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
