Strategic Management Methodology

Generally Accepted Principles for Practitioners

C. W. Roney

Guidelines for Strategists, Number 1

Preface
This book was written for the commercial planning profession—the community of management
professionals who form, facilitate, and manage procedures for selecting corporate and
business objectives; developing strategy and plans of business, and facilitating strategy
implementation. Nearly every sizeable business in America prepares a formal plan of business.
In each such business, at least one manager is responsible for overseeing the firm's planning
procedures. This book is intended to be a source of methodological guidance for those
managers.

The focus of this text is on practice—how planning functions best are performed
administratively. There is an abundance of theoretical writing and empirical research into
topics pertaining to business and corporate strategy. But, surprisingly little definitive
information is available to guide professional planning managers or senior executives in
selecting the procedural principles most likely to produce plans that can be implemented
successfully in the specific circumstances of their firms. This book is intended to fill that void.

In this volume, the planning manager will find a collection of methodological principles that are
“generally accepted” for one of three reasons. First, their effectiveness may have been
demonstrated empirically, either by formal research or case histories. Second, academicians
may be in general agreement on the practical application of strategic management theory.
Third, even if empirical evidence or relevant theory are unavailable, a pattern of customary
practice may have evolved. In the absence of those foundations, I have drawn on three
decades ofour firm's experience in formulating plans and planning procedures with and for
clients in virtually all sectors of American industry.

Wherever possible, the empirical bases for planning principles have been emphasized and
theoretically unsupported constructs have been minimized. Nevertheless, the methodologies of
business and corporate planning still include many principles and practices that have not been
tested empirically. Much applied research still is needed to define planning methods' efficacy,
in several types of commercial and industrial settings. Thus, commercial planning professionals
today employ methodologies that apply substantial portions of both art and science.

C. W. Roney
Wilson, NC
November 2003

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.

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 Two's three chapters address administrative principles for managing strategic planning
functions. It begins with a chapter on the managerial responsibilities for performing and the
authorities for approving the work of strategic planning. In research conducted by our firm, we
have learned that, in some industries, firms' performance is best when plans are approved by
the board of directors. In other industries, performance is best when the chief executive has
that authority. This striking difference in industries' planning-performance dynamics illustrates
the importance of a proper organizational alignment of planning responsibilities and
authorities.

The second chapter in Part II reviews administrative principles that should be observed by
planning managers in conducting planning functions. The third chapter explores several
contingencies that may affect how those administrative principles are best applied in a firm's
particular circumstances. For example, the often-encountered impediment of organizational
resistance to planning is discussed.

In Part III, strategic decision-making procedures are described. This book is intended to
provide methodological principles for practicing strategic planning managers who facilitate and
administer strategic planning functions, but rarely have the authority or responsibility to make
strategic decisions themselves. Accordingly, these two chapters are focused on the procedures
rather than the substance of strategic decision making. For a more comprehensive treatment
of substantive matters related to strategic decision making, readers may refer to the author's
forthcoming volume addressed solely to that subject.
The first chapter in Part III addresses decision-making procedures for firms with single
businesses. Even multi-business corporations arecomprised of individual businesses, each of
which should follow the principles set forth here. The second chapter addresses special
procedural considerations that apply in multi-business corporations; here, readers will find
decision-making procedures that are unique to corporate-level planning, as opposed to
business-level planning.

Part IV addresses requirements for effective implementation of strategy. Planning managers

can't implement strategy themselves, of course, but they must work with line executives at all
levels to provide the capabilities and resources that are needed for effective implementation.
Making such provisions is an essential, but often overlooked, element of the planning function.

The first chapter of Part IV addresses implementation capabilities—both skills and resources.
Surely, this is the least developed area of strategic management literature. In both theory and
practice, our current methodology for realizing strategy has many voids. Much more is known
about how to form strategy and formulate strategic plans than about the competences that are
required to implement strategy effectively. But, readers may take some comfort from the
specific guidelines in this chapter. (Readers also may be encouraged to know that a fourth
volume in this series will describe the methodology of strategy implementation in much
greater detail.)

The second chapter in Part IV addresses procedures for implementing strategies that call for
transforming the structure of an enterprise through acquisitions, divestments, mergers,
alliances, joint ventures, and bankruptcy reorganizations. Planning managers usually don't do
the legal, auditing, tax, regulatory, or engineering work that takes place when firms are
restructured. They often are asked to coordinate such functions administratively, however. This
chapter provides some procedural guidelines for that role. A forthcoming volume in this series
will describe the substance of restructuring methods, legal/regulatory considerations, and
related economic issues in much more detail.

In Part V, planning principles that were stated at the end of each chapter have been
recompiled in a more consolidated form. Practitioners may refer to this abbreviated
compendium for quick reference or review as they go about the work of forming plans and
planning procedures for their firms. They may refer back to the text for more detailed
principles as needed.

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 chapter'ssubject matter. General acceptance of these
principles is a reflection of (1) evidence that has been assembled in empirical research, (2)
strategic management theory that is widely accepted in the academic community, and/or (3)
procedures that are customary among practicing planning professionals. As a general matter,
those factors were given weights of importance corresponding to the sequence in which they
were just mentioned. That is, empirical evidence was given the greatest weight; widely
accepted academic theory was weighted second; and customary practices were given less
weight, since one purpose of this volume is to provide practitioners with procedural principles
that may supplement, or even replace, some of their present customs. Finally, to supplement
those three sources and to resolve matters of practical application, the author drew on about
thirty years of practice as a planning professional.
When statements of planning principles were drafted, an attempt was made to distinguish
between their reliability, or degree of uncertainty. To accomplish this distinction, the following
categories of principles (and their definitions) were employed:

Axiom: 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
A description of a natural phenomenon that can be tested empirically, stated
Hypothesis: 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
practitioners—and that this chasm has been growing wider in recent years. It is time to narrow
the gap between strategic management theorists and the practitioners who, like engineers,
apply the theory that accumulates in academe. This book has taken a step in that direction.
Surely, there will be revisions and additions as we rediscover the rich sources of guidance for
planning practitioners that reside in the strategic management literature and harvest them in
these guidelines.

Part I
Foundations of Methodology Foundations of
Methodology
The community of strategic planning practitioners, although amorphous, is very large. A
survey conducted by our firm in 1995 found that 88 percent of 368 publicly owned industrial
corporations had formal strategic planning programs (Roney, 2001). Moreover, that proportion
had been growing in recent years and probably is approaching 90 percent today. Indeed,
Rigby (2001) also reported that his survey, conducted in 2000, found the incidence rate in
North America to be 89 percent.

Those results should not be surprising. Try to imagine a chief executive standing before his
shareholders at an annual meeting, or a meeting of securities analysts, saying something like
the following. “Frankly, we really don't do strategic planning in our firm; and we don't have a
formal plan of business—no goals and no deliberate strategy. Instead, we're opportunists:
we're fast on our feet and take things as they come. I like to manage by walking around,
rather than focusing on any particular direction at a time.” Most would agree that any chief
executive who made a remark like that, without joking, probably wouldn't be employed much
longer. A large majority of senior business executives in fact do practice formal planning; as
observed earlier, mostcorporations of any significant size have formal plans of business. They
also have staffs of professional managers who administer and facilitate planning procedures.

This book has been written for both senior executives and serious planning professionals, as
well as academic methodologists. It provides a comprehensive collection of methodological
principles for conducting a firm's planning functions. In this, first of four parts, there are four
chapters on the foundations of comprehensive commercial planning—historic perspective;
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 didn't 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 firm's commercial success—by either increasing upside performance potential
or reducing downside risk—are reviewed. The purpose of planning is to realize both of those
benefits. A related discussion addresses the firm's economic mission and the role that
comprehensive planning can play in helping the firm to accomplish its mission successfully.

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 model—also a bedrock of the remaining chapters—is
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 firm's highest
potentialmight be. Each approach—deterministic and incremental, deductive and inductive—
can 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 because—being so
rational and deductive—it 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.

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.

EVOLUTION OF MODERN CONCEPTS

The Pennsylvania Railroad's management formed a corporate structure to perform long-range
planning functions in the 1860s and the 1870s (Chandler, 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.

Fayol's 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, Fayol's
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.

Fayol's 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 Fayol's plans were much more than simple quantitative exercises; they
contained integrated strategy statements. The first year of a plan's 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 interconnected and updated
regularly. Fayol's methods were so novel and successful that he was appointed to the French
Legion of Honor (Chevalier in 1888 and Officer in 1913). 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 Fayol's 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 today's business planning functions in American corporations before
the turn of the twentieth century and that Fayol had implemented planning practices in the
late 1860s—well before World War I. Therefore, the transference of military planning
techniques to business may have strengthened American management's 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” (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. Ansoff's 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 post-World 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 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
contingency's 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 plan—at 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 study's 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 1993-2000. In North America, the incidence
rate had reached 89 percent in 2000. Satisfaction levels were reported to be quite high (about
89 percent).

EXHIBIT 1.1 Emergence of Formal Planning in Countries Other than the United
States

No. of
Incidence
Companies
Region/Country Author(s) Survey Year N1 N2 RR Pct.
Foo Check-Teck
P. H. Grinyer
ASEAN Region 1988-89 1300 325 25% 100%
Peter
McKiernan
Filip Caeldries
Belgium R. von c. 1986 1000 124 12% 66%
Dierdonck
Robert
Denmark Ackelsberg c. 1987 NA 12 NA 100%
William Harris
H. 15%-
France c. 1968 790 371 47%
Schollhammer 70%
W. H. Strigel
Germany I. Bamberger 1965 NA 1600 NA <20%
Eduard Gabele
Werner Keppler 1973-74 289 181 62% 35%
D. N.
Greece Koufopoulos 1991 231 62 27% 69%
Neil A. Morgan
Japan Toyohiro Kono 1975 536 74 14% 57%
D. Jan Eppink
Netherlands Doede Keuning c. 1974 20 20 100% 85%
Klaas de Jong
C. H. Wee
Singapore Seok Kuan Lee c. 1987 749 223 30% 56%
John U. Farley
B. W. Denning
United Kingdom 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 1994-1996, 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. Theincidence 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 Branch's (1962)
The Corporate Planning Process. (Professor Branch received the first doctorate in planning
awarded by Harvard University.) Complete in its treatment of methodology, Branch's text
discussed planning's 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

Andrews' theoretical work, The Concept of Corporate Planning (1971), Branch's text—which is
far more definitive—predated Andrews' by nearly a decade. Immediately after Andrews' text,
two others—more along the lines of Branch's—were 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
Ansoff's first text, published in 1965 (followed by subsequent versions in 1979 and 1988).
Even more systematic and procedurally definitive were Argenti's two texts (1969, 1974).
Particularly helpful was Argenti's 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 objectives”—following Drucker's (1964) work—
established procedural principles for harmonizing organizational resources in the
implementation of goal-seeking strategy (Odiorne, 1961; Morrisey, 1977; Giegold, 1978).
Borrowing from McGregor's (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 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 firm's 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 firm's
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” containingcomprehensive summaries of business
planning principles. The first of those texts was Drucker's The Practice of Management (1954).
As noted earlier, Melville Branch's text (1962) also was a landmark. Ansoff's Corporate
Strategy followed in 1965. Unquestionably, the most comprehensive methodological treatment
of comprehensive planning principles to date was Steiner's (1969a) three-volume work, Top
Management Planning (updated in 1979 under a slightly different title). Steiner's survey of
“pitfalls” in planning (1972) isolated a variety of procedural reasons for lack of success from
planning procedures.

Whereas Steiner's approach was from the practicing professional's 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. Ansoff's 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, maintaining, 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
(1964-1973), the Arab Oil Crisis (1974-1975), a stock market crash (1987), collapse of the
savings and loan industry (1991), and two deep recessions, in 1982-1983 and 1990-1991.
Critics of business planning chided the planning profession's inability to anticipate and deal
with those crises. Eventually, it became fashionable to discredit commercial planning and
professional planners for a host of sins—from intellectual arrogance to the failure of CBP to
insulate firms' performance from recessions (Kiechel, 1982; Peters and Waterman, 1982;
Mintzberg, 1994c). In retrospect, it would seem that strategic planning was blamed for being
too rational in a period of economic irrationality. Nevertheless, in the 1980s, planning
departments often were downsized or disbanded. This period is designated as the “Dark Ages”
of CBP in Exhibit 1.2.

After the classical methods were discarded, objectives no longer were necessarily static.
Rather, they were subject to frequent change, reflecting volatile social and economic
environments, where “uncertainty” became an important issue in policy making (Boulton et
al., 1982; Bourgeois, 1985; Camillus and Datta, 1991; Downey et al., 1975; Duncan, 1972;
Thurow, 1995). But in those firms where the regimen of classic business planning methods
had been discarded, no other methodology arose to take its place. Thus, lacking in viable
navigation aids, many managements floundered strategically in the recession of 1981-1982
and afterward. The very mission of commercial planning itself became unclear; and many
professional planners lost their identities, as well as their jobs.

EXHIBIT 1.2 Evolution of CBP Concepts in the Twentieth Century

Emergence of Business
1860 - Pennsylvania RR forms a planning office
Planning
ca. - H. Fayol uses comprehensive business plans to manage
1865 French mining companies
1903 - DuPont forms Corp. Development Dept.
- H. Fayol's mgt. principles include business plans; CBP
1916
procedures: 5-10 yr. planning horizon
Evolution of the CBP
1945 - WWII ends
Concept
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
1965 - G. Odiorne: Management by Objectives
planning practices
1969 - G. Steiner: Top Management Planning
1969 - J. Argenti: Systematic Corporate Planning
1970 - R. Ackoff: deterministic methodology
- Ansoff et al. and Thune and House: first research
1970
demonstrating financial impacts of CBP functions
1972 - Ansoff: “the concept of strategic management”
1970- - Many other empirical studies of principles planning vs.
“Generally accepted” CBP
81 financial performance mainly confirm CBP's 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
- B. Wernerfelt: resource-based view of competitive
1984
advantage
Immediately after the 1981-1982 recession, a wave of acquisitions by means of leveraged
buyouts (LBOs) swept over America (Curran, 1990; Faltermayer, 1991). As this wave swelled,
“corporate planning” departments became “corporate development” departments. Corporate
planners' skills were refocused on the task of identifying opportunities to acquire and/or divest
businesses in order to “maximize shareholder value” as quickly as possible. The result was a
transformation of many in the corporate planning profession into a new breed of financial
gunslingers—investment advisors whose purpose often was to conduct acquisition/divestment
searches and to assist top management in effecting transactions. Many planning professionals,
whose traditional role was to administer a rational, deliberative discipline in pursuit of an
enterprise's long-term well-being, became financial mechanics in search of the quick buck.

In the late 1980s, low-quality acquisitions and divestments—and the financing vehicle that
enabled them, the undisciplined issuance of “junk bonds” to effect LBOs—came to an abrupt
halt, when adverse consequences of high risks inherent in those vehicles were realized by
many lending institutions that suffered huge losses. Stock markets collapsed in October 1987.
Previous pillars of the industrial community, such as Allis Chalmers, International Harvester,
Youngstown Sheet and Tube, Jones and Laughlin Steel, Fruehauf, Revco, TWA, Braniff Airlines,
Continental Airlines, R. H. Macy Co., and Wickes Corp. suffered financial catastrophes and
bankruptcy. The result was intense risk aversion by both lending institutions and industrial
treasurers. By 1990, sources of highly leveraged acquisition funding had withdrawn from the
market. The torrent of LBOs and junk bonds ended, and the gunslingers again were
unemployed.

EXHIBIT 1.2 continued

1986 - A. Rappaport: shareholder value as a primary goal

“Dark Ages” of 1981- - LBOs and junk bonds. Corporate “planning” becomes “corporate
CBP 90 development.”
1982 - “Corporate Strategists Under Fire” Fortune, 12/27/82
1994 - Mintzberg: The Rise and Fall of Strategic Planning
Renaissance of - Hamel and Prahalad: “competing for the future” with strategic
1994
CBP intent and core competences
1992 - Emergence of Strategic Planning Technology

In Search of a New Concept

In the first half of the 1990s, there has been a renewed interest in the discipline of
comprehensive commercial planning; and the commercial planning profession has regained
some favor (Houlden, 1995). However, when this book was written, management professionals
and academics still had not found a planning methodology to meet industry's current needs
any better than those that existed in the 1980s. However, many of the generally accepted
commercial planning principles that existed in the 1970s and early 1980s have been forgotten
or discarded. The planning profession and academic methodologists seem to be groping for a
new approach that is grounded in classical principles—deliberate and rational, as before—but
updated to reflect modern information technology, and the need for more effective responses
to rapidly changing business conditions. Such an approach has emerged with the aid of
modern information technology; it is described in Chapter 4 of this volume.

In the 1990s, it became much easier, technologically, to conduct comprehensive planning

functions according to classical principles than when those principles initially were formulated.
With personal computers, data storage technology, electronic planning software, and the
Internet, classic planning procedures that earlier could not keep up evidentially or
administratively with environmental change can do so fairly easily (Roney, 2002). Therefore, it
is time for the commercial planning profession again to take an inventory of classic business
planning principles and define a more conventional, “neoclassical” methodology, appropriate
for the present decade. At the same time, any such inventory of planning principles also must
reflect an abundant body of empirical knowledge regarding the efficacy of alternative planning
methods accumulated by researchers during the past quarter century. The resulting
“neoclassical” methodology should reflect both classical planning principles and the facilitation
of planning work that can be accomplished by information technology. In this volume such an
inventory has been collected; and an updated collection of generally accepted commercial
planning principles has begun to re-emerge. Many of the classic principles remain quite
satisfactory. Where they no longer meet current needs, however, it is time for academic
researchers and other methodologists to fill those voids.

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

in other political systems. Rather than government, private stakeholders and management
make such choices in a free enterprise system. Through their purchasing decisions, consumers
of goods and services decide which firms succeed in their missions and which ones fail. As
Drucker (1946; xii, 16, 17) observed, this simple description has farreaching implications for
management; and that is especially the case for commercial planning professionals. Exhibit
1.3 provides a list of twenty companies that were industry leaders in 1955. None of them
existed in 1995, although a few reemerged after bankruptcy as entirely different companies,
retaining only their old names (e.g., Greyhound, Insilco, Penn Central). Indeed, only about 20
percent of the companies on Fortune's 500 list in 1955 were on the list in 1995; that survival
rate still applies today.

The implication of this corporate obituary is quite dramatic. Even companies as large as those
among the Fortune 500 may not survive as leaders for as long as a single manager's career.
The mortality of smaller companies is even more severe. What accounts for this tendency of
companies to fall by the wayside? The answer is that a sort of Darwinian

EXHIBIT 1.3 Twenty Companies That Failed

1955 Fortune 500 Last

Company Disposition
Rank 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
Acquired by Terex
Fruehauf 165 1989
Corp.
Greyhound Chapter 11 **
Int'l Silver Chapter 11* 436 **
Int'l Harvester Chapter 11 23 1986
Jones and Laughlin Steel Assets bought by LTV 42 1968
Kaiser Steel Chapter 11 255 1988
Partial sale to Nippon
National Steel Corp 54 1984
Kakon
Pan Am Airlines Chapter 11 1991
Penn Central Chapter 11 — **
Acquired by Ford and
Philco 90 1961
EMI
RCA Acquired by Sony 26 1989
 1955 Fortune 500 Last
Company Disposition
Rank Year
Republic Steel Acquired by LTV 21 1984
Studebaker-Packard Failed 75 1963
Uniroyal Liquidated 1986
Wickes Chapter 11* — 1981
Assets bought by Lykes
Youngstown Sheet and Tube 55 1969
Corp.
* after LBO failure ** reorganized
successfully in a new form

natural selection occurs. Over a long time, only the most fit tend to survive. Others fail. What
makes one firm “fit”, and another unfit, to survive is the survivor's distinctive competence to
supply goods and/or services to some segment of society that demands them (Selznick,
1957:5). Only those businesses that are the most competent to perform their economic
missions will survive, in the long term. The source of distinctive competence, in turn, probably
is a combination of valuable, unique, inimitable resources that are both physical and
intellectual in nature (Penrose, 1959; Wernerfelt, 1984; Rumelt, 1984; Barney, 1986a, 1991;
Dierickx and Cool, 1989; Peteraf, 1993).

There is a vital corollary to the foregoing statements. The mission of a firm, in free enterprise,
is to survive. But, survival—at least in free enterprise competition—usually is possible only
when a firm performs an economic function, that is, supplies specific goods or services
required by society, more competently than other firms that also attempt to survive by
performing the same function. Thus, the firm's “mission” is its socioeconomic function, and a
basic requirement of management is to select a mission that offers the firm its best prospects
for survival. In short, firms should undertake missions for which they are most competent and
acquire or develop the competences that endow them with sustained competitive advantage in
performing their missions.

Economic and industrial history tell us a lot about business missions. Lester Thurow (1992,
1995) wrote about industrial missions that had been, but no longer are, feasible for American
Industry. Throughout their volume, Hamel and Prahalad (1994) also wrote about industrial
missions that were feasible for American firms, but still were ceded to foreign competitors in
the 1980s, due to poor long-range planning. With a better planning methodology, those firms
might have been more competitive in global markets during the 1980s, since sound planning
should have resulted in more effective alignments of physical and intellectual resources to
emerging market conditions. Thus, it seems that excellence in planning itself can confer a
competitive advantage.

Survival of the Enterprise Through

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

The purpose of comprehensive commercial planning is to increase the probability of an

enterprise's long-term survival by improving its economic viability—that is, by improving the
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 firm's 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
1970-1983, 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 1939-1949 were more likely to have had
formal planning programs than were companies with low growth rates. When slow-growth
companies in that period became fast-growth companies in 1949-1956, 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.

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 non-planners' 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 plan

EXHIBIT 1.4 Results of Planning- Performance Research in Specific Industries, 1970-

1989

Industries Industries
Dates in Which in Which Measure of
of Planning There Was Planning
Improved No Benefit
Sample
Authors Pub. Study Sales* Returns** Sales* Returns**
Size
Drugs Food Oil
Thune & Drugs Food Oil
36 1970 1958- 65 Chemicals Steel Discrete***
House Chemicals Steel
Machinery Machinery
Drugs & Drugs &
Herold 10 1972 1962-69 — — Discrete***
Chemicals Chemicals
Durables &
Fulmer & Durables Nondurables
314 1973 1970-72 — Nondurables Discrete***
Rue Mfrs. Mfrs.
Mfrs.
Machinery Machinery
Karger & Electronics Electronics
38 1975 1964-73 — — Discrete***
Malik Chemicals Chemicals
Drugs Drugs
Klein 58 1975 1970-74 Sm. Banks — — Sm. Banks Composite Scale
Kallman &
298 1978 1965-74 — — Trucking Trucking Composite Scale
Shapiro
Aus.
Burt 14 1978 1974-76 — — — Composite Scale
Retailers
Wood & 3 Categories of CBP
41 1979 1972-76 — Lg. Banks — —
LaForge development
Sapp & 4 levels of CBP
302 1981 1980 Banks Banks — —
Seiler development
Robinson &
38 1983 1977-79 — — Sm. Banks Sm. Banks Discrete***
Pearce
Composite scale of
Fredrickson
27 1984 1979 — — (Sawmills) (Saw mills) comprehensiveness—
& Mitchell
unstable industry
 Composite scale of
Paint & Paint &
Fredrickson 38 1984 1981 — — comprehensiveness—
Coatings Coatings
stable industry
Whitehead Sm.
Sm.
& Gup Gup 253 1985 1983 Banks
— Banks Lg. Discrete***
& 253 1989 1983 (Lg.
Banks
Whitehead Banks)
Bracker & 1977- Dry 4 categories of CBP
188 1986 Dry Cleaners — —
Pearson 81 Cleaners development
Bracker, Sm
1979- Sm Elect'cs 3 categories of CBP
Keats & 73 1988 Elect'cs — —
84 Cos. development
Pearson Cos.
Metals Auto
Parts Bldg Bldg
1994- Composite scale &
Roney 157 2001 Metals Construction Comp's Comp's
95 Discrete***
Envir. Machinery Machinery
Services
LEGEND:
* Refers to
growth of
deposits in
banks,
revenues in
all other
industries.
. ** Refers
to both
profit
margins and
rates of
return.
*** 2
categories—
planners
and non-
planners ()
Refers to
industries in
which
planning
impaired
sales and/
or returns;
in all others,
there were
no
significant
differences.
ning and the largest firms benefited least. But, among non-planners, size alone distinguished
the best performers: the largest non-planners 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 “planning-performance 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 don't 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, ” impactsof practice
variables—such as experience in planning, frequency of review, and linkage of incentives to
objectives—can 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 plan's 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
buildingcomponents 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 industry's 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 discipline—and approaches
to maximizing its benefits—should 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 America's Civil War was ending. But,
comprehensive commercial planning, in itspresent 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 firm's 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 1981-1982, 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 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

Comprehensive commercial planning (CP) is a management discipline, indigenous

to modern business administration. It evolved, as firms grew in size and
Axiom 1.01 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.
The purpose of CP is to discover how a firm's resources should be deployed in
Axiom 1.02 future environments so as to maximize its competence to perform a stated mission
for society and, thereby, its long-term survival.

Postulates
 The 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
Postulate 1.01 define success in performance of the firm's 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.

Due to its insistence on evidence and syllogism—and the dynamism of

business information in turbulent economic environments—the classic model
Postulate 1.02
can be administratively impractical because of the limited amount of external
information that a firm can attain, process, and interpret.
Business planning decisions are made partly to develop and deploy internal
Postulate 1.03
resources in pursuit of competitive advantage and maximum economic return.
Business planning decisions are made partly in pursuit of favorable positions in
Postulate 1.04 economies, industries, and markets where the firm is or may be located. Those
environments change continuously, however.
A realistic range of potential significant changes in the environment
Corollary 1.041 (contingencies) can be described. Alternative strategies can be defined for
each contingency.
As the number and complexity of contingencies increase, so do the number
Corollary 1.042
and complexity of possible contingent strategies.
As the number of contingent strategies increases, a threshold of administrative
Corollary 1.043
infeasibility is approached.
The threshold of CP administrative infeasibility is a function of the firm's
Corollary 1.044
information technology and its administrative management abilities.

Hypotheses

Comprehensive business planning (CBP) can exert any of three impacts on

Hypothesis 1.01
revenue, market share, profit margins, and return on investment:
—Performance enhancement in stable or expanding markets

—Resistance to industry/market downturns or recessions (risk reduction)

—Performance impedance in either of the above conditions
Firms' tendencies to realize enhancement, risk reduction, or impedance
Hypothesis 1.02 impacts of CBP functions are contingent upon the following internal, firm-
specific variables:
—Firm size
—Financial condition/resources
—The firm's relative level of asset-intensity
—Management experience in planning functions
—The level of senior management involvement in planning functions
Firms' tendencies to realize performance enhancement (“affirmative”), risk
Hypothesis 1.03 reduction (“protective”), or impedance impacts of CBP functions are
contingent upon the following variables in the external environment:
 —The industry's economic structure
—Relative stability of the industry and its markets
—Relative uncertainty of the firm's industry and markets
—Complexity of the firm's industry and market structures
—Phase of the economic cycle (expansive or recessive)
Firms' tendencies to realize performance enhancement or impedance effects of
Hypothesis 1.04 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

Affirmative benefits of CBP functions are most likely to occur in the most
Hypothesis 1.05 “asset-intensive” industries, i.e., those in which asset values are relatively
high in proportion to revenues.
Affirmative benefits of CBP functions are most likely to occur in stable (versus
Hypothesis 1.06
unstable) industries and markets.
Protective benefits of CBP functions are most likely to occur in intensely
Hypothesis 1.07
cyclical industries and markets characterized by the greatest uncertainty.
Impedance effects of CBP functions are most likely to occur in industries and
Hypothesis 1.08
markets with unstable (versus stable) structures.
Negligible impacts of CBP functions on financial performance are most likely to
Hypothesis 1.09
occur in highly regulated industries.
In a given industry, firms that employ information technology to perform
Hypothesis 1.10 planning functions will exhibit more persistence (lower termination rate) and
greater effectiveness (attainment of objectives) in CP functions.

2
The Planning Process
This chapter has two objectives: to explain some basic concepts of comprehensive commercial
planning and to describe a three-stage procedural model in which those concepts are applied.
Both objectives are critical because they will reappear throughout the following chapters.

The notion of “comprehensive” commercial planning is addressed first. Commercial planning—

like planning done in the public sector by government agencies or military organizations, for
example—attempts to discover how all of the firm's capabilities and resources can be deployed
within the foreseeable external environment, so that the firm's 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.

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 former's scope includes all units in a multi-business enterprise, while the
latter's 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 firm's management has selected a
mission before these procedures begin. “Mission” refers to the economic function that a firm's
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 firm's 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 contract's fulfillment and renewal.
Three-Stage Process Model
Comprehensive planning is a system of ongoing managerial procedures, which include three
types of activities:
• Gathering evidence—Acquisition and interpretation of the evidence regarding internal
capabilities of the enterprise and external business conditions needed to make planning
decisions;
• Decision making—Selecting from alternative mission success standards (goals) and
approaches for pursuing them (strategy); and
• Implementation—Defining 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.

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 firm's 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 enterprise—all of its resources and all of their functions—to predefine the firm's 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
enterprise's fundamental goals as well as its approach to their accomplishment—essentially,
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. Mintzberg's 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 firm's
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 firm's management style.

Comprehensive Planning Is Neither Long-Range

nor Strategic Planning
A sound plan is founded on a solid understanding of the firm's present capabilities, as much as
it is on an appraisal of future requirements. 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 validation—an 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 enterprise's 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 firm's
eventual failure, simply because internal and external business conditions change continually.

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, Steiner's 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 short-term 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

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
organization's 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 mission's
goals, tactics to accomplish strategy and achieve its objectives, and budgets to control the
current use of resources. We don't 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 plan's length to the organizational level at which
it is prepared. At each level, plans' terms extend from the current to long terms—with one
exception. We don't 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

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 2.1-2.3 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 floor—where department plans reside—is 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, it's no wonder that methodologists have failed to find
a generally accepted terminology for all the elements of commercial planning! This is why we
prefer to use the term, 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

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 firm's external environment. Usually, the scope of such an appraisal includes
relevant aspects of global, national, and/or local economies; structural characteristics of the
company's industry (including the nature of competition, regulation, technology, etc.); and an
assessment of demand for the company's products or services in relevant markets. None of
these—economy, industry, or market—is within management's control; but management still
can understand their impacts on the firm's performance potential and prepare for foreseeable
changes in them.

Also in this first phase, management conducts a critical analysis of the firm's capabilities,
including its physical and intellectual resources in each internal function, and forms
conclusions regarding competitive

Figure 2.6 Comprehensive Planning: Three-Dimensional View

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 strengths, and
weaknesses.
Stage II. Make Essential Planning Decisions
GOALS: Predefined descriptions of success: level
of risk, financial results, market position, and
long-term growth.
Stage III. Deliberate, Orderly Implementation
PROGRAMS OR PROJECTS: Statements of
intended action to implement strategy, including
responsibility assignments, schedules, costs, and
benefits.
EXTERNAL: Diagnoses of problems and
opportunities in the present and foreseeable
economy, industry, and markets.
STRATEGY: Management's approach to
achieving goals and rationale for selection
from alternatives; contingency planning.
CONTROLS: Monitoring and assessment of
progress toward strategic objectives and
programs' completion; perpetural
replanning.

strengths and weaknesses. Only elements of the business under management's control and
only those that are relevant to competitive success or failure are included in such an analysis.
In essence, we are interested here in taking an inventory of competences and limitations that
might influence the firm's competitive position favorably or unfavorably and management's
ability to implement strategy effectively. (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 management's general approach to accomplishing its goals—the scope of work required and
a rationale for selecting the approach to be taken rather than alternatives. (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 with vital functions of
an enterprise—such 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

Stage III.
Implementation
Stage III consists of devising and executing procedures to implement management's 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
objectives—and therefore goals—are 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 profit—lines 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 alsomonitors 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 plan's 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 firm's relevant economy, industry
conditions, and markets for its products or services;
— Internal: assessments of critical capabilities—functional 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 plan's primary theme.

COMMERCIAL PLANS' MANY USES

The most common use of comprehensive business plans—and the one to which we will refer
most in this volume—is as a decision-making guide regarding allocation of valuable resources
in pursuit of strategic objectives during the conduct of intended managerial functions
throughout a firm. However, the number of uses—and users—of 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 organization's 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
firm's performance potential while controlling its risk.

SUMMARY
Comprehensive plans have three essential ingredients: evidence regarding internal and
external business conditions upon which to pred-icate planning decisions; planning decisions
themselves, including predefined descriptions of success (goals) and management's 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 firm's resources
are focused on achieving objectives. As CP also is adaptive to the firm's 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
A systematic procedure for selecting goals and strategies
Comprehensive
that predefine the future success of an enterprise and
Definition 2.010 Commercial Planning
for making current decisions to implement strategies
(CP)
deliberately though predefined, goal-oriented work.
Comprehensive CP principles and procedures for individual business
Definition 2.020 Business Planning units within multi-business enterprises (MBE) or for
(CBP) single-unit enterprises in their entirety.
Comprehensive
CP principles and procedures applied at the corporate
Definition 2.030 Corporate Planning
level of a multi-business enterprise (MBE).
(CCP)
A predefined description of commercial success for an
Definition 2.040 Goal
entire enterprise (MBE or single business).

An approach, that includes the directed, coordinated work

Definition 2.050 Strategy required to pursue one or more goals, supported by a
rationale for selecting the approach to be taken.
Instrumental A single task required to implement a portion of a
Definition 2.051
Activity strategy.
Definition 2.052 Objective The intended result of an instrumental activity.
A collection of instrumental activities that share common
Definition 2.053 Functional Strategy association with a specified function of the enterprise,
such as production, distribution, sales, or research.
Definition 2.060 Strategic Objective The intended result of a functional strategy.
Goals are the ultimate objectives of a firm's entire
Corollary 2.061
strategy.
A documented result of the CP process, including a firm's
Comprehensive goals, strategy, and implementation elements, supported
Definition 2.070
Commercial Plan by evidence from internal and external business
conditions assessments.
Implementation A collection of interrelated instrumental activities with an
Definition 2.081
Project ultimate chronological objective.
Implementation A collection of interrelated instrumental activities with no
Definition 2.082
Program ultimate chronological objective.

Predefining alternative strategies to replace a prevailing

Contingency strategy if and when business conditions (internal or external)
Definition 2.090
Planning render the prevailing strategy less appropriate than a
contingent strategy.

GENERALLY ACCEPTED PLANNING

PRINCIPLES: PURPOSES AND
POSSIBILITIES OF PLANNING
Axioms

The firm's mission, in free enterprise, is to survive by supplying specific goods

and/or services to a served market more competently than do other firms
Axiom 2.01 attempting to perform the same mission. An informal “contract” between the firm
and society is renewable as long as the firm meets the contract's performance
requirements.
The CP process includes assembly of relevant decision-making information,
selection of intended success standards (goals) and approaches to goals'
Axiom 2.02
accomplishment (strategies), definitions of deliberate actions to implement
strategies, and perpetual reiterations of this process.
CP treats the firm as a whole entity in which individual functions are vitally
Axiom 2.03 interrelated—necessary but not, by themselves, sufficient elements of the firm or
its plan.
CP principles are unique to the private sector. Planning principles that are
appropriate in government organizations (civilian or military) and government-
Axiom 2.04
owned enterprises are not necessarily applicable in the private sector, and vice
versa.

Postulates

Comprehensive commercial planning (CP) increases the probability of a firm's

Postulate 2.01
survival by effectively matching internal resources and com

Over time, goals degenerate into strategic objectives, strategic objectives into
simpler objectives. Eventually, all objectives are replaced by others. This
Postulate 2.02
perpetual degeneration and renewal of goals and objectives continues for the
life of a firm.
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
Postulate 2.03
rational process, it employs objective evidence wherever that is possible. The
evidence considered describes a firm's internal capabilities and resources as
well as its external environment—in both the present and the likely future.
The CP process can occur at two levels: planning for single businesses (CBP)
Postulate 2.04
and for entire corporations (CCP) within which multiple business units exist.
CBP (comprehensive business planning) goals include acceptable levels of risk,
Corollary 2.041
financial return, market position, and long-term growth for a single business.
CCP (comprehensive corporate planning) goals include acceptable levels of
Corollary 2.042 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.

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 firm's economic mission. Next, they consider evidence
regarding internal resources and environmental conditions. Based on the firm's 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“best” selection because
business organizations are prohibitively complex and dynamic—and 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
intuitively—spontaneously, insightfully, and opportunistically—but 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 firm's 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 firm's 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 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 resources—permitting
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
firm's surplus (“slack”) resources afford some latitude within which objectives that are
acceptable to all negotiators may be found. The amount of a firm's slack determines
management's 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 management's 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 firm's 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.”

Friedmann's 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
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, Friedmann's 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 natureof 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 Carter's prescription for responding to uncertainty and
complexity through more comprehensive planning, was correct (Grinyer et al., 1986; Kukalis,
1991).

Surely, strategy is conceived both developmentally—that is, as part of a formal process—and

adaptively—that 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 planning—including strategy conception—occurs

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)

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 goal's 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 CEO's timing of implementation, rather than the logical
process by which goal selections occur.

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 Mazzolini's 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 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 industry's 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 manager's challenge is to develop
an approach that fits the firm's specific needs and circumstances (Steiner, 1979:53-79;
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 formulation—that is,
deterministic versus incremental, rational versus political, elicited versus emitted—within 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 conditions—including
internal capabilities and external problems or opportunities—is 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 firm's highest performance
potential. Failure to make such basic decisions probably would be viewed by many as
dereliction of top management's duty (Lauenstein, 1986) because—without goals and strategy
—a firm lacks essential direction and functional cohesion. As time passes, however, new
approaches to objectives and new goals will evolve—usually, incrementally. Thus, for the
classi-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
firm's 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

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.1a-A.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.

Ansoff's (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 Ansoff's 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, Ansoff's original model is no longer
generally accepted. However, in many other respects, Ansoff pioneered strategic
managementmethodology; 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. Smalter's 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 Ansoff's
(1965) model, Smalter's placed the definition of goals and objectives after assessments of
internal capabilities and the external environment—a much more informative arrangement,
which now is generally accepted.

Smalter's 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 Smalter's model, long-range and short-range planning are integrated.
The pragmatism of Smalter's 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 Smalter's 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. Steiner's models are
essentially rational and define several management decision-making steps in the planning
process. Exhibit A.4, in the Appendix, taken from Steiner's text (1979:17), is perhaps the
most succinct and complete of several versions that he published. Steiner's model is important
for several

Source: Reprinted from Long Range Planning, Vol. 1, No. 3, D. Hargreaves, “Corporate
Planning: A Chairman's 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 holders—a factor not
included in prior models. Third, it demonstrates that medium-range 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, Steiner's model is a heuristic one. His text
(1979) also provided several diagrammatic representations of how planning procedures unfold
at levels of top corporate management and line operations. Similarly, roles of the corporate
planning department and division planning staffs are portrayed in Steiner's 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, Ansoff's texts are full of
detailed diagrams that define strategic decision making, they look very much like a computer
programmer's flow charts.

Perhaps the latest refinement of classic decision models was provided by Grinyer (1971).
Grinyer's 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 firm's 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

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.

Rhyne's (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 andclassic procedures fell into some disrepute—not 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 aids—all 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 business—including economic, industry, and
market conditions, as well as operating conditions throughout the firm—or 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 two—with 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 emphasiswill be appropriate depending upon the
firm's 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 management's 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 firm's essential approach to planning. If strategy evolves
completely autonomously, the firm will be like a ship without a rudder—without 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 firm's basic approach to strategic planning
will be. Deterministic or incremental? Elicited or emitted? Rational or political? From this
decision, all of a firm's 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.

GENERALLY ACCEPTED PLANNING

PRINCIPLES: PRINCIPLES OF CLASSIC
PLANNING MODELS
Definitions

Adaptive planning methods are environmentally focused. While they do not

deny the efficacy of resource-based methods, they are more concerned with
Definition 3.01
positioning the firm advantageously to exploit opportunities and minimize
problems in foreseeable economic, industry, and market conditions.
Integrative planning methods are primarily resource based. They seek to
develop capabilities and other resources that are so valuable, inimitable, and
Definition 3.02
invulnerable to environmental uncertainty that they invest the firm with
sustained competitive advantage in multiple environments.

Postulates

The CP process is both integrative and adaptive: it draws analytic evidence

from the enterprise and its external environment about the adequacy of
Postulate 3.01
internal capabilities, and then implements strategic decisions by developing
new capabilities and deploying resources.
CP is essentially a rational process in which management attempts to achieve
Postulate 3.02 a favorable balance between the firm's internal capabilities and its
environment.
CP is a deterministic discipline. Management selects from alternative uses of
Corollary 3.02.1 resources and selects actions that it believes will maximize the likelihood of
desired future outcomes.
Because business conditions within and outside the firm evolve continually,
plans also must change continually. No plan will remain appropriate for a
Corollary 3.02.2
firm's business conditions indefinitely. CP is therefore a continuous process of
rational decisions to form and implement new strategy.
Because it responds to analytic evidence about problems and opportunities in
Corollary 3.02.3
an evolving ex
 Strategy induces “search” behavior as managers take action to implement
strategy. In that process, entirely new concepts of goals and strategy may be
Postulate 3.03 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

Strategic planning processes that are the most adaptive will be found in firms
Hypothesis 3.01
that are commercially more successful than other firms.
Rational, deterministic approaches to strategy are more effective in improving
Hypothesis 3.02 performance potential than are political, intuitive, and/or incremental
approaches.
To fulfill its missions of minimizing risk and maximizing performance potential,
the CP process will differ between firms based on their intrinsic resources'
Hypothesis 3.03
size, slack, uniqueness, and permanence, on one hand, and, on the other
hand, economic, industry, and market conditions.

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.

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 practical—no 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 1943-1956. In that generation, each new
computer's 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

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 (1964-1974) 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 (1975-
1985) 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 computingsystems
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 Oracle's
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 Ansoff's background, for instance. Ansoff was a pioneer in
developing classic strategic-planning 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, Ansoff's 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 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 corporations—and most smaller ones—were unable to follow the classic syllogistic model
of strategic planning and keep up with the rapidly changing pace of business. 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 abandoned—not 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
writeapplication 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 basis—
making 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 firm's 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 andprogramming 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 wasn't
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,
Oracle's 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 toexploit 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 pieces—computers, software, data storage devices,
and data communication systems—fell 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

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 co-relationships between a multitude of variables in the firm's
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 firm's 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 berealized 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 divisions
—even those operating in several countries—to 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 mail—and 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 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 planning's state of
the art hasn't 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 firm's 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 author's 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
industries—especially those that are relatively mature, such as construction, steel, chemicals,
and forest products. In addition, numerous privately owned databases are offered
commercially; these can beused to assess individual companies as well as entire industries
and markets.

Well-known vendors of economic and industry data include Standard & Poor's, 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
Manufacturer's News, Inc., or Dun and Bradstreet Corporation. D&B data also are available
online; Manufacturer's 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 firm's 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 & Poor's and Value Line can be used for such benchmarking
applications. Rigby's (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.

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 manager's 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
systems—and 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 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. Many—like the BLS forecast—are 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 Department's 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.

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 planner's toolkit
—including 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 firm's 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 firm's financial
statements and project them according to the individual analyst's 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.

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), Porter's (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 firm's 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 firm's 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 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
usedto 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
available—and 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 projects—for 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
don't 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.

Since it is generally recognized that implementation is often the weakest link in strategic
planning methodology, the advent of cost-effective, 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 plan—including 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 comprehensive 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 1984-1989.

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.

The confluence of these four technology streams—computing hardware, software, data

storage, and data communication technology—provided 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 1991-1993, 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

Strategic Planning Technology (SPT) is a combination of four information

technologies—computing hardware, specialized planning software, electronic
Definition 4.01 data storage, and electronic data communication—that facilitates both adaptive
and integrative planning approaches even in very dynamic environments and
complex firms.

Postulates
 Until the 1990s, information processing requirements of CP process models
were prohibitive. That no longer is true. Strategic planning technology has
Postulate 4.01 enabled the classic CP process model to be implemented more efficiently and
more effectively than when modern CP models first were articulated in the
1960s.
Benefits of SPT include: (1) the planner has direct access to computing
resources; (2) the planner can frame difficult questions and obtain immediate
Postulate 4.02 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.
Postulate 4.03 Ten categories of electronic planning aids are available:

Databases Benchmarking systems Market analysis/forecasting systems Financial

analysis/forecasting systems General purpose spreadsheets Graphic planning aids Decision
support systems Documentation systems Project management systems Progress
review/evaluation systems

Hypothesis

In a given industry, firms that employ information technology to perform

planning functions will exhibit more persistence (lower termination rate) and
Hypothesis 4.01
greater effectiveness (attainment of objectives) in CP functions than other
firms.

Source: Roney 2002.

Figure 4.3 The Availability of Electronic Data Systems to Support Strategic and Business
Planning
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
manager's job.

Chapter 5 begins with a review of the responsibilities and authorities for preparing and
approving plans of business. Ultimately, it is the chief executive's 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 level—the 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.

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 manager's 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 issues—including methods for arriving at participation and consensus,
corporate culture, management style, and resistance to planning.

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 manager's 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 firm's 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 firm's mission, goals, and
strategy must be authorized at a high level of management (Pearce and Zahra

1991; Judge and Zeithaml, 1992; Stiles, 2001). Whether that level should be the board of
directors or the firm's 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 executive's level. They were
identified by planning executives in 29 percent of these firms. (Percentages don't 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. (1987:81-85), 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%

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. (1987:81-85) 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 study's scope included planning practices by corporate and division
management of 324 companies in ten industries during 1994-1995. Corporate plans were
approved most often by the board (59%) and only half as frequently (28%) by the chief
executive. An executive committee of Top Management (probably under the CEO's 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)

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 board's backing
(and plans' approval) before making very large capital commitments and taking
commensurate risks with shareholders' equity.

During the recession of 1990-1991, 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
1983-1990 “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 board's 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 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.
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 asset-intensive 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 CEO's 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 cliché, “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 CEO's 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 executive's intensive involvement is not required. Thus, a good planning
procedure actually will relieve the chief executive of time burdens in strategic deliberations
while, at the same time, improving strategic decisions' quality.

While Pennington's 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 CEO's 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 team's 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 function's 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 profession's body of
methodological knowledge, because the planning function is uniquely within the chief
executive's 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. Steiner's classic study (1972) of “pitfalls” in
corporate planning demonstrated that over-delegation of planning responsibilities by the CEO
was the most likely reason for a planning function to fail (Exhibit 5.1). 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 O'Connor (1972)
demonstrated that

EXHIBIT 5.1 Pitfalls in Comprehensive Long-Range Planning: The Ten Most

Important Pitfalls to Be Avoided as Ranked by Respondents (N=159)

Rank Description
Top management's assumption that it can delegate the planning function to a
1
planner.
Top management becomes so engrossed in current problems that it spends
2 insufficient time on long-range planning, and the process becomes discredited
among other managers and staff.
Failure to develop company goals suitable as a basis for formulating long-range
3
plans.
Failure to assume the necessary involvement in the planning process of a major
4
line personnel.
5 Failure to use plans as standards for measuring managerial performance.
Failure to create a climate in the company which is congenial and not resistant to
6
planning.
Assuming that corporate comprehensive planning is something separate from
7
the entire management process.
Injecting so much formality into the system that it lacks flexibility, looseness,
8
and simplicity, and restrains creativity.
Failure of top management to review with departmental and divisional heads the
9
long-range plans which they have developed.
Top management's consistently rejecting the formal planning mechanism by
10
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 firm's 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 CEO's management style and as aids to
directing operations. This does not necessarily imply that the CEO must spend inordinate 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 CEO's
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 management's
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 Lauenstein's 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 firm's size and structure, the CEO's management style, the industry's 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)

demonstrated that even senior management team members' influence on the corporate plan's
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
strategy—but not goals—seems to enhance performance.

Participation of Middle Management

Regardless of whether the firm is centralized or decentralized, Vancil (1976) proposed that
strategy should become something personal—formulated by managers at all levels, corporate,
division, and departmental. Thus, each manager must have some strategic responsibilities. In
Vancil's 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

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 firm's competitive position and/or financial condition create sufficient slack
resources to afford participative management. Thus, greater participation of line managers in
planning can't 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 planner's 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
executiveand 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 relationships—
that 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 planner's 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 1984-1986, 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 withinprescribed 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 Mintzberg's (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
G + (T or
Related Products T or S
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. 31-39. Copyright ©
1989, with permission from Elsevier Science.
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 Steiner's (1972a) “pitfalls” in American firms' planning practices, Houlden (1995)
also offered a very similar list for firms in the U.K. during 1983-1993. First on the list (like
Steiner's) was the CEO's 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 firms—and occasionally even
large ones—often can benefit from the temporary or part-time services of external experts
who may play useful roles in facilitating planning functions when top management needs
either more or less assistance than a fulltime staff can provide. Bracker and Pearson (1986)
endorsed the potential benefits of external planning professionals for small firms during their
study of small firms' planning practices. However, Delany's (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 societiesthat are dedicated to commercial
planning. Societies of planning professionals have several thousand members. Moreover, in the
academic community, the Academy of Management's 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 SLF's 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 society's membership
composition and is suggestive of the various vocations where planning professionals currently
are located. Without question, SPS currently is the world's 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 society's 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 world's 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 knowledge—heavily supported by academic research, journals, and other
extensive literature—comprise 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' businessTABLE 5.5 The Strategic Planning Society: April 2002
Membership
 Number of Members Pct of total
Industrial
Manufacturing/Construction 220 7.4%
Utilities 227 7.7
Telecommunications 192 6.5
Retail 78 2.6
Printing/Publishing 40 1.3
757 25.5
Professional Services
Consultants 692 23.4
Education 339 11.4
Other 127 4.3
1,158 39.1
Other Services
Financial 355 12.0
Transportation 46 1.6
Charities 70 2.4
Other 153 5.1
624 21.1
Public Service
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 raisedregarding 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 profession's 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
profession's 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. (1987:63-64) 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 executive's 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 executivesin their decision-making functions. Remarking on the corporate
planner's 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 long-range 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 planner's role at Solvay American Corp., concluded somewhat differently: He
believed that when corporate planners actually were involved in forming a corporation's
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 increase—because of vulnerability of core technology or
complexity of the firm's structure—planning functions' analytic sophistication (and the role of
professionals for this purpose) increases, as well. They also found that, when the firm's
market shareis high (reducing risk) or when the firm is devoted to serving one or a very few
customers (reducing competitive uncertainty), 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. 351-90).

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,

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

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 CEO's ability to exercise objective decision
making are lost.
• Influence on planning decisions tends to decline with managerial distance from the
chairman's 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 company's
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 person's availability and/or other executives are disenfranchised from their
planning functions.

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 CEO's
leadership role. On the other hand, in very asset-intensive industries, board approval seems to
engender greater success than when the CEO has that authority—probably due to the heavy
financial commitments required to implement strategy and decision-makers' commensurate
political risks. 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 process—serving 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 firm's 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

The chief executive has ultimate responsibility for CP functions' design, staffing,
Axiom 5.01 and direction. However, elements of this responsibility may be delegated to
subordinate managers.

The chief executive must have at least a basic understanding of generally

Corollary 5.011
accepted planning principles.

Postulates
 Professional planning managers perform two completely different roles: (1)
Postulate 5.01 administration of the planning process (“procedural”) and (2) technical support
of actual planning functions (“substantive”).
Skills required of the planning manager are determined by the diversification
versus concentration of a firm's lines of business, its experience with planning,
Postulate 5.02
and top management style. These requirements evolve with the firm's
development over time.

Hypotheses

Board approval of strategic plans enhances profitability in asset-intensive

Hypothesis 5.01
industries, especially during recessions.
CEO approval of strategic plans enhances profitability in non-asset-intensive
Hypothesis 5.02
and/or volatile industries.
Participation of mid-level managers in making planning decisions does not
Hypothesis 5.03
enhance profitability (although it may enhance job satisfaction).
Influence on planning decisions tends to decline with management distance
Hypothesis 5.04
from the chairman's office.
Reporting relationships of planning professionals typically are to the CEO, but
Hypothesis 5.05 staff reporting relationships may be more likely to enhance plans' quality and
impacts on performance.
Procedures in which the corporate planning staff closely supports line
Hypothesis 5.06 managers' planning tend to enhance acceptance of planning by the latter. This
is especially true in high-risk businesses.
Effective implementation of a comprehensive plan requires direct leadership
Hypothesis 5.07 by the chief executive. If such leadership is not present, performance benefits
of CP functions will be minimal.

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 assistthe 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 firm's planning needs

Integration of long-range and near-term planning

Avoiding common procedural pitfalls

GETTING THE PLANNING PROCESS

STARTED
Vancil (1967) wrote a humorous, 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 Vancil's article include the following:
• The CEO is a planning department's only “legitimate” father.
• The CEO's most important initial decision is to select a bride (planning executive). It's
often best not to look outside the company for this manager, but rather to select a
“matron of proven domestic abilities” from within—in 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 CEO's style and level of involvement in rearing a new planning
department.
• In the planning department's 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 Vancil's article appeared, Von Allmen (1969) also published guidelines for “setting
up corporate planning, ” emphasizing the 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 planner's 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
company's 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 Allmen's 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 Allmen's 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, 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, Kraushar's 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 department's 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 department's performance should be monitored and communicated; it must be
demonstrated that the department is an asset rather than a drain on the company's
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) functionmust 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 firm's
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
year's 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 Vancil's 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 allocation 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 Lorange's 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 2-3 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 Wilson's procedure, formal strategic planning functions are
conducted throughout the entire year at both corporate and operating levels of management.
Wilson's approach is interesting because it includes the preparation of a “status quo”
(baseline) cash flow projection in order to arrive at a beginning point for allocating funds to
proposed projects before long-range plans are prepared in detail by operating divisions'
management. 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 procedure—an
unusual but

very pragmatic step. The chronology of planning milestones in Wilson's 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 Smalter's 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 Smalter's 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

Target
Milestone
Date
Corporate Planning Department prepares Top Corporate Management's proposed 5-
2/28
year financial objectives and (after approval) distributes them to line management.
Divisions reply, concurring or submitting counterproposals and proposed changes to
4/30
prevailing strategy.
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 for the next year, and capital expenditure 7/31
proposals.
Planning Department reports proposed capital projects and estimated free cash flow
8/31
to Top Corporate Management.
Top Corporate Management notifies divisions of capital project approvals. 9/30
Divisions submit their 5-year plans and next year's detailed operating budgets, which
11/30
are reviewed and approved.
 Target
Milestone
Date
Planning Department issues next year's budgets and revised corporate five-year plan. 12/31
Source: Adapted from Wilson 1971.

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 program's flexibility and amenability to change.
When decision-making 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. 4-8. Copyright © 1969, with permission from Elsevier Science.

Figure 6.1 Planning-Programming-Budgeting Sequence

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. 4-8. Copyright© 1969, with permission from Elsevier Science.

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 organization's culture, through regular involvement.

Steiner (1974) provided several procedural maxims for improving the planning function's
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 pragmatic—not 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
year's 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 system's 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

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 function—improving financial performance or increasing market share and growth—
determined the best-suited style of planning:
• Financial performance was enhanced when line managers received adequate support
from planning professionals as well as top management.
• 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 system's
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. Forexample, 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 firm's ability to change its plan can be a test of the planning function's 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 firm's effective response to changes in business conditions, and
it increases the probability of a planning function's survival.

Since most business conditions assumptions ultimately will become invalid and must be
replaced eventually, flexible techniques for updating planning assumptions, strategy, action
programs—and, occasionally, even goals—are 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 until—when the contingency in
question becomes more realistic than the assumptions in the prevailing plan—the contingent
strategy can be substituted for its prevailing counterpart in the current plan (Roney, 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 FIRM'S PLANNING

NEEDS
Two natural forces of evolution can change a firm's 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, theircompetitive 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 firm's
planning needs is manifested in real life: Pennington (1972) observed that a firm must “learn
to plan” and that, when the firm's environment changes, so must its planning techniques. As
this process unfolds, a firm's 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
management's implementation priorities also shift between stages of the firm's 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 firm's 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 firm's 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
assumptions of a firm's planning methodology from time to time, to be sure that it remains
consistent with the firm's 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). Henry's (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 other's. 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-range-long-range linkage seemed to reflect the firm's 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 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 long-range
strategy.

Three years later, Steiner and Schölhammer (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 Henry's
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
Henry's 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.

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

Postulate 6.11 A new planning function must be ordained by the Board and CEO.
6.12 Upwards of two years are required to install initial planning procedures.
Implementation of the new process should be pragmatic. Initial success in
6.13 producing benefits to the firm must occur soon after implementation and be
widely acknowledged.
The planning manager must establish supportive working relationships with line
6.14
units and become integrally involved with line management.
Sophistication of planning procedures should grow only as the organization
6.15
becomes more competent and confident in planning.

Scheduling of Procedures: Six Postulates

Planning activities should be out the entire year in order to maintain

Postulate 6.21
scheduled through strategic
awareness and avoid
managerial strain from
 conducting the process in
a more limited period of
time.
The process re-initiates at the outset of each year, with
corporate-level reviews of fundamental mission-related issues,
6.22 sources of return on investment, the firm's structure,
successes and failures of the current corporate and business
plans, and primary strategic issues.
Strategic plans of business units and/or the single business
6.23
corporation are prepared during the first half of the year.
Business units' strategic plans are consolidated and a
6.24
corporate-level strategic plan is drafted at mid-year.
Conflicts 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
6.25
anticipated corporate cash flows, and other implementation
projects/programs are approved. Strategic plans then are
completed and approved.
Operating plans and budgets to implement the first year of
6.26 the strategic plan, including approved projects, are prepared
and approved in the fourth quarter.

Keeping Planning Practical: Five Postulates

The planning staff should be an internal consulting resource, able to perform

Postulate 6.31
analytic projects to facilitate decision making by line management.
Planning managers should lend active support in line management functions,
6.32
primarily as business analysts and consultants.
6.33 The operating plan and budget must be linked to longer range plans.
Management incentives must be based partly on formulation and
6.34
implementation of extended strategy.
Implementation elements of the plan must be fully developed so that they can
6.35
be executed reliably.

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.
A sound plan implemented long enough, without replanning, is either
6.13
worthless or a prescription for failure.

Evolution of a Firm's Planning Skills: Three Hypotheses

Hypothesis 6.21 Firms learn to plan and improve at it over time.

Firms' planning requirements evolve with their life-cycle stages and
6.22
experience in planning. This process passes through identifiable stages.
As firms evolve in complexity or simplicity and size, required planning skills
also evolve. For instance, when a firm is growing through acquisitions, certain
6.23 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:

Comprehensive planning, as a decision-making and resource allocation

Postulate 6.41
process, spans both long and short terms.
Budgeting is at one end of the time span covered by comprehensive planning.
Postulate 6.42 Long-range planning is at the other end. These two disciplines are inextricably
related.
Failure to link strategic and operational (long-and short-range) plans is a
Hypothesis 6.31
primary reason for the failure of plans and planning functions.

Pitfalls: Six Hypotheses

Effectiveness of planning functions will be impaired if any of the following principles is

violated:

Ultimate responsibility for planning functions'

Hypothesis 6.41 performance must not be delegated by the CEO to
others.
Goals must be sufficiently specific
6.42 to serve as a basis for forming
strategy.
Senior corporate and business unit mangers
6.43
must understand essential planning principles.
Strategic and operational planning must be
6.44
linked.
Executives' compensation must reflect their
6.45
contributions to strategic planning.
Capital allocations to businesses must be
6.46
consistent with the corporate plan.

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
firm's 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.

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 firm's 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 industry's
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 turbulence—a concept
that subsequently became increasingly popular. Presumably, turbulence is most severe in
highly dynamic industries.

Assuming that one's 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 internally—presumably reflecting the extent to which
operating capabilities are satisfactory or unsatisfactory. These two factors' combined influence
on management's 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

Source: Reprinted from Academy of Management Journal, Vol. 18, C. R. Anderson and F. T.
Paine, “Managerial Perceptions and Strategic Behavior, ” pp. 811-823. 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 1971-1976, 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 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 firm's
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 1981-1982 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 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 team's 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 firm's authority structure becomes even more decentralized—usually because lines of
business are diversified—a single framework

Source: Adapted from Vancil and Lorange 1975.

Figure 7.2 Appropriate Approaches to Decision Making in Firm Size/Structure Combinations

of goals and strategy is more difficult (if not impossible) to hand down to all business entities.
“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 corporation's 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 management's 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 performance—but 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 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 planner's 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 planningprocedures. They conjectured that their
findings reflected a growing need for top-level control and coordination of operating units as a
corporation's size and complexity increase. 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 contacted—a 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 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 years—further suggesting an asset intensity-planning
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

over, “in any company's 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 plan's 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 horizon's limit include:

The point where present values of discounted cash flows reach zero

The ROI payback period

The product life cycle

The relative permanence of goals

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 term's 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 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 Rue's (1976) earlier study of relationships between
environmental turbulence and several indicators of planning sophistication also found that
higher levels of environmental turbulence tended to be accompanied by more frequent
reviews.

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 Kudla's
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 sample's 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 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, 1969:44-56, 202-4; 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 top-down 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, 1982:220-27). 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 1966-1970 and interviewing 91 of their officers.
Surprisingly, they wereunable 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.

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 firm's
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 strategy's rationale among the
organization's 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 andconsensus can play in enhancing the effectiveness of
planning, strategy, or a firm's 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 team's 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
firm's business conditions (internal strengths and weaknesses and environmental uncertainty)
and on means to achieve goals and accomplish strategy serves as a strong performance
enhancer. Even Bourgeois's 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 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
strategy-forming process may be helpful in this respect (Wooldridge and Floyd 1990), but not
necessarily (Dyson and Foster, 1982). More important, a management team's 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 institution—and who probably contributed to the firm's prevailing
strategy—will 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
organizationgains 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 industry's 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 firm's culture.

MANAGEMENT STYLE
The chief executive's management style also will have a determining impact on corporate
culture as well as the planning function's approach and effectiveness. In fact, the arrivals and
departures of chief executives have been shown to make a significant difference in firms'
financial performance (Lieberson and O'Connor, 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 style's impacts on planning's 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

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 Golightly's (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 Golightly's archetypes. However, the point remains the same:
Planning procedures must be compatible with the predominant style of a firm's 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
Management Style Typical Planning Approach
Indigenous/introverted Logical incrementalism
Disjointed/ad hoc Inconsistent, rivalrous

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. Ansoff's (1965)
observation, that changes in a firm's 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 Ewing's 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 planning—including 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 Ewing's 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 Ewing's “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 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 firm's 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 firm's particular circumstances. These contingencies
include the following:

•The firm's size and structure (centralized versus decentralized) will determine how
planning authority and information should flow between top and line management.
• Complexity. Planning functions should be most fully developed when the firm's 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 team's 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 firm's 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 firm's
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, asset-intensive 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 plan's 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
difficult but important to diagnose before the planning process is designed.
• The chief executive's style of management also should be diagnosed before a planning
process is designed because a CEO's style will determine the flow of authority in decision
making, 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 manager's 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
firm's planning procedures accordingly. Of course, a change of chief executive, an acquisition
or divestment, and/or a significant shift in the firm's financial or competitive fortune (and
slack) will cause a significant change in some or all of these contingencies. 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 Steiner's conclusions in that table have been confirmed
empirically, but they are generally accepted by professional practitioners.

GENERALLY ACCEPTED PLANNING

PRINCIPLES: PROCEDURAL DESIGN
CONTINGENCIES
Risk

Environmental risk is a function of dynamism, complexity, and industries'

Postulate 7.1
accommodation of slack resources or munificence.
Planning methods should be adjusted to rationalize environmental uncertainty,
Postulate 7.12
or risk, and strengths or weaknesses of internal functions.
Hypothesis 7.11 Comprehensive planning operates as a risk reduction device.
Hypothesis 7.12 Accurate assessment of environmental uncertainty enhances profitability.
Comprehensive planning functions enhance firm profitability where the
Hypothesis 7.13
environment is complex, in asset intensive and mature or declining industries.
 Comprehensiveness of planning functions is more likely to enhance
Hypothesis 7.14
profitability in stable versus unstable industries.

EXHIBIT 7.1 Factors Influencing Planning Process Formality

MORE FORMALITY LESS FORMALITY

ORGANIZATION
Large companies Small, one-plant companies
MANAGEMENT STYLE
Authoritarian Democratic-permissive
Operational leader
Policymaker
Intuitive thinker
Inexperienced in planning Experienced in planning
COMPLEXITY OF ENVIRONMENT
Stable environment Turbulent environment
Modest competition Severe competition
Many markets and customers Single market and customer
COMPLEXITY OF PRODUCTION PROCESSES
Long production lead times Short production lead times
Capital-intensive
Labor-intensive
Integrated manufacturing processes Simple manufacturing processes
High technology Low technology
Long market reaction time Short 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 activities To train managers
Source: Adapted from Steiner 1979, 54.

Organizational Contingencies

Axiom 7.21 The chief executive is the senior planning officer.

Hypothesis As firms' structural complexity increases, the sophistication of their planning
7.21 procedures also tends to increase.
Hypothesis Comprehensive planning, as an integrative discipline, enhances cohesion of
7.22 complex organizations.
Hypothesis Firm size and structure (centralized, decentralized) determine appropriate
7.23 planning and decision-making procedures (top down, team; bottom up, hybrid).
Hypothesis
Required planning skills also are determined partly by a firm's complexity.
7.24
Hypothesis To the extent that planning decisions are made rationally, rather than politically,
7.25 planned results are more likely to 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-
7.32 intensive industries and least prevalent in 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
7.34 variables. The scanning horizon should 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'
7.36 present values approach zero, the ROI payback period, the pro
Hypothesis
Environmental complexity is positively related to the planning horizon's length.
7.37
Hypothesis
Environmental volatility is inversely related to the planning horizon's length.
7.38

Review Frequency

Hypothesis Review frequency tends to increase with both environmental complexity and
7.41 volatility.
Hypothesis Typical review frequencies are at least annual, but many industrial firms review
7.42 their plans more often than once per year.

Participation and Consensus

Hypothesis Participative approaches to planning enhance consensus but not necessarily the
7.51 plan's technical quality or the firm's performance.
Hypothesis Consensus can enhance the integration of an organization, which in turn can
7.52 enhance performance.
Hypothesis Discord over goals and objectives can enhance performance by extending the
7.53 scope of alternatives considered.
Hypothesis Consensus on strategy, environmental complexity, and firm capabilities
7.54 enhances performance.

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
7.62 style.
Hypothesis
A change of the CEO can have a major disruptive performance effect.
7.63
The chief executive's management style greatly influences the firm's procedural
Hypothesis
approach to planning. Planning procedures are most effective when they are
7.64
compatible with the CEO's management style.

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 decisions—selecting 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 strategy 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.

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 plan's 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

are the corporate plan's building blocks. In either case—single business firm or multiple
business corporation—planning 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 manager's 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
firm's 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 industry—raising 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 management's role in planning to thelevel
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 1980-1984. 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 Fredrickson's 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 firm's business planning mission well may
depend on the quality of environmental evidence and soundness of information systems
available to support executives in making strategic decisions. 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 shouldprovide 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 author's 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 continuum—the present
situation, most likely future, and alternative futures or “contingencies.” The horizontal axis
describes the environmental domain—economy, 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 8.1—analysis 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.
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 firm's 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 long-term 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

Sources of
Performance
demand:
National income norms, structural Diagnosis of the
consumer,
accounts, historical factors, rivalry, present situation,
Analysis industrial, public.
business cycles, input/output trends and critical
Purchase decision
long-term trends tables, competitor success factors
dynamics,
intelligence
demographics
Demographic
Time series
Analogies, growth forecasts: socio-
extension:
curves, input- psychological Prognosis of most
trend/cycle
output simulation, models, industrial likely future
Forecasting models,
technological purchasing business
econometric
forecasting, cycle models, conditions
models, expert
forecasting econometrics,
opinions
hybrids
Systemic threats, Potential impacts of styles, work styles
impacts of structural shifts— Potential impacts Scenarios
Contingencies structural shifts competitors' of shifts in describing impacts
and Alternate due to regulation, entry/exit; new consumer needs, of changes in
Futures geo-demographics, technology; new industrial fundamental
resources' materials; new requirements, life forecasting
availability, etc. regulations assumptions
Industry
attractiveness,
Economic suppliers: Buyers'
aggregates of competitive willingness and The Commercial
Scope
nations where the behavior, industry ability to Environment
firm does business performance, purchase.
regulation,
technology
Source: Roney,
1999.
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, 1999:220-222).

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 potentials—versus the influence which
management exerts through strategy—has 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 industry—versus firm—effects 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 industry's structure and its intrinsic competitive
dynamics can have a significant impact on a firm's 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.

Porter's “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?

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?

Porter's 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 industry's business conditions. The following
guidelines may assist the planning manager in gathering evidence regarding Porter's 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 industry's growth, (4) costs to be incurred by customers
when switching suppliers, (5) the presence or absence of competitors aggressively attempting
to gain market share, (6) the potential payoff to competitors from strategic aggression, (7)
the firm's potential cost of exiting an industry, (8) competitors' diversity, and (9) the likelihood
that weak competitors will be acquired by strong outsiders. Since there is a direct link between
each of these factors and the level of competition, planning managers should consider all of
them in an analysis of any industry.

Entry barriers. The probability of new industry entrants, Porter's third “force, ” is sometimes
more difficult to assess than the others. The formidability of entry barriers is inversely related
to this probability. Porter identified nine such barriers. Once identified, their analysis is
straightforward:

Inaccessibility of technology and specialized knowledge to potential new entrants

Economies of scale enjoyed by present participants

Availability of learning/experience effects

Brand preferences/customer loyalty

Capital requirements

Disadvantages of inaccessible resources such as patents

Inaccessible distribution channels

Regulatory limits (e.g., licenses)

International trade restrictions

The planning manager should compile an assessment of such entry barriers in a firm's
industry. The probability that new competitors likely will enter an industry or market in which
the firm competes then may be estimated.

Threats of substitute products. In assessing the relative opportunities for firms in other
industries to offer substitute products, it will be helpful to assess several “driving forces of
competition.” Porter proposed that thirteen such forces should be considered:

Changing long-term industry growth

• • Changing consumption trends
rates
• Potential product innovations • Potential technology changes
• Likely marketing innovations • Potential entry/exit of competitors
Impending diffusion of technical know-
• • Impending globalization of the industry
how
Changing cost/efficiency of industry Emerging preferences for differentiated versus
• •
participants standard products
• Potential regulatory changes • Shifting societal values or attitudes
• Changing industry risk levels
Recognizing and Defining Industry
Types
From the preceding paragraphs, it is obvious that a substantial amount of effort may be
required to diagnose the specific competitive dynamics in any industry. For example, industries
may differ significantly in their sensitivity to driving forces such as those just listed. However,
Hambrick (1983) conjectured that a more “parsimonious” approach to industry analysis might
be possible if it could be demonstrated that groups of industries share competitive
characteristics. Using the PIMS database of mature manufacturing businesses and cluster
analysis, he attempted to find such “types” of industrial goods producers. In fact, he found
eight of them, which he named as follows: Roller-coaster commodities (e.g., steel, plywood,
fertilizer) Disciplined capital goods makers (e.g., turbines, heavy machinery) Aggressive
makers of capital goods (e.g., construction and printing machinery)

Closeted combatants (e.g., ready-mixed concrete, steel finishing)

Unruly mob (e.g., adhesives, valves, pipe, hand tools, parts)

Passive provisioners (e.g., paper containers, paints, nonferrous wire)

Aggressive makers of stable feedstocks and supplies (e.g., dyes, hoses, belting, small pumps,
motors, photo supplies)

Orderly producers of mundane supplies (e.g., abrasives, saws, blades)

Industry analysts find Hambrick's approach attractive because it suggests that more efficient
ways of assessing the competitive environment than diagnosing each industry separately may
be available. No pretense was made by Hambrick to having arrived at a definitive list, but an
encouraging argument was made that unique types of industries can be discovered. Such a
“typology” could support a better understanding of how each industry behaves, based on
typical characteristics of an industry group. If the economic and competitive characteristics of
an industry's type are known, the practicality of prescribing strategic planning procedures for
that entire industry group should be greatly enhanced.

Other Industry Analysis Methods

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

Market Assessment
Whereas strategic assessment of industries entails analysis of supply factors in a firm's
external environment, market assessment is addressed to demand factors. At the broadest
level, such analyses maybe conducted in the consumer, industrial, government, or finance
sectors. In all cases, however, analysts will need to diagnose the structural components or
segments of a sector and organize the analytic approach accordingly. For instance, when
addressing consumer market segments, an analysis may be divided into factors that influence
demand for non-durables, durables, and services. In each of those subsectors, demand may
be further subdivided into market segments of goods and services that are relatively essential
or non-discretionary versus those whose consumption can be deferred for some period of
time. Another useful analytic approach is to describe buyers' willingness versus their ability to
make such purchases in order to discover the point where discretionary consumption may
begin to accelerate or decelerate significantly.

In assessing factors that influence demand for consumer goods, especially, demographic
analysis may prove to be highly useful. Consumers' needs and tastes of course differ sharply
between age and income groups. Interactions of those two dimensions (age and income) often
serve as powerful discriminators of demand for consumer products and services. In the
industrial sector and the government sector, consumption tends to be more rational based on
cost/benefit trade-offs. In any event, the planning manager should attempt to identify those
drivers of demand most likely to explain increases and decreases in consumption of the firm's
products or services. With an accurate understanding of such driver variables, planning
managers then can proceed to undertake the forecasting procedures discussed next.

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 firm's performance. Recall that, earlier in this
chapter, the planning manager was encouraged to identify certain “critical factors” in the
economy and industry. Having identified these factors through the procedures described
earlier, it should be possible to form forecasts of changes in them that, in turn, may alter the
firm's performance potential. Such forecasts of course can aid management greatly in making
planning decisions.

The scope of forecasting methods available to planning managers is summarized in Table 8.2.
This table classifies planning methods in terms of two dimensions: planning horizon (short,
medium, and long term) and anticipatory logic (judgmental, extrapolative, and explanatory).

TABLE 8.2 Scope of Forecasting Methods

Logic 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 Life-cycle
models
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 domains—economy, industry, and market. Economic forecasting devices that
planning managers frequently use include econometric models and models of business cycle
timing. Industry forecasting techniques frequently used for commercial planning purposes
include linking input-output tables to econometric models (as discussed earlier); industry 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 can design the forecasting
techniques best suited to a firm's circumstances, after which the planning staff can employ
them on a regular basis. The key, in any event, is to establish a sustained forecasting
program.

As additional information is obtained from environmental scanning and early warning

procedures, forecasts appropriately should be reviewed and revised. A mistake frequently
made by senior management is to assume that long-range forecasts actually will come true.
Indeed, they may; but forecasts should be viewed as interpretations of current information
regarding the critical driver variables that are under regular observation. When trends in driver
variables change, so should forecasts. Of course, this susceptibility of forecasts to change
injects an element of risk into any environmental assessment and business planning
procedure. Management needs to understand the realistic range of alternative futures, and we
will turn to that subject next.

Alternative Futures and Contingency

Planning
Students of strategic management long have recognized the difficulties and costs that
environmental uncertainty can inject into firms' planning methodologies. For instance, Keats
and Hitt (1988) studied 110 manufacturing firms' reactions to environmental instability,
complexity, and hostility. They found an inverse relationship between environmental instability
and firms' operating results. In response to substantial environmental instability, firms
responded by developing simpler structures—that is, by reducing their organizations'
complexity. While scholars certainly have differed as to how increases in uncertainty should be
answered by strategic management methodology (Ansoff, 1988; Mintzberg, 1994d; Mangaliso
and Mir, 1996), nearly all would agree that environmental instability can increase levels of
business risk to a point where the firm's performance potential may be impaired. How, then,
can management control the risks which flow from environmental uncertainty?

One answer is to employ a two-fold technique of (1) forming alternative future scenarios
describing the realistic range of relevant futures and then (2) preparing responses to all
scenarios that are sufficiently likely and/or important to compel preparation of a strategic
response. 2 Exhibit 8.2 portrays the categories of alternative futures which warrant formation
of such contingency plans and those which do not. Only those high-impact contingent futures
that can alter the firm's 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 con

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
industry's or market's 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 firm's operating resources and
managerial functions should be sufficient to deal with those forces comfortably and
competently.

Source: Roney 1999.

tingencies don't 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 firm's 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
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 1974-1975. 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 firm's 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 firm's relative competitive strength or functional capability, while the second
dimension describes the industry's or market's attractiveness. The following paragraphs
discuss five such approaches to evaluating a firm's strategic situation.

Market Share/Growth Matrix

The Boston Consulting Group's four-celled market share/growth matrix (Figure 8.1)
demonstrates a classic technique for comparing competitors' positions on an industry's
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 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 model's
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. 41-55. Copyright ©
1977.

Figure 8.1 Market Share/Growth Matrix: Cash-Flow Characteristics

Source: Adapted from Hambrick, MacMillan, and Day 1982.

Figure 8.2 Normative Cash Flows within the BCG Matrix—An Alternative View

focus” strategy enabled these 40 firms to generate satisfactory rates of return—thereby raising
a fundamental question regarding the BCG model's validity for firms with low shares of mature
markets.

In 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 firm's 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 firm's

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 industry's attractiveness may be based on any one of Porter's (1980)
five forces or the analyst's 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 evolution—conception, 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
1970-1979 and confirmed that life-cycle 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
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 product's
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 firm's economic sector and products' purchase
frequencies are relatively fixed, life-cycle stage may be the most important of these three for
purposes of anticipating long-range shifts in strategic problems or opportunities.

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 management's 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, management's selection of strategy may not be appropriate for the industry's
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 Schendel's (1978) product/market evolution portfolio matrix employs the life-cycle
concept in an interesting and generally underappreciated combination of the previously
mentioned methods. In this portfolio, circles' sizes refer to markets or market segments in
which the firm competes. Shaded wedges reflect the firm's (or products') shares of those
markets. “Competitive position” reflects the firm's 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

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 G's prospects are not very encouraging, since its market is
declining and the firm's share is low. This “evolution” matrix also can be used in a somewhat
different manner, to display trends in individual products' positions across an industry's history
—and 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 firm's 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
firm's 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

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 firm's lines of business—
and to assemble a realistic estimate of the firm's comparative ability to perform the functions
of its industry in the future. Unfortunately, Capon et al. (1987:64-65) 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 life-cycle evolution matrix, this one also is a very useful
device for strategy formation itself.

ASSESSMENT OF THE FIRM'S

CAPABILITIES
All of the matrix methods discussed in the previous section require an assessment of the firm's
situation within two dimensions: (1) market or industry position/attractiveness and (2) the
firm's ability to perform, 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 firm's relative competence; the McKinsey/GE matrix requires an
assessment of the firm's “strength” on the basis of various objective measures; and the
directional policy matrix requires a judgment of the firm's future functional capabilities on the
basis of more subjective criteria. In each case, the planning manager must assemble evidence
for assessing the firm's 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, an objective exercise. However, that is not
always the case. Individuals' perceptions of a firm's strengths and weaknesses are strongly
influenced by the evaluator rather than the organization's 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 firm's 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 firm's 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 firm's operating strengths
and/or weaknesses, one essential guideline should be observed. That is, a firm's strengths and
weaknesses will be distinguishable on the basis of their distinctiveness in comparison to
capabilities of other firms in the same industry and/or market. 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
strategically—especially 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 withsome 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 firm's financial performance to
industry norms and individual competitors' results are abundant. For publicly owned firms,
such sources include investor services such as Standard & Poor's, Moody's, and Value Line, as
well as many online data retrieval services such as the Securities and Exchange Commission's
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 firm's 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 firm's 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 firm's 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 competitor's distinctive competences. Then, evaluations of
the

TABLE 8.3 Marketing Focus: Priorities

Strategic Focus
Evaluation Criterion Competitors Customers
Market/ Demand Predictable Dynamic, Uncertain
Industry Structure Concentrated, Stable Fragmented, Unstable
Few buyers with much discretion Multiple buyers with less
Buyers' Discretion
in vendor selection discretion in vendor selection
Source: Adapted from Day
and Wensley 1988.

firm's 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 firm's strategy to enhance internal capabilities can be focused on
gaining distinctive competence where it matters most.

When analysis begins from a customer's 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 firm's 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 firm's 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 forassessing 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 manufacturer's
equipment, then the competitor's 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; O'Toole, 1996), this approach to assessing and elevating internal competences is worth
serious consideration—especially 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 firm's financial, marketing, and operating performance indicators to those of comparable
firms—that is, firms in the same industry—often are made. Sources of industry norms for such
“benchmarking” exercises are abundant. As

EXHIBIT 8.3 Industry Trade Associations as a Source of Operating Benchmarks

Illustrations
Association Industry Norms Reports
Annual and historical operating data including production, shipments,
American Forest and
capacity and international trade of major grades. Also reports energy
Paper Association
usage, raw material consumption, wages and compensation, capital
www.afandpa.org
investment, financial performance and industry structure.
American Iron and Steel Statistics on steel industry operations in the U.S. and Canada; steel
Institute imports and exports; and world production of pig iron and raw steel
www.steel.org by countries. Weekly capacity utilization reports.
American Petroleum
Numerous practice standards including capacity utilization, quality
Institute
control, worker training, etc.
www.api.org
Association of Business
Support Services Industry production standards for business support such as word
International, Inc. processing, desk-top publishing, graphic design, etc.
www.abssi.org
Collision Repair
Industry-INSIGHT
Financial and operating statistics of automobile collision repair shops
www.collision-
insight.com
National Automotive
Compiles and publishes average automobile dealer financial operating
Dealers Association
performance measures
www.nada.org
Semiconductor Industry Analyses and operating performance for U.S. semiconductor firms
Association including productivity measures, sales per employee, wafer
www.semichips.org fabrication facilities utilization, and worldwide employment figures
The Society of the
Plastics Industry Financial and operating norms of plastic processing companies
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 Poor's, Moody's Industrial Services, the Value Line Survey, and
EDGAR—the Securities and Exchange Commission's “electronic data gathering analysis and
retrieval” system. Another excellent source is the Strategic Management Institute's 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 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 firm's performance are more meaningful.
However, in some industries only rudimentary public data can be obtained. Moreover, many
analytic data sources, such as Standard and Poor's “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 volume's 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 manager's responsibility to install methods and procedures for
supporting strategic decisionmaking. Thus, it is the planning manager's 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 andStrickland, 2003:41-45) 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 firm—perhaps one emerging
from bankruptcy—may view success from the perspective of risk reduction and financial
solvency rather than profit margins or market shares. On the other hand, a successful firm in
a mature industry—such as automotive, basic metals, or chemicals—may 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 firm's 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 firm's 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 firm's 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 bycomparable 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 market's 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 Porter's 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 industry's 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;

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
industry's life cycle.

Shepherd (1972) studied relationships between rates of return, market share, and market
concentration during 1960-1969 in 231 publicly owned firms. He built ten regression models to
determine the sensitivity of returns in several groups of firms—for 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. 25-37. Copyright © 1972, with permission from MIT
Press.

Figure 8.7 ROI Relationships to Market Share and Industry Concentration, N=231

beginning market shares during 1970-1972. 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,
1987:70-102 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 isn't 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 can't be recovered by higher prices—for example, new
features, a wider variety, broader distribution, advertising and promotion.

Figure 8.8 Hypothetical Relationship of Market Share and Return

Some would argue that the firm's goal should be to maximize return on invested capital and
not necessarily to maximize market share. 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 firm's likely
performance—that 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 firm's 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 functions—marketing, operations, administration, finance—and often for
combinations of functions, for example, in plan-
Figure 8.9 Baseline Projection, Goal and Strategic Objective: Interrelationships

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 firm's market share simply cannot be known? One option is to
make reasonable assumptions regarding market size and to proceed with selecting market
share and sales goals. 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 Schölhammer, 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 aTABLE 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 firm's competitive direction. Until the CEO's 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.

TABLE 8.5 Information Required for Goal Selection

1. Financial performance trends of the industry and principal competitors

Rates of return realized by investors in competitors' and the firm's equity versus costs of
2.
borrowed capital
3. Market and industry growth rates: trends and forecasts
4. An assessment of the product's or industry's life-cycle stage
5. Competitors' and the firm's market shares
Core competences of the firm and its competitors with similar missions, including
6.
competitors' principal product claims
7. Estimates of competitors' costs of production, marketing, and administration
8. An assessment of Porter's “five forces” of industry competition
A list of “driving forces” or “critical success factors” that seem to determine success or
9.
failure of firms seeking to perform a mission similar to that of the firm
An assessment of conflicts of interest and timing within and between business units insofar
10.
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.

Least-cost versus Differentiation

Porter's (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 firm's 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 firm's 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.

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 study's
results did confirm some of the model's 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
study's results seemed to suggest that—in industrial firms at least—“integrative” (or resource-
based) strategies are employed most frequently and can be more effective than “adaptive”
strategies. On the other hand, Rhyne's (1987) study of 66 Fortune 1000 firms during 1980-
1984 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 firm's 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 firm's 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 firm's present and potential functional strengths. Then, the
strategist attempts to exploit those strengths by finding market and industry segments where
the firm's strongest abilities can be exploited to the greatest advantage (Ewing, 1969:80, 91).
In essence, management seeks out industry/market segments with critical success factors
that match the firm's strongest capabilities and resources.

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 firm's 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 acceptance—especially in fastpaced
high-technology industries.
Competing for Future Leadership
Hamel and Prahalad (1994) declared that the planning executive's two most important
challenges in formulating strategy are (1) arriving at a correct vision of future business
conditions and (2) developing core competence to do business in the most attractive industries
and market segments of the future. 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:

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' traits—such as quality, asset
intensity, vertical integration, and advertising—to 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

Robert's (1993) ten driving forces comprise another list of strategic themes. According to
Robert, a firm's 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 firm's 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. Robert's list may not be exhaustive;

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 firm's industry or market segment. If those CSFs are not on Robert's list, they
still must be addressed by a firm's 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 environments—for example, adverse changes in government regulations, distribution
channels, and technology—during 1970-1974. 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 decisions 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

Goals may be established on any of four dimensions: level of risk, financial results,
Axiom 8.01 market position, long-term growth. Goals at least must define criteria for
competitive and financial success.

Postulates

There are interrelationships between goal types. A requirement of goal setting is

Postulate 8.01
to find a combination of acceptable results on all four dimensions.
Strategic objectives express differences between a firm's present performance
potential or position and the firm's ultimate goal. Thus, if the firm presently
Postulate 8.02 projects sales of $200 million and needs $250 million to achieve its competitive
goals, the strategic objective is $50 million in sales from sources that presently
are not being exploited.
Strategic objectives can be defined either deductively (goals versus baseline
Postulate 8.03
projection) or inductively (the sum of identified program benefits).
Management must declare the type of strategy by which it intends to pursue
goals; there is a wide range of choices including generic (applicable to all firms),
Postulate 8.04
contingent (depending on the firm's circumstances), adaptive (market focused),
and integrative (resource based).
Each strategy must have a fundamental theme, the title of which often is the
name of a “driving force” that management decides best explains how internal
Postulate 8.05
resources and the external environment can be rationalized for optimum
performance potential and sustained competitive
advantage. This theme must be articulated before a strategy can be fully
developed.
Objective evidence regarding the firm's industry position and internal
Postulate 8.06
capabilities is required for well-balanced strategic decisions.
Critical success factors (CSFs) of an industry should be diagnosed empirically as
a means of avoiding bias and focusing analytic efforts productively. CSFs define
Postulate 8.07
functional capabilities at which firms must excel in order to compete
successfully in their industries.
Benchmarking systems such as the PIMS program may be helpful in diagnosing
Postulate 8.08 a firm's competitive strengths and weaknesses in CSFs, according to objective
criteria.
While composite statistics, based on publicly owned companies' disclosures,
may provide useful norms for objective setting and benchmarking, such norms
Postulate 8.09
may not be valid for privately owned firms because their sources of capital do
not include the public equity markets.
Porter's (1980, 1985a) “five” forces are essential elements of a strategic
Postulate 8.10 assessment; they form an effective frame of reference for gathering evidence
about industry attractiveness.
At least one “matrix” technique to jointly assess the firm's functional strength
and its market or industry position should be employed, as a means of
Postulate 8.11 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

Assembling sound evidence for strategic decisions enhances firms' rates of

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

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

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 be—or how many businesses exist within it—the performance
potential of each business will be enhanced by a sound plan and a well-conceived planning
procedure. Moreover, the feasibility of a corporate plan, when there are several divisions
and/or subsidiaries, depends on the feasibility of those individual businesses' plans as well as
the feasibility of corporate-level strategy. However, the presence of multiple businesses does
present corporate management with some additional planning challenges not to be found in
the single business.

The following paragraphs discuss those special concerns that must be addressed by corporate-
level planning managers in multi-business 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
procedures that must be performed at the headquarters level, separate from those performed
by individual businesses within the corporation.

Is There a Mission?
A legitimate question may be raised about the true “mission” of a corporation that is
comprised of very diversified businesses. As observed in Chapter 2, the mission of a business
is defined by the economic function it performs for society. Each individual business within a
diversified portfolio probably has (or can have) a definable mission. But what is the parent
company's mission? The more diversified a corporation becomes, the more difficult it also
becomes to define that corporation's mission in the aggregate. Perhaps, like a merchant bank,
it is simply to provide capital with which to finance portfolio businesses.

Typically, like a merchant bank, the mission of a multi-division corporation is stated primarily
in financial terms and commits the corporation to maximizing shareholder returns. However, it
certainly is possible to define the mission of a multi-business corporation in other terms. For
instance, the corporation might perceive its role as something of a “management company, ”
versus a “holding company”—providing scarce managerial resources to businesses in its
portfolio and actively exploiting synergistic opportunities to increase long-term yields by
combining portfolio companies' resources, thereby enabling them to compete more
successfully. Corporate resources provided by parents to divisions and subsidiaries include
cash and credit, of course. But, they also may include technology, management skills, and
other intellectual resources (Calori, 1988). Subsidiaries and divisions of such management
companies are more likely to be closely related to one another than they are to be highly
diversified. In such cases, the parent company indeed may be able to perform a truly
economic mission for society by combining the capabilities and missions of individual
businesses into a more valuable amalgamation (Rumelt, 1974), rather than acting solely as an
investor for the benefit of its shareholders. Examples include Ametek, Inc. (electrical
products), Parker-Hannifin Corp. (motion controls), SPX Corp. (tools), Textron Inc. (industrial
technology) and United Technologies Corp. (industrial technology).

Defining the corporate mission is a province exclusively of top corporate management and the
board of directors. But, as mentioned earlier, each individual business unit has its own
economic function to perform and, therefore, its own mission. For that reason, as Berg (1965)
first observed, conflicts can arise between corporate and subsidiary business interests. Indeed,
they often do. Reconciling such conflicts is a function that ultimately can be performed only at
the corporate level—often with substantial difficulty.

Defining Corporate Strengths and

Weaknesses
Whereas the “capabilities” section of an individual business plan addresses strengths and
weaknesses of functional capabilities, the corporate focus of a business analysis shifts
substantially. At the corporate level, a “portfolio” of investments in operating businesses is
evaluated in terms of those businesses' financial performance trends and potentials, and their
competitive positions. In a “capabilities analysis” performed at the corporate level, individual
businesses also can be evaluated in terms of their synergies with other businesses in the
portfolio, as well as their operating competences. Thus, groups of related businesses
(“strategic business units”) can be formed and evaluated without the myopic limitations that
may exist when each individual business is evaluated in a vacuum. This opportunity to
evaluate individual businesses' potential contributions to a corporate enterprise is an often
overlooked, but vital, function of corporate planning procedures.

In addition to an evaluation of individual business units' performance potentials, a 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 organization—both its capabilities and structure.

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

Goal Selection
Corporate-level goals of multi-division corporations usually are expressed in terms of rates of
return on invested capital or, preferably, value added to shareholder wealth by business units'
and corporatelevel strategy. The concept of added shareholder value provides a common
thread for formulating goals that can flow from the very top of a corporate structure to every
business unit. For this reason, among others, value-added concepts have been particularly
fruitful in formulating goals and objectives for portfolio businesses as well as the corporation
as a whole (Rappaport, 1981; Reimann, 1989a, b; Copeland et al., 1990; Stewart, 1991; Tully,
1993).

Individual business units usually formulate goals based on their respective shares of individual
market or industry segments. But only when business units are closely related to each other is
it possible for corporate-level goals to be expressed in competitive terms. Thus, multibusiness
firms that confine their portfolios to relatively limited lines of business—for example, those in
the basic metals, petroleum, chemical, textile, and food-processing industries—are able to
formulate consolidated competitive goals based on market shares or other indicators of
competitive position. But highly diversified enterprises can't establish market-share goals at
the corporate level.

When corporations diversify, their goals typically emphasize either growth or earnings—one
more than the other. In a study of 170 European executives, Horovitz and Thietart (1982)
demonstrated that each of those goals will be served best by planning procedures,
organizational structures, and controls that differ materially. Diversified firms with fast growth
rates were characterized by a decentralized but well-coordinated management structure; a
participative planning style in which top corporate management remained closely involved;
and the use of forecasts in control procedures. Diversified firms with high profit margins were
characterized by less involvement of top management in the planning process. However, those
with the highest profit margins also tended to have more formalized organizations and more
effective coordination than others. Here, as in the previous chapter, we find the very
contingent nature of both strategy and strategic planning. In this case, the emphasis of
growth or earnings in selecting a firm's goals and objectives can have a determining impact on
the appropriate method of planning, as well as the strategy to be selected.

Strategy Selection
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 corporation's businesses
are represented on a single grid, such as the market share/growth matrix. The corporate
strategist's challenge then is to identify a collection of business investments that offers the
most attractive opportunity for balancing cash flows and maximizing total returns over a long
term. 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 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 1949-1969, 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. Rumelt's 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 Rumelt's sample. Several confirmations of the argument that
highly “focused” corporations tend to outperform others have appeared since Rumelt's
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 Rumelt's 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 1958-1969 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 lower—thereby 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 industriesin the United States. A classification scheme based on “broad” versus
“narrow” diversity was employed to divide each population. Data on diversity were available
for only 223 of those 250 firms, but, this still was one of the largest studies of its kind.
Performance variables—including the rate of return on equity, return on capital, sales growth,
and growth of earnings per share—were obtained from the Forbes Annual Report on Industry
for 1984 and reflected five-year averages. Results partially supported Rumelt's (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 Rumelt's (1974) findings by studying rates of return on
assets and risk (as reflected in returns' variance) among 80 diversified corporations during
1973-1977. Firms were classified according to Rumelt's scheme as related-constrained
(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 Rumelt's original sample for which data were available in Standard
and Poor's Compustat® files. The unrelated category of additional firms were drawn randomly
from the Fortune 500 lists. 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 highest-performing firms in
the related-constrained category were major participants in the pharmaceutical industry and
that two other pharmaceutical firms also were in that category. 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 Rumelt's 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 riskmay 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 under-performance of conglomerates have
included corporate management's 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, 1979:36-46; Copeland et al. 1990:319-321).
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 portfolio's scope—that is, the level of
diversification—and the industries in which to participate and (2) allocating corporate capital to
portfolio businesses. If management's objective is to reduce risk, a “hedging” strategy of
diversification (conglomeration) may be helpful; but it probably will not enhance returns above
industryaverages. 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 planner's 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
(1969:161-64) 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 over

Figure 9.1 Strategic Objective of Acquisitions

stated. To illustrate, McKinsey and Company's Corporate Leadership Center studied 116
acquisition programs, usually involving multiple acquisitions, during 1972-1983. 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., 1990:319-21).

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 strategy—including the allocation of
corporate resources to business units—must remain a responsibility of top corporate
management (Vancil and Lorange 1975). Probably such decisions will reflect the personal
preferences and background of senior corporate officers, 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.

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 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 resource-based 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. Variousother 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 management's 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 single-industry concern, the entire process took
only about six months.

Wilson (1971) defined a similar process, which emphasized corporate allocations of capital to
division's 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 year's 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 Vancil's 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. Vancil's 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 firm's 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 Vancil's 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 corporation's 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 management, 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 organization's 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 Schölhammer (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 study's purpose was to
trace sources of pitfalls in MNC business planning either to headquarters or management of
Brazilian subsidiaries (see Table 9.1). When

TABLE 9.1 Sources and Impacts of Pitfalls in Multinational Business Planning

Problem Type
Problem Locus: Management Planning System
Short-run orientation; Oversophistication, overformalized;
Headquarters
insensitivity to culture insufficient data
Subsidiary Resistance; doctored data Unreliable data; unskilled planners
Source: Adapted from Brandt
and Hulbert 1980.

planning problems occurred at the parent company's headquarters, they reflected top
management's emphasis on short-term results and insensitivity to Brazil's 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

Corporate-wide planning policy, both procedural and substantive, is the

Axiom 9.01
responsibility of top corporate management.

The parent company's mission, like subsidiaries' missions, must be defined. In the
Axiom 9.02
case of diversified corporations, a core mission may not exist.
Corporate-level analysis of internal capabilities embraces business units' risk levels,
performance potentials, competitive potentials, and growth potentials, as well as
Axiom 9.03
the quality of unique corporate functions, including top management and staff
services.
Corporate-level environmental analysis provides an independent assessment of
Axiom 9.04 business units' present and potential competitive positions, industry conditions,
and marketing conditions.
Corporate-level strategy declares the intended levels of capital invested in business
Axiom 9.05
units, diversification, and synergy.

Postulates

Corporate-level goals can be expressed in terms of risk level, financial results,

Postulate 9.01 and long-term growth. But corporate-level competitive goals may not be
meaningful in diversified corporations.
Conflicts occur between holding companies' missions and subsidiary businesses'
Postulate 9.02
missions. These conflicts often cannot be resolved.
A portfolio matrix approach should be taken to assess the quality of a
corporation's business portfolio. Such techniques are especially useful for cash-
Postulate 9.03
flow planning purposes, capital allocation, and forming acquisition/divestment
strategies.
Planning activities at corporate and division levels must be scheduled
Postulate 9.04 throughout the year so that strategic awareness is sustained and planning
responsibilities do not become too burdensome.
Corporate- and business-level planning must be coordinated. The corporate plan
cannot be finished until business units' plans are finished. However,
assessments of competitive capabilities, market positions and potentials,
Postulate 9.05
assembly of baseline financial projections, definitions of strategic issues,
development of goals and strategy, action programming, and budgeting can
occur simultaneously at each level.
 Planning activities are complex in multinational corporations because planning
practices and cultures often differ between nations. However, as in the purely
Postulate 9.06 domestic case, multinational commercial planning must be coordinated based
on some concept of corporate structure, for example, centralized or
decentralized by product line, geographic region, and the like.

Hypotheses

The justification of portfolio diversification as a corporate risk-reducing

Hypothesis 9.01 strategy will differ between enterprises, depending on the industries in which
they participate, partly because industries differ in risk-reward relationships.
Hypothesis 9.02 Acquisition investments turn out unsuccessfully more often than successfully.
Acquisitions conducted to implement a previously defined strategy are more
Hypothesis 9.03
likely than others to be successful.
Acquisitions related to existing businesses are more likely to succeed than
Hypothesis 9.04
divergent diversifications.
Firms with the most related portfolios provide more opportunities for top
corporate management to participate in business units' strategic planning,
Hypothesis 9.05 while very diversified enterprises' senior executives typically exercise greater
detachment, relying mainly on financial measures for planning and
assessment of business units' performance.
The relatedness or diversification of corporate entities predetermines the most
Hypothesis 9.06 appropriate style for proposing plans and decision making: top-down or top
team (related) versus bottom-up or hybrid (diversified).

Part IV
Implementation of Strategy
Part IV addresses strategy implementation, an often-overlooked requirement for effective
planning functions. Chapter 10 approaches this subject from perspectives of competences and
resources. Readers will discover that a firm must possess several critical skills if it is to
implement strategy successfully. Implementing strategy can be likened to athletics. First, the
player must be in good shape; that is, a firm must be proficient in “the fundamentals” of
management. Then, there must be adequate equipment and other resources, a well-aligned
organization, and sufficient motivation of both individuals and the entire team. With those
fundamental capabilities, the firm's management can, through training and practice, acquire
essential skills for converting strategy into effective action.

As these implementation skills are practiced, the management team gets into even better
shape. Resources, organizational integrity, and motivation all grow stronger. Conversely, if the
essential skills are not practiced or if, for some other reason, the firm allows itself to get out of
shape, then implementation proficiency also suffers. Finally, some specialized techniques for
implementing strategy are discussed. Among these techniques are management by objectives,
balanced scorecard, budgeting, project management, incentive compensation, teamwork, and
management development. Here again, there is a reciprocal relationship. With better skills, it
is easier to employ specialized implementation techniques. Conversely, if the techniques are
not kept current, basic skills can grow rusty and the team will lose its competitive edge.

Chapter 11 includes a collection of special procedures to be followed when strategy calls for
restructuring. Corporate planning executives often administer their firms' restructuring
procedures, which may include acquisitions, divestments, mergers, alliances, joint ventures,
and even reorganization of business units or the entire enterprise in bankruptcy proceedings.
Each of those restructuring procedures is addressed in this chapter. Also discussed are several
legal, regulatory, and economic issues that can arise when an enterprise is restructured. Those
issues and technical methods for restructuring the firm will be developed at greater length in a
forthcoming volume of this series.
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 management's remarkable propensity not to convert strategy into effective
action? Oversimplified, our conclusion isthat management and methodologists have become
far more adept at conducting strategic analyses and forming strategies than in developing
plans' implementation procedures. Thus, there is a large void in strategic management
methodology—not in the conception of strategy, but in its realization. What we have learned
from our studies of strategy implementation has convinced us that the theory and
methodology of strategic management is woefully deficient in its understanding of what is
required to realize strategic intent. Therefore, management is left largely to its own devices in
this critical function. At a minimum, planning managers and chief executives must understand
that a strategic plan or a business plan—indeed, any plan—that lacks a well-developed
approach to implementation is incomplete and probably will not succeed.

Top managers, and even planning executives, seem to make a widespread assumption that, if
a brilliant strategy has been formulated, it then will be implemented simply by virtue of its
intellectual merit. Moreover, the conventional wisdom seems to be that forming strategy
requires more talent, if not intelligence, than implementation; implementation accordingly is a
matter to be delegated down the chain of command to managers and supervisors who
probably weren't involved in forming strategy in the first place. There is the fatal flaw. Senior
management assumes that strategy will be self-fulfilling. To the contrary, we have concluded
that there is no such thing as a self-fulfilling strategy.

Implementation of strategy surely calls for methods and skills much different from those
required to form good strategy. However, there appear to be far fewer methodological
guidelines for implementing strategy than forming it. Texts that have included “strategy
implementation” in their titles really have focused on the dynamics of organization structures
as strategy is formed (Hrebiniak and Joyce, 1984) or on the planning process itself (Lorange,
1982). In fact, there has been no methodological examination of how strategy is realized.
Therefore, a forthcoming volume in this series will address that topic comprehensively. In this
chapter, a few of the most important skills and competences that firms must have to
implement strategy successfully are summarized. These are the skills that any management
must have to realize the intended benefits of its strategy, no matter how elegant that strategy
may be.
THREE GENERIC COMPETENCES
Essentially, the implementation section of a plan must describe management's approach to
converting strategy into goal-oriented behavior. That approach must be supported by three
essential elements: adequate resources, an appropriately aligned organizational structure, and
the motivation of organizational members to exert sustained goaloriented effort. Our studies of
empirical and theoretical evidence have convinced us that a framework of competences in
those three fundamental categories must be developed before a firm can implement strategy
effectively.

Resources must be adequate to support strategic intent, because strategy must be

implemented in the future as well as the present. Resources, present and intended, will
determine the scope of strategy that is feasible. In our consulting practice, we have observed
that management often attempts strategy that is beyond its means, because capacity of some
kind is lacking. At other times, the problem is less immediately apparent and reflects
misalignment of intellectual and physical assets. For instance, management may acquire
powerful computing resources; but if organizational skills and practices aren't able to make
proficient use of them, powerful computers actually may impair performance rather than
facilitate it. Moreover, some level of “slack” resources, or reserves, will be required if
competences to implement future strategies are to be developed. If a firm's resources are
stretched thin and fully utilized in the present, it will be difficult to build reserves for the
future, let alone respond effectively to unanticipated exigencies. Thus, management must
build surplus resources that can be developed for competition in the future while deploying
other assets effectively in the present. These concepts of course are well founded by the work
of theorists including Bourgeois (1980b, 1981), Bourgeois and Singh (1983), D'Aveni (1994),
and Hamel and Prahalad (1989, 1994).

A second class of generic capabilities required for effective strategy implementation is a 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 (D'Aveni, 1994, 1995). Finally, organizations must be able to do more than
just adapt to change; they also must integrate new information within their structures and
benefit collectively from experience. In short, organizations must be able to “learn” (Senge et
al., 1999).

Unfortunately, many organizations have difficulty in learning. Ewing (1969) first observed this
impediment in organizational members' seemingly natural resistance to both change and
formal planning. This resistance to change apparently reflects some very fundamental
psychological mechanisms. Among top managers, for example, strategic failures actually can
elicit escalated commitment to the failed strategy rather than making adjustments and
forming new, more appropriate strategy (Teger, 1980; Brockner and Rubin, 1985; Staw and
Ross, 1987; Brockner, 1992). This tendency for decision makers to persist in failing programs
of action, or “escalating commitment, ” reflects their unwillingness to acknowledge that
mistakes in prior commitments of resources were made. In short, they seem unwilling, rather
than unable to learn.

A third class of generic requirements for effective implementation of strategy is the motivation
of individuals at all levels to persist in effective goal-seeking behavior. In part, this means that
strategy managers must be able to overcome the natural resistance of people to change and a
wide range of cultural barriers. Thus, to take effective action in implementing strategy, it often
is necessary to achieve the consensus of an organization's 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 firm's 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 firm's ability to draw upon all three categories of generic implementation capabilities—
balanced resources, a properly aligned organizational structure, and effective motivation—will
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 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 firm's 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, 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 Corporation's 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.

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 Chandler's (1962) pioneering work, it has been generally accepted that changes in a
firm's scope of business or other fundamental changes in strategy must be accompanied by an
appropriate realignment of the corporate structure. 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
firm's circumstances. However, Nutt's research (1987, 1998) seems to demonstrate that there
are at least four generic styles—intervention, 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 group's 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 consultant's 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 Nutt's 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 firm's 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 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 critical skills for implementing strategic plans. In effect, the annual
operating budget should represent the first year's 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 plan's 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 firm's 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 industry's or market's
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
transitions 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, today's 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 leaders—with visions of doing business in
entirely new ways—are required. To develop altogether new competences also may test an
organization's 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 management's higher-level strategy well
may call for the disintegration of those same functions over a longer term.

The Ability to Realize When It's Time to

Change Strategy and Replan
This final implementation skill is a natural complement to the one just discussed. 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 firm's 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 D'Aveni (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 surveillance, 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
Figure 10.1 The Implementation Competences Bridge

developed relatively recently—for 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 manager's
option, as long as the requirement that all ten skills be used is satisfied.

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 don't 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
nonfinancial 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 assessment—and of strategy implementation—to 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 scorecard's 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 likelihoodof 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, soshould 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 non-production 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
department's budget may be submitted at alternative performance levels. Then, top
management can select from alternative packages depending upon objectives' priority and the
firm's 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 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 management's 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 know-how 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 empowerment—that 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, 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 teams—how they should be formed, how to
select their members, how to manage them, and how to select their leaders—that 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 team's purpose is to accomplish organizational
objectives); and teams must be able to assess themselves and practice self-improvement.
Depending upon the team's 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 bestrong enough to maintain the group's 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 member's
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 other's specialized
skills in order to accomplish the group's 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 high-impact 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 doesn't 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 manager's “bank account.”
Subsequent years' achievements increase or decrease the account's balance. The manager
receives a payment equivalent to one quarter of his bank account's 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.

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 10-50 percent. Most estimates tend to be near the low end of that
range. This seems to be why various forms of commercial planning—whether it is called
comprehensive planning, long-range planning, strategic planning, or business planning—often
have beencriticized. If plans aren't implemented, they can't 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 firm's 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 implementation—or, 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 criticalabilities 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 wish—as 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: well-matched physical and intellectual resources, an organization
structure that is suited to the firm's 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

Effective implementation of plans is a requisite for the success of commercial

Axiom 10.01
planning.

Postulates

Strategy is not self-fulfilling: a deliberate implementation method is required

Postulate 10.01
to realize strategy.

Hypotheses

In order to acquire and develop proficiency in implementation skills, a firm

Hypothesis 10.01 first must have three generic capabilities: sufficient resources, a well-
integrated organization structure, and adequate motivation.
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
Hypothesis 10.02
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 it's time to change strategy and replan.
The relationship between implementation skills and generic capabilities is
reciprocally reinforcing. With practice, the ten skills build generic capabilities,
Hypothesis 10.03 and vice versa. Conversely, degeneration in one category—either generic
capabilities or implementation skills—will produce degeneration in the other
category.
Implementation skills are converted to implementation competences by
procedural routines, or techniques, such as management by objectives, the
Hypothesis 10.04 balanced scorecard, and zero base budgeting. There are many such
techniques to choose from, and management may employ as many as it likes
—as long as all ten implementation skills are employed.
The relationship between implementation skills and techniques is reciprocally
reinforcing. Practicing implementation techniques builds basic
Hypothesis 10.05 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.
 Generic functional capabilities and proficiency in using implementation
Hypothesis 10.06
techniques are not di

rectly related. A mediating variable is implementation competence, in the

form of the ten interrelated skills listed in Hypothesis 10.02.
Equity-sharing incentives are most effective in expansive markets; bonus
Hypothesis 10.07
incentives are most effective in recessive markets.
The interventionist approach to leadership in strategy implementation is
Hypothesis 10.08 more effective than others, including participative, persuasive, and edictive
approaches

11
Restructuring the Enterprise
In the previous two chapters, a generalized procedure for developing strategic objectives was
described. In that procedure, the firm's 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 firm's
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
performance—in 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 re
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.

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 pooled—
often 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 terms—including sales, earnings, cash flow, managerial
skills, and technology, among others. But it is essential that the acquiring firm's management
have a clear idea of how the intended acquisition will facilitate implementation of its more
fundamental strategy.

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 partner's 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 substantialdocuments 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 don't 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 parties—especially the buyer—are
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 environmental 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 financing—which should have been arranged previously—is
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 industry's 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 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 industry's 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 other's “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 plan's term.

Let us now address the problem that arises when an industry's maturity and its prospects for
consolidation offer relatively few opportunities for improvement in earnings through
acquisition. 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 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 alternatives—including 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 firm's shareholders, charged with pursuing their
highest returns. Conflicting with that role is the manager's 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 doesn't add to shareholder value, more “agency conflicts”
between executives' and shareholders' interests in growth may exist.

Moreover, higher business risks tend to increase returns but reduce executives' job security—
another “agency conflict.” The point is simply this: executives' reasons for pursuing
acquisitions and mergers may not necessarily be shared by a firm's stockholders. Moreover,
society's 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 don't have to change their ownership or buy each other's 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 other's 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 arrangements—alliances and joint ventures—have 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).

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 firm's 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 Corning's expertise was in fiberglass. Newstructures 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 resource-sharing
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 moresuccessful 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 other's
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
arrangement—a joint venture—is 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.

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 agreement—
more 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 enterprise's 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
enterprise's 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 firm's 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 firm's financial condition may fall into insolvency even though its fundamental
economic logic and business mission remain sound. In such cases, a reorganization of the
firm's 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 firm's fundamental infeasibility due
to long-term industry prospects or managerial incompetence then management may choose to
petition a federal court for protection from creditors under the U.S. Bankruptcy Code in order
to reorganize the company's 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 1980-1989 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 Flynn's confirmed cases would
be slightly less than 6 percent—not much different from Jensen-Conklin's 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
executive's 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 creditors—in the form of a statutory “reorganization plan”—
can be adopted, various creditor classes will vote on the proposed settlement. To facilitate
their decision, creditors must be provided with a “disclosure document” that explains the
reasons for insolvency and rationale for expecting a reorganization to improve creditors'
potential recoveries above those from a straightforward liquidation. 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 plan's 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 plan's 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 company's
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 plan—whether proposed by management or by a group of creditors after
management's exclusionary period has lapsed—will 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 judge's discretion by imposing some definite
requirements for recognizing creditors' claims. The
“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
executive's 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 practices—stemming 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 HartScott-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.

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 seller's 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 liabilities—including past violations and related remedial orders
—incurred 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. Imposedpenalties 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 tax-avoidance 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 management's approach to pursuing a firm's 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 firm's present
performance potential to standards of success (goals) and inferring value additions that will be
required from new sources not available at present, 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 asufficient 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 tenet—that restructurings only should supplement internal strategy
—should 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 approaches—which incur lower risks than ownership
changes—still incur higher risks than those usually associated with internal development
strategies.

The somewhat lengthy procedures of conceiving and executing ownership changes—

acquisitions, divestments, or mergers—are 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 contingencies—for
instance, the industry's 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' life-cycle stages. Acquisitions are most appropriate in low
technology and laborintensive industries, while joint ventures and alliances tend to be more
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,
management's fundamental interests still are served by controlling or minimizing risks
associated with extending the scope of an enterprise so that it grows larger, 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
transactions—alliances 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 resources—capital, physical, and human—that are appropriate for pursuing a stated
objective will be contributed to such an enterprise; and management will have to be
compatible, or the transaction won't 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 resource-sharing approachesoffer their
principals to mitigate risks—sharing 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, resource-sharing 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 enterprise's risk is
related to its performance potential.

Finally, this chapter addressed reorganization of the firm's capitalization under the U.S.
Bankruptcy Code. This approach to restructuring is appropriate only when the firm's 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 firm—for instance, burdening a firm with unsupportable debt in a
leveraged buyout or when a major customer becomes insolvent—should 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 enterprise's 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 requirements 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 manager's 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
 An acquisition is a purchase of the stock or assets in one business by another
Definition 11.01
business or person(s).
A stock purchase is an acquisition effected by purchasing at least 80 percent
Definition 11.02 of a company's issued and outstanding shares of stock. All assets and
liabilities of the acquired firm are conveyed to the buyer.
An asset purchase is an acquisition effected by purchasing essentially all
assets of the target business. As partial payment, the buyer may assume
Definition 11.03
some or all of the seller's financial liabilities. Assumption of off-balance-sheet
liabilities is partially negotiable.
Definition 11.11 A divestment is the reciprocal portion of an acquisition.
An equity carve-out is the sale of stock in a subsidiary to new investors. The
Definition 11.12
subsidiary becomes a new legal entity.
A spin-off is a distribution of shares in a subsidiary to the parent company's
Definition 11.13
shareholders. The subsidiary becomes a new legal entity.
Definition 11.14 A break-up is several spin-offs resulting in dissolution of the parent firm.
A merger is a pooling of two corporations' assets and liabilities to create a new
Definition 11.21
corporation with

no gain or loss by either

party. (Mergers became
rare in the United States
after June 30, 2001.)
An alliance is the formation of either a contractual or non-
Definition 11.31 binding relationship between two or more firms with
complementary business interests.
A joint venture is the formation of a jointly owned corporation
by two or more firms to achieve a stated purpose or goal.
Definition 11.41
Each party becomes a shareholder and participates in
governance of the new corporation.
A bankruptcy is a declaration of insolvency by a firm,
Definition 11.51 partnership, or individual with a petition for protection from
creditors under the U.S. Bankruptcy Code.
A bankruptcy reorganization is an attempt to form a plan for
settlements with creditors under Chapter 11 of the U.S.
Definition 11.52 Bankruptcy Code, by reorganizing the bankrupt firm's
capitalization and then resuming operations under a plan to
meet new creditor obligations.
A bankruptcy liquidation is a planned liquidation of assets,
following rules and procedures set forth in Chapter 7 of the
Definition 11.53
U.S. Bankruptcy Code, administered under the direction of the
U.S. Trustee's Office.

Axiom

A secondary strategic objective emerges when management cannot reconcile the

difference between a firm's goals and present momentum using existing, internal
Axiom 11.01
resources. This new objective can be attained only by appropriating external
resources or lowering the goal.

Postulates

Strategies that attempt to accomplish objectives through external resources

Postulate 11.01
result in “restructurings” of capitalization and/or the organization.
 There are two types of restructurings: (1) changes in ownership and (2)
Postulate 11.02
resource sharing.
Ownership changes include acquisitions, divestments, mergers, and
Corollary 11.021
bankruptcy.

Corollary 11.022 Resource sharing is accomplished by alliances and joint ventures.

Alliances and joint ventures permit firms to share risks of a single business
Postulate 11.03
and/or hedge market risks through multiple commitments.
Bankruptcy reorganizations should be attempted only when reasons for
Postulate 11.04 insolvency do not stem from an infeasible business model or managerial
incompetence.
Legal and regulatory limitations on the approach to any restructuring strategy
Postulate 11.05
must be considered when they initially are planned.

Hypotheses

Restructurings are most successful when they are conducted to accomplish a

Hypothesis 11.01
higher-level strategy rather than to realize an unanticipated opportunity.
Acquisitions, mergers, divestments, alliances, and joint ventures can be used
Hypothesis 11.02
to obtain “learning effects” early in an industry's life cycle.
Those same transactions can be used to accomplish “scale economies” late in
Hypothesis 11.03
an industry's life cycle.
Acquisitions and mergers in pursuit of product or service diversification
Hypothesis 11.04 should avoid extremely concentrated or diversified portfolios; focused
portfolios of related businesses are most profitable.
Most of the value added by acquisitions is appropriated by sellers, not
buyers. Thus, rates of economic value added by acquisitions, proportionate
Hypothesis 11.05
to investment, tend to be relatively low when compared to resource-sharing
transactions.
Resource-sharing transactions such as alliances and joint ventures have
higher returns than ownership changes, because they are more focused on
Hypothesis 11.06
specific objectives, avoid unproductive assets and acquisition premiums, and
employ compatible personnel.
Alliances are preferred for purposes of hedging relatively high performance
Hypothesis 11.07
risks, as in research and development enterprises.

Joint ventures are preferred for minimizing risks of mistrust, versus

Hypothesis 11.08
performance, as when two proprietary technologies are combined.
Resource-sharing arrangements are preferred over ownership changes when
Hypothesis 11.09 the partners' markets do not overlap. Acquisitions are preferred when
markets do overlap.
Bankruptcy reorganizations' chances for success are very low (P <.10). Even
Hypothesis 11.10
after confirmation, the probability of a reorganized firm's success is P <.30.
A formal plan of business should be prepared for any restructuring as a
Hypothesis 11.11
means of improving its chances for success.
Hypothesis 11.12 “Agency 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.

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 firm's planning
procedures.

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 management's “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.

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 firm's internal capabilities and external (environmental) conditions. Each dimension
—integration and adaptation—is vitally important.

8. Management's choices of objectives, strategy, and planning style will be determined by its
perceptions of (1) environmental uncertainty or risk and (2) the firm's need for improvement
of internal capabilities. Interactions of these two perceptions will produce a strategy that is
more or less adaptive or integrative—that 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 relatedlines 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” approach—consisting of
both top-down and bottom-up procedures—may 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 mode—perpetually 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 industries—less 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
firm's resources of capital and sufficient time to permit a thorough consideration of
alternatives.

16. Effectiveness of the planning function and performance typically will be enhanced by
consensus of the management team on a firm's external business conditions, risks, and
approaches to pursuing objectives. Agreement on means (strategy) is more important to a
firm's 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 firm's highest-level plan (the “corporate plan”) must include allocations of capital to
competing investments within the corporation—that 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 firm's structural complexity increases, so should the sophistication of its planning
procedures.

24. When risk levels are high, planning procedures should be most highly developed—for
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.

26. The firm's planning process must evolve in response to its practice in planning, economic
cyclicality, progression of the industry- or 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 executive's 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 executive's time, while improving the quality of a CEO's
(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 manager's 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.

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 executive—
overdelegation or underprioritizing of planning functions and failure to become adequately
informed regarding planning principles. Each pitfall can result in poor direction of the planning
function and a low likelihood of planning success. 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 manager's 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.

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 firm's 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 firm's
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 firm's 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 firm's 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 firm's 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 industry's
critical success factors. Competence alone is not sufficient for competitive strength. A
competitive strength or weakness exists only when the firm's competence in a critical function
is distinctively superior or inferior to that of competitors. 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 firm's 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 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 performance—
before changes in strategy are introduced—is one measure of goals' difficulty/feasibility. The
gap's size also provides quantification of strategic objectives—that 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 “loser's” business will suffer from under
investment, and its ability to attain or sustain competitive advantage may be impaired. Thus,
a corporation's overall financial interest (and its shareholders' interests) may conflict with the
interests of such “losing” divisions (as well as the interests of their employees, 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 trade-offs 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 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 level—for 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 occur—before
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 management's
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 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 firm's 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 it's 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 category—either generic capabilities or implementation skills—will 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
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 firm's 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
industry's 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 industry's 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.

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 firm's 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 added—and perhaps that
some should be deleted or changed. To suggest that these principles characterize the total
methodology of comprehensive commercial planning would be naïve, 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.

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 firm's 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 firm's
comparative competences, and selecting from alternative strategic approaches to the firm's
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 processfor supplementing the present scope of business through
acquisitions and/or reinforcing returns through divestments—or, perhaps, alliances and joint
ventures—all of which would appear more prominently in subsequent models.

Igor Ansoff's 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 Ansoff's
book. (Ansoff's model evolved in his subsequent publications.) Since it would be awkward to
present all of Ansoff's 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 Ansoff's highly influential model. Note that his model does incorporate a
diversification strategy as well as an internal development strategy. Note, also, Ansoff's
attention to the resource requirements for competitive advantage—a 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 management's current implementation priorities.

Smalter's (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 Smalter's 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 Steiner's 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,
Steiner's 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, Steiner's model is “closed.” That is, it is heuristic in nature.

EXHIBIT A.1a Formulation of Economic Mission

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 firm's capability profile is a statement in quantitative and/ or qualitative terms of the
firm's capabilities in the functional areas defined in the normative capability profile.

(e) Relating the firm's capability profile to the normative capability profile for each field of
endeavor will serve to develop comparative profiles which indicate how well the firm's
capabilities match the requirements for success in each field.

(f) The firm's performance potential in each field may be derived by matching the comparative
capability profiles with inherent potential in each field with respect to growth, 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.
EXHIBIT A.1b Formulation of Competitive Strategy

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 firm's 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.

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, November-December, 1962.
Copyright © 1962 by the Harvard Business School Publishing Company; all rights reserved.
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, November-December, 1962.
Copyright © 1962 by the Harvard Business School Publishing Company; all rights reserved

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, November-December, 1962.
Copyright © 1962 by Harvard Business School Publishing Company; all rights reserved.
EXHIBIT A.2 Ansoff's 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.

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. 4-8, Copyright © 1969, with per mission from Elsevier Science.
EXHIBIT A.4 Comprehensive Strategic Planning: Structure and Process

Source: Reprinted with the permission of The Free Press, a division of Simon & Schuster Adult
Publishing Group, from Strategic Planning, “What Every Manager Must Know, ” by George A.
Steiner. Copyright © 1979 by The Free Press. All rights reserved.

About the Author

CURTIS W. RONEY, Ph.D., is a principal of Commercial Planning Consultants in Wilson, North
Carolina, and an associate professor of management at North Carolina Wesleyan College. His
professional career of over thirty years has been devoted to business planning, strategic
management and corporate development. As a senior corporate executive, strategic planner
and management consultant, Dr. Roney has been active in many industries and businesses of
all sizes. He is a recognized expert in strategic planning methods for cyclical industries. His
previous book, Assessing the Business Environment: Guidelines for Strategists (Quorum
Books) was published in December 1999.

Dr. Roney's managerial posts have included corporate planning director at Holiday Inns, Inc.,
and vice president, planning and development at Philips Industries, Inc., a major producer of
building components, materials handling equipment and vehicular running gear. He also served
on the internal consulting staff at PepsiCo, Inc. and the consulting staff of Peat, Marwick,
Mitchell and Co. (predecessor to KPMG). His present and recent clients include public
companies that supply products and services to cyclical industries such as basic metals,
specialty chemicals, building products, automotive components and construction equipment.

Professor Roney is currently completing four additional volumes in Praeger's Guidelines for
Strategists series on strategic planning. Remaining volumes in this series will address methods
for gathering strategic evidence, making strategic decisions, implementing strategy and
corporate restructuring. His next book, Gathering the Evidence: Guidelines for Strategists, will
be released soon.