Limits to Strategic Planning

 

Strategic and Tactical Planning


For thirteen years, I was a corporate economist and a corporate planner manager for three Fortune 500 companies.  I discovered that I could do my job as a corporate economist while ignoring all but the simplest of economic concepts. As a corporate planner, I learned that the planning processes of large corporations were, at best, mostly a waste of time and resources, and at worst, contributed to the relative demise of the companies. Of the three companies I worked for, one has been sold three times, one has gone through a bankruptcy, and the other merged with (actually sold to) A Brazilian company.  This is becoming typical; the failure rate of large corporations is accelerating.

Other disciplines in business are no better.  Marketing is still based on ideas, usually summarized by the four P’s, that are a formula for stagnation at best and decline at worst.  Mass-media advertising, born at the beginning of a rapid growth in consumer affluence and network TV as a novel medium to mass-market branded products, doesn’t work any more.  There are vastly more products, markets are fragmented and we hit the mute button when the ads come on.  Cable and the Internet are the new advertising and marketing tools. Advertising on the Internet is dominated by the social media and search companies Google and Meta. Think of one TV ad campaign that actually convinced you to change products.

What about financial planning?  Financial control was a brilliant innovation 80-90 years ago, with its full potential realized by General Motors in the 1920s.  It made possible the huge, multi-division corporations of today.  Although operations were “decentralized” into division, corporate control was strengthened through the financial controls of budgeting and allocation of investment funds.

Financial planning and control often has a negative effect on corporate performance as the budgeting and planning numbers have taken on a life of their own.  “Hitting the numbers” has had a chilling effect on innovation and risk-taking.  Executive bonuses and the value of their stock options are tied to short-term profit increases. The system invites acquisitions and cost cutting (massive lay-offs, less investment and outsourcing) as major strategies. Manipulating the accounting system has become an important business skill.  At worse, it gives us Enron and massive fraud in the entire financial system.

Almost all studies show that drastic cost cutting by firing large numbers of employees does not increase profits (rates of return) after two years.  

Acquisitions, despite reducing duplication and head counts, seldom make a minimum rate of return. For two reasons - asymmetric information (sellers know more than buyers) and buyers remorse (bidding competition of very competitive corporate executives). The result is optimistic assumptions about future growth in sales and profits or ignoring discounted rates of return analysis when bidding. Buyers pay too much to make an acceptable return on investment.

Think of all the business fads of the last few decades.  Total quality management.  Reengineering.  Matrix or decentralized decision-making organizational structures.  Benchmarking.  Six Sigma.  Many of them are still in management and organizational development textbooks.

As a manager, how can you make good decisions if you do not understand the economic environment, consumer motivation, how to reach and influence consumers, distrust the numbers but work under the tyranny of the budget, are worried about the next “down-sizing,” and have to adapt to the consultants’ “fad of the month?”

But what about new ways to manage?  What about Mission Statements and strategic visions? What about Project Management and cross-functional teams, “intrapreneurs,” process change, Black Belt Swat teams that swoop in and quickly solve problems? What about the belief that software like SAP will solve your company’s problems? What about the most advanced advice from consulting firms? If corporate managers feel they must call in management consulting firms like McKinsey to tell them how to manage, then the board of directors should fire the managers.  


The Reality


With all these ideas on how to improve corporate performance, why are so many big corporations in deep trouble?  Leave aside the dotcoms.  Leave aside the criminal conspiracies disguised as corporations, their accountants, their lawyers and their investment bankers.  Think about the cutting-edge companies of 30 years ago, the ones that were praised in books like In Search of Excellence.  What happened to IBM, Xerox, Polaroid, K-Mart, Digital Equipment and the other companies that have since disappeared?  Even many of the pharmaceuticals no longer make a superior rate of return and continuing to merge.  To some extent, they have become the venture capital and marketing arms of small biotechnology companies.

In the 1980s and the early 1990s, everyone studied Japanese management to try to figure out how to emulate the success of Japanese companies.  Actually, it turned out, only a very small number of Japanese companies were successful or world-class.  The rest of the economy was very inefficient, the political system corrupt and bureaucratic, and small, innovative companies could not get financing or even be allowed to compete against entrenched large companies.  The result – starting in 1991, 30 years of economic stagnation.  Even the great consumer electronics companies are firing employees and merging operations, two strategies that would have been unthinkable 10 years ago.  When was the last time anyone pointed to Toshiba or Sony as a corporate model?

How can a company have Project Management teams, decentralized decision-making and encourage risk taking when their main strategy is firing employees, particularly middle managers, and outsourcing?  If there is no loyalty or trust on either side, no strategy will work.  The corporation, more than the economy, becomes a Darwinian jungle, not a means to coordinate activity towards a common goal. 

What is extraordinary about the capitalist system is how vulnerable huge, market-dominant companies are and how fast they are wounded or killed by new, small, innovative companies.  Innovating new technology and developing new industries are usually done by new companies, with a disproportionate percent of them founded by immigrants, members of minority groups, and social outsiders. 

But that’s not the whole story.  Pickles are at least three thousand years old (the Egyptians made them).  How could Heinz, who dominated the pickle market for decades, get clobbered within 10 years by a new company called Vlasic, headed by a family that never made a pickle until they started the company?  There are no secrets to making ice cream (the Romans made it); yet a couple of ex-hippies in Vermont made the largest dairy products and ice cream company in America look sluggish and stupid?  In a declining market dominated by two huge companies - coffee - a Seattle company called Starbucks reinvented the basis for competition and turned coffee into a growth industry.  No industry was more moribund or boring that the sneaker industry but Nike turned it into both a growth industry and a fashion industry.  When Fred Smith wrote a paper at Yale Management School outlining the future FedEx, his business prof gave him a C and advised him to forget the idea. Every college business department in America looked to Harvard or Wharton as the model but an entirely different approach by a for-profit company called University of Phoenix has revolutionized professional education at the college level.


Strategic Planning – Good and Bad


So what is good about strategic planning?  I see the following benefits:

Corporate and divisional management must make their assumptions about the competitive environment explicit. It is then possible to change strategies if something important in the competitive environment changes.

It lengthens the planning horizons of operational managers, unless quarterly financial goals become the main focus. It introduces long-run trends into operational planning.

It encourages corporate management to develop a strategic vision, which includes what the corporation is comparatively good at doing and what it is not.
This helps define what businesses or markets the company should be in and which ones it shouldn’t be in.

It makes explicit the division of capital resources between operational efficiency and strategic investments in new products and new markets.

It introduces and attempts to analyze potential sources of risk to the business and suggests how to adapt to unexpected change.


What is bad about strategic planning?

It often degenerates into financial objectives, encouraging behavior that increases the risks of long-run failure of the company.

It concentrates on operational efficiency and marginal improvements in the current business as the expense of thinking and funding strategic investments.

Goals are set and resources allocated mostly based on the relative power of top managers.

Yearly planning schedules are too rigid and too slow to react to major changes in the competitive environment. Large amounts of real-time or almost real-time data and analysis are now available to make operational decision.

I believe that a company should not establish long-run financial objectives.  The long-run financial performance should be the result of business decisions, not financial pressure.  The time saved from setting long-run financial goals could be spent analyzing the competitive environment and devising “what-if” strategies for different possible scenarios.

I believe that radically new analytical tools and models that study nonlinear dynamic systems will be more useful than planning systems based on current economic and financial models. 


Your Future and Strategic Planning


You will probably end up working for a mediocre company.  Most companies, especially large ones, grow along with the economy.  Most of what the company does, and most of what you do, will be fairly routine.   Even small changes will meet resistance and be difficult to make, unless there is a crisis.  The company will make small changes to its products and product lines, increase its advertising on TV and in magazines or switch some advertising to Google, try to cut costs by moving production, assembly and software programming to lower-wage countries, and put increasing pressure on its managers and employees to produce results faster with fewer resources. You will be insecure and stressed. Top management will make speeches about the need for radical change but will have golden parachutes if they mess up. They will avoid major risks.  Middle managers will oppose almost all attempts at change, fearing loss of power and possibly employment. Acquisitions will be made for financial reasons, often followed by massive lay-offs, power struggles and organizational chaos. Your main competitors will be multinational corporations but small innovative companies below your company’s competitive surveillance radar screen will do the most damage. Welcome to the future.

You have four choices – start your own company (highly risky), go to work for a start-up that could be the next big thing (risky), join a nunnery or monastery (the best choice), or become a better employee and manager with new transferable skills. Update your resume and join LinkedIn.  Cultivate your network. Look for opportunities in new industries and innovative companies. Your company may not really have a strategic or long-range plan but you should.

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Also see Alan Turing and Strategic Management




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