporate strategy cannot be overpage_219 Page 220

Figure 9.1 Strategic Objective of Acquisitions stated. To illustrate, McKinsey and Companys Corporate Leadership Center studied 116 acquisition programs, usually involving multiple acquisitions, during 19721983. Companies were either among the Fortune 200 or the Financial Times top 150. The results disclosed that 61 percent of these programs ended in failure, and only 23 percent in success. The chance of success was increased to 45 percent when acquiring companies bought smaller companies in related businesses. If the target was large in an unrelated line of business, the success rate fell to only 14 percent. Companies with strong core businesses prior to their acquisition programs had much better chances of success than those without strong core businesses; virtually 92 percent of the successful acquisition programs were conducted by firms that had strong core businesses (Copeland et al., 1990:31921). 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. Most important, selections of corporate mission, corporate goals, and corporate level strategyincluding the allocation of corporate resources to business unitsmust 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, as well as the industry culture from which managers of different companies in the same industry derive common experiences and values (Hambrick and Mason, 1984). An assessment of such psychological and cultural predispositions to planning practices of top management in a single firm, or even an entire industry, can be a source of professional advantage for the planning executive. page_220 Page 221 Other planning functions and decisions that cannot be delegated include the formulation of financial policy regarding dividends, return on investment requirements, and the amount of capital that will be made available to operating entities (Vancil, 1976). Corporate management also must provide objectives and policy guidance to managers of headquarters functions, which in turn may affect divisions and/or subsidiaries. Such functions surely include the administration of policy regarding acquisitions and divestments. Often, research and development functions also are conducted at the corporate level. Finally, there is one function that calls for critical decision making by top corporate management alone: This is the identification, development, and appointment of individuals to whom top management of businesses within the corporate portfolio will be entrusted. IMPACTS OF CORPORATE STRUCTURE ON PLANNING STYLE IN DIVERSIFIED FIRMS As observed in a previous chapter, 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. Recall that Rumelt (1974) provided a taxonomy of corporate diversification and relatedness that remains in common use. Accordingly, a corporation may consist of a single business, a group which includes a dominant line of businesses (vertically integrated; either tightly or loosely constrained), a group of related businesses (tightly or loosely constrained), or a group of essentially unrelated businesses (passive versus acquisitive conglomerates). If the corporation is engaged in relatively constrained lines of related businesses and the corporate management structure is centralized, then a top-down approach to formulating planning methods, goals, strategy, and even divisions objectives is possible. However, to the extent that diversification and decentralization are present, either a bottom-up, hybrid, or team approach will be required. Participation of Corporate Management in Division Planning To the extent that corporate entities are related (e.g., through commonality of served markets, manufacturing methods, technology, 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. Goold and page_221 Page 222 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. Specifically, 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. Strategic control: Corporate management requires plans to be prepared, but delegates authority for planning and implementation to line management. Corporate management directs the process and evaluates proposed plans. Financial control: Corporate management delegates all planning and operating authority to line management; monitors financial performance; rewards managers who accomplish their strategies successfully; and replaces managers who do not perform successfully. Corporate-level planning decisions (e.g., funding of growth programs and portfolio investments or divestments) are

primarily based on ROI trends and potentials, not on businesses plans. Consider the case of a large integrated producer of steel, copper, or aluminum. Although there may be several operating divisions, strategic management still can be centralized, regardless of corporate size, because lines of business are narrow and closely related. Firms in the basic metals, chemicals, petroleum, forest products, and other natural resourcebased industries all are likely to present such situations. On the other hand, as diversification broadens, perhaps even extending into multiple industries, it is most likely that individual businesses executives will be delegated relatively broad powers for formulating strategy independently of corporate management (Kinnunen, 1976). Corporate-Division Conflicts As mentioned previously, the strategic interests of large corporations and their individual divisions or subsidiaries easily may be in conflict (Berg, 1965). This axiom has far-reaching implications. If ideal levels of investment were made by each business in order to maximize its performance potential, the sum of investment requirements, even in very large corporations, well might exceed corporate resources. In such cases, corporate management must make selections from resource allocation alternatives; and those selections often will leave some subsidiaries or divisions unable to realize their maximum performance potentials because capital resources simply are not sufficient. Various page_222 Page 223 other conflicts between divisions and corporate interests may arise in complex organizations. For instance, corporate management may prefer to fund the development of a fledgling business with excellent (albeit risky) long-term potential while declining to fund otherwise attractive projects in a larger subsidiary that dominates its stable or declining market with a mature technology. Eventually, the fundamental strategic thinking of top corporate management and line management will disagree in some respects. When this occurs, management at each level may be severely challenged. Frequently, line managers know more about the individual businesses with which they have been entrusted than corporate management. Yet, corporate executives make the final funding decisions. Roney (1977a) prescribed a number of diagnostic criteria by which to evaluate such conflicts based on the quality of line managements planning rationale, tests of objectives feasibility, and evaluations of management competence. In any event, the corporate planning executive must be prepared to advise top corporate management on such conflicts, because they are inevitable. SCHEDULING OF PLANNING ACTIVITIES IN COMPLEX FIRMS The typical schedule of planning activities in a substantial firm lasts all year. Long-range plans are prepared by operating management, at least in concept, in time for corporate management to review them at mid-year. Negotiations between corporate and division managers and revisions of operating plans typically are accomplished by the end of the third quarter. Annual operating plans for each business and the corporation then are completed in November. These procedures are discussed, in Chapter 6. Smalter (1969) provided a detailed explanation of how such procedural models are implemented in real life (see Exhibit 6.2). In a large minerals concern, corporate- and division-level planning functions were divided. At the corporate level, a five-year plan of business was updated each year: It included corporate goals and objectives; economic, industry, and market forecasts; internal strengths/weakness evaluations; marketing problem/opportunity definitions; baseline financial projections; internal strategy; capital expenditure projections; an acquisition strategy; financial statement objectives; and a budget for the first year of implementation. Divisions prepared plans with a similar structure. Planning staffs existed at both corporate and division levels. But, in this singleindustry concern, the entire process took only about six months. page_223 Page 224 Wilson (1971) defined a similar process, which emphasized corporate allocations of capital to divisions development projects before they completed their plans. (Otherwise, division managers assumptions might not be realistic.) The process began with definitions of corporate-level objectives for a five-year period. Then, negotiations ensued with division managers regarding their businesses potential roles in realizing corporate objectives. By the end of the fourth month, a corporate-level plan was drafted and division objectives were issued. The corporate plan prescribed approximate funding levels that would be available to divisions, subject to their proposed projects approvals. With that information, divisions then could prepare their plans of business with reliable funding assumptions. By the end of the seventh month, divisions submitted their updated five year plans. Those plans were reviewed and approved somewhere around the end of the ninth month. Subsequently, final drafts of corporate and division plans were completed and the coming years budget was prepared. The entire process took nearly a full year. Vancil and Lorange (1975) proposed that interactions between corporate and division management during planning activities should evolve through three cycles of progressive refinement. In the first cycle, corporate-level objectives and general strategy are developed. During this cycle, division managers propose broad strategic objectives. By mid-year, top corporate management arrives at basic decisions regarding corporate objectives, strategy, and performance required from divisions or subsidiaries. If the sum of proposed division objectives is not sufficient to accomplish corporate-level objectives, negotiations between corporate and business unit managers must address this planning gap by identifying opportunities to improve division performance further, reallocating corporate resources to the most promising businesses, considering acquisitions or divestments, or reducing corporate goals. Ultimately, such decisions can be made only at the top level of corporate management. In Vancils second cycle, division managers develop more detailed plans to pursue approved objectives, involving more members of their management teams. By the end of the third fiscal quarter, division/subsidiary plans should be available for presentation to corporate management and review by the corporate planning staff. Sometime in September, the third cycle begins; at this point, 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. Vancils entire process also required a full year and culminated with approval of operating budgets.

Vancil (1976) later explained, in greater detail, how strategy should be developed at each level of each cycle. He proposed that the firms page_224 Page 225 concept of strategy must permeate an entire corporation. Even at the most basic level of the corporation, he argued, each department or functional manager should have a personal strategy for contributing to achieving objectives at the next highest level. Constraints are to be imposed on lower levels within the organization by policy decisions made at a higher level. This concept of constraints is essential to Vancils procedural approach because it avoids the kind of conflicts which Berg (1965) had described earlier. While the foregoing procedural norms are over a quarter-century old, they remain generally accepted and characteristic of customary practices. MULTINATIONAL COMPANIES: FURTHER COMPLICATIONS Previous paragraphs have discussed complications in planning procedures that occur when firms grow more diversified and/or more decentralized. These complexities are magnified when a firm enters international markets. Ansoff (1988:99) characterized international operations as the most risk-prone of diversifications. Indeed, as American businesses extended their reach beyond domestic markets, special procedural problems were encountered in corporate planning. Cain (1972) drew on his extensive international management consulting experience to characterize several differences between multinational and domestic business planning. He identified four principal problems with which international business planners must contend. First, planning functions simply may fail, at the outset, even to be installed successfully because of impracticalities emanating from remoteness, language differences, information deficiencies, and so on. Second, 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.S. parent and so engender resentment of subsidiary or division personnel. Third, the quality of plans and planning initially may be beneath U.S. standards because of a lack of good information and the unfamiliarity of foreign managers with American planning methods. Finally, international businesses sometimes tended toward parochialism and away from the synergies that corporate-wide planning seeks to accomplish. A More Complex Corporate Structure Channon (1976) studied strategic planning in 50 European and American multinational corporations. He observed that each corporations page_225 Page 226 structure could be described using geographic or product dimensions. To illustrate the geographic dimension, firms in the chemical industry tended to be globally oriented, due to very high capital costs, high-scale economies, high levels of technology, uniformity of production processes, and universality of products use. Food processors, on the other hand, tended to be more nationally organized, because of local tastes and relatively low-scale economies in that industry. 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, the extent of actual versus apparent control, and the levels of politically engendered risk that enter into planning decisions. Development of, and changes in, multinational firms management personnel also are especially important in multinational corporate planning (Hussey 1972, 1980). Thus, 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. Prahalad (1976) addressed the complex power relationships between business units of multinational corporations that can occur when operations are located in several countries. These relationships greatly complicate strategic decision making and global strategy implementation. The challenge for top corporate management in resolving multinational conflicts, Prahalad argued, is to control the locus of power in order to minimize conflicts between managers of international business units and top corporate management. Power-control tactics available to corporate management include (1) transferring managers between regions, products, or plants; (2) standardizing plants in order to minimize differences that can elicit conflict; (3) building broad scope corporate-wide communications and cultural institutions; (4) managing the pattern of internal information dissemination in order to control business unit managers relative political advantages; and (5) occasional changes in profit center managers reporting relationships. Rutenberg (1970) took a somewhat different approach than the one just described, preferring to distinguish authority structures within the MNC management organization as either ethnocentric (locally focused) or geocentric (global) at corporate or division levels. He proposed that differences between these two concepts determine how strategic decisions regarding capital costs, pricing, product designs, asset management, and managerial rotation are made. At one extreme, the headquarters office is the source of local decision authority, and subsidiaries are viewed as tightly integrated elements of the global corporate structure. In that case, all strategic decisions regarding finance, pricing, and product design are made by top corporate managepage_226 Page 227 ment, and operating management implements corporate decisions. At the opposite extreme, subsidiary executives have much greater autonomy but receive much less support from the parent corporation; such, subsidiaries may have to obtain their own financing, for instance. Between the two extremes, sharing of corporate and local resources can produce various degrees of integration or differentiation of financial, marketing, and operating authority, so that a more or less multinational management

structure can emerge. In all multinational corporate planning procedures, two fundamental decisions must be made by planning managers and senior corporate executives at an early stage. First, an organizational structure and approach to managerial control must be selected. Second, selections of countries in which to invest and operate offshore businesses must be made. Thomas (1974) discussed those two aspects of corporate planning decisions in describing how a large subsidiary of Unilever Corp. chose to organize about 160 businesses geographically. Ultimately, the organizations structure was based on groupings of countries with common languages. 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; capital expenditures in excess of certain maximums required corporate approval; and corporate management alone selected the top managers of each business and their compensation. Pitfalls Steiner and Schlhammer (1975) studied 460 multinational companies to identify the incidence of pitfalls in multinational business planning. The three most important pitfalls were overdelegation of planning to planning managers, negligence of the planning function altogether, and failure to develop goals specific enough to guide strategy formulation. No differences in the incidence of these pitfalls were attributable to corporate size. However, formality of planning did differ between countries; the most formal planning procedures were found in the United States and England, while the least formal procedures were found in Japan. Formal documentation was most frequent in Canada, but least frequent in Japan and Italy. Procedural pitfalls in planning for international businesses also were identified by Brandt and Hulbert (1980), who studied 63 multinational corporations with manufacturing subsidiaries in Brazil and headquarters in either North America, Europe, or Japan. The studys purpose was to trace sources of pitfalls in MNC business planning either to headquarters or management of Brazilian subsidiaries (see Table 9.1). When page_227 Page 228 TABLE 9.1 Sources and Impacts of Pitfalls in Multinational Business Planning Problem Type Problem Locus: Management Planning System Headquarters Short-run orientation; insensitivity to culture Oversophistication, overformalized; insufficient data Subsidiary Resistance; doctored data Unreliable data; unskilled planners Source: Adapted from Brandt and Hulbert 1980. planning problems occurred at the parent companys headquarters, they reflected top managements emphasis on short-term results and insensitivity to Brazils cultural requirements. 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. 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. Of course, such plans contents were unreliable and the local management team tended not to develop good planning skills. Regrettably, 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. The record on such questions simply has not been kept current. CONCLUSION 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). GENERALLY ACCEPTED PLANNING PRINCIPLES: CORPORATE-LEVEL PLANNING Axioms Axiom 9.01 Corporate-wide planning policy, both procedural and substantive, is the responsibility of top corporate management. page_228 Page 229 Axiom9.02The parent companys mission, like subsidiaries missions, must be defined. In the case of diversified corporations, a core mission may not exist. Axiom9.03Corporate-level analysis of internal capabilities embraces business units risk levels, performance potentials, competitive potentials, and growth potentials, as well as the quality of unique corporate functions, including top management and staff services. Axiom9.04Corporate-level environmental analysis provides an independent assessment of business units present and potential competitive positions, industry conditions, and marketing conditions. Axiom9.05Corporate-level strategy declares the intended levels of capital invested in business units, diversification, and synergy. Postulates Postulate9.01Corporate-level goals can be expressed in terms of risk level, financial results, and long-term growth. But corporatelevel competitive goals may not be meaningful in diversified corporations. Postulate9.02Conflicts occur between holding companies missions and subsidiary businesses missions. These conflicts often cannot be resolved. Postulate9.03A portfolio matrix approach should be taken to assess the quality of a corporations business portfolio. Such techniques are especially useful for cash-flow planning purposes, capital allocation, and forming acquisition/divestment strategies.

Postulate9.04Planning activities at corporate and division levels must be scheduled throughout the year so that strategic awareness is sustained and planning responsibilities do not become too burdensome. Postulate9.05Corporate- 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, assembly of baseline financial projections, definitions of strategic issues, development of goals and strategy, action programming, and budgeting can occur simultaneously at each level. page_229 Page 230 Postulate9.06Planning activities are complex in multinational corporations because planning practices and cultures often differ between nations. However, as in the purely 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 Hypothesis9.01The justification of portfolio diversification as a corporate risk-reducing strategy will differ between enterprises, depending on the industries in which they participate, partly because industries differ in risk-reward relationships. Hypothesis9.02Acquisition investments turn out unsuccessfully more often than successfully. Hypothesis9.03Acquisitions conducted to implement a previously defined strategy are more likely than others to be successful. Hypothesis9.04Acquisitions related to existing businesses are more likely to succeed than divergent diversifications. Hypothesis9.05Firms with the most related portfolios provide more opportunities for top corporate management to participate in business units strategic planning, while very diversified enterprises senior executives typically exercise greater detachment, relying mainly on financial measures for planning and assessment of business units performance. Hypothesis9.06The relatedness or diversification of corporate entities predetermines the most appropriate style for proposing plans and decision making: top-down or top team (related) versus bottom-up or hybrid (diversified). page_230 Page 231 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 firms 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, page_231 Page 232 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. page_232 Page 233 10 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 managements remarkable propensity not to convert strategy into effective action? Oversimplified, our conclusion is page_233 Page 234 that 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 methodologynot 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 planindeed, any planthat 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 werent 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. THREE GENERIC COMPETENCES Essentially, the implementation section of a plan must describe managements approach to converting strategy into goal-oriented bepage_234 Page 235 havior. 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 arent 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 firms 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), DAveni (1994), and Hamel and Prahalad (1989, 1994). A second class of generic capabilities required for effective strategy implementation is a well-aligned 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 (DAveni, 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 expepage_235 Page 236 rience. 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 wide range of cultural barriers. Thus, to take effective action in implementing strategy, it often is necessary to achieve the consensus of an organizations members because, of course, consensus is the antithesis of resistance. Unfortunately, few effective mechanisms for achieving reliable consensus are known. Participative approaches to selecting objectives and strategy seem to be among the most widely accepted techniques (Miller and Monge, 1986; Cotton et al., 1988, 1990). Research also indicates that consensus in approaches to pursuing objectives is more important than consensus on the objectives themselves. Indeed, some discord regarding objectives may be beneficial by promoting consideration of a broad range of alternatives (Bourgeois, 1978, 1980a; Hall, 1983). Whether it is through consensus or the more direct device of a lucrative incentive compensation program that links rewards to objectives accomplishment, individuals must be more than just willing to enact the firms strategy; they must be enthusiastic about doing so. The level of motivation must be sufficient to sustain persistent, vigorous effort in the pursuit of strategic objectives. A firms ability to draw upon all three categories of generic implementation capabilitiesbalanced resources, a properly aligned organizational structure, and effective motivationwill be greatly affected by leadership. Indeed, leadership combines all three of these implementation capabilities. Leaders themselves are valuable resources. They provide and sustain motivation throughout the organization, especially when difficult obstacles are encountered and problems must page_236 Page 237 be solved. Finally, leaders are the ultimate structural integrating mechanisms; good leaders guide organizations in adapting and learning from experience and in changing strategy when it is necessary to do so. TEN CRITICAL SKILLS FOR CONVERTING STRATEGY TO EFFECTIVE ACTION Our studies of strategy implementation, and over a quarter-century of practice, also have convinced us that ten critical skills must be present in any firm for strategy to be implemented effectively and reliably. These skills flow naturally from the three generic categories of implementation capabilities described in the preceding section. The following ten profiles checklist may be used by strategy managers to be sure that these skills are available in their firms. The Ability to Set Internally Consistent Objectives The firms objectives should reflect standards of success in financial and competitive performance, as well as acceptable levels of risk and rates of long-term growth. However, it often is difficult to find a collection of objectives, supported by viable strategies in all four dimensions, that is internally consistent. As Doyle (1994) asserted, the challenge is to find a zone of tolerance where all objective criteria may not necessarily be maximized, but each is raised to an acceptable level. A framework of internally consistent objectives is a vital integrating mechanism for coordinating specialized organizational units conflicting interests. Such a framework provides expectations for critical success factors and standards for assessing performance of individuals as well as the entire organization. Just as important, it also provides a vehicle for instilling awareness of strategy in individuals throughout the organization, thereby overcoming otherwise formidable cultural resistance. The Ability to Achieve Strategic Awareness It surely is difficult for managers to implement strategy if they are unaware of it! Yet, a majority of companies seem to take for granted that line supervisors and mid-level managers will implement strategy effectively without such an awareness. Clearly, that usually is not the case (Hambrick, 1981). Some method of communicating strategy throughout the organization is essential. One device to accomplish such awareness, of course, is to invite managers at all levels to participate in forming strategy and objectives, at least for their areas of responsibility. Thus, page_237 Page 238 strategic awareness is a natural complement of internally consistent objectives because, in any participative approach to objective setting, internal consistency also must be achieved. The management by objectives technique has been used to effect such arrangements with favorable impacts on performance (Ivancevich, 1972, 1974, 1976, 1977; Kondrasuk, 1981; Rodgers and Hunter, 1991). The Ability to Manage Resistance to Changes in Strategy Resistance to change can take many forms and be pervasive throughout most organizations. As observed in the previous section, resistance to change is minimized to the extent that consensus on strategy is accomplished. However, this is easier said than done. There seems to be a natural resistance to strategic planning itself (Ewing, 1969). Moreover, there is a tendency, especially at higher levels of management, to persist in the pursuit of obviously unsuccessful strategies in a form of behavior that has been called escalating commitment (Brockner, 1992). Managing resistance to strategic change and attaining strategic consensus thus may be one of the most difficult of all strategy implementation skills to master. Regrettably, the methodology for achieving such a consensus is not well developed (Locke, Schweiger and Latham, 1986; Latham and Marshall, 1982; Latham and Saari, 1979; Latham, Erez and Locke, 1988; Latham, Mitchell and Dossett, 1978) and little is known about how to accomplish consensus reliably, let alone to overcome resistance. Nevertheless, several approaches have been proposed (Schweiger and Lena, 1986; Miller and Monge, 1986; Cotton et al., 1988, 1990; Meyers and Hood, 1994).

The Ability to Sustain Vigorous, Focused Effort Here is where the difference between conceiving and implementing strategy becomes most apparent. Top management may be able to conceive brilliant strategy in bursts of creative insight, but realizing strategy requires sustained, vigorous, focused effort. Forming strategy is an intellectually stimulating exercise, but implementing it is just plain hard work. How to attain this kind of motivation still is more of an art than a science. Effective leadership surely is required. It may be necessary to assemble an elite team such as the Manhattan Project, which created the first atomic bomb during World War II, or the Xerox Corporations Palo Alto Research Center (PARC), which created the first desktop computer. But, in more mundane settings, 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. page_238 Page 239 Numerous studies of incentive compensation effectiveness over the years have demonstrated that some types of incentives are more effective than others, depending upon the circumstances. For instance, 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. Our research also demonstrates that linkage of incentives to objectives is more effective in some industries than in others. Published research further has demonstrated that equity-sharing incentives are not very reliable enhancers of performance potential (Crystal, 1991a,b,c, 1992; Carbone, 1975; Mandel, 1990; Linden and Contavespi, 1991). There is insufficient space here to delve more deeply into this subject. We will conclude only by observing that proper alignment of incentives to objectives requires careful, competent crafting. The Ability to Align Structure and Strategy Since Chandlers (1962) pioneering work, it has been generally accepted that changes in a firms scope of business or other fundamental changes in strategy must be accompanied by an appropriate realignment of the corporate structure. This principle has been confirmed by scholars for three decades, most recently by Harris and Ruefli (2000). It also is generally accepted that, in stable environments where firms are not subject to severe internal imbalances, mechanistic organizational structures can be effective. But, in less stable and more complex environments, organic structures are most appropriate (Burns and Stalker, 1961; Woodward, 1965). Excessively narrow or diverse collections of businesses within the same corporation are unlikely to enjoy superior earnings, while corporations with multiple businesses that are sufficiently related to each other to provide internal synergies tend to enjoy superior performance (Rumelt, 1974; Christensen and Montgomery, 1981; Grinyer, Al-Bazzaz and Yasai-Ardekani, 1980). As organizations grow more complex, and competition intensifies, functional specialization is likely to occur. In such cases, the importance of organizational integrating mechanisms will increase to the point where such mechanisms are essential for effective strategy implementation (Lawrence and Lorsch, 1967). Perhaps this is why decentralized decision structures seem to be preferable to more centralized structures as firms become larger (Dalton et al., 1980). The Ability to Identify and Develop Leaders and Managers The most appropriate leadership style for any particular firm may differ depending upon that firms circumstances. However, Nutts repage_239 Page 240 search (1987, 1998) seems to demonstrate that there are at least four generic stylesintervention, participation, persuasion, and edict. As a general rule, the intervention approach seems to be the most effective: in that approach, managers implement strategy by setting objectives and reasoning with organization members regarding both the objectives and the approach to pursue them. While responsibility for enactment of strategy is delegated to organizational members, the manager remains in control and accountable for the outcome. In a more participative style, managers actually delegate responsibility for setting objectives and forming strategy to a selected group, committing to adopt the groups recommendation. Persuasion is a style in which managers attempt to sell strategic ideas to organizational members, often with the aid of some claim to incontrovertible authority, such as a consultants report. Of course, an edictive style is the most authoritarian and least participative. This is not to say that these four styles are the only ones available, but they do seem to lend themselves to empirical assessment. Nutt found that the intervention approach had the highest success rate, but that it was employed relatively infrequently (in only about 10% of 352 cases that he studied). Participation was the next most effective approach, used by 13 percent of the sample. Persuasion and edict approaches were taken most frequently (49% and 30%, respectively), but they had the least success of all. The edict approach was especially ineffective. To illustrate other leadership style taxonomies that are available, Shrivastava and Nachman (1989) studied 27 published case histories and identified four leadership styles: entrepreneurial, bureaucratic, political, and professional. The entrepreneurial style incorporated minimal delegation of authority and was edictive in nature. The bureaucratic style employed rules and models corresponding to Nutts persuasion approach. The political style was based on achievement of dominant coalitions. The professional style of leadership relied upon information and expertise. Of course, there are still other taxonomies. In any event, the challenge of top corporate management is to select leaders whose styles are appropriate to the firms circumstances. In most cases, an interventionist approach should be given very serious consideration. In our strategic management consulting practice, we have reviewed scores of companies strategic plans. Rarely is there a section on development of management and future leaders. Most firms are ill-prepared for events of executive succession. Yet, such events can impact organizational stability and performance greatly, as Shen (2000a,b) recently demonstrated. Consequently, if firms are not fortunate enough to have qualified internal successors, they must take their chances in the open market. But what happens when qualified candidates are not available? Of course, it would be much better if

page_240 Page 241 qualified managers were developed deliberately in strategic programs of long-term management development. Forming a management development program certainly is not easy. Among the challenges to be faced are obvious differences between aptitudes and skills required of functional managers versus business unit leaders. These two types of requisites vary considerably, as scholars have observed for many years (e.g., Zaleznik, 1977; Bennis, 1989a,b). Different still are the skills required of line supervisors and team leaders (Murphy, 1996). For all of these reasons, a planned approach to developing strategic leaders as they grow within organizations is unquestionably the most enlightened approach, albeit a rarity. An effective program to develop strategic leaders probably includes two essential elements. First, qualified candidates must be selected based on their aptitudes. Then, they must be exposed to strategically important issues in successive increments (Bowman and Kakabadse, 1997). The Ability to Conduct Projects Ultimately, strategy must be implemented through deliberate action. Whether they do so intentionally or not, managers who conduct strategic activities that are at all complex, last for any significant period of time, and/or require the commitment of significant resources, will organize such activities either into projects with defined endpoints or procedural programs. A large body of professional methodology has emerged in recent years to guide executives in managing projects and programs effectively. Modern project management methods have become important facilitators of strategy implementation because they focus human, physical, and capital resources on attaining specific objectives. They reduce the uncertainty and confusion surrounding projects implementation by clarifying paths to objectives achievement and resource requirements for successful completion. Project management methods also enable executives to clarify alternatives when barriers to progress are encountered, enabling them to make fully informed decisions faster and to take effective action with greater confidence. Thus, 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. The Ability to Budget and Monitor Progress Whereas strategic plans often take a long-term view, management eventually must come to grips with implementation in the present and near-term future. This is why budgeting and progress evaluation are page_241 Page 242 critical skills for implementing strategic plans. In effect, the annual operating budget should represent the first years implementation of a longer range strategic plan. As such, the two should be seamless. The annual operating budget becomes a microscopic view of the strategic plans first year. 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. Consequently, the problems of resistance to planning and strategic change discussed earlier are aggravated. Managers tend to resist the budgeting function when budgets are used as tools for measuring their performance, because they naturally prefer to avoid the risks associated with measuring their levels of achievement in comparison to previously established standards for success. It is the threat of embarrassment that makes budgeting so disagreeable to them. Nevertheless, some form of control is essential for keeping resources focused on achieving strategic objectives and avoiding financial risks. Indeed, absence of control implies that an organization is out of control, and senior managers clearly are derelict when that situation exists. The challenge, therefore, is to impose positive control so that a firms near term strategic intent is affirmed by the budget and controls encourage the accomplishment of objectives, rather than discouraging managers from participating in the planning process. The Ability to Envision Needs for Future Competences Hamel and Prahalad, in their widely circulated article on strategic intent (1989), their article on strategy as stretch and leverage (1993), and their well-known book on competing for the future (1994), defined several requirements for long-term strategic success. 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 industrys or markets evolution. 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. Development of such intellectual and technological resources cannot occur overnight. Rather, a deliberate program of competence development over five or even ten years before deployment may be necessary. Unfortunately, Hamel and Prahalad give readers very little guidance in determining exactly how the requirements for future competitive advantage may be developed. However, there is a growing body of knowledge regarding technological forecasting procedures and for identifying the likely tranpage_242 Page 243 sitions from current to emerging technologies. For some interesting and practical illustrations, readers might consult the works of Foster (1986) and Modis (1992, 1994, 1998). Certainly, todays competences eventually will become insufficient to meet future needs. However, only after the need for new competences in the future has been envisioned can a strategy be formed to develop or acquire them. Acquisition or development of new competences may require investment of considerable time and effort by many persons; and the struggle to develop them even may be culture defining, as when Disney developed a new form of motion picture, or Apple developed a new kind of computer. For extraordinary accomplishments such as these, extraordinary leaderswith visions of doing business in entirely new waysare required. To develop altogether new competences also may test an organizations ability to learn and adapt. A firm eventually will

be required to constructively disintegrate operating functions that well may be quite satisfactory for the present. This requirement, of course, presents a certain irony: Whereas functional integrating mechanisms are necessary to implement current strategy, top managements higher-level strategy well may call for the disintegration of those same functions over a longer term. The Ability to Realize When Its Time to Change Strategy and Replan This final implementation skill is a natural complement to the one just discussed. There comes a time in every firm when management realizes that implementing the current strategy long enough surely will lead to failure. Even an excellent strategy will have an unfortunate outcome if it is not replaced by a more appropriate one as the firms business conditions change. Indeed, strategy making is an ongoing process and the need to make continuous changes in strategy must be expected. With faster-changing environments, organizations must become increasingly proficient in their replanning skills. Needs for replanning may be discovered in the ordinary course of formal planning procedures, or they may be thrust upon management by sudden environmental shocks. In either case, the firm will be well served if a reservoir of contingent strategies and adjustments to implementation programs is available. Contingency planning, then, is a hallmark of proficiency in strategy implementation. As observed earlier, the most effective strategic managers initiate strategic change in planned programs of creative destruction, a term that DAveni (1994) borrowed from the famous economist Joseph Schumpeter (1939). In any event, whether strategic change is compelled by sudden shocks in the competitive environment or responds to emerging shifts identified through environmental surpage_243 Page 244 veillance, or even is self-imposed by the firm itself in programs of planned obsolescence, successful strategic management requires the ability to modify strategy and replan continually. CONVERTING SKILLS TO IMPLEMENTATION COMPETENCES At this point, we have reviewed three generic classes of implementation capabilities in the form of balanced resources, a properly aligned organization structure, and motivation of both individuals and the organization. Those foundation capabilities are needed in order to acquire ten critical implementation skills: Objective setting Selecting and retaining leaders Achieving strategic awareness Budgeting and progress evaluation Managing resistance Conducting projects Sustaining vigorous effort Envisioning needs for future competences Aligning structure to strategy Critically assessing current strategy Now, it is time to consider how those skills can be converted into effective action so that strategy in fact is realized. Proficiency in the ten critical skills reinforces the three generic capabilities (resources, structural alignment, and motivation). But generic capabilities, until they are refined into the ten critical skills, are not sufficient to implement strategy directly. Proficiency in the ten critical skills, however, is reciprocally reinforcing; as each skill grows, the generic categories become stronger. Similarly, as the ten critical skills are channeled into the specific implementation techniques which we are about to discuss, practicing those techniques enhances the ten critical skills, in a second reciprocal reinforcement mechanism (Figure 10.1). Thus, in strategy implementation, the common phrase practice makes perfect really does apply. Together, these two systems of mutually reinforcing relationships between generic capabilities, functional skills, and techniques for taking specific action to implement strategy comprise a reciprocally reinforcing system of implementation competences, which may be called the implementation-competences bridge. Scope of Available Techniques Over the years, several techniques have been employed by strategic planning methodologists to implement strategy. Some of these were page_244 Page 245

Figure 10.1 The Implementation Competences Bridge developed relatively recentlyfor example, the balanced scorecard of Kaplan and Norton (1996a,b,c,d). Others, such as management by objectives (Drucker, 1954, 1964; Odiorne, 1965) and zero-base budgeting (Pyhrr, 1970, 1973) have existed for over a quarter-century. The following paragraphs summarize ten specific techniques for implementing strategy. Each draws upon one or more of the ten critical skills discussed in the previous section. In order to implement strategy effectively, all ten critical skills must be deployed in some combination of techniques. The skills enable strategy to be realized as action. However, they must be deployed through the use of formal techniques, such as those discussed shortly. In turn, practicing those techniques will reinforce and help to build the basic skills. For example, effective use of the balanced scorecard requires abilities to set internally consistent objectives, achieve strategic awareness of the management team, align structure to strategy, identify the need for future competences, monitor and control progress, modify strategy, and replan. Not

only does implementing the balanced scorecard draw upon each of those critical skills but, through practice, it enhances them so that they grow stronger with practice. Over the years, developers of several implementation techniques and their followers have proclaimed them as all-inclusive strategic management systems, implying that no other is needed. In fact, what we have learned is that planning managers must make use of multiple techniques as the circumstances of their firms and their strategies require. But, in all cases, whatever combination of techniques may be used, all ten critical skills must be employed for strategy to be implemented successfully. The choice of techniques is a planning managers option, as long as the requirement that all ten skills be used is satisfied. page_245 Page 246 Management by Objectives If management by objectives (MBO) was not the first formal technique for implementing strategy, it must be one of the very first, having been initiated in the early 1950s at General Motors. First formally defined by Peter Drucker (1954, 1964), the most generally accepted MBO process model probably was drafted by Odiorne (1965). Since then, there have been numerous adaptations and revisions. 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. Accordingly, the objectives of all organizational elements are aligned to support and justify corporate goals and strategic objectives. Individual managers are integrally involved in this process. Managers and their subordinates at all levels negotiate subordinates proposals for contributing to the accomplishment of their units objectives. Mid-level managers negotiate with corporate executives in a similar manner. Action programs and projects to achieve objectives are defined at all levels. Performance in the pursuit of planned objectives and implementation of planned action programs is reviewed regularly and often enough so that variances from planned progress can be recognized in time for management to influence results. Empirical studies seem to have demonstrated that MBO programs impacts on organizational performance and employee productivity have been generally favorable; and the weight of evidence seems to demonstrate that MBO programs, while certainly not perfectly reliable, are likely to increase the rate of success in strategy implementation significantly (Kondrasuk, 1981). But this technique must have top management endorsement to succeed. When top management commitment to MBO programs was high, Rogers and Hunter (1991) reported that the average productivity gain was 56 percent. But when commitment was low, the average gain was only 6 percent. On balance, 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. It is this rational orderliness that makes MBO so appealing, as well as effective. The Balanced Scorecard MBO procedures certainly dont focus exclusively on financial performance. For instance, employees productivity often has been treated as a performance variable, in MBO programs. Nevertheless, it is true that strategy implementation techniques typically have neglected nonpage_246 Page 247 financial measures of performance that precede the creation of economic value. For this reason, the balanced scorecard was created by a project team managed by an accounting professor and a management consultant (Kaplan and Norton, 1993; Kaplan, 1994; Kaplan and Norton, 1996a,b,c,d). The balanced scorecard extended the scope of strategic objectives measurement and assessmentand of strategy implementationto a broader framework, in four dimensions: (1) conventional financial measures, (2) customer satisfaction, (3) internal business processes, and (4) innovation and learning. The process of deriving strategic objectives to be assessed by balanced scorecard performance measures is similar to that of management by objectives. However, one difference is that the balanced scorecard procedure does not extend necessarily to individual managers throughout an organization. Instead, it is focused more on the performance of functions and departments. The balanced scorecards performance measures are developed to reflect an assessment of unique cause-effect relationships between driver variables and performance measures in each firm. Such relationships enable managers to form hypotheses about what makes the firm successful and, using the balanced scorecard, to test such hypotheses. Then, based on analyses of variances, a greater understanding of performance drivers and critical success factors should emerge. Eventually, management should be able to develop a valid theory of how the firm performs in each of the four dimensions. Management then will have a reliable basis for relating strategic action to results. Plans reliability thus should increase over time, as the organization learns from perpetual hypothesis testing. Project Management A project is an endeavor that has a definable objective, consumes resources, and operates under constraints of time, cost, and quality. The challenge of project management is to plan, organize, direct, and control activities that have not been attempted in the past and may not be repeated in the future. That is, projects are often unique endeavors. 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; and numerous techniques to implement project management methods have been developed. Indeed, an entire profession of project managers has emerged in response to the wide recognition that project management methodology can enhance organizational performance potential. Most recently, a wide variety of electronic computing aids has been developed to facilitate the work of project management, so that the likelihood page_247 Page 248

of accomplishing intended results within constraints of time and resources has been greatly improved. While the project management profession finds its greatest appreciation in several project-driven industries such as defense and construction, 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 response, 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, 2002). Budgeting and Control It was observed earlier that operating budgets and strategic plans should be connected seamlessly. Thus, operating budgets should be a detailed representation of how the strategic plan will be implemented in the current year. A few generic budgeting and progress evaluation techniques have emerged over the years, and planning managers should be familiar with them. 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, planning managers also should be aware that numerous alternative approaches to classic budgeting procedures are available. For example, firms in capital-intensive industries require relatively elaborate capital budgeting procedures. Capital budgeting is one point where the connection of annual budgeting and longer-range strategic planning endeavors often becomes obvious. The purpose of most capital expenditures of significant size is to facilitate the accomplishment of strategic action projects such as construction of new capacity. The payback periods of such projects may be upwards of seven to ten years; and they must achieve rates of return higher than capital costs, if they are to increase economic value of the firm. If near-term capital budgeting procedures are detached from strategic planning procedures, greater weight may be given to short-term justification of projects than their strategic justification. In such cases, managers will lose respect for the strategic planning process. There is no excuse for allowing this to happen; capital budgets should be justified by strategy first and then confirmed by conventional capital budgeting procedures. In some industries, elaborate models of costs may be needed to construct operationally valid performance objectives. In these cases, standard costing systems are required, and operational plans typically are expressed as flexible budgets. As production requirements vary, so page_248 Page 249 should direct manufacturing costs (i.e., those related to consumption of materials, labor, and variable overhead). For this reason, planned operating results will flex, depending upon operating levels. Standard cost systems are not the only devices that can be used to arrive at flexible budgets. A recent development in accounting methodology is activity based costing. Here, collections of activities costs are combined for more valid estimates of costs when fluctuations in operating levels occur. For example, costs associated with quality defects often are not reflected in standard costs. These may include costs of reworking or otherwise correcting defective products or producing replacements. Several activities are involved in such processes, and their costs can be measured. Then, the costs and benefits of quality improvement programs can be expressed more accurately and included in operating budgets. Yet another alternative budgeting technique of which planning managers should be aware is zero base budgeting (ZBB). This technique is employed to accomplish a better match between objectives and overhead resources utilization. Rather than assuming the same functions will be performed by staff and other support organizations year after year, the ZBB method recognizes that objectives eventually are achieved and that some functions need not be repeated perpetually. With ZBB, budgets for nonproduction departments do not begin by assuming that current functions must be maintained. Instead, 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. Thus, multiple proposals for each departments budget may be submitted at alternative performance levels. Then, top management can select from alternative packages depending upon objectives priority and the firms financial limitations. 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, 1979; Bostrom, Austin and Zenowich, 1985). With the advent of spreadsheet software for personal computers, however, those limitations no longer are as prohibitive as they were previously. Management Development Programs These techniques include management selection, recruiting, and training procedures. Since successful strategy formation and implementation require managers with appropriate skills and organizational units with distinctive competences, management development programs can be decisive in determining firms long-term competitive page_249 Page 250 potentials. The fundamental logic of this assertion is self-evident; in any given industry, just one organization will possess the highest levels of skills and the greatest competences for performing a specific mission. Only those firms which possess distinctively superior skills and competences are likely to enjoy competitive advantages over the long term. In designing management development programs, it is vital that specific objectives be stated. Hamel and Prahalad (1989, 1993, 1994) challenged management to identify competences that will be required for competing successfully in future markets. Once those skills have been defined, 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. Specifying the skills that will be required, auditing the inventory of presently available skills versus those requirements, and forming programs to fill the resulting gaps are the procedural steps involved in defining programs to develop sustained managerial competences.

Teams as Strategy Implementation Devices As business conditions have grown more complex and the growth of technological knowledge has exploded, considerable attention has been directed to teams and teamwork as means of enhancing managements ability to implement strategy. This is because individual levels of technical competence necessarily fall short of the complex skills typically needed to accomplish strategy. Therefore, collaborative techniques are required. Moreover, as the level of education and sophistication of technological knowhow among organization members has grown, it has been logical to delegate responsibilities for forming objectives and strategy to members deeper within the organization, rather than retaining those responsibilities solely at the top: The result has been a growing tendency toward empowermentthat is, to delegate responsibility for forming strategy and developing implementation programs that previously would have been left solely to top management. These changes have called for dramatic departures from classic conventions of organizational structures and decision making. For example, with the diffusion of responsibility and authority for strategy (i.e., empowerment), there has been a corresponding increase in the need for integrating mechanisms, in the sense that Lawrence and Lorsch (1967) originally conceived the term. Teams can be powerful integrating mechanisms. 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. With effective strategy teams, it no longer may be necessary for top management to be the sole source of functional competence, page_250 Page 251 as might have been expected in the past. Rather, through the use of teams and teamwork, 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. So much has been written in recent years about teamshow they should be formed, how to select their members, how to manage them, and how to select their leadersthat it is difficult to treat this subject adequately in the present summary. Studies such as that by Parker (1990) have attempted to disclose characteristics of effective teams. For instance, they must have a clear sense of purpose; there must be broad participation of team members in decision making; specific teamwork skills must be developed; consensus must be achieved; there must be an environment of open communication and trust; team members must have clearly defined roles but share leadership functions; they must be able to relate to other elements of the organization outside the team (because the teams purpose is to accomplish organizational objectives); and teams must be able to assess themselves and practice self-improvement. Depending upon the teams mission and circumstances, team members should be selected to provide different kinds of skills and forms of teamwork. Thus, some members should be selected because they are task-oriented, rational, and logical. Others may be selected for their ability to perceive longer-range strategy. Still others may be selected for their social interaction skills and abilities to facilitate processes. Some team members even may be selected because of their skeptical natures, tendencies to challenge assumptions, and abilities to provoke positive debate. Similarly, team leaders will be selected based upon the challenges that they must face. Some may be executives, while others may be selected from within the operating organization. Technology teams members and leaders will be selected much differently than members of top and mid-management teams. Thus, team leaders necessary qualifications certainly will differ depending upon teams locations and functions within the organization. A critical distinction should be made between teams formed to perform routine, ongoing processes and high-impact teams, or task forces, which are formed to achieve specific, challenging objectives. Unlike operational process teams, high-impact teams have relatively short lives that end when an assigned task has been completed. These teams tasks are usually very difficult and their work may be intense. Their members are selected for specific skills and abilities to contribute to objectives accomplishment. Often, high-impact teams work is so confidential that members must be isolated from the rest of the organization; but, in such isolation, esprit de corps may be built more quickly. These teams leaders must be talented in special ways. They must be page_251 Page 252 strong enough to maintain the groups focus; they must be diplomatic and resourceful enough to obtain necessary resources; they must be supportive and able to facilitate conflict resolution; above all, they must recognize that each members competence is a very valuable resource. High-impact teams members are motivated by the importance of their mission and, accordingly, are willing to defer to each others specialized skills in order to accomplish the groups mission (Bennis and Biederman, 1997; Lipman-Blumen and Leavitt, 1999). The empirical history of teams and teamwork is far from consistent. Some case histories have demonstrated that it is quite difficult to improve process-performance through teamwork (Williams, 1996; Owen, 1995). However, it is generally recognized that highimpact teams and task forces are much more likely to succeed. Based on our study of numerous case histories in the academic literature, 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. Incentive Compensation Arrangements It is generally accepted that attaching valuable rewards to objectives accomplishment will increase the likelihood of successful outcomes. Thus, most firms have some form of incentive compensation arrangements. However, our unpublished research (Roney, 2001:235) has demonstrated that linkage of executives incentives directly to objectives in strategic plans differs widely between industries. This is not to say that top management doesnt usually receive incentive compensation; indeed, it does. But, specific linkage of incentives payment to accomplishment of strategic objectives is not very frequent in industrial services and fabrication industries, for instance. Essentially, there are two types of incentive arrangements: bonus payments and equity sharing. In bonus arrangements, significant payouts are made when objectives are achieved. Bonuses may be paid for achieving difficult objectives to entire top management

teams or to individual managers. Payment need not be immediate; for instance, schemes for paying bonus awards over an extended term can be devised. If the strategic planning horizon is four years, for instance, earned bonuses can be deposited in each participating managers bank account. Subsequent years achievements increase or decrease the accounts balance. The manager receives a payment equivalent to one quarter of his bank accounts balance at the end of each year. Such arrangements give managers long-term perspectives; sacrificing long-term corporate health for short-term gains ultimately will not be rewarded as much as sustained improvement. page_252 Page 253 One criticism of bonus arrangements is that they may encourage management to set low targets so that objectives accomplishment and bonus payments are assured. Indeed, more than 90 percent of executive incentive plans studied by Linden and Contavespi (1991) actually did result in payment. 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. Equity-sharing arrangements include both stock options and stock grants. It is widely recognized that arrangements such as these have grown rapidly in recent years and now extend into many organizations, well beyond top management levels (Kanter and Ward, 1991; Paulin, 1991). Unfortunately, empirical research also seems to demonstrate that equity-sharing arrangements have little or no correlation with firms actual performance (Blasi and Kruse, 1991; Crystal, 1991a,b,c, 1992). Thus, although most firms have equity-sharing arrangements, bonus arrangements are more likely to be successful in enhancing the probability of strategic objectives achievement. 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. Indeed, proficiency in administration of business and corporate planning procedures is a prerequisite to successful implementation of strategy in a deliberate, reliable manner; and the firm must have a reliable methodological mechanism for continuous replanning. Comprehensive plans and their strategies are ever-changing by necessity. Because plans quickly can become invalidated by changes in the competitive environment and/or internal capabilities, modifications to implementation tactics, objectives of strategy, or even strategy itself must occur continually. Proficient administration of the planning function and continual maintenance of the plan, therefore, are also prerequisites for effective strategy implementation. SUMMARY AND CONCLUSIONS This chapter began with a recitation of the regrettably low rate at which commercial plans strategies are realized by effective implementation. Estimates of successful implementation rates are in the range of 1050 percent. Most estimates tend to be near the low end of that range. This seems to be why various forms of commercial planningwhether it is called comprehensive planning, long-range planning, strategic planning, or business planningoften have been page_253 Page 254 criticized. If plans arent implemented, they cant make much of a contribution to firms performance. There are three fundamental reasons why strategy usually is not implemented effectively. The first reason is insufficient resources; the firm may not have an adequate depth or breadth of physical, capital, or intellectual assets. The second reason is disorganization; the firm may not be able to integrate and concentrate its resources so that they are focused in a chosen direction. Alternatively, the firm may not be able to adapt its organization structure or strategy to a changing environment, that is, the economy, industry, and markets in which the firm participates. The third reason is insufficient motivation; individuals, groups, or essentially all of a firms employees may be either unwilling or unenthusiastic about implementing a strategy that management has chosen. A great deal is known about how managers may form goals, strategy, and strategic objectives. Conversely, not a great deal is known about how a firm can acquire the resources, organizational structure, and motivation that are required to implement strategy with reliably positive results. 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. This is probably the most destructive misconception that can exist in strategic management, because it nearly assures that the planning effort will fail. To repeat a phrase coined at the beginning of this chapter, there is no such thing as a self-fulfilling strategy. Unfortunately, there has been no definitive reference or source of generally accepted principles to guide management in strategy implementation. 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. Among these are the texts by Hrebiniak and Joyce (1984) and Lorange (1982), as well as most general texts on strategic management principles. Thus, the flaw that has made strategic management unsuccessful on so many occasions is not in our theories of strategy, but in our methodology for implementationor, rather, the lack of such a methodology. 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. 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, organization structure, and motivation. Next, a collection of ten specific abilities required to implement strategy was proposed. Those ten critical page_254 Page 255 abilities stem from the three classes of generic capabilities proposed previously. While the three generic capability classes are well grounded and established in the literature of strategic management, the ten critical implementation abilities are taken from our

consulting experience of over twenty-five years, as well as the strategic management literature. Whether this list is too short, too long, or correct as stated remains to be determined by the community of empirical academicians and practitioners who are concerned with strategic planning. Finally, ten generally accepted implementation techniques, which can be used to deploy the ten critical abilities, were reviewed. There have been other techniques in the past, and there surely will be more in the future. Planning managers are free to choose as many or few techniques as they wishas long as all ten critical skills eventually are employed. We have drawn the following conclusions from our review of implementation methodology. First, an excellent strategy is far from certain to be implemented on its own merits; indeed, there is no such thing as a self-fulfilling strategy. Second, implementing all but the most existential of strategies probably is not possible until a firm has attained three classes of prerequisite capabilities: wellmatched physical and intellectual resources, an organization structure that is suited to the firms strategy, and well-motivated personnel. Third, 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. The ten critical abilities must be available first. Then, 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, such as the balanced scorecard. Management by objectives (MBO) is an example of an effective technique that was once, but no longer is, popular. Yet MBO probably is the one implementation technique that demonstrably has increased rates of success in strategy implementation more than any other. GENERALLY ACCEPTED PLANNING PRINCIPLES: IMPLEMENTATION Axioms Axiom 10.01 Effective implementation of plans is a requisite for the success of commercial planning. Postulates Postulate 10.01 Strategy is not self-fulfilling: a deliberate implementation method is required to realize strategy. page_255 Page 256 Hypotheses Hypothesis10.01In order to acquire and develop proficiency in implementation skills, a firm first must have three generic capabilities: sufficient resources, a well-integrated organization structure, and adequate motivation. Hypothesis10.02Management must have ten skills to implement strategy effectively: the ability to set internally consistent objectives; the ability to achieve strategic awareness; the ability to manage resistance to changes in strategy; the ability to sustain vigorous, focused effort; the ability to align structure and strategy; the ability to identify and develop leaders and managers; the ability to conduct projects; the ability to budget and monitor progress; the ability to envision needs for future competences; and the ability to realize when its time to change strategy and replan. Hypothesis10.03The relationship between implementation skills and generic capabilities is reciprocally reinforcing. With practice, the ten skills build generic capabilities, and vice versa. Conversely, degeneration in one categoryeither generic capabilities or implementation skillswill produce degeneration in the other category. Hypothesis10.04Implementation skills are converted to implementation competences by procedural routines, or techniques, such as management by objectives, the balanced scorecard, and zero base budgeting. There are many such techniques to choose from, and management may employ as many as it likesas long as all ten implementation skills are employed. Hypothesis10.05The relationship between implementation skills and techniques is reciprocally reinforcing. Practicing implementation techniques builds basic implementation skills, and strengthening implementation skills facilitates the future use of techniques. Conversely, if any skill degenerates through lack of practice, it will become more difficult to use some techniques. Hypothesis10.06Generic functional capabilities and proficiency in using implementation techniques are not di page_256 Page 257 rectly related. A mediating variable is implementation competence, in the form of the ten interrelated skills listed in Hypothesis 10.02. Hypothesis10.07Equity-sharing incentives are most effective in expansive markets; bonus incentives are most effective in recessive markets. Hypothesis10.08The interventionist approach to leadership in strategy implementation is more effective than others, including participative, persuasive, and edictive approaches. page_257 Page 258 This page intentionally left blank. page_258 Page 259 11 Restructuring the Enterprise In the previous two chapters, a generalized procedure for developing strategic objectives was described. In that procedure, the firms current momentum (i.e., before any benefits of strategy) is described in a baseline forecast of financial and competitive performance. The baseline projection then is contrasted to standards of excellence, or goals. With these two elements, management

is able to compute objectives for bridging gaps between the firms current momentum and intended outcomes, as portrayed in Figure 10.1. In a single business enterprise, 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 a multi-business corporation, objectives of corporate-wide strategy also may be described by the beneficial impacts of all business units strategy, combined. The sum of business unit strategies benefits, added to the corporate baseline projection, should produce a consolidated estimate of corporate results that exceeds standards of excellence (goals) for corporate-level performancein terms of total earnings, return on shareholders equity, and/or various measures of shareholder value (Figure 8.1). However, a problem can arise, at either the corporate level or in an individual business, when the sum of strategic benefits and the baseline projection does not meet or exceed goals. This second gap is portrayed in Figure 11.1. In Figure 11.1, the strategic objective is denoted by the term OS. The objective of strategy that can be supported by presently available repage_259 Page 260

Figure 11.1 Measuring the Second Gap sources is denoted by the term OS1. Notice that there is a significant difference between OS and OS1. How that second gap (OS2) can be filled is the subject of this chapter. 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, and thereby enable additional strategy to fill the second gap. As such, structural transformations comprise a special class of managerial action that can be taken to implement strategy. Such actions fall into one of two general categories: Ownership changes: acquisitions, divestments, mergers, bankruptcy Resource sharing: alliances, joint ventures Structural transformations in both categories will be discussed in the following paragraphs. A forthcoming volume in this series will deal comprehensively with the subject of corporate restructuring. That volume will address structural transformations from the perspectives of procedural methodology, legal/regulatory environment, and economic considerations of acquisitions, divestments, mergers, alliances, joint ventures, and bankruptcies. Therefore, no attempt has been made here to treat this large subject area in complete detail. But, since corporate-level planning and strategy typically include restructuring tactics, the remainder of this chapter will address some of the related procedural issues. page_260 Page 261 CHANGING OWNERSHIP: ACQUISITIONS AND DIVESTMENTS In this section, a general procedure for conducting projects leading to the purchase or sale of one business by another will be discussed. An alternative form of business combination is the merger, in which equity interests as well as the assets and liabilities of two firms are pooledoften without tax liabilities to either party. However, in recent amendments to accounting standards for business combinations, the Financial Accounting Standards Board (FASB) disallowed most forms of pooling transactions, as of June 30, 2001. The Board, in Statement 141 (July 2001), insisted that nearly all business combinations now must be accounted for as purchases. Thus, mergers are conducted relatively infrequently today, and purchases are the normal form of transaction in which changes of business ownership are effected. Before proceeding further, it is important to acknowledge that business restructuring is to be discussed here within the context of strategic planning. In that context, acquisitions and divestments are considered to be devices for implementing a higher-level strategy and do not hold the status of strategy itself. It has long been recognized that acquisitions conducted to implement a higher level of strategy enjoy financial outcomes superior to those of less deliberate, more opportunistic transactions, as Ansoff et al., (1970) first demonstrated. Of course, 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, hold, and sell businesses purely for investment purposes. But in this volume, acquisitions, divestments, and other restructuring tactics are treated solely as devices for implementing a higher level of strategy. Twelve Procedural Steps The purchase and/or sale of a business typically should be undertaken in twelve steps. As observed in the preceding paragraph, 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. If there is a second gap, as described earlier, then that strategic objective may be accomplished by an acquisition or divestment. Acquisition and divestment objectives may be expressed in many termsincluding sales, earnings, cash flow, managerial skills, and technology, among others. But it is essential that the acquiring firms management have a clear idea of how the intended acquisition will facilitate implementation of its more fundamental strategy. page_261 Page 262 Conversely, businesses to be divested also should have comprehensive plans of business. A strategic plan of business often is the best possible basis for demonstrating current and potential value to prospective buyers. Moreover, a solid plan frequently provides directional stability to the management of businesses destined for divestment, acting as a sort of centerboard in the turbulence that arises when ownership is about to change. The second step consists of a search for buyers or sellers. Typically, this work entails conventional industry and market research. Also, there are often well-established networks of quasi-public information regarding active buyers and sellers in the acquisition market. This information is cultivated and traded by investment bankers, business brokers, and other intermediaries. While exploiting such sources, 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. In part, 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. The third step is to make contact with the most promising prospective transaction partners. There are many channels for making these contacts, including (but not limited to) intermediaries such as acquisition consultants, investment bankers, business brokers, attorneys, public accountants, and commercial bankers. However, many important transactions result simply from a telephone call by one chief executive to another. Many other transactions result from overtures by one planning executive either to another planning executive or the prospective partners chief executive. To the extent that initial contacts are between principals, transaction costs may be minimized and premature public disclosures may be avoided. Nevertheless, most transactions are initiated through intermediaries. The fourth step entails striking a deal and structuring the intended transaction. The transaction may be structured as a purchase of stock, purchase of assets, or merger. But, as explained earlier, pooling transactions (mergers) were greatly curtailed after June 30, 2001. Very often, the form of transaction will depend on possible tax liabilities of each partner. There is a significant conflict here, because a transaction that has favorable tax consequences for one partner usually has unfavorable consequences for the other. The fifth step is to create a non-binding agreement in principle, usually represented in a letter of intent. This letter actually will address each element in the binding agreement for purchase and sale of the business in question; and it will serve as a sort of scale model that counsel for both sides may follow in drafting the substantial page_262 Page 263 documents that usually must be prepared to effect acquisition and divestment transactions. It is worth taking enough time to prepare a comprehensive letter of intent so that, later, 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. Some executives dont like letters of intent because they fear that such letters could create binding obligations. However, this risk is minimal if the letter clearly declares that it is not a binding obligation of each party, except with regard to such matters as maintenance of confidentiality, cessation of further solicitations by the seller, responsibility of each party for professional fees, and the like. Certainly, when transaction terms are comprehensively understood at the outset, the likelihood of a successful closing is enhanced. The sixth step entails various regulatory filings. These filings may be quite numerous, depending upon the nature of each party to the transaction. If, for instance, one or both parties are relatively large and already hold significant shares of the market, then notification of the Federal Trade Commission and the U.S. Justice Department will be compelled by the Hart-Scott-Rodino Act. 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, if they wish to inquire further. Competent legal counsel in dealing with these specialized regulatory requirements is mandatory. In the event that the transaction involves a purchase of production facilities, then employees in the acquired plant will be severed from their existing employer and, ultimately, may lose their jobs if the new owner does not rehire them. 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. Depending upon the intended disposition of assets, various filings with environmental regulatory agencies also may be necessary. If the transaction is substantial, disclosures to one or both firms shareholders even may be required; this is especially likely in the event of a merger and, of course, a purchase of stock. Clearly, competent legal counsel will be required at this stage. The seventh step usually is called due diligence. Both partiesespecially the buyerare obliged to exercise diligence in examining the intended transaction, including assets, liabilities, operations, and business conditions. Correspondingly, the seller is obliged to make full and complete disclosures, and failure to disclose material facts can occasion severe legal penalties. Of particular importance here will be environpage_263 Page 264

mental issues, pending or potential litigation, pending and/or potential product liability, and any other liabilities that may survive the closing. Once again, the advice and guidance of competent legal counsel are essential. The eighth step again requires assistance of legal counsel; this is where the formal purchase/sale or merger agreement is drafted. If the letter of intent prepared earlier was written well, the work in this step should not produce unexpected complications. Nevertheless, the process can be long and burdensome, since numerous exhibits may be required to define the assets and liabilities that will and will not be conveyed, employees who will and will not be transferred, and so forth. In the ninth step, necessary financingwhich should have been arranged previouslyis committed if not actually put into place. This may entail the issuance of stock, bonds, commercial loans, and/or other debt, utilizing either private or public sources of funding. Here is where the assistance of financial advisors such as investment bankers, other financial consultants, commercial bankers, and asset-based lenders may be needed. In the tenth step, various approvals will be required before the transaction can be closed. Approvals may be needed from stockholders, lenders, labor unions, or regulators, among others. The final two steps are the actual closing of a transaction and, subsequently, accounting for it correctly. Accounting for acquisitions, divestments, and mergers is a specialized, albeit well-established, discipline. Depending on its size and complexity, the transaction may require a special review by independent auditors. Economic Issues Changes in ownership of businesses through acquisitions, divestments, and mergers can create numerous economic issues that should be considered by planning managers before forming strategies that call for structural transformations. As mentioned earlier, the fifth volume in this series is devoted to structural transformations: A significant portion of that volume is devoted to economic issues. We will summarize here only some of the most important issues of which planning managers should be aware as they consider potential restructuring tactics. The economic costs and benefits that reasonably can be expected from acquisitions will vary depending upon an industrys maturity and life-cycle stage. In emergent industries, accelerated growth through acquisitions and mergers can provide organizations with opportunities to learn critical skills of production, marketing, distribution, and the like. Very often, such learning effects will be reflected in accelerated rates page_264 Page 265 of cost reduction and growth, thereby providing organizations that learn the fastest with competitive advantages. However, as an industry matures and later life cycle stages evolve, opportunities for learning effects become fewer. This is because industries usually have efficient mechanisms for transferring learning effects between competitors during an industrys growth stage. For instance, suppliers of machinery and materials often provide competing producers with access to successively improved versions of their products and technology. Similarly, managers migrate between competitors in the same industry, transferring each others proprietary practices. Thus, in mature industries, potential learning effects eventually become negligible. Then, unit costs are likely to be lowered primarily as a result of increased scale, that is, absorption of fixed costs and expenses by larger volumes of output. In these cases, 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. As industries mature, they also tend to consolidate, progressing from fragmentation to concentration. It is generally recognized that there is a U relationship between industry concentration and profitability. In very fragmented industries, several suppliers may be differentiated and, thereby, offer customers unique features that permit premium prices to be charged. However, with increasing competition, rival firms margins tend to narrow as economic rents are competed away. Finally, as industries mature further and their participants share a common technology, a very small number of them (perhaps only one) will emerge as least-cost competitors, while a very few others establish claims of superior quality or service, thereby justifying higher prices. Eventually, 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 competition wanes in declining industries, oligopolistic rents may emerge. For these reasons, 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 plans term. Let us now address the problem that arises when an industrys maturity and its prospects for consolidation offer relatively few opportunities for improvement in earnings through acquisition. One option, of course, is to diversify rather than continue to focus on current lines of business. While such diversification may be unavoidable in mature industries, 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 page_265 Page 266 a portfolio of more-related businesses. Conversely, if a firm focuses on a very restricted line of business, rates of return tend to be characteristically low. Thus, the relationship between rates of return and relative diversification seems to be best characterized by an inverted U function (Rumelt, 1974). The relative returns to be expected from acquisitions and divestments also pose important questions to planning executives. Abundant research has demonstrated that sellers tend to appropriate the majority of added value that stems from business combinations effected through acquisitions and mergers. This apparently is simply the result of competitive bidding. Typically, the premium in an acquisition price reflects nearly all of the additional value that can be anticipated by buyers. However, to the extent that future business conditions fail to meet buyers expectations, as often is the case, then buyers actually may pay premiums that

exceed the value added by business combinations (Copeland, Koller and Murrin, 1994:318; Byrd, Parrino and Pritsch, 1998; Weston and Chung, 1990; Copeland and Weston, 1998, 754; Sirower, 1998; Datta, Pinches and Narayanan, 1992). Since such overpayments occur quite commonly, planning managers always should question whether acquisitions are appropriate vehicles to implement growth strategies. Certainly, there are alternativesincluding formal alliances and joint ventures, and internal business development. Here, again, empirical research provides some guidance and will be discussed in the next section of this chapter. For the present, let it suffice to say that alliances and joint ventures typically produce higher returns than acquisitions and mergers. One last economic that which must be addressed here is the matter of agency relationships. Senior management acts as an agent of the firms shareholders, charged with pursuing their highest returns. Conflicting with that role is the managers own self-interest. Given this conflict, it is often useful to appreciate that executives frequently prefer to pursue tightly focused acquisitions that increase the size of an enterprise, but minimize its risk. Shareholders typically prefer that corporate management take more risks because the relationship between equity risks and returns tends to be positive. Thus, shareholders probably prefer to see balance sheets leverage ratios higher than management prefers. Similarly, shareholders prefer that surplus cash flows are dividended to the shareholders rather than used for executive perquisites or economically unjustified acquisitions. Salaries tend to be larger in bigger companies than smaller ones. To the extent that corporate growth increases executive paychecks, executives have incentives to pursue acquisitions simply for growth. But if growth doesnt add to shareholder value, more agency conflicts between executives and shareholders interests in growth may exist. page_266 Page 267 Moreover, higher business risks tend to increase returns but reduce executives job securityanother agency conflict. The point is simply this: executives reasons for pursuing acquisitions and mergers may not necessarily be shared by a firms stockholders. Moreover, societys best interest (e.g., preservation of an economic infrastructure) may conflict with the interests of both shareholders and management. So, in addition to conventional agency issues, planning managers and chief executives should pause to be sure that acquisitions, no matter how attractive otherwise, are likely to move the firm forward in the performance of its business mission and avoid regulatory complications. SHARING RESOURCES AND RESPONSIBILITIES: ALLIANCES AND JOINT VENTURES Firms dont have to change their ownership or buy each others assets to fill the second gap. Rather, alliances and joint ventures may be preferred alternatives. In these arrangements, two or more firms agree to pursue the same business objective while remaining independent. Depending upon the form of their relationship, they will share responsibilities for operations and governance of a joint enterprise, and each will contribute essential resources to it. Nevertheless, their fundamental businesses and goals will continue to differ. Each still will pursue its own individual mission without threatening the others mission. But in the enterprise that they share, their physical and intellectual assets may be combined to enhance the competitive advantage of both partners. In an alliance, there is an explicit or implicit contractual relationship between the parties to participate in a joint enterprise. However, the parties usually do not share ownership of any enterprise assets. Such relationships may be found in dedicated arrangements between suppliers and distributors, for instance. Or, joint marketing relationships may be formed as when computer hardware and software producers collaborate. In a joint venture, the partners do share ownership of an enterprise and/or its assets. Each firm may contribute capital and management, while one contributes production capability and the other contributes marketing or distribution resources, for instance. A separate corporate entity usually is formed and the allies become joint shareholders. Resource-sharing arrangementsalliances and joint ventureshave experienced explosive growth in the 1980s and 1990s, as reported by Harrigan (1986b), Culpan and Kostelac (1993), Harbison and Pekar (1993, 1998), and Pekar and Allio (1994). Paralleling the explosive growth of resource sharing arrangements, academic inquiries into their nature and effectiveness also have grown explosively (Zajac, 1998). page_267 Page 268 All of this explosive growth is not difficult to understand. In recent years, technology has progressed so rapidly, and economic environments have become so turbulent, that it now is nearly impossible, even for very large firms, to acquire all of the vital resources needed to compete effectively. Alliances and joint ventures have enabled advantageous combinations of resources to be assembled as a means of achieving growth while mitigating many risks. By participating in several alliances and joint ventures, firms can hedge against the turbulence of our times because it is possible for firms to share risks, as well as resources and opportunities. Alliances and joint ventures provide strategic options that are better suited to some firms than others. For instance, they are found most frequently in very asset-intensive industries with high risks of technical obsolescence and/or high entry costs. Sharing arrangements also are found frequently in financial service industries, which are intensely competitive (Culpan and Kostelac, 1993). 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, 1986b; Hamel, Doz and Prahalad, 1989; Hamel, 1991). But in no case should resource sharing arrangements dominate firms strategies or overwhelm a firms own core competence (Von Hippel, 1988; Harrigan, 1986b). Rather, resource-sharing arrangements, like acquisitions, should be undertaken as one way to implement a higher strategy. In any event, as observed earlier, alliances and joint ventures also are attractive because, when compared to acquisitions and venture capital projects, they tend to be the most successful financially (Pekar and Allio, 1994). However, those benefits are not usually gained easily. Firms must acquire and develop specific skills to participate in and manage resource-sharing arrangements effectively. The more experience a firm has in such arrangements, the more successful they tend to be (Bleeke and Ernst, 1993; Harbison and Pekar, 1998).

Structural Alternatives Since alliances and joint ventures are relatively new arrivals to strategic methodology, a wide variety of structural alternatives may be observed in the literature and practice. For instance, these arrangements may be vertical (between customers and suppliers) or horizontal (between partners from two different industries attempting to serve a similar market). An example of a horizontal joint venture is Siecor, a firm formed with assets contributed by Siemens and Corning to form a very successful fiber optic cable company. Siemens had expertise in cable manufacturing, while Cornings expertise was in fiberglass. New page_268 Page 269 structures of alliances still are emerging. Among the most recent forms are alliances between competitors and several forms of cross-border alliances (Harbison and Pekar, 1995). The purpose of an alliance also will have a great deal of influence on the selection of a structure. For instance, most alliances formed to conduct joint research and development programs tend to be contractual rather than equity-sharing arrangements (Hagedoorn and Schakenraad, 1994; Hagedoorn, 1993). Alliances tend to be preferred in high-technology industries, while mergers and acquisitions tend to be preferred in low-technology industries and in all industries when core competences are involved, rather than organizational learning of new competences (Hagedoorn and Duysters, 2002). About 41 percent of joint ventures are formed for cooperative marketing; 33 percent for manufacturing; and only 11 percent for research and development. When all joint ventures are taken as a whole, they represent about two-thirds (69%) of all resourcesharing arrangements (Culpan and Kostelac, 1993). Resource-sharing arrangements also may differ dramatically on the basis of their expected lives. The typical term for an alliance is about seven years, in the United States. But in Europe the typical alliance life is about twelve years (Bleeke and Ernst, 1993). Expected lives of joint ventures are longer, of course. Situations Most Conducive to Resource-Sharing Arrangements Some research into resource-sharing arrangements has begun to disclose business situations in which they are most likely to be productive. For instance, early in the life cycle stages of capital-intensive industries, joint ventures may help to mitigate financial risks. However, in the early stages of labor-intensive industries life cycles, contractual alliances are preferred. Conversely, late in the life cycles of all industries, joint ventures tend to be a preferred means of consolidating excess industry capacity (Harrigan, 1986b). Multinational alliances tend to be preferred when products or services are not standardized on a global basis. When products are standardized, the expertise of another partner simply may not be needed. Joint ventures also may be useful devices to mitigate international ownership risks. For example, most Chinese investments by U.S. firms tend to be in the form of joint ventures (Mockler, 1999: Ch. 1; Luo, 1999). In high technology industries, resource-sharing arrangements work best when each partner contributes a different form of technology, and each side learns from the other in a contractual alliance (Osborn and Baughn, 1990). Of course, there are some circumstances in which alliances and joint ventures are not advisable. For instance, acquisitions seem to be more page_269 Page 270 successful than either alliances or joint ventures when firms participate in overlapping geographic markets. But alliances or joint ventures work better than acquisitions when markets are not overlapping (Bleeke and Ernst, 1993). Acquisitions and mergers tend to be preferred over alliances and joint ventures in low-technology industries (Hagedoorn and Duysters, 2002) and in very concentrated industries (Kogut, 1989). 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 others dominant position. Prospects for success are much better when both partners approach the relationship as equals with comparable strengths. When one is stronger than the other or when both are weak, neither alliances nor joint ventures are likely to enjoy favorable outcomes (Bleeke and Ernst, 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), contractual forms of alliances seem to be preferred. But if risks of resource-sharing arrangements stem from inabilities of the parties to trust each other enough (for instance, because of the proprietary nature of high technology and the competitive advantage that might ensue from appropriation of trade secrets), then an equity-sharing arrangementa joint ventureis the most appropriate form (Das and Teng, 1996a,b). Stages of Formation Alliances and joint ventures both tend to be established through a series of ten formative steps, as follows: First, a strategic plan is prepared; its strategy must be resource based. The industry and served markets are surveyed in order to identify firms whose resources and capabilities are complementary to those of the initiator. Next, the initiator conducts a search for prospective partners who not only possess the necessary resources, but are also qualified based on their cultural compatibility and other commercial circumstances. The initiator next identifies and approaches the most preferred prospects and continues to do so until a willing collaborator is found. An alliance then can be structured so that maximum synergies and benefits may be derived; for instance, the choice must be made between a contractual alliance or an equity-sharing joint venture. page_270 Page 271 Governance and operations of the arrangement then must be negotiated, and managerial responsibilities must be defined. Terms

and conditions for dissolution of the arrangement after its objectives have been accomplished also are defined. The results of these negotiations should be expressed in a letter of intent or a memorandum of understanding. With a memorandum of understanding, counsel for each side may draft an agreementmore elaborate in the case of a joint venture and less so in the case of a temporary alliance. 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; persons who actually will be involved in operating the alliance should take part in drafting this plan. Then, leaders of the enterprise should be selected from the team that constructed the business plan, and they should commence operations of the enterprise. Finally, there should be regular assessment of the enterprises progress, and when departures from the plan occur, replanning should be done. The evolution of resource-sharing arrangements from inception to maturity has been described by scholars from two other perspectives. First, a classic, life-cycle perspective traces the enterprises initial formation, maturation, and eventual conclusion as objectives are reached (Das, Sen and Sengupta, 1998). Second, a behavioral perspective traces the process of building trust across time and multiple ventures (Ring and van de Ven, 1994). Each perspective is useful in framing the plan for a resource-sharing venture. BANKRUPTCY REORGANIZATION On occasion, enterprises become insolvent for reasons that do not reflect managerial incompetence or even weaknesses in the firms business model. For example, a perfectly sound business may be acquired by an overzealous conglomerate and burdened with unsupportable acquisition debt; this has been a frequent occurrence in American business during the past two decades. For another example, a long-standing excellent customer may fall into insolvency. Other examples might include natural disasters and upheavals in foreign markets or even dumping practices by desperate international competitors. In all of these cases, the firms financial condition may fall into insolvency even though its fundamental economic logic and business mission remain page_271 Page 272 sound. In such cases, a reorganization of the firms capital structure, under protection and oversight of a U.S. bankruptcy court, may be attempted. When this step is taken, creditors usually must accept compromises in repayment plans or, alternatively, become shareholders of the reorganized enterprise. Of course, insolvency also may be the result of managerial incompetence, which, according to Hotchkiss (1995), is its most likely explanation in most cases. The incidence of insolvency also is highest during recessions and in declining industries. Certainly, if a firm participates in a declining industry, its business model may be fundamentally flawed and prospects for a successful reorganization will be minimized. Assuming that the reasons for insolvency do not reflect the firms 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.S. Bankruptcy Code in order to reorganize the companys capitalization and go forward on a more financially feasible basis. Of course, this is an extreme measure. Better alternatives may include work-outs with creditors participation in restructuring decisions. 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. Only when those options are not available or reasonable should a firm attempt to reorganize in bankruptcy, because the likelihood of a successful outcome is very low. Jensen-Conklin (1992) found that only 7.5 percent of cases filed in the Southern New York district during 19801989 succeeded in reorganizing. Among those, only a third of the plans actually were confirmed. Flynn (1989) also found that only 17.3 percent of filed plans were confirmed, agreeing closely with Jensen-Conklin since a third of Flynns confirmed cases would be slightly less than 6 percentnot much different from Jensen-Conklins 7.5 percent. In short, the chances of a successful reorganization seem to be less than one in ten. In the event that a reorganization under the U.S. Bankruptcy Code is attempted, the planning executives skills will be fully tested, because companies in bankruptcy must function under conditions of extreme duress. Many vendors will refuse to ship supplies without prepayment. As avoidable expenses must be eliminated, staff resources will be minimal. Moreover, critical managers may seek new employment. For such reasons, bankruptcy judges typically permit debtors to retain consulting assistance as an administrative expense of the bankruptcy estate. Before a proposed settlement with creditorsin the form of a statutory reorganization plancan be adopted, various creditor classes will vote on the proposed settlement. To facilitate their decision, credipage_272 Page 273 tors 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. A formal plan of business structured according to principles found elsewhere in this volume can be an effective disclosure document. If a disclosure document does take the form of a conventional plan of business, then the plans principal objectives will include repaying creditors and regaining financial solvency. A strategy for achieving such objectives will be clearly defined and implementation elements of the plan will demonstrate that the strategy is feasible. Provided that financing arrangements are adequate, creditors and the court should take some encouragement in the plans feasibility and, therefore, in its potential outcome. Five procedural steps typically are taken in reorganization proceedings under the U.S. Bankruptcy Code, as follows:

 First, an estate for the benefit of creditors is created when an insolvent companys management files a petition for protection from creditors in a U.S. bankruptcy court. Shortly after the petition, an administrative apparatus is created under the supervision of a U.S. Trustee. This apparatus will include at least one committee of creditors and various supervisory procedures provided in the Bankruptcy Code. Also included in this apparatus is a procedure for regular reporting of all material events, including regular filing of mandatory financial schedules. After the necessary administrative apparatus has been established, 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. Often, the exclusionary period in which management alone may form, draft, and propose a statutory reorganization plan will be extended several times by the presiding bankruptcy judge. Ultimately, a planwhether proposed by management or by a group of creditors after managements exclusionary period has lapsedwill be assembled. When the bankruptcy judge decides that a plan and disclosure documents are structurally adequate, they may be distributed to creditors with ballots. A balloting procedure informs the judge as to the approval or disapproval that has been registered by each class of creditors who are affected. However, the bankruptcy judge has great latitude in interpreting the Bankruptcy Code and departing from the wishes that creditors express in their ballots. The Bankruptcy Code does limit a judges discretion by imposing some definite requirements for recognizing creditors claims. The page_273 Page 274 absolute priority rule dictates precedence of some classes claims over others. Following such rules, the bankruptcy judge ultimately will confirm a plan of settlements with creditors (the statutory reorganization plan); and the company will emerge from bankruptcy protection. Typically, the emergent post-bankruptcy firm will have a capital structure very different from the structure that existed when the firm initially filed for protection. In most cases, the prior shareholders, if they retain any equity interest at all, will suffer severe dilution, because the previous creditors likely will accept equity in exchange for their debt and the plan will call for extinction of previous shareholdings, in accordance with the absolute priority rule. Implementation of the reorganization plan is a highly risky undertaking, as mentioned earlier. However, a well-prepared plan of business with a strong implementation element may make a major difference in the outcome of any reorganization attempt. LEGAL AND REGULATORY CONSIDERATIONS It is hard to imagine any domain of strategic management, or any aspect of the planning executives responsibility, that is more substantially influenced by legal and regulatory considerations than matters of restructuring. Consequently, in each of the structural transformations addressed by this chapter, participation of legal counsel will be mandatory. Planning managers should acquaint themselves with the relevant legal and regulatory issues that pertain to changes in ownership, resource sharing, and reorganization arrangements so that they can anticipate them and function effectively as they arise. The following paragraphs briefly summarize several legal and regulatory areas with which planning managers should gain working familiarity. Antitrust Laws In the previous discussion of acquisitions, divestments and mergers, brief mention was made of regulatory filings required by the Hart-Scott-Rodino Act of 1970 and enforcement of anti-trust laws by the Federal Trade Commission as well as the U.S. Justice Department. In fact, a large body of law protects the U.S. economy and public investors from adverse impacts of monopolistic practicesstemming from the Sherman Act of 1890. Subsequent legislation was established by Section 7 of the Clayton Act (1914), the Celler-Kefauver Amendment to the Clayton Act (1950), the Federal Trade Commission Act (1914), and the Hartpage_274 Page 275 Scott-Rodino Act (1970). In its current form, 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. Thus, business strategists should beware of achieving such dominant market positions that objections by the FTC or the Justice Department are triggered. Similarly, acquisitions, mergers, and even joint ventures that significantly increase industry concentration should be reviewed within the context of antitrust legislation. Securities Laws Whenever a firm obtains financing from the general public or even from restricted segments of the public, U.S. securities laws place stringent requirements on registration, disclosure, and related corporate behaviors. They also impose severe penalties on violators. In particular, planning managers should acquaint themselves with the Securities Acts of 1933 and 1934, which provide the foundation for disclosure requirements and public reporting by companies whose securities are distributed and traded in public exchanges. The Malony Act of 1938 extended U.S. securities laws to over-the-counter transactions and exchanges by associations of securities dealers (e.g., the National Association of Securities Dealers). The Trust Indenture Act of 1939 extended federal oversight to publicly exchanged debt instruments, e.g., bonds. The Investment Advisors Act (1940) required disclosures by persons who effect public securities transactions. The Williams Act (1968) affected tender offers. 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). This body of legislation is complex. But, planning managers would do well at least to become aware of the securities laws somewhat intricate and restrictive disclosure, reporting, and trading requirements. Employment Laws A host of legislation, at federal and state levels, protects workers rights to be represented in collective bargaining and to work in a safe environment. Some of these laws also can affect the ways in which structural transformations can or cannot be effected. Thus,

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. page_275 Page 276 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. These requirements do not apply to very small businesses (less than 100 employees) or to transactions where the buyer will retain liability for the sellers current collective bargaining agreement, as in a merger or stock purchase arrangement. One purpose of the WARN Act, of course, is to enable labor unions to prepare for and initiate collective bargaining with the new owner. Thus, the National Labor Relations Act (1935), the Labor-Management Relations Act (1947), and the Landrum-Griffin Act (1959) all may be relevant. In its present state, this legislation essentially compels management to bargain in good faith with a pre-existing bargaining unit. While the buyer does not have to accept a pending labor contract, the union may be able to compel the new owner either to accept the existing contract, negotiate a new one, or face the prospect of taking possession of idle facilities. Occupational safety and health liabilitiesincluding past violations and related remedial ordersincurred by the existing owner of a facility must be disclosed to the intended new owner. Responsibility for the fulfillment of any OSHA compliance requirements then may be negotiated prior to closing any acquisition/divestment transaction. 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. environmental laws. These include the Clean Air Act of 1970, the Clean Water Act of 1972, the Resource Conservation and Recovery Act (RCRA) of 1976, and the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) of 1980. CERCLA, also known as the Superfund Act, was enacted in 1980 and amended by the Superfund Amendments and Reauthorization Act (SARA) of 1986. CERCLA and SARA established stringent information-gathering and reporting requirements. They required owners and operators of hazardous waste storage, treatment or disposal sites to notify the Environmental Protection Agency of hazardous substances discovery; established a federal authority to respond to hazardous substance emergencies and to clean them up; created a trust fund to pay for removal and remediation of hazardous waste; and made persons responsible for hazardous substance releases liable for cleanup and restitution costs. Certain exemptions were provided by SARA for innocent landowners who acquire property without knowing that hazardous substances previously were deposited there. However, 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. Imposed page_276 Page 277 penalties and liabilities under CERCLA and SARA have exceeded one billion dollars. Thus, they are always considered during due diligence proceedings when manufacturing facilities change hands. 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. After all, 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.S. Tax Code that pertains to transformations of business structures. Here, it must suffice simply to recognize that, in an acquisition/divestment proceeding, transactions that minimize tax liabilities of the buyer probably will maximize those of the seller, and vice versa. Thus, during any transaction negotiation, it will be important to address responsibilities for tax liabilities incurred as a result of purchase price allocations to the transferred assets. As mentioned earlier, tax-free poolings of interest largely were eliminated at mid-year of 2001. This is not to say that mergers cannot still occur, but freedom from tax liabilities largely has been eliminated. Section 382 of the Internal Revenue Code also contains special rules that apply to buyers utilization of sellers prior operating losses for taxavoidance purposes. Critical limitations particularly apply when changes in control occur; 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. CONCLUSIONS Strategy is managements approach to pursuing a firms goals and its rationale for selecting the approach to be taken, rather than alternatives. In Chapter 8 of this volume, a method for determining the amount of work required to implement strategy successfully (the strategic objective) is explained (see Figure 8.9). That method entails contrasting the firms present performance potential to standards of success (goals) and inferring value additions that will be required from new sources not available at present, such as new markets and new products. Strategy is implemented when managers conduct deliberate, goal-seeking work. When expected benefits of strategic projects and programs fill the gap between present performance potential and success standards, with a page_277 Page 278 sufficient contingency allowance for probable error, strategy is considered to be satisfactory. 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. More specifically, how the resulting second gap can be filled, using external resources, is the subject of this chapter. Indeed, strategic objectives often can be achieved by bringing new resources into a firm or by unburdening existing resources by divesting unproductive assets, thereby enabling additional strategy to fill the second gap (see

Figure 11.1). Such actions fall into two general categories: (1) ownership changes and (2) resource sharing. This chapter begins by making a fundamental assertion that, as long as the economic mission of an enterprise remains tenable, restructurings should be viewed as tactics to implement a higher strategy by supplementing internal resources with new resources from outside the firm. Having reviewed the relatively low success rates of acquisitions and mergers, we can appreciate, now, why this tenetthat restructurings only should supplement internal strategyshould be followed. When resources from outside the firm must be appropriated in order to accomplish strategic objectives, a much higher level of risk is incurred than when draws upon internal resources. Even resource-sharing approacheswhich incur lower risks than ownership changesstill incur higher risks than those usually associated with internal development strategies. The somewhat lengthy procedures of conceiving and executing ownership changesacquisitions, divestments, or mergersare described in this chapter. Aside from their administrative, legal, and regulatory complexities, these ownership transactions also engender several economic problems. Perhaps the greatest of these is, very simply, the low likelihood of a satisfactory return. Buyers rarely earn back premiums that they pay for expected value added by an acquisition or merger, often because such expectations are too optimistic. The appropriateness of an acquisition or merger will differ in response to several contingenciesfor instance, the industrys life-cycle stage. As industries mature, they grow less profitable, and recovering premiums over an extended payback period becomes more difficult. Nevertheless, acquisitions and joint ventures typically are the preferred means for consolidating excess capacity during industries declining life cycle stages. Acquisitions, mergers, alliances, and joint ventures all tend to add economic value through learning effects early in industries lifecycle stages. Acquisitions are most appropriate in low technology and laborintensive industries, while joint ventures and alliances tend to be more page_278 Page 279 appropriate in high technology industries. But, in later life-cycle stages, economic value tends to be added primarily through economies of scale. Acquisitions and mergers also can be used as a means of diversification. But we have seen that the benefits of extreme concentration or diversification of a business portfolio typically are very limited. Focused portfolios, with only modest diversification of related businesses, will tend to perform best, because economic value then is likely to be shared efficiently between the businesses. This, of course, is the well-known phenomenon of synergy. Complicating acquisitions and mergers are agency conflicts between the interests of shareholders and management. While these conflicts can be mediated and/or resolved, managements fundamental interests still are served by controlling or minimizing risks associated with extending the scope of an enterprise so that it grows larger, but no less secure. With larger size, companies tend to pay higher salaries. With business security comes job security. But shareholders, on the other hand, tend to accept higher levels of business risk because, with greater risk, greater returns are expected. Shareholders also tend to prefer higher returns on equity to faster growth in size alone. After exploring procedures for ownership changes, this chapter turns to resource sharing transactionsalliances and joint ventures. Compared to change-of-ownership transactions, resource-sharing procedures are relatively new arrivals to the arsenal of restructuring tactics, but they benefit from certain economic advantages over ownership changes. In a typical acquisition or merger, the initiator of a transaction usually must accept some products or assets that are less desirable than core assets. But the undesirable assets, which may dilute returns, are part of the deal. The acquiring and acquired management teams also may not be completely compatible. For such reasons, acquisitions and mergers usually must be cleaned up after their closings. That is not the case with resource-sharing approaches, which are constructed by their partners in order to accomplish specific business objectives. Only the resourcescapital, physical, and humanthat are appropriate for pursuing a stated objective will be contributed to such an enterprise; and management will have to be compatible, or the transaction wont be closed. Not surprisingly, then, with focused resources, no excess assets, commitment to a stated objective, and management cohesion, resource-sharing enterprises enjoy higher rates of return on investment than acquisitions and mergers. This is one reason for the explosive growth of resource-sharing transactions during the past two decades. Another reason is the opportunity that resourcesharing approaches page_279 Page 280 offer their principals to mitigate riskssharing them with partners and hedging them by participating in several such enterprises at once. Like other restructuring transactions, resource-sharing transactions must be structured to fit their circumstances. 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, then an alliance makes most sense because asset commitments are less substantial and more revocable. However, 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, then joint ventures tend to be preferable because both parties stand to lose committed assets if the arrangement comes unraveled. Thus, enterprises formed to pursue research and development projects tend to be alliances, while enterprises to produce new products in emergent industries tend to be joint ventures. When two companies each serve different markets, alliances and joint ventures can be formed productively because each party contributes significantly to the enterprise. But when the parties markets overlap, resourcesharing approaches incur such high risks of mistrust that acquisitions or mergers (ownership changes) are more appropriate than resource sharing; mistrust then becomes a minor source of risk, and most of the enterprises risk is related to its performance potential. Finally, this chapter addressed reorganization of the firms capitalization under the U.S. Bankruptcy Code. This approach to

restructuring is appropriate only when the firms economic mission no longer is feasible for reasons of insolvency. However, if insolvency is due to a fundamentally flawed business model or managerial incompetence, chances of a successful reorganization are essentially nil. Only when insolvency is the result of an exogenous shock to an otherwise viable firmfor instance, burdening a firm with unsupportable debt in a leveraged buyout or when a major customer becomes insolventshould reorganization in bankruptcy be attempted. Nevertheless, the likelihood of a successful restructuring in bankruptcy is quite low. Surveys have suggested that the overall success rate is less than 10 percent and that, even after confirmation, the chances that a reorganized firm will survive are less than 30 percent. Adding to the difficulty of bankruptcy reorganizations is their very complex and costly administrative apparatus. For these reasons, management facing a reorganization should consider alternatives such as voluntary work-outs with creditors. However, if a bankruptcy reorganization is to be attempted, then the discipline of formal business planning should enhance the enterprises chances for success. These concluding remarks would not be complete without reacknowledging the importance of technical proficiency at several stages of any restructuring project. Certainly, legal and regulatory repage_280 Page 281 quirements should be addressed when planning such transactions. Antitrust laws, securities laws, employment laws, environmental laws, and tax laws all will impose important limitations on the scope of permissible procedures. Several economic issues must be addressed as well; for instance, an industry analysis should confirm whether a restructuring will be undertaken to accomplish learning effects or scale economies, depending upon the life-cycle stage. In any event, enterprise restructuring procedures call upon the full scope of a planning managers skills. Certainly, 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. GENERALLY ACCEPTED PLANNING PRINCIPLES: RESTRUCTURING Definitions Definition11.01An acquisition is a purchase of the stock or assets in one business by another business or person(s). Definition11.02A stock purchase is an acquisition effected by purchasing at least 80 percent of a companys issued and outstanding shares of stock. All assets and liabilities of the acquired firm are conveyed to the buyer. Definition11.03An asset purchase is an acquisition effected by purchasing essentially all assets of the target business. As partial payment, the buyer may assume some or all of the sellers financial liabilities. Assumption of off-balance-sheet liabilities is partially negotiable. Definition11.11A divestment is the reciprocal portion of an acquisition. Definition11.12An equity carve-out is the sale of stock in a subsidiary to new investors. The subsidiary becomes a new legal entity. Definition11.13A spin-off is a distribution of shares in a subsidiary to the parent companys shareholders. The subsidiary becomes a new legal entity. Definition11.14A break-up is several spin-offs resulting in dissolution of the parent firm. Definition11.21A merger is a pooling of two corporations assets and liabilities to create a new corporation with page_281 Page 282 no gain or loss by either party. (Mergers became rare in the United States after June 30, 2001.) Definition11.31An alliance is the formation of either a contractual or non-binding relationship between two or more firms with complementary business interests. Definition11.41A joint venture is the formation of a jointly owned corporation by two or more firms to achieve a stated purpose or goal. Each party becomes a shareholder and participates in governance of the new corporation. Definition11.51A bankruptcy is a declaration of insolvency by a firm, partnership, or individual with a petition for protection from creditors under the U.S. Bankruptcy Code. Definition11.52A bankruptcy reorganization is an attempt to form a plan for settlements with creditors under Chapter 11 of the U.S. Bankruptcy Code, by reorganizing the bankrupt firms capitalization and then resuming operations under a plan to meet new creditor obligations. Definition11.53A bankruptcy liquidation is a planned liquidation of assets, following rules and procedures set forth in Chapter 7 of the U.S. Bankruptcy Code, administered under the direction of the U.S. Trustees Office. Axiom Axiom11.01A secondary strategic objective emerges when management cannot reconcile the difference between a firms goals and present momentum using existing, internal resources. This new objective can be attained only by appropriating external resources or lowering the goal. Postulates Postulate 11.01 Strategies that attempt to accomplish objectives through external resources result in restructurings of capitalization and/or the organization. Postulate 11.02 There are two types of restructurings: (1) changes in ownership and (2) resource sharing. Corollary11.021Ownership changes include acquisitions, divestments, mergers, and bankruptcy. page_282 Page 283 Corollary11.022Resource sharing is accomplished by alliances and joint ventures.

Postulate 11.03 Alliances and joint ventures permit firms to share risks of a single business and/or hedge market risks through multiple commitments. Postulate 11.04 Bankruptcy reorganizations should be attempted only when reasons for insolvency do not stem from an infeasible business model or managerial incompetence. Postulate 11.05 Legal and regulatory limitations on the approach to any restructuring strategy must be considered when they initially are planned. Hypotheses Hypothesis11.01Restructurings are most successful when they are conducted to accomplish a higher-level strategy rather than to realize an unanticipated opportunity. Hypothesis11.02Acquisitions, mergers, divestments, alliances, and joint ventures can be used to obtain learning effects early in an industrys life cycle. Hypothesis11.03Those same transactions can be used to accomplish scale economies late in an industrys life cycle. Hypothesis11.04Acquisitions and mergers in pursuit of product or service diversification should avoid extremely concentrated or diversified portfolios; focused portfolios of related businesses are most profitable. Hypothesis11.05Most of the value added by acquisitions is appropriated by sellers, not buyers. Thus, rates of economic value added by acquisitions, proportionate to investment, tend to be relatively low when compared to resource-sharing transactions. Hypothesis11.06Resource-sharing transactions such as alliances and joint ventures have higher returns than ownership changes, because they are more focused on specific objectives, avoid unproductive assets and acquisition premiums, and employ compatible personnel. Hypothesis11.07Alliances are preferred for purposes of hedging relatively high performance risks, as in research and development enterprises. page_283 Page 284 Hypothesis11.08Joint ventures are preferred for minimizing risks of mistrust, versus performance, as when two proprietary technologies are combined. Hypothesis11.09Resource-sharing arrangements are preferred over ownership changes when the partners markets do not overlap. Acquisitions are preferred when markets do overlap. Hypothesis11.10Bankruptcy reorganizations chances for success are very low (P<.10). Even after confirmation, the probability of a reorganized firms success is P<.30. Hypothesis11.11A formal plan of business should be prepared for any restructuring as a means of improving its chances for success. Hypothesis11.12Agency conflicts between the interests of executives and shareholders reflect their different incentives to accept risks and appropriate internal cash flows. Management prefers lower risks than shareholders. Each prefers cash to flow in its direction. page_284 Page 285 Part V Summary The preceding eleven chapters describe procedural principles of strategic planning from four different perspectives: foundations of methodology, administrative management, decision making, and implementation. At the end of each chapter, detailed lists of generally accepted planning principles (GAPP) are provided. In Chapter 12, those principles are consolidated into a somewhat more general form. 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. Readers then may refer back to any individual chapter as necessary for the relevant particulars of a principle under consideration. This list of principles also can be used to structure internal auditing programs for assessing the soundness of a firms planning procedures. page_285 Page 286 This page intentionally left blank. page_286 Page 287 12 Generally Accepted Planning Principles: A Compilation Generally accepted principles of comprehensive planning procedures are summarized in the following paragraphs. These ninety principles represent conclusions from empirical research, current theory, and customary practices, all of which were described in the previous chapters. BASIC APPROACH 1. The planning process may be either deterministic (making the best selections from alternative goals, strategies, and objectives based on available information) or incremental (making successive approximations toward better choices that are politically acceptable, but probably not optimal). Both types of process may be found within the same firm. However, preferences for one

approach or the other determine top managements style of planning and policy-level decision making. 2. The degree of line managers autonomy in making planning decisions will determine the extent and locus of strategic innovation, as well as the appropriate choice of a centralized or decentralized planning style. High levels of autonomy and widespread innovation are easiest to achieve when a decentralized, bottom-up style is employed and are more difficult to achieve when a more centralized, top-down style is employed. page_287 Page 288 3. Procedural rationality (deliberate, deductive or inductive, logic) enhances the effectiveness of strategic decision making (i.e., the extent to which strategy results in objectives accomplishment). a. Centralized planning approaches are most conducive to rational decision procedures. b. Political influences on decision making tend to impede rational procedures and strategic effectiveness. 4. Strategic decisions are made to develop and deploy internal resources in pursuit of competitive advantage and economic return. 5. Firms tendencies to realize the performance enhancement or impedance effects of comprehensive planning functions are contingent upon variables in their planning practices, including: Level of top management involvement Frequency of review Approval authority: board of directors Planning horizon or CEO Linkage of incentives to objectives The use of information technology GENERAL PLANNING MODEL 6. There are two categories of commercial planning models: process models and content models. The former describe sequentially how information is obtained and processed. The latter describe the relevance of information elements to decision-making. While the two categories are closely interrelated, this volume is concerned primarily with process models and procedural principles. 7. Effective planning procedures are both integrative and adaptive. That is, they seek balances between a firms internal capabilities and external (environmental) conditions. Each dimensionintegration and adaptationis vitally important. 8. Managements choices of objectives, strategy, and planning style will be determined by its perceptions of (1) environmental uncertainty or risk and (2) the firms need for improvement of internal capabilities. Interactions of these two perceptions will produce a strategy that is more or less adaptive or integrativethat is, focused on marketing conditions and/or acquisitions of proprietary resources. SELECTING A BASIC PROCEDURE 9. The initiative in strategy formation (top-down, bottom-up, team, or hybrid) should be selected on the bases of firm size and degree of centralization in decision making. Top-down approaches work best where there is a centralized structure and a single line of business; this is especially true in smaller firms. In larger firms with closely related page_288 Page 289 lines of business, a top-management team approach may be combined effectively with a top down style. Bottom-up approaches work best in more diversified, decentralized, and/or complex firms; this is especially true in large multinational corporations. In smaller diversified firms, a team approach also may be effective. In very large corporations, a hybrid approachconsisting of both top-down and bottom-up proceduresmay be most effective, albeit more time consuming and difficult to administer. 10. The classic planning process model includes three stages: gathering evidence about internal capabilities and the external environment; making decisions about standards for success and the approach to be taken in pursuing them; and implementation of the selected approach through projects, programs, and replanning as necessary. 11. When the classic models initially were developed, their evidential and administrative requirements were impractical. As a result of modern computing, software, data storage, and communication technology, it no longer is infeasible or impractical to implement classic planning models in a dynamic modeperpetually updating evidence and replanning as and when necessary. This is the neoclassical approach. 12. The typical planning horizon is five years. However, the horizon should be shorter for small firms and even large firms, when the environment is turbulent. The horizon should be longer in firms with complex structures and markets and for firms which are capital intensive. 13. Implementation of strategy is an essentially integrative discipline in which decisions are made to deploy resources within units of the firm. Therefore, plans ultimately must be communicated to and carried out by line managers, each of whom must understand his or her role in implementing strategy. 14. Plans typically are reviewed at least annually. However, review frequencies often are, and should be, higher than that. A quarterly or semi-annual review procedure may be preferable. However, appropriate review frequencies differ between industriesless often in stable, asset-intensive industries; more often in dynamic markets and/or industries such as high technology and many consumer products or services. PERFECTING THE PROCEDURE 15. Some discord on goals and objectives can be beneficial if there is sufficient slack in the firms resources of capital and sufficient time to permit a thorough consideration of alternatives. page_289 Page 290 16. Effectiveness of the planning function and performance typically will be enhanced by consensus of the management team on a firms external business conditions, risks, and approaches to pursuing objectives. Agreement on means (strategy) is more important

to a firms success than agreement on ends (goals and objectives). 17. 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. 18. Optimizing approaches to objective setting are practical only when planning decisions flow from the top down; they are impractical when a bottom-up approach is taken. 19. Corporate culture influences the choice of planning procedures. Since planning procedures must be accepted by an organization before they can be employed successfully, they also must be designed consistent with cultural realities. 20. Every new planning procedure causes an anti-planning attitude, if not overt resistance, among the managers affected. This fact of life must be taken into consideration when introducing new planning procedures. Time permitting, frequent changes of small magnitude are preferable to infrequent changes of great magnitude. However, in a rapidly changing or turbulent industry or market, an incremental approach probably is not practical. Then, strong support of the top management team and CEO is vital. 21. The planning process must include an effective implementation procedure; failure to satisfy this requirement is the most frequent reason for planning functions failure. Implementation effectiveness is greatly enhanced when the professional planning staff gives strong technical support to line managers in developing strategy and project/program management. 22. The firms highest-level plan (the corporate plan) must include allocations of capital to competing investments within the corporationthat is, divisions or subsidiaries, product lines, the treasury (for dividends and debt retirement), acquisitions, and the like. Such allocations must be carried through to business units budgets. 23. As the firms structural complexity increases, so should the sophistication of its planning procedures. 24. When risk levels are high, planning procedures should be most highly developedfor instance, when there is competitive vulnerability of technology or when business conditions (internal and external) are volatile. 25. Complexities of the planning system and business conditions should be inversely related. However, complexity and comprehensiveness should not be confused; the planning process always should be comprehensive insofar as scope of the General Planning Model is concerned. page_290 Page 291 26. The firms planning process must evolve in response to its practice in planning, economic cyclicality, progression of the industryor product-life cycle, changes of organization structure, and changes in management style. Therefore, it is desirable to perform an independent annual audit of planning procedures. ALLOCATION/DELEGATION OF PLANNING RESPONSIBILITIES 27. The chief executives responsibilities for planning include being well informed on generally accepted planning principles, selecting planning policy, organizing the planning function, and delegating responsibilities for doing the work of planning. 28. A hallmark of administrative success in planning appears when detailed planning functions consume relatively little of the chief executives time, while improving the quality of a CEOs (and other senior executives) strategic decisions. 29. The professional planning manager serves best as an internal consultant and educator on planning methods and strategic decisionmaking technology, a monitor of business conditions, a provider of analytic services, an administrator, and a catalyst to strategic thinking throughout the management organization. 30. 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; to the chief executive a responsibility of selecting from strategic alternatives and proposing decisions to the board; and to line managers a role of proposing operating plans to the chief executive. However, the appropriate involvement of these three management levels varies between industries. For example, board involvement in planning procedures should be more extensive in asset-intensive industries, even at the division level. ADMINISTRATION OF PLANNING PROCEDURES 31. To be effective, the planning executive must be an accomplished administrator, and the planning function must be administratively sound. 32. Initiation of a new or revised planning procedure itself should reflect careful planning, following the guidelines in Chapter 6. At the outset, a new planning managers scope of administrative and technical responsibilities and authorities should be clearly defined. 33. The planning function must have stated objectives just like any other staff function, including specific work products. page_291 Page 292 34. The typical strategic planning process follows an administrative schedule of activities that spans the entire year. However, planning must be a dynamic function. While an annual planning calendar should be used to organize an otherwise unwieldy information flow and avoid administrative burdens, departures from the general procedure should be permitted when changes in internal or external conditions warrant unscheduled replanning. Therefore, the planning process really should be perpetual at every stage. 35. Since many assumptions regarding external business conditions will become invalid after the plan is prepared, a flexible method for updating assumptions, strategy, objectives, and implementation programs is required. 36. There is a natural tendency of managers to resist any significant change of goals and strategy. Larger changes will be met by greater resistance. Changing a plan can precipitate a crisis, but failure to keep the plan up to date can lead to a catastrophe. For all of these reasons, replanning procedures should be perpetual and deliberate. 37. Planning functions most frequent flaws include two mistakes by the chief executiveoverdelegation 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. The chief executive must be the chief planning officer.

38. Long-range strategic planning and current operational planning processes should be closely integrated. Strategic and operational plans should be more tightly linked when the planning horizon is relatively short. PLANNING FOR THE SINGLE BUSINESS 39. Companies with single lines of business require just one comprehensive plan. Companies with multiple lines of business, divisions, and/or subsidiaries require a plan for each business and one more for the corporation as a whole. Feasibility of the corporate plan depends on feasibility of the individual business plans. 40. Effective execution of the planning function requires an evidentially demanding approach. It is the planning managers responsibility to acquire sufficient evidence to support planning decisions. Usage of relevant information in making planning decisions and financial performance are positively correlated. 41. Accuracy of planning information with which to evaluate uncertainty of the economy, industry, and market (the environment) is positively correlated with financial results. page_292 Page 293 42. The scope of environmental information assembled to support planning decisions should include trends, the current situation and forecasts of the relevant economy, intra-industry competition and market conditions, an inventory of critical success factors, and an inventory of the firms strategically driving forces. 43. The scope of information required for a competitive position analysis (using one of the matrix methods) includes competitors and/or products market shares; industry/market growth rate trends and potentials; other industry attractiveness indicators; the firms comparative ability to supply a product or service versus competitors abilities; forecasts of business sector prospects; and diagnoses of product/industry life-cycle stages. 44. Information describing the firms operating capabilities, compared to competitors capabilities, is an essential input to planning decisions. Objectivity in gathering and assessing such information is difficult to achieve. 45. One approach to enhancing objectivity entails compiling a profile of performance norms for the firms industry or segment. The scope of such a profile includes financial performance, as well as marketing, operating, and technological norms. Such a profile can provide objective benchmarks with which to evaluate a firms relative strengths and weaknesses in sales, costs, margins, rates of return, leverage, cash flow, and so on. 46. Evaluations of internal capabilities should be based on an impartial list of the industrys critical success factors. Competence alone is not sufficient for competitive strength. A competitive strength or weakness exists only when the firms competence in a critical function is distinctively superior or inferior to that of competitors. Here, again, objectivity is critical; for that reason, assembling benchmarks of best practices is highly desirable. 47. The planning manager should gain technical comfort with the firms cost accounting practices and judge their adequacy for measuring contributions from lines of business. 48. There are four categories of business goals: level of risk, financial results, competitive position, and long-term growth. The planning manager should assemble and organize information with which to define success standards of each type. 49. Competitive and financial success are closely related. There is a positive correlation between market share and the rate of return on investment, until some optimum share is reached. At that point, incremental market share is likely to be accompanied by lower financial returns. The planning process should identify and clarify trade-offs between higher financial returns and higher market shares. 50. Competitive success standards are more difficult than financial standards to define: a simple market share goal may suffice. But other page_293 Page 294 competitive standards also may be defined; one example is permanence, or staying power in an industry based on technological superiority. 51. Operating success standards are even harder to define; but they may be developed from industry performance norms, engineering standards, and benchmarking studies. 52. The size of gaps between goals and baseline projections of most likely performancebefore changes in strategy are introducedis one measure of goals difficulty/feasibility. The gaps size also provides quantification of strategic objectivesthat is, the amount of improvement required from strategy to achieve goals. 53. Goals of corporate and operating management often conflict. For instance, two divisions each may require capital to realize their highest performance potential, when adequate funding can be supplied to only one of them. The losers business will suffer from under investment, and its ability to attain or sustain competitive advantage may be impaired. Thus, a corporations overall financial interest (and its shareholders interests) may conflict with the interests of such losing divisions (as well as the interests of their employees, suppliers, and other stakeholders). 54. Technical acceptability of goals and objectives should be based on their specificity, soundness of rationale, and suitability as a basis for defining strategy. Political/social considerations also will influence acceptance. 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. Until they are communicated, goals cannot provide strategic guidance to operating elements of the organization. 55. Strategy selection entails diagnosing the relative merits of adaptive (market-positioning) versus integrative (resource-based) approaches; least-cost versus differentiation approaches; and competing for future versus present markets and then making tradeoffs in resource allocations. 56. The most typical approach to selecting strategy is adaptive. Market opportunities are defined first, and internal capabilities

then are adopted for the best possible fit to those external opportunities. 57. An alternative approach to selecting strategy entails an inside-out procedure, that is, enhancing and cultivating core competences, then searching for markets where such competences are critical success factors. This is the resource-based view of strategy selection. PLANNING FOR THE MULTI-BUSINESS CORPORATION 58. Some planning functions in multi-business corporations cannot be delegated to line management and must be performed only by page_294 Page 295 corporate management. These include defining the concept and scope of corporate businesses; evaluating strengths and weaknesses of the business portfolio and headquarters functions; evaluating growth potentials and other attractiveness characteristics of new or existing businesses and markets; corporate goal-setting; allocation of capital to businesses in the portfolio; identifying synergies and possible combinations of portfolio businesses; and altering the corporate structure through acquisitions, divestments, joint ventures, alliances, and bankruptcy. 59. Some environmental assessment functions may be performed most economically at the corporate levelfor example, economic, industry, and market analysis and forecasting. Such analyses and forecasts may be shared with operating management, thereby achieving uniformity of planning functions as well as economies. However, these environmental assessment functions (among others) also may be decentralized; it is not essential to centralize them, although it may be desirable to do so. 60. Administrative planning procedures may take longer and be more cumbersome in highly diversified and/or complex corporations. But corporate complexity itself is an incentive to develop comprehensive planning functions and to realize their integrative benefits. 61. The chief executive and corporate planning executive must decide how communications with line management regarding corporate strategy and operating objectives will occurbefore or after individual business plans are proposed to corporate management by line management. 62. Corporate involvement in planning functions of divisions and subsidiaries may entail either direct participation, procedural control, or essential detachment. The appropriate choice depends on the extent to which portfolio businesses are related versus diversified and the extent to which strategic decisionmaking is centralized, versus decentralized. 63. Diversification of the business-portfolio may reduce financial risk; but it also may impose a lower limit on financial performance potential reflecting corporate overhead costs, the difficulty of accomplishing successful acquisitions and reasonable limits on corporate managements ability to understand a broad scope of markets, industries, and individual businesses. For these reasons, it is usually best for all businesses in the portfolio to be closely related and within a common sector of industries and/or markets. 64. Multinational businesses represent the most complex and diversified of strategic situations. Factors that influence the design of planning procedures for multinational corporations include the following: concept of corporate structure: product versus geographically oriented page_295 Page 296 acceptable levels of capital risk at corporate and foreign operating levels power relationships between corporate headquarters managers, foreign business managers, governments regulators, 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. Sources of difficulty in planning for multinational businesses may emanate either from headquarters or operating units. They may be manifested in managerial ability, cultural resistance, or flaws in the planning system. Thus, risks associated with MNC business planning typically are very high and multinational business planning is especially difficult. IMPLEMENTATION 66. Effective implementation of strategy is a fundamental requisite for success of the commercial planning function. Strategy is not self-fulfilling; a deliberate implementation method is required to realize strategy. 67. In order to acquire and develop proficiency in implementation skills, a firm first must have sound fundamentals in the form of three generic capabilities: sufficient resources; a strong, well-formed organization structure; and adequate motivation. 68. A firms management must have ten skills to implement strategy effectively: the ability to set internally consistent objectives; the ability to achieve strategic awareness; the ability to manage resistance to changes in strategy; the ability to sustain vigorous, focused effort; the ability to align structure and strategy; the ability to identify and develop leaders and managers; the ability to conduct projects; the ability to budget and monitor progress; the ability to envision needs for future competences; and the ability to realize when its time to change strategy and replan. 69. The relationship between implementation skills and generic capabilities is reciprocally reinforcing. With practice, the ten skills build generic capabilities, and vice versa. Conversely, degeneration in one categoryeither generic capabilities or implementation skillswill produce degeneration in the other category. 70. Implementation skills are converted to implementation competences by procedural routines, or techniques, such as management by objectives, the balanced scorecard, and zero base budgeting. There are many such techniques to choose from; and management may page_296 Page 297 employ as many as it likes, as long as all ten implementation skills are employed.

71. The relationship between implementation skills and techniques is reciprocally reinforcing. Practicing implementation techniques builds basic implementation skills, and strengthening implementation skills facilitates the future use of new techniques. Conversely, if any skill degenerates through lack of practice, it will become more difficult to use some techniques. RESTRUCTURING 72. A secondary strategic objective emerges when management cannot reconcile the difference between a firms goals and present momentum using existing internal resources. This new objective can be attained only by appropriating external resources or lowering the goal. 73. Restructurings are most successful when they are conducted to accomplish a higher-level strategy rather than to exploit an unanticipated opportunity. 74. There are two types of restructurings: (1) changes in ownership and (2) resource sharing. Ownership changes include acquisitions, divestments, mergers, and bankruptcy. Resource sharing is accomplished by alliances and joint ventures. 75. Acquisitions, mergers, divestments, alliances, and joint ventures attempted early in an industrys life cycle should be intended to obtain learning effects. 76. Those same transactions should attempt to accomplish scale economies, in mature and declining stages of an industrys life cycle. 77. Acquisitions and mergers in pursuit of product or service diversification should avoid extremely concentrated or very diversified portfolios; focused portfolios of related businesses are most profitable. 78. Most of the value added by acquisitions tends to be appropriated by sellers, not buyers. Thus, rates of economic value added by acquisitions, proportionate to investment, tend to be low. 79. Resource-sharing transactions, including alliances and joint ventures, tend to have higher returns than ownership changes, because they are more focused on specific objectives, avoid surplus assets and acquisition premiums, and employ personnel who are selected for particular competences. 80. 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. 81. Alliances are preferred for purposes of hedging performance risks as in research and development enterprises. page_297 Page 298 82. Joint ventures are preferred for minimizing risks of mistrust, versus performance, as in a combination of two proprietary technologies. 83. Resource-sharing arrangements are preferred when the partners markets do not overlap. Acquisitions are preferred when markets do overlap. 84. Bankruptcy reorganizations chances for success are very low (less than 10%). Even after confirmation, the probability of a reorganized firms success is less than 30 percent. 85. Bankruptcy reorganizations should be attempted only when reasons for insolvency do not stem from an infeasible business model or managerial incompetence. Otherwise, liquidation is mandated. 86. A formal plan should be prepared for any restructuring as a means of improving its chances for success. 87. Agency conflicts between the interests of executives and shareholders reflect their different incentives to accept risks and to employ internal cash flows. Management prefers lower risks than shareholders. Each prefers cash to flow in its direction. PLANNING TECHNOLOGY 88. Strategic planning technology (SPT) includes a combination of four information technologies in performing the work of comprehensive planning: computing hardware, specialized planning software, electronic data storage, and electronic data communication. SPT facilitates both adaptive and integrative planning approaches even in very dynamic environments and complex firms. 89. Until the 1990s, information processing requirements of CP process models were prohibitive; that no longer is true. SPT has enabled the classical planning process models to be implemented more efficiently and effectively than when they first were articulated in the 1960s. The result has been a neoclassical approach to comprehensive planning. 90. In a given industry, 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. CONCLUSION This compilation of ninety principles, of course, is only a first effort. Surely, as others review these principles, they will propose that more principles should be addedand perhaps that some should be deleted or changed. To suggest that these principles characterize the total methpage_298 Page 299 odology of comprehensive commercial planning would be nave, at best. But, hopefully, these principles provide a foundation upon which a more complete structure may be built, over time. Most important, the mission of assembling generally accepted planning principles has begun. page_299 Page 300 This page intentionally left blank. page_300

Page 301 Appendix Evolution of Classic Planning Models Chapter 3 of this volume provides an explanation of the classic approach to strategic planning. In that chapter, the evolution of classic process and decision models is described, and specific reference is made to several models that appeared in the strategic management literature during the formative 1960s and 1970s. In that chapter, reference also is made to this appendix for graphic illustrations of classical approaches to the three-stage process of assessing the firms strategic capabilities and its external environment (i.e., economy, industry, and markets), making decisions to select goals and strategy, and formulating an approach to the deliberate implementation of strategy. A collection of flow-chart illustrations in this appendix demonstrates how systematic, rational planning models evolved during the formative years when classic strategic planning methodology emerged. The most elaborate illustration in this collection is taken from an important article published by Gilmore and Brandenburg over forty years ago, in the 1962 edition of the Harvard Business Review (Exhibit A.1). Many current readers may be surprised by the completeness, if not elaborateness, of this model, which closely resembles process models in use today. For instance, note the authors attention to economic mission, assessment of the firms comparative competences, and selecting from alternative strategic approaches to the firms industry and market. Also note throughout these exhibits the authors attention to potential synergies and the pragmatic requirements of action programming. About the only element missing from this model is a process page_301 Page 302 for supplementing the present scope of business through acquisitions and/or reinforcing returns through divestmentsor, perhaps, alliances and joint venturesall of which would appear more prominently in subsequent models. Igor Ansoffs elaborate model appeared in his textbook, first published in 1965. In fact, Exhibit A.2 (p. 310) is a condensation of several schematic diagrams that appear throughout Ansoffs book. (Ansoffs model evolved in his subsequent publications.) Since it would be awkward to present all of Ansoffs flow charts here, the author collaborated with two principals of the Ansoff Institute at Escondido, California, in order to construct this composite summary of Professor Ansoffs highly influential model. Note that his model does incorporate a diversification strategy as well as an internal development strategy. Note, also, Ansoffs attention to the resource requirements for competitive advantagea focal point of the current strategic management literature. Finally, 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 managements current implementation priorities. Smalters (1969) systematic approach (Exhibit A.3, p. 311) is divided into the same three segments that is found in the general planning model discussed in Chapter 3 of this volume. Smalter was a practitioner, and his model is broken further into several elements that describe the work done at each stage of the planning process in his firm. Note, in the second and third stages of Smalters model, his attention to decision making in order to select from alternative goals and strategies as well as action programs. This process of clarifying alternatives has become a fundamental mechanism for managing the risks that may be incurred when making strategic planning decisions. Finally, we skip forward a full decade to Professor George Steiners model (1979), which integrated essentially all elements of decision making in the strategic planning process (Exhibit A.4, p. 312). Steiner also distinguished strategic or long-range planning from tactical planning. In his model, he demonstrated that the two dimensions are simply at different extremes of the time spectrum and that they logically interconnect. Here, also, one finds references to stakeholders other than the stockholders alone. Most important, perhaps, Steiners model demonstrates that comprehensive strategic planning is a continual, unending process. At each stage, planning decisions may have impacts on other elements of the plan and elicit corresponding amendments. As actual results occur, further amendments of each element in the plan and the planning process also may be elicited. Thus, unlike the other models in this appendix, Steiners model is closed. That is, it is heuristic in nature. page_302 Page 303

EXHIBIT A.1a Formulation of Economic Mission page_303 Page 304 Notes: (a) A field of endeavor is a sphere of business activity within which a firm operates. It may be characterized by a common thread such as technology or product- market orientation. For a small company, a segment of an industry may constitute its field of

endeavor, and it may be thought of as specialized. A larger firm may be active in several related fields of endeavor within an industry and be considered integrated. Or a company may be acting in several unrelated fields of endeavor and be thought of as diversified. (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 both rate of growth and outlook for continuance of growth; ii) flexibility in relation to the uncertainties of technological change; iii) stability in resisting major declines in the business cycle; and iv) return on investment. The performance of leading firms in the field offers some indication of the potential inherent in the field. (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. Measures are needed in such functional areas as research and development, marketing, production, finance and management. 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. (d) The firms capability profile is a statement in quantitative and/ or qualitative terms of the firms capabilities in the functional areas defined in the normative capability profile. (e) Relating the firms capability profile to the normative capability profile for each field of endeavor will serve to develop comparative profiles which indicate how well the firms capabilities match the requirements for success in each field. (f) The firms performance potential in each field may be derived by matching the comparative capability profiles with inherent potential in each field with respect to growth, flexibility, stability and return on investment (g) It may be desirable for the firm to be active in more than one field of endeavor. If integration or diversification appears attractive, possible combinations of the more promising fields should be formulated at this point. (h) Alternative combinations of several fields of endeavor may be evaluated with respect to feasibility by comparing resource requirements. Resource requirements will reflect the degree to which synergy is realized under each alternative. (i) Also, alternative combinations of fields of endeavor may be evaluated with respect to growth, flexibility, stability and return on investment. Particular note should be paid to the degree to which synergy is realized under each alternative. (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. The foregoing analyses are concerned with the problem of choosing a combination of fields of endeavor and objectives from an economic point of view. To this information base top management must add noneconomic considerations and business judgment in order to arrive at a final decision. Source: Reprinted by permission of Harvard Business Review, Exhibit 1, from Anatomy of Corporate Planning by F. F. Gilmore and R. G. page_304 Page 305

EXHIBIT A.1b Formulation of Competitive Strategy page_305 Page 306 NOTES (a) Product- market opportunities (characterized by the significant features that are expected to influence their outcome) are specific combinations of product- market sales approaches which define possible ways of exploiting a field of endeavor. (b) Based on the information developed in the preceding three steps, an analysis may be made of the firms functional capabilities with respect to research and development, marketing, production, finance, and management. Changes required for successful implementation of each alternative product- market opportunity may be defined as product- market plans. (c) Combining plans for the more attractive product- market opportunities with one another, or with existing plans in fields of endeavor in which the company is already operating, will serve to develop alternative strategies for the firm as a whole. (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. The particular ways in which performance objectives will be pursued in each field of endeavor, together with the functional goals necessary for their accomplishment, are specified, thus providing the framework for development of a program of action. Source: Reprinted by permission of Harvard Business Review, Exhibit 1, from Anatomy of Corporate Planning by F. F. Gilmore and R. G. Brandenburg, November December, 1962. Copyright 1962 by the Harvard Business School Publishing Company; all rights reserved. page_306

Page 307

EXHIBIT A.1c Specification of Programs of Action Source: Reprinted by permission of Harvard Business Review, Exhibit 1, from Anatomy of Corporate Planning by F. F. Gilmore and R. G. Brandenburg, NovemberDecember, 1962. Copyright 1962 by the Harvard Business School Publishing Company; all rights reserved. page_307 Page 308

EXHIBIT A.1d Reappraisal of Master Plan Source: Reprinted by permission of Harvard Business Review, Exhibit 1, from Anatomy of Corporate Planning by F. F. Gilmore and R. G. Brandenburg, NovemberDecember, 1962. Copyright 1962 by the Harvard Business School Publishing Company; all rights reserved. page_308 Page 309

EXHIBIT A.1e Top Management Planning Framework Source: Reprinted by permission of Harvard Business Review, Exhibit 1, from Anatomy of Corporate Planning by F. F. Gilmore and R. G. Brandenburg, NovemberDecember, 1962. Copyright 1962 by Harvard Business School Publishing Company; all rights reserved. page_309 Page 310

EXHIBIT A.2 Ansoffs Strategic Planning Model* * Adapted from Ansoff, 1965; pp. 34, 123, 172, 173, 177 ** Includes resources' allocation and strategy implementation The author gratefully acknowledges contributions from Dr. Peter H. Antoniou and Dr. Patrick Sullivan at The Ansoff Institute (Escondido, California) who participated in constructing this composite of Professor Ansoff's model. page_310 Page 311

EXHIBIT A.3 A Strategic Planning System Source: Reprinted from Long Range Planning, Vol. 1, D. J. Smalter, Anatomy of a Long Range Plan, pp. 48, Copyright 1969, with per mission from Elsevier Science. page_311 Page 312

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general, 33, 34 incidence, 1, 8, 911 inter-industry differences, 9, 2225 mid-managements role, 103105 purposes, 1821, 26, 28, 29, 31, 32 three-dimensional view, 3740 Consensus, 149154, 159 Contents of a comprehensive plan, 44 Contingencies, procedural, 5894, 129 Contingency planning, 9, 48, 178180 page_339 Page 340 Corporate level planning, 212, 220221, 294296 administration, 211, 220, 243244, 291292 defining strengths and weaknesses, 213 diversification, 215219 division conflicts, 222223, 295 goal selection, 214 market analysis, 213 scheduling, 223225 strategy selection, 215 Critical failure factors, 188 Critical success factors, 188 Culture, corporate, 154155, 159, 290 Decision making: consensus in, 149154 deterministic vs. incremental, 52, 55 general, 4142, 165166 inductive vs. deductive, 3, 57, 199200 participation in, 149154 rational vs. political, 57 Decision models, 6164 Directors, 9698, 98100 Distinctive competence, 2021 Divestments, 266 Division planning: corporate conflicts, 222 corporate participation, 221222 Driving forces, 174, 205206 Economic analysis, 170172 Environmental assessment, 169180 Evidence: for decision making, 168169 gathering, 4041 scope, in planning, 293 Fayol, Henri, 6, 7 Financial analysis, 83, 189 Five forces analysis (Porter, 1980), 172174 Forecasting, 176178 General planning model, 59 Generally accepted planning princi ples, 9, 1115, 2932, 4849, 6768, 89, 116117, 134137, 160163, 207209, 228230, 255257, 281284, 287299 Goals and objectives, 193194 acceptance criteria, 199200, 237 competitive, 195, 293 definition of, 46, 47, 237 financial, 194 inter-relationships, 195197, 293

selection of, 200201 trade-offs, 197198, 294 History of planning, 518 Implementation, 4344, 296297 competences, 233237 general procedure, 231232 pitfalls, 128 ten critical skills, 237244, 296 Implementation competences bridge, 244245, 296297 Incentive compensation, 252253 Incrementalism, 4344, 52, 56 Industry analysis, 172 Industry trade associations, 192 Industry types, 174175 Information technology, 7073 Integration, strategic, 35, 67 Joint ventures, 253, 266, 279, 280, 282, 297 Law: anti-trust, 274 employment, 275 environmental, 276 securities, 275 tax, 277 Leadership, 239241 Life cycle, product/market, 183185 Management by objectives (MBO), 246, 255 Management development, 249250 Management style, 155157 Market assessment, 175176 page_340 Page 341 Matrix: directional policy, 186187 market share/ growth, 180182 multi-factor, 182183 product/market evolution, 185186 Mid-management, participation, 103105 Military planning models, 79 Mission defined, 34 multi-business, 212 Multi-national planning, 10, 225228 Neoclassical methodology, 18, 6970 Neoclassicism, 3, 18 Organization: alignment to strategy, 239 complexity, 145146, 159, 225227 size and structure, 143145, 159, 221222 Participative procedures, 149154, 159 Planning executives: qualifications, 113114 roles, 93, 105108 Planning horizon, 146148, 159, 289 Planning needs, evolution, 130132 Planning process:

administration, 243244, 253, 291 getting started, 120123 long-range and near-term, 35, 36, 132133, 136, 242243 pitfalls, 133134, 227228 planning term, 146148, 159 practicality, 126129 scope, 35 scheduling, 123126, 134135, 223225 three-stage model, 34, 4044 updating, 129130, 136 Planning-performance research, 1, 13, 2127 Process models, 6163, 301312 Product/market life cycle, 185186 Professional planning specialists, 108 Progress review, 241, 242 Project management, 86, 241, 247248 Resistance to planning, 157158, 238239, 290 Restructuring, 264274, 297298 Review frequency, 148149, 159, 289 Risk management, 140143 Strategic awareness, 237238 Strategic autonomy, 5355 Strategic management, 6061 Strategic Management Society, 108 Strategic objectives, 47, 198199 Strategic planning, 36 pitfalls, 133134, 227228 effectiveness research, 1, 2127 incidence, 1, 10, 11 Strategic Planning Society, 108 Strategic planning technology, 8789, 298 benchmarking, 8081 benefits, 7678 competitive intelligence, 80 databases, 7980 decision support systems, 8485 defined, 89 documentation aids, 8586 electronic spreadsheets, 83 evolution, 7476 financial analysis and forecasting systems, 83 graphic aids, 84 marketing analysis/forecasting systems, 8182 progress review/evaluation systems, 87 project management systems, 86 Strategy adaptive vs. integrative, 202203 defined, 47 driving forces, 205 in crises, 206 least-cost vs. differentiation, 202 long range, 204 page_341 Page 342 PIMS program, 13, 193, 204205 resource based, 203204 selecting, 201 self-fulfilling (myth), 234 Systems models of planning, 7273 Teams, 143, 250252

Top-down vs. bottom up procedures, 143145, 288 Uses of commercial plans, 4445 page_342