6892207 Strategic Management Methodology

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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 professionthe community of managementprofessionals who form, facilitate, and manage procedures for selecting corporate andbusiness objectives; developing strategy and plans of business, and facilitating strategyimplementation. 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 planningprocedures. This book is intended to be a source of methodological guidance for thosemanagers.

The focus of this text is on practicehow planning functions best are performedadministratively. There is an abundance of theoretical writing and empirical research intotopics pertaining to business and corporate strategy. But, surprisingly little definitiveinformation is available to guide professional planning managers or senior executives inselecting the procedural principles most likely to produce plans that can be implementedsuccessfully 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 aregenerally accepted for one of three reasons. First, their effectiveness may have beendemonstrated empirically, either by formal research or case histories. Second, academiciansmay 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 customarypractice may have evolved. In the absence of those foundations, I have drawn on threedecades ofour firm's experience in formulating plans and planning procedures with and forclients in virtually all sectors of American industry.

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

C. W. RoneyWilson, NCNovember 2003

Introduction

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


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It is important to emphasize that the study of strategic planning methodology should not belimited to techniques alone. Many books have been written on planning techniques over theyears, but without firm foundations in theory and/or empirical verification, very few haveendured the test of time. Accordingly, this volume is a compendium of both theory andempirical evidence that pertain specifically to how firms should be managed strategically.Thus, the application of strategic management theory and empirical evidence to planningtechnique 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 engineeringis to theoretical physics. More than simply procedural guidelines, then, this book containsprinciples of applied strategic management theory and empirical evidence that are eithergenerally accepted or sufficiently verifiable to serve as bases for professional practice. Bothstrategic management scholars and serious strategic planning practitioners who desire acomprehensive collection of generally accepted planning principles should find this volumeuseful.

ORGANIZATION OF THIS BOOK

The text consists of twelve chapters, divided into five parts. Part I addresses the foundationsof strategic management methodology. Its first chapter discusses the planning mission froma historic perspective, which should give planning managers the comfort of knowing that theirprofession has evolved in lockstep with modern management. In the second chapter, the basicapproach of comprehensive planning is defined. In the third chapter, that basic approach iselaborated in the form of a classic procedural model. In the fourth chapter, readers will learnhow the classic model fell from favor during the 1970s and 1980s, as its evidential andanalytic requirements overwhelmed the administrative capabilities of most corporations. In the1990s, with arrival of new information technology, those impediments to executing the classicmodel were removed. Accordingly, the fourth chapter also proclaims that a new age instrategic planning methodology has arrived and that neoclassicism now represents the stateof the planning art.

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

The second chapter in Part II reviews administrative principles that should be observed byplanning managers in conducting planning functions. The third chapter explores severalcontingencies that may affect how those administrative principles are best applied in a firm'sparticular circumstances. For example, the often-encountered impediment of organizationalresistance to planning is discussed.

In Part III, strategic decision-making procedures are described. This book is intended toprovide methodological principles for practicing strategic planning managers who facilitate andadminister strategic planning functions, but rarely have the authority or responsibility to makestrategic decisions themselves. Accordingly, these two chapters are focused on theproceduresrather than the substance of strategic decision making. For a more comprehensive treatmentof substantive matters related to strategic decision making, readers may refer to the author'sforthcoming volume addressed solely to that subject.


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The first chapter in Part III addresses decision-making procedures for firms with singlebusinesses. Even multi-business corporations arecomprised of individual businesses, each ofwhich should follow the principles set forth here. The second chapter addresses specialprocedural considerations that apply in multi-business corporations; here, readers will finddecision-making procedures that are unique to corporate-level planning, as opposed tobusiness-level planning.

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

The first chapter of Part IV addresses implementation capabilitiesboth skills and resources.Surely, this is the least developed area of strategic management literature. In both theory andpractice, our current methodology for realizing strategy has many voids. Much more is knownabout how to form strategy and formulate strategic plans than about the competences that arerequired to implement strategy effectively. But, readers may take some comfort from thespecific guidelines in this chapter. (Readers also may be encouraged to know that a fourthvolume in this series will describe the methodology of strategy implementation in muchgreater detail.)

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

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

HOW GENERALLY ACCEPTEDPRINCIPLES ARE STATED

At the end of each chapter, readers will find an abbreviated list of generally acceptedplanning principles that apply to the chapter'ssubject matter. General acceptance of theseprinciples 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 theywere just mentioned. That is, empirical evidence was given the greatest weight; widelyaccepted academic theory was weighted second; and customary practices were given lessweight, since one purpose of this volume is to provide practitioners with procedural principlesthat may supplement, or even replace, some of their present customs. Finally, to supplementthose three sources and to resolve matters of practical application, the author drew on aboutthirty years of practice as a planning professional.


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When statements of planning principles were drafted, an attempt was made to distinguishbetween their reliability, or degree of uncertainty. To accomplish this distinction, the followingcategories 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 trueCorollary: A statement that must be true if the one that precedes it is true

Hypothesis:A description of a natural phenomenon that can be tested empirically, statedtentatively to provide a possible explanation of the phenomenon underconsideration

CONCLUSION

This compilation of generally accepted strategic planning principles is long overdue. Thelegions of academicians who study strategic management, in all of its various forms, haveproduced mountains of literature, which surely benefit practitioners from time to time. Mostwould agree that there is a chasm between strategic management theorists and professional

practitionersand that this chasm has been growing wider in recent years. It is time to narrowthe 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 forplanning practitioners that reside in the strategic management literature and harvest them inthese guidelines.

Part I

Foundations of Methodology Foundations of

Methodology

The community of strategic planning practitioners, although amorphous, is very large. Asurvey conducted by our firm in 1995 found that 88 percent of 368 publicly owned industrialcorporations had formal strategic planning programs (Roney, 2001). Moreover, that proportionhad 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 inNorth America to be 89 percent.

Those results should not be surprising. Try to imagine a chief executive standing before hisshareholders at an annual meeting, or a meeting of securities analysts, saying something likethe following. Frankly, we really don't do strategic planning in our firm; and we don't have aformal plan of businessno 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 muchlonger. A large majority of senior business executives in fact do practice formal planning; asobserved earlier, mostcorporations of any significant size have formal plans of business. Theyalso have staffs of professional managers who administer and facilitate planning procedures.

This book has been written for both senior executives and serious planning professionals, aswell as academic methodologists. It provides a comprehensive collection of methodologicalprinciples for conducting a firm's planning functions. In this, first of four parts, there are fourchapters on the foundations of comprehensive commercial planninghistoric perspective;


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some basic methodological concepts; the classical approach to planning; and a neoclassicalapproach that exploits modern advances in information technology.

Chapter 1 begins by summarizing the historic evolution of comprehensive planning into aformal management discipline. Military planning and strategy existed around 450 B.C.; butstrategic 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 acentury later, however.

Benefits to be expected from commercial planning also are discussed in Chapter 1. Morespecifically, results of empirical research demonstrating that formal planning can improve theprobability of a firm's commercial successby either increasing upside performance potentialor reducing downside riskare reviewed. The purpose of planning is to realize both of thosebenefits. A related discussion addresses the firm's economic mission and the role thatcomprehensive planning can play in helping the firm to accomplish its mission successfully.

Chapter 2 explores essential concepts of comprehensive planning and its methodologicalscope. In this chapter, some very important terms used throughout the remainder of the bookare defined. Among those are comprehensive commercial planning, comprehensivecorporate planning, comprehensive business planning, goal, strategy, and objective.

A three-stage general planning modelalso a bedrock of the remaining chaptersisintroduced here as well.

Chapter 3 reviews the basic approach of strategic planning from two quite differentperspectives. In one case, planning decisions are viewed as rationally deductive in nature. Ifmanagement knows how to define standards of success, then, at any given time, it also shouldbe 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 andsuccess. An alternative perspective may be taken, however. This is an inductive approach, bywhich planning decisions are made incrementally rather than deterministically. At any giventime, management may discover opportunities to improve upon the status quo. Thus, a policyof continuous improvement is adopted without necessarily knowing what the firm's highestpotentialmight be. Each approachdeterministic and incremental, deductive and inductivecan be effective. However, as the classic strategic planning models used most frequently todayare deterministic and deductive in nature, the classic model of strategic planning as adecision-making process is described here in greatest detail.

While the classic planning model has made a great impact on the practice of modernmanagement and has influenced how corporations still are administered, that modelnevertheless has been cumbersome and difficult to execute, primarily becausebeing sorational and deductiveit requires substantial evidence and analysis to support executives'decisions. In an age of increasing turbulence, the evidential and administrative burdens ofclassic procedures greatly impaired their practicality and their effectiveness until informationtechnology eventually made those procedures much less difficult.

In Chapter 4, readers will learn how modern information technology has been applied tostrategic planning methodology so that the impediments of informational overload and

administrative burden no longer impair the classic models' execution. In fact, informationtechnology has so facilitated execution of the classic models that a new, neoclassicalmethodology of strategic planning has emerged. Neoclassicism today represents the state ofthe planning art. In this chapter, readers will become familiar with a wide variety of electronicplanning aids now available to facilitate strategic planning at all stages of the process.

1


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Historic Perspective Historic Perspective

The ability to conjecture about the future and to formulate plans is an attribute thatdistinguishes humankind from other species. We cannot say when formalized planning began,but surely it was long before modern management theorists started to write about thissubject. For centuries, military commanders have conducted operations according to battle

plans predicated upon analyses of their forces' capabilities, opponents' capabilities, and battleconditions in the environment. Cummings (1995) reported that the earliest surviving volumeon strategy was written by Aeneas, about 450 B.C. Pericles devised plans and strategies forwar 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 citizensof Athens) emerged. At about the same time, Sun Tzu authored a complete text on militarystrategy that mandated comprehensive planning (Chen, 1994:43). Houlden (1995:100) wroteas follows: Throughout history, whether it be Caesar, Hannibal, or Nelson, there have beenexamples of the art of strategy. But, it is only recently that science has developed to such astage that more of a blend between the science and art has given rise to strategic planning aswe know it today. Indeed, as explained later, modern commercial planning has existed foronly about forty years, although some formal business plans clearly were being prepared wellover a hundred years ago.

EVOLUTION OF MODERN CONCEPTS

The Pennsylvania Railroad's management formed a corporate structure to perform long-rangeplanning functions in the 1860s and the 1870s (Chandler, 1962:22, 23). DuPont also wasamong the earliest manufacturing concerns to form a corporate planning function, which it didin 1903 (Dutton, 1942:185, 186). Chandler (1962) described the early arrival of formalizedplanning in those and several other large American corporations from about the onset of thetwentieth century. Using in-depth analyses of how those corporations' managerial andadministrative structures evolved, Chandler concluded that formal planning practices (amongothers) evolved in response to the increasing administrative complexity that accompaniedcorporate growth and diversification.

Emergence of Comprehensive CommercialPlanning

Henri Fayol (1916), in one of the first texts on management principles, prescribed an elaboratesystem of well-integrated long- and short-range planning procedures and plans, which he usedin actual practice from 1866 to about 1918. For fifty years, his French mining companiesformulated 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, withprinciples not unlike many that appeared more than a half-century later. Remarkably, Fayol's

book on industrial management principles defined the comprehensive business planningprocess 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 planningmethods with great success in his own mining companies.

Fayol's plans included formal business analyses, market analyses, ten-year forecasts, and veryspecific implementation programs, as well as progress monitoring procedures and contingencyplans. Forecasts in Fayol's plans were much more than simple quantitative exercises; they


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contained integrated strategy statements. The first year of a plan's ten-year term wasexpanded 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 updatedregularly. Fayol's methods were so novel and successful that he was appointed to the FrenchLegion of Honor (Chevalier in 1888 and Officer in 1913). He received the Delesse Prize fromthe 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 developedslowly. 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 afterWorld 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 influencethat 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 methodsand procedures developed during World War II. Indeed, military planners have developedprinciples for devising strategy, assigning implementation tasks to operating units, andallocating 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 transferredfrom military to business organizations through management migration. Although this legendmay have some truth, recall that Chandler (1962) documented the presence of planningdepartments and many of today's business planning functions in American corporations beforethe turn of the twentieth century and that Fayol had implemented planning practices in thelate 1860swell before World War I. Therefore, the transference of military planningtechniques to business may have strengthened American management's planning capabilitiesafter 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 progressivelygreater 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 isclosely related to the effectiveness of organization structure. Thus, command and controlconcepts evolved.

When World War II ended, military veterans with planning experience often put the techniquesthat they had learned to good use, especially in the military-industrial complex, asEisenhower called it in his farewell speech (1960). For example, Robert McNamara applied PPBand 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 inmilitary applications of planning, but also from a plethora of quantitative approaches tooptimizing outcomes in complex systems and the arrival of the electronic computer. IgorAnsoff, after receiving his Ph.D. degree from Brown University in 1948, got his early


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experience in planning at RAND Corporation. He moved to Lockheed Aircraft Corporation in1957, where he became a vice president for planning and programs (Hussey, 1999). Bothfirms were original members of the postwar military-industrial complex and early users of thefirst large-scale computing machines. Ansoff's brilliant academic career subsequently took himto Carnegie Mellon, Vanderbilt, and U.S. International University. He was a founder of classicstrategic management methodology (Ansoff, 1965).

Notwithstanding its uncertain validity, the military analogy unquestionably has been helpful tostrategy authors (Harrigan, 1980, 1986a; Kotler and Singh, 1981; Fahey, 1985; Cohen, 1986;Peacock, 1984; Rogers, 1987; Parks, Pharr and Lockeman, 1994). Initially, concepts ofbusiness planning, like their military analogs, involved relatively static objectives. Generallyaccepted planning principles, early in their post-World War II evolution, focused on selectingfixed goals (or objectives) and then defining the work required to bridge gaps between presentpositions and objectives (Argenti, 1969; Kami, 1969). Ultimately, the required work wasbroken down into manageable tasks that might be assigned to organizational units andindividual managers. Gilmore and Brandenburg (1962) provided a graphic description of thisclassic procedural model; it will be found in the Appendix.

During the 1960s and early 1970s, planning principles in business and the military did seem toevolve 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 ofconditions on the competitive battlefield. In addition to prevailing assumptions regarding theenvironment, alternative scenarios were formulated (Wilson, 1973; Downey et al., 1975;Edmunds, 1982; Hoffman, 1985; Schwartz, 1991; Mercer, 1995a, b). Strategic responses toalternative scenarios, or contingencies, initially may be prepared in less detail than strategy inthe prevailing plan. Then, when environmental monitoring indicates that the probability of acontingency's occurrence is increasing, a strategy for responding to that contingency can berefined. Eventually, it may become appropriate to substitute contingency plans forcorresponding elements in the prevailing planat which time the contingency plan will prevailand the predecessor will be discarded.

General Acceptance of Planning

PracticesThe steady growth of formal planning practices in American business was defined statisticallyand chronicled by several writers after the mid-1950s. One study, conducted by the NationalIndustrial Conference Board in 1955 found that 75 percent of 166 large corporations hadinstalled long-range planning functions (Baker and Thompson, 1956). Ten years later, thatproportion allegedly had risen to over 90 percent (Brown, Sands and Thompson, 1969).However, most other studies' results produced less spectacular growth rates. A survey byBusiness Managementmagazine in 1967 found that about half of 101 large corporations hadbegun to plan formally. Fulmer and Rue (1973) found that only 23 percent of 386 respondentsto their survey of a broader sample, conducted for the Planning Executives Institute, hadhighly developed strategic planning functions, but that another 50 percent had long-rangefinancial 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 otherindustrialized nations confirmed that the practice of comprehensive plans was widespread on aglobal scale (Exhibit 1.1). By the end of the 1960s, formal strategic planning had become anestablished management discipline.

Some studies observed that the incidence of comprehensive business planning (CBP) practiceswas significantly influenced by firms' sizes (Henry, 1981; Houlden, 1985). Other studiesdisclosed that planning propensities tended to differ between industries (Fulmer and Rue,1973; Dess and Beard, 1984). Subsequent surveys tended to report that the incidence offormal CBP functions increased steadily both in the United States and in most industrialized


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nations (Houlden, 1995). Most recently, Rigby (2001) confirmed that the incidence of strategicplanning had increased throughout the period of 1993-2000. In North America, the incidencerate had reached 89 percent in 2000. Satisfaction levels were reported to be quite high (about89 percent).

EXHIBIT 1.1 Emergence of Formal Planning in Countries Other than the UnitedStates

No. ofCompanies

Incidence

Region/Country Author(s) Survey Year N1 N2 RR Pct.

ASEAN Region

Foo Check-TeckP. H. GrinyerPeterMcKiernan

1988-89 1300 325 25% 100%

BelgiumFilip CaeldriesR. vonDierdonck

c. 1986 1000 124 12% 66%

DenmarkRobertAckelsbergWilliam Harris

c. 1987 NA 12 NA 100%

FranceH.Schollhammer

c. 1968 790 371 47%15%-70%

GermanyW. H. StrigelI. BambergerEduard Gabele

1965 NA 1600 NA


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intense industries. Since our response rates were quite high (85%) and our sample wasrelatively large, our findings probably are reliable for publicly owned firms in the industriesthat we studied.

Emergence of Generally Accepted

PrinciplesAs academic and professional interest in the practice and promise of comprehensive businessplanning accelerated, methodologists turned their attention to articulating principles by whichincreasing numbers of managers involved in formalized planning could benefit from theexperience and assessments of others. Initially, attempts at codification were fairly broad inscope, providing guidance in integrating multiple management functions to implementplanning 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 planningawarded by Harvard University.) Complete in its treatment of methodology, Branch's textdiscussed planning's theoretical bases, purposes, procedures, assumptions, analytictechniques, implementation, performance monitoring, and even the future of planning as afunction 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 11Machinery 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 textwhich isfar more definitivepredated Andrews' by nearly a decade. Immediately after Andrews' text,two othersmore along the lines of Branch'swere published by Ewing (1972) and Hussey

(1974). Lorange and Vancil (1977) probably reached the limit of such early approaches todefining strategic planning functions by compiling a series of articles that prescribed how CBPprocedures should be performed in various elements of the organization at different stages ofthe process.

Systematic procedural approaches to performing specific tasks of comprehensive businessplanning also emerged fairly early. Among the most important of such works surely wasAnsoff'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


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beginning point for quantifying strategic objectives in financial terms and demonstrating howincremental benefits of strategic objectives should be defined. Ackoff (1970) elaborated onsome of these concepts by providing a quantitative context for setting objectives and ageneral approach to systematizing planning tasks. Other important treatments of systematicapproaches to defining procedural planning principles were published by Enrick (1967),Rothschild (1979), Grant and King (1982), Sawyer (1983), and Marrus (1984). Ansoff also wasinstrumental in defining systematic approaches to implanting strategy (1984).

As procedural planning principles emerged, their architects focused greater attention onpracticalities. In particular, procedural principles were focused more intensely onimplementation requirements. For instance, managers' work could be prioritized by a hierarchythat connected objectives throughout the enterprise to corporate-level goals and strategicobjectives (Granger, 1964; Pearson, 1979). Subsequent texts by Hrebiniak and Joyce (1984),Hamermesh (1986), and Lorange (1982) focused on strategy implementation. At the sametime, several approaches to managing by objectivesfollowing Drucker's (1964) workestablished procedural principles for harmonizing organizational resources in theimplementation of goal-seeking strategy (Odiorne, 1961; Morrisey, 1977; Giegold, 1978).Borrowing from McGregor's (1960) notion, the human side of planning also was developedas a vital consideration of implementation methodology by Ewing (1969) and others whosework in this area was summarized by Madden (1980) for the Planning Executives Institute.

As academicians grew more interested in business planning and strategy, they focusedresearch inquiries on the efficacy of alternative planning procedures. A virtual tidal wave ofresearch into technical planning practices followed. Some results of that research aresummarized in a subsequent section of this chapter. However, illustrations include the initialstudy of its kind by Ansoff et al. (1970), which contrasted acquisition results of companies thathad highly developed planning functions to those of companies that did not. When acquisitionswere conducted to implement formal strategies in comprehensive plans, financial results weresuperior to those of firms in which acquisitions were not guided by comprehensive plans. Atthe same time, Thune and House (1970) reported results of a smaller but statistically morerigorous analysis: they found that planners in some industries outperformed nonplanners.Another groundbreaking research report was that of Rumelt in 1974, which focused onrelationships between growth strategy, corporate structure, and financial performance. Firmsthat 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 wasrepresented by a growing number of investigators and theorists who focused attention on thecompetitive 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 competitivecircumstances by selecting specific approaches to marketing, new product development,quality management, advertising, and promotion that are best matched to the firm's marketposition. For firms with multiple divisions, portfolio techniques to prioritize alternativeinvestments in divisions were devised (Hedley, 1977; Robinson, Hitchens and Wade, 1978). Byfar 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'sindustrial environment as a prerequisite to selecting competitive strategy.

Approaches to the formulation of goals and strategy continue to emerge. For instance, astream of research and methodology initiated by Rappaport (1981, 1986) and manifested inthe methodological texts of Stewart (1990) and Copeland et al. (1994) has focused on thegoal 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 otherhand, Hamel and Prahalad (1994) argued that management must develop more ambitious andfuture-oriented strategies to improve their competitive market positions, based on thedeliberate, sustained development of core competences to compete in emerging industries andmarkets.


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One manifestation of the emergence of generally accepted planning principles was a steadystream of management handbooks containingcomprehensive summaries of businessplanning 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 CorporateStrategyfollowed in 1965. Unquestionably, the most comprehensive methodological treatmentof comprehensive planning principles to date was Steiner's (1969a) three-volume work, TopManagement 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 fromplanning procedures.

Whereas Steiner's approach was from the practicing professional's point of view, the text bySchendel and Hofer (1979) was a landmark in the academic community. That text containedmaterial developed from fourteen research papers delivered at a conference held at theUniversity of Pittsburgh in May 1977, where nearly a hundred academicians addressed thesubject matter of strategic management to be covered by graduate curricula on businesspolicy 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 strategicmanagement. Ansoff's Strategic Management(1979) followed in the next year and his earlierpaper (Ansoff, 1972) initially defined the term, strategic management. in Since 1980, therehave been no significant new attempts to codify the body of knowledge regarding CBPprinciples 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 appearregularly.

Thus, by the early 1980s, a broad body of knowledge regarding methods and procedures forcomprehensive commercial planning had been accumulated and, as such, represented

generally accepted planning principles. Perhaps these principles, which existed in planninghandbooks such as those summarized earlier (and a host of unmentioned others), were notyet as definitive or fully developed as generally accepted principles in more matureprofessional disciplines, such as accounting. But, taken as a whole, the theoretical literatureand results of empirical research required for general acceptance of planning methodologywere being accumulated rapidly.

As turbulence of the economic environment increased in the 1970s and 1980s, fundamentalconcepts of planning nevertheless remained essentially unchanged; objectives still were staticrather than dynamic. However, because there might be many contingencies, and plans'complexity had grown as the structures of industrial enterprises grew more complex, itbecame increasingly difficult to perform all of the computations and record-keeping tasksinvolved in forming, maintaining, and monitoring plans. Moreover, if objectives still were static,environmental dynamism kept increasing. The replanning function became ever moreimportant, 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 ofelectronic planning aids' still lagged the acceleration of business conditions' turbulence. Theresult was an inability of classic planning models to keep up with the pace of change. Plansfrequently 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 the1990s 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


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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 dealwith those crises. Eventually, it became fashionable to discredit commercial planning andprofessional planners for a host of sinsfrom intellectual arrogance to the failure of CBP toinsulate firms' performance from recessions (Kiechel, 1982; Peters and Waterman, 1982;Mintzberg, 1994c). In retrospect, it would seem that strategic planning was blamed for beingtoo 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 Agesof 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 economicenvironments, where uncertainty became an important issue in policy making (Boulton etal., 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 methodshad been discarded, no other methodology arose to take its place. Thus, lacking in viablenavigation aids, many managements floundered strategically in the recession of 1981-1982and afterward. The very mission of commercial planning itself became unclear; and manyprofessional planners lost their identities, as well as their jobs.

EXHIBIT 1.2 Evolution of CBP Concepts in the Twentieth Century

Emergence of BusinessPlanning

1860 - Pennsylvania RR forms a planning office

ca.1865

- H. Fayol uses comprehensive business plans to manageFrench mining companies

1903 - DuPont forms Corp. Development Dept.

1916- H. Fayol's mgt. principles include business plans; CBPprocedures: 5-10 yr. planning horizon

Evolution of the CBPConcept

1945 - WWII ends

1946 - P. Drucker: Concept of the Corporation

1954 - P. Drucker: first text to include CBP methods

1959 - IBM commences formal corporate planning1959 - 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 ofplanning practices

1965 - G. Odiorne: Management by Objectives

1969 - G. Steiner: Top Management Planning

1969 - J. Argenti: Systematic Corporate Planning

1970 - R. Ackoff: deterministic methodology

1970- Ansoff et al. and Thune and House: first researchdemonstrating financial impacts of CBP functions

1972 - Ansoff: the concept of strategic management

Generally accepted CBP1970-81

- Many other empirical studies of principles planning vs.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

1984- B. Wernerfelt: resource-based view of competitiveadvantage


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Immediately after the 1981-1982 recession, a wave of acquisitions by means of leveragedbuyouts (LBOs) swept over America (Curran, 1990; Faltermayer, 1991). As this wave swelled,

corporate planning departments became corporate development departments. Corporateplanners' skills were refocused on the task of identifying opportunities to acquire and/or divestbusinesses in order to maximize shareholder value as quickly as possible. The result was atransformation of many in the corporate planning profession into a new breed of financialgunslingersinvestment 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 anenterprise's long-term well-being, became financial mechanics in search of the quick buck.

In the late 1980s, low-quality acquisitions and divestmentsand the financing vehicle thatenabled them, the undisciplined issuance of junk bonds to effect LBOscame to an abrupthalt, when adverse consequences of high risks inherent in those vehicles were realized bymany 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 andbankruptcy. The result was intense risk aversion by both lending institutions and industrialtreasurers. By 1990, sources of highly leveraged acquisition funding had withdrawn from themarket. The torrent of LBOs and junk bonds ended, and the gunslingers again wereunemployed.

EXHIBIT 1.2 continued

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

Dark Ages ofCBP

1981-90

- LBOs and junk bonds. Corporate planning becomes corporatedevelopment.

1982 - Corporate Strategists Under Fire Fortune, 12/27/82

1994 - Mintzberg: The Rise and Fall of Strategic Planning

Renaissance ofCBP

1994- Hamel and Prahalad: competing for the future with strategicintent 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 ofcomprehensive commercial planning; and the commercial planning profession has regainedsome favor (Houlden, 1995). However, when this book was written, management professionalsand academics still had not found a planning methodology to meet industry's current needsany better than those that existed in the 1980s. However, many of the generally acceptedcommercial planning principles that existed in the 1970s and early 1980s have been forgottenor discarded. The planning profession and academic methodologists seem to be groping for anew approach that is grounded in classical principlesdeliberate and rational, as beforebutupdated to reflect modern information technology, and the need for more effective responsesto rapidly changing business conditions. Such an approach has emerged with the aid ofmodern information technology; it is described in Chapter 4 of this volume.

In the 1990s, it became much easier, technologically, to conduct comprehensive planningfunctions according to classical principles than when those principles initially were formulated.With personal computers, data storage technology, electronic planning software, and theInternet, classic planning procedures that earlier could not keep up evidentially oradministratively with environmental change can do so fairly easily (Roney, 2002). Therefore, itis time for the commercial planning profession again to take an inventory of classic businessplanning principles and define a more conventional, neoclassical methodology, appropriatefor the present decade. At the same time, any such inventory of planning principles also must


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reflect an abundant body of empirical knowledge regarding the efficacy of alternative planningmethods accumulated by researchers during the past quarter century. The resulting

neoclassical methodology should reflect both classical planning principles and the facilitationof planning work that can be accomplished by information technology. In this volume such aninventory has been collected; and an updated collection of generally accepted commercialplanning principles has begun to re-emerge. Many of the classic principles remain quitesatisfactory. 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 COMPREHENSIVEPLANNING

In a political system of free enterprise, private businesses choose to perform economicmissions that would be assigned to them by the state

in other political systems. Rather than government, private stakeholders and managementmake such choices in a free enterprise system. Through their purchasing decisions, consumersof goods and services decide which firms succeed in their missions and which ones fail. AsDrucker (1946; xii, 16, 17) observed, this simple description has farreaching implications formanagement; and that is especially the case for commercial planning professionals. Exhibit1.3 provides a list of twenty companies that were industry leaders in 1955. None of themexisted 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 20percent of the companies on Fortune's 500 list in 1955 were on the list in 1995; that survivalrate still applies today.

The implication of this corporate obituary is quite dramatic. Even companies as large as thoseamong 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 ofcompanies to fall by the wayside? The answer is that a sort of Darwinian

EXHIBIT 1.3 Twenty Companies That Failed

Company Disposition1955 Fortune 500Rank

LastYear

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

FruehaufAcquired by TerexCorp.

165 1989

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 1968Kaiser Steel Chapter 11 255 1988

National Steel CorpPartial sale to NipponKakon

54 1984

Pan Am Airlines Chapter 11 1991

Penn Central Chapter 11 **

PhilcoAcquired by Ford andEMI

90 1961

RCA Acquired by Sony 26 1989


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Company Disposition1955 Fortune 500Rank

LastYear

Republic Steel Acquired by LTV 21 1984

Studebaker-Packard Failed 75 1963

Uniroyal Liquidated 1986

Wickes Chapter 11* 1981

Youngstown Sheet and Tube Assets bought by LykesCorp.

55 1969

* after LBO failure ** reorganizedsuccessfully in a new form

natural selection occurs. Over a long time, only the most fit tend to survive. Others fail. Whatmakes one firm fit, and another unfit, to survive is the survivor's distinctive competence tosupply 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 economicmissions will survive, in the long term. The source of distinctive competence, in turn, probablyis a combination of valuable, unique, inimitable resources that are both physical andintellectual in nature (Penrose, 1959; Wernerfelt, 1984; Rumelt, 1984; Barney, 1986a, 1991;Dierickx and Cool, 1989; Peteraf, 1993).

There is a vital corollary to the foregoing statements. The mission of a firm, in free enterprise,is to survive. But, survivalat least in free enterprise competitionusually is possible onlywhen a firm performs an economic function, that is, supplies specific goods or servicesrequired by society, more competently than other firms that also attempt to survive byperforming the same function. Thus, the firm's mission is its socioeconomic function, and abasic requirement of management is to select a mission that offers the firm its best prospectsfor survival. In short, firms should undertake missions for which they are most competent andacquire or develop the competences that endow them with sustained competitive advantage inperforming 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 AmericanIndustry. 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 inthe 1980s, due to poor long-range planning. With a better planning methodology, those firmsmight have been more competitive in global markets during the 1980s, since sound planningshould have resulted in more effective alignments of physical and intellectual resources toemerging market conditions. Thus, it seems that excellence in planning itself can confer acompetitive advantage.

Survival of the Enterprise ThroughDistinctive 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 corporateobituaries list in Exhibit 1.3 demonstrates. Success is measured in terms of earnings and cashflow 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 performan economic function with distinctive competence, whereupon earnings and cash flow shouldprovide 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 anenterprise's long-term survival by improving its economic viabilitythat is, by improving the


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likelihood of mission success. Through the planning discipline, management matches internalresources and competences to current and anticipated demand, or need, for its present orpotential competences. Management attempts to anticipate future business conditions andadjust 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 themeans of performing economic missions; and it is not possible to formulate a corporatestrategy 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 superiorreturns is only for superior competences and their conversion into successful performance ofthe mission. One corollary to this statement is that strategic planning, as the practicalapplication of strategic management theory, can have life-defining consequences for a firm.

Evidence That CBP Functions Can FulfillTheir Mission

A large body of empirical evidence supports the proposition that the purpose of comprehensivebusiness plannings is to enhance the prospects for economic survival of the enterprise. During1970-1983, comparisons of planners' versus non-planners' financial results generally (but not

always) confirmed favorable financial concomitants of planning. Descriptive summaries of thatresearch have been provided by Roney (1976), Armstrong (1982), Rhyne (1986), Huff andReger (1987), Capon, (1987), Dess et al. (1990), and, most recently, Miller and Cardinal(1994).

The first empirical study to demonstrate potentially beneficial impacts of comprehensivebusiness planning (CBP) on corporate financial results may have been reported by theStanford Research Institute (Holden, Fish and Smith, 1941; Sypher, 1957). Companies withexceptional growth in sales and earnings during 1939-1949 were more likely to have hadformal planning programs than were companies with low growth rates. When slow-growthcompanies in that period became fast-growth companies in 1949-1956, they again were morelikely to have had formal planning programs than firms in which growth slowed down. Othermanagement practices, besides formal planning, were examined in this study; and no attemptwas 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 ofcomprehensive business planning for extended periods of time (beyond annual budgeting) as apotential contributor to financial success. Studies by Thune and House (1970) and Ansoff et al.(1970) discovered that planners outperformed non-planners in terms of conventionalfinancial performance measures, such as profit margins and rates of return. For the nextseveral years, comparisons of planners' versus non-planners' financial results generallyconfirmed 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 industrialfirms (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, Keatsand 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 functionsgrew faster than others and that their CEOs were able to pay themselves more, but netincome 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 amongsmall fast-growth firms on the Inc. 500 list. Bracker and Pearson (1986) even found strongevidence that dry cleaners tend to benefit financially from comprehensive planning.


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Throughout the research on relationships between planning and performance, inter-industrydifferences have been evident (see Exhibit 1.4). Thune and House (1970) found beneficialeffects of planning in the drug, chemical, and machinery industries but not in the oil, food, andsteel industries. Karger and Malik (1975) apparently found positive relationships in themachinery, chemical/drug, and electronic industries, as did Herold (1972) in the drug andchemical 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 nondurablesmanufacturers, benefited from formal planning. Service firms' results actually seemed tosuffer impairment from formal planning (although differences were not statistically significant).In that study, small manufacturers also benefited from planning more than largermanufacturers. Curiously, Thune and House (1970) also found an inverse correlation betweensize, planning, and performance. Among planners, the smallest firms benefited most fromformal plan

EXHIBIT 1.4 Results of Planning- Performance Research in Specific Industries, 1970-1989

Datesof

Industriesin WhichPlanningImproved

Industriesin WhichThere WasNo Benefit

Measure ofPlanning

AuthorsSampleSize

Pub. Study Sales* Returns** Sales* Returns**

Thune &House

36 1970 1958- 65DrugsChemicals

DrugsChemicalsMachinery

Food OilSteelMachinery

Food OilSteel

Discrete***

Herold 10 1972 1962-69Drugs &Chemicals

Drugs &Chemicals

Discrete***

Fulmer &Rue

314 1973 1970-72 DurablesMfrs.

Durables &Nondurables

Mfrs.

NondurablesMfrs.

Discrete***

Karger &Malik

38 1975 1964-73

MachineryElectronicsChemicalsDrugs

MachineryElectronicsChemicalsDrugs

Discrete***

Klein 58 1975 1970-74 Sm. Banks Sm. Banks Composite Scale

Kallman &Shapiro

298 1978 1965-74 Trucking Trucking Composite Scale

Burt 14 1978 1974-76 Aus.Retailers

Composite Scale

Wood &LaForge

41 1979 1972-76 Lg. Banks 3 Categories of CBPdevelopment

Sapp &

Seiler

302 1981 1980 Banks Banks 4 levels of CBP

developmentRobinson &Pearce

38 1983 1977-79 Sm. Banks Sm. Banks Discrete***

Fredrickson& Mitchell

27 1984 1979 (Sawmills) (Saw mills)Composite scale ofcomprehensivenessunstable industry


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Fredrickson 38 1984 1981 Paint &Coatings

Paint &Coatings

Composite scale ofcomprehensivenessstable industry

Whitehead

& Gup Gup&Whitehead

253253 19851989 19831983

Sm.

Banks Lg.Banks

Sm.

Banks(Lg.Banks)

Discrete***

Bracker &Pearson

188 19861977-81

DryCleaners

Dry Cleaners 4 categories of CBPdevelopment

Bracker,Keats &Pearson

73 19881979-84

SmElect'csCos.

Sm Elect'csCos.

3 categories of CBPdevelopment

Roney 157 20011994-95

Metals

Metals AutoPartsConstructionEnvir.Services

BldgComp'sMachinery

BldgComp'sMachinery

Composite scale &Discrete***

LEGEND:

* Refers togrowth ofdeposits inbanks,revenues inall otherindustries.. ** Refersto bothprofitmargins andrates ofreturn.*** 2

categoriesplannersand non-planners ()Refers toindustries inwhichplanningimpairedsales and/or returns;in all others,there werenosignificantdifferences.


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ning and the largest firms benefited least. But, among non-planners, size alone distinguishedthe best performers: the largest non-planners did better than the smallest.

Banking, perhaps more than any other single industry, has been a popular domain forresearchers seeking to discover financial correlates of formal planning. This probably isbecause financial institutions are required by regulators to disclose their financial results topublic agencies, thereby providing long histories of valid data. Wood and LaForge (1979) andSapp 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 anextensive 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 foundbeneficial 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 theSawmill Industry actually was accompanied by slower growth in sales and returns. Whiteheadand Gup (1985) found that rates of return were lower in large banks that had strategic plansthan in those that did not. Several studies of regulated industries such as trucking (Kallmanand 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 complicatesmanagerial functions and/or otherwise renders them less effective. Another is thatunderperformers employ planning efforts to correct deficiencies and improve results.Conversely, better performers don't need the remedial benefits of planning as much asunderperformers, and may not practice planning as often as underperformers in someindustries.

It also is helpful to distinguish between research studies that classify subject companiesdiscretely as planners or non-planners and studies in which subject companies are ratedbased on the relative development of their planning functions (see Exhibit 1.4). The lattermethod is now preferred. As time has passed since the initial planning-performance studieswere done in the 1970s, acceptance of comprehensive planning has grown to a point wherevery few companies now admit to being non-planners. Therefore, simple comparisons on thebasis of presence or absence of planning are becoming increasingly difficult. Using a scaling

technique that measures the relative development of planning functions largely resolves issuesthat 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 practicevariablessuch as experience in planning, frequency of review, and linkage of incentives toobjectivescan be measured. Those measures also can be assembled into composite scoresfor use as independent variables in assessing the impact of the development of CBP functionson 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 exhaustiveanalysis, results from nearly 2,500 companies were aggregated. Beneficial impacts of formalCBP practices were reflected in statistically significant differences between planners' and non-planners' revenue growth, growth in earnings, and rates of return on investment. A latermeta-analytic study by Miller and Cardinal (1994) produced similar results. Moreover,statistical variance was reduced significantly by accounting for differences in researchmethods. Dess, Ireland and Hitt (1990) also demonstrated that industry effects can influencethe outcome of such studies significantly. Thus, the preponderance of evidence from planning-performance studies has been positive, especially when industry differences and researchmethods are taken into account.

In 1994 and 1995, our firm conducted what may be the most recent series of empirical studieson this question (Roney, 2001). Companies that practiced comprehensive business planningcould incur either of two beneficial consequences depending upon industry, asset intensity,


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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; inothers, CBP functions enhanced firms' financial performance in terms of both profit marginsand rates of return. In all industries, firms that practiced comprehensive business planningwere better able to withstand the onset of a recession than were competitors that did notpractice comprehensive business planning. Thus, CBP functions may bestow a benefit of risk

reduction, rather than enhancement of performance potential, per se. These two types ofbenefit may be labeled, respectively, affirmative, andprotective (Roney, 1976).

All firms that practice comprehensive planning do not necessarily enjoy either affirmative orprotective benefits, however. In some industries, the above-mentioned research findings alsoseemed to demonstrate that CBP procedures actually have impeded firms' performance. Recallthat 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 andbuildingcomponents industries. But, impedance effects typically occurred as trade-offs: inindustries where CBP enhanced market shares, financial results were compromised; inindustries where CBP enhanced financial results, market shares declined.

Impedance effects of comprehensive planning are confusing, at best, and perhaps alarming toexecutives 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 thanothers) are indicated in specific industries and business conditions (Hofer, 1975; Kukalis,1991). Important contingency variables (among many others) include the industry's life-cyclestage (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 andcircumstances where CBP functions have not proven to be financially beneficial.

Taken as a whole, the findings of planning-performance research to date have beenencouraging. They also present a major methodological challenge to both academicians andthe commercial planning profession. Planning principles tend to be practiced uniformlybetween industries. Nowhere in the multitude of strategic management or planning texts will

one find prescribed differences in planning procedures that should be employed in individualindustries. While it is intuitively logical that efficacy of the planning disciplineand approachesto maximizing its benefitsshould vary sharply between industries, that reality is not yetreflected in generally accepted planning principles. Who would believe that business planningshould be done the same way in a steel company as in a banking concern or an electronicscompany? Yet, that is the implication that one gets from reading standard strategicmanagement texts. To the contrary, our research findings (Roney, 2001) strongly suggest thatalignment of methods to industries' (and even companies') special circumstances is aprerequisite 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 formulatingformal plans and strategies to accomplish military objectives. Henri Fayol (1916) used formalbusiness planning methods, similar to those in practice today, to manage French miningcompanies beginning somewhere around 1865, when America's Civil War was ending. But,comprehensive commercial planning, in itspresent form, probably did not obtain generalrecognition in the United States until around 1955. Subsequently, planning methods wererefined to a point where generally accepted principles of planning emerged in the early1970s.


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The purpose of modern commercial planning is to increase the probability of a firm's survivalin free enterprise competition by improving its economic viability. There is a large body ofempirical evidence to support the validity of that mission. Research demonstrates that in many(but not all) industries, formalized comprehensive planning functions are accompanied byenhancements of financial and/or competitive performance. However, uncontrollable conditionsof economies, industries, and markets grew increasingly complex and volatile in the 1970s and1980s, making business conditions so turbulent that classic planning methods' evidential and

administrative requirements became prohibitively burdensome. With the recessions of 1974and 1981-1982, business literature challenged the efficacy of formal planning.

After 1982, classic planning practices became much less common and planning departmentsoften were disbanded. Many corporate planning departments were converted into corporatedevelopment departments, which were re-tasked to assist top management in searching forand effecting acquisitions, divestments, and mergers. When a wave of highly leveragedacquisition/divestment transactions collapsed at the end of the 1980s, a vacuum was left:generally accepted planning principles either no longer were relevant to current businesscircumstances or had been largely forgotten. Fortunately, as information technology began tomake the work of planning much easier in the 1980s, its evidential and administrativerequirements 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 informationtechnology, was revived. In part, this may be because of the frightening pronouncements bysome management theorists that the best policies embrace relatively unstructured approacheswherein management existentially moves from one situation to another, strategizing as it goes(Mintzberg, 1994a). Peters and Waterman (1982) called this management by walkingaround. Popular business theorists have promoted various other strategic nostrums. But intheir more sober moments, most senior managers realize that such undisciplined methods donot provide a satisfactory way to run any business. It is fortunate that, throughout the 1980sand 1990s, academic research into the efficacy of strategic management and planningfunctions continued, notwithstanding relative silence of the business planning professionduring those years. Indeed, a large body of empirical evidence and theory that may guideplanning managers in selecting methods and procedures appropriate for the specificcircumstances 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 condensationand application of that methodology.

A summary of the generally accepted planning principles discussed in this chapter follows.

GENERALLY ACCEPTED PLANNINGPRINCIPLES: BASIC CONCEPTS

Axioms

Axiom 1.01

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

to modern business administration. It evolved, as firms grew in size andcomplexity, in response to simultaneous requirements for firms' managers tointegrate specialized functions, adapt to a dynamic external environment, andanticipate needs for future changes in those requirements.

Axiom 1.02The purpose of CP is to discover how a firm's resources should be deployed infuture environments so as to maximize its competence to perform a stated missionfor society and, thereby, its long-term survival.

Postulates


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Postulate 1.01

The classic model of comprehensive business planning (CBP) is essentiallyrational, syllogistic, and evidential. It seeks evidence regarding internalcapabilities of the firm and its external environment. Then, goals are selected todefine success in performance of the firm's mission, and strategy is defined asan approach to attain goals supported by a rationale for selecting the approach.Finally, strategy is elaborated for implementation as deliberate, intentional,objective-seeking work.

Postulate 1.02

Due to its insistence on evidence and syllogismand the dynamism ofbusiness information in turbulent economic environmentsthe classic modelcan be administratively impractical because of the limited amount of externalinformation that a firm can attain, process, and interpret.

Postulate 1.03Business planning decisions are made partly to develop and deploy internalresources in pursuit of competitive advantage and maximum economic return.

Postulate 1.04Business planning decisions are made partly in pursuit of favorable positions ineconomies, industries, and markets where the firm is or may be located. Thoseenvironments change continuously, however.

Corollary 1.041A realistic range of potential significant changes in the environment(contingencies) can be described. Alternative strategies can be defined foreach contingency.

Corollary 1.042As the number and complexity of contingencies increase, so do the numberand complexity of possible contingent strategies.

Corollary 1.043As the number of contingent strategies increases, a threshold of administrativeinfeasibility is approached.

Corollary 1.044The threshold of CP administrative infeasibility is a function of the firm'sinformation technology and its administrative management abilities.

Hypotheses

Hypothesis 1.01Comprehensive business planning (CBP) can exert any of three impacts onrevenue, 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

Hypothesis 1.02Firms' tendencies to realize enhancement, risk reduction, or impedanceimpacts 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

Hypothesis 1.03Firms' tendencies to realize performance enhancement (affirmative), riskreduction (protective), or impedance impacts of CBP functions arecontingent upon the following variables in the external environment:


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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)

Hypothesis 1.04

Firms' tendencies to realize performance enhancement or impedance effects of

CBP functions are contingent upon variables in their planning practices,including:

Approval authority: Board or CEO

Planning horizon

Frequency of review

Linkage of incentives to objectives

The use of information technology

Hypothesis 1.05 Affirmative benefits of CBP functions are most likely to occur in the mostasset-intensive industries, i.e., those in which asset values are relativelyhigh in proportion to revenues.

Hypothesis 1.06Affirmative benefits of CBP functions are most likely to occur in stable (versusunstable) industries and markets.

Hypothesis 1.07Protective benefits of CBP functions are most likely to occur in intenselycyclical industries and markets characterized by the greatest uncertainty.

Hypothesis 1.08Impedance effects of CBP functions are most likely to occur in industries andmarkets with unstable (versus stable) structures.

Hypothesis 1.09Negligible impacts of CBP functions on financial performance are most likely tooccur in highly regulated industries.

Hypothesis 1.10In a given industry, firms that employ information technology to performplanning functions will exhibit more persistence (lower termination rate) andgreater effectiveness (attainment of objectives) in CP functions.

2The Planning Process

This chapter has two objectives: to explain some basic concepts of comprehensive commercialplanning 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 planninglike planning done in the public sector by government agencies or military organizations, forexampleattempts to discover how all of the firm's capabilities and resources can be deployedwithin the foreseeable external environment, so that the firm's mission is conducted with ahigh likelihood of success. After describing the basic concepts of comprehensive planningconceptually, the discussion will take a more practical perspective by explaining how evidenceis gathered, selections of goals and strategies are made, and implementation procedures areprescribed in a typical planning process.

BASIC CONCEPTS OF COMPREHENSIVE PLANNING


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In this volume, the term comprehensive planning refers to a systematic procedure forselecting goals and strategies that define, respectively, standards for the future success of abusiness 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 theirnames suggest, the former's scope includes all units in a multi-business enterprise, while thelatter's scope includes just one business or a single-business enterprise. This volumeaddresses the methodologies of both CCP and CBP. But, greatest emphasis is placed on CBPprinciples because, even in a multi-business enterprise, which has unique planningrequirements, each business within the enterprise must form and implement plans effectivelyfor the entire enterprise to realize its highest performance potential. Both CCP and CBP areconducted in three basic stages, which are described in the second half of this chapter.

Assumption of a Pre-existing MissionBoth CCP and CBP methodology presuppose that the firm's management has selected amission before these procedures begin. Mission refers to the economic function that a firm'smanagement chooses to perform for society. A mission may be redefined after any of thethree procedural sequences has been completed; but that is not typically the case. When

management selects a firm's mission, it enters into a sort ofsocial contractto deliver certainbenefits to stakeholders in exchange for a license to exist. This license will be renewed bysociety for as long as the firm remains distinctively competent to deliver the benefits promisedin its social contract and actually performs the mission successfully. CP procedures provide aneffective means of greatly enhancing the likelihood of this contract's fulfillment and renewal.

Three-Stage Process ModelComprehensive planning is a system of ongoing managerial procedures, which include threetypes of activities:

Gathering evidenceAcquisition and interpretation of the evidence regarding internalcapabilities of the enterprise and external business conditions needed to make planningdecisions; Decision makingSelecting from alternative mission success standards (goals) andapproaches for pursuing them (strategy); and ImplementationDefining instrumental action projects or programs, monitoring their

progress, responding to departures of results from intentions, and performing all threeelements of this procedure continuously.

All of these procedural elements are necessary to perform comprehensive planning, but noneis sufficient by itself. Each element will be explained further in the second part of this chapter.

Comprehensive Planning Is Both anIntegrative and an Adaptive Discipline

The notion ofcomprehensive planning implies that a commercial enterprise must be treated asa whole entity and as part of a larger economic system. Thus, CBP is not limited to theanalysis of a firm's individual operating strengths and weaknesses, financial analysis, marketor industry analysis, forecasting, goal setting, resource allocation, budgeting, or projectmanagement. Rather, the planning concepts and methods found in this book embrace all ofthose techniques. It is a system of interrelated methods and procedures that deal with thewhole enterpriseall of its resources and all of their functionsto predefine the firm's highestperformance potential in its economic, industry, and marketing environment.

The terms planning and strategy have been defined very differently by various authors. Forinstance, Chandler (1962:13) and Andrews (1971:28) used the term, strategy to include an


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enterprise's fundamental goals as well as its approach to their accomplishmentessentially,the entire scope of what we refer to as planning here. On the other hand, Mintzberg (1994b,c) describes planning as a process primarily of scheduling work after the more creativeprocess of forming strategy has been accomplished. Mintzberg's concept has a muchnarrower 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 systematicprocess in which management selects success standards and an intended course of actionbased on rational assessments of anticipated external business conditions, the firm'sperformance capabilities, available resources, and likely consequences of deliberate actionschosen rationally from alternatives. Although reasonable persons have differed, over theyears, regarding the scope and content of strategic planning, the position taken here is mostcompatible with the group of authors just mentioned, that is, that commercial planning is acomprehensive, systematic, and perpetual process. It cannot be performed effectively on aonce-a-year or piecemeal basis. Rather, adjustments must be made to any part of a plan asand when changing circumstances require. For this reason, CP should be an integral elementof a firm's management style.

Comprehensive Planning Is Neither Long-Rangenor Strategic Planning

A sound plan is founded on a solid understanding of the firm's present capabilities, as much asit is on an appraisal of futu

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