Establishing Metrics and Mission/Vision Statements

Part 1:

Establishing Metrics

Your text explains why it is important to select the appropriate criteria for strategic planning. Part of this process is establishing metrics to measure the progressive success of the strategic plan. Choose and discuss two metrics that an organization might consider when developing a strategic plan? What are some considerations or criteria that leaders utilize when developing a strategic plan? How might this process work in your current organization or a previous organization?

Part 2:

Mission and Vision Statements

In Weeks Two and Three we examined mission and vision statements. Conduct an internet search to find an organization that lists its mission and vision statement on its website. What do the mission and vision statements communicate? How might the organization use mission and vision statements when establishing goals for the organization? How might this process impact operational planning and the establishment of metrics?

Assignments: Each part must be 250 words and clearly labeled

Part 1:

Establishing Metrics

Part 2:

Mission and Vision Statements

Week Four Lecture

Chapter Seven – Choosing the Best Strategy

When identifying how to choose the best strategy one of the first approaches might be to create a criteria matrix. A “criteria matrix is used to evaluate the bundles against multiple criteria using a scoring system that enables the results of using each criterion to be added up at the end” (Abraham, 2012, p. 207). One recommendation might be to choose five to six of the most important criteria and then to organize them and assign a numerical rating.
For example: if you were purchasing a home, you might have a list of the “must haves” and the “must not’s”. Ideally finding a home with all the must haves would be perfect, but that rarely happens. So one might list the “must haves” by importance. For example: first there has to be a two-car garage, second, there must be direct access from the garage to the kitchen, third, the master bedroom must have a roman tub. These are three essential items for the buyer. There might be other must haves, but they are willing to compromise on them (big yard, wood floors, and granite counter tops). Once you have the list of what is most important to what you would like and what is comprisable, you can then assign a numerical rating system. This will help you work out the best strategy for what you are seeking to accomplish. The same is true in business. There are things that must happen and then there are items that can be worked with later. Identifying these items will help you to create a criteria matrix that ultimately helps you identify the best strategy.
It should be noted, however, that when assigning a numerical rating, there are things that can alternate one’s views. According to Abraham (2012), “the danger with using such a quantitative yet still subjective method to choose a strategic alternative is that it invites criticism precisely because one person’s criteria chosen” (p. 209).
Another important aspect in terms of choosing the best strategy entails deciding on the objectives. There should always be a time frame when looking at objectives. When deciding on objectives there are three steps that need to take place; however, before these three can take place it is important to first decide on a strategy. The three step process in terms of setting objectives include: limit choices, set annual objectives, and match objectives to strategy (Abraham, 2012).
Once the strategy and objectives are identified, it is important to always have a contingency plan. As the old saying goes “nothing ever goes according to plan”; therefore it is important to have a backup plan for if or when this happens. An interesting point in the textbook indicates that “triggers should be external, specific and quantitative” (Abraham, 2012, p. 217). However, if any of these three triggers are absent, the company may not know when to incorporate the contingency plan. There are three guidelines stated in the textbook in regards to good contingencies:

1. “Do not renege the adopted ‘best’ strategy” (Abraham, 2012, p. 218).

2. “Do not make something that the company is already doing the contingency” (Abraham, 2012, p. 219).

3. “Make the contingency a solution to the problem implied in the trigger” (Abraham, 2012, p. 219).

Chapter Eight – Operational and Budget Planning

When conducting operational and budget planning it is essential that the plans coincide with the mission and vision of the company. For many companies there may be department visions and missions that target specifically what that area is working on. However, all goals within each department must relate to the organization’s mission and vision statement.
In terms of operational planning, this typically involves various activities, which may include looking at programs, projects, and activities in addition to identifying new strategies that may come into play (Abraham, 2012, p. 234).
Budget planning involves looking at the financial resources in terms of what is available and how it will be spent to work with the organizational strategies in place (Abraham, 2012).

Chapter Nine – Implementation

Establishing metrics is an essential tool for organizations to use in terms of looking at where the company is operating and how they can continue to improve. According to Abraham (2012), “evaluating progress at numerous stages throughout implementation allows the manager and his or her team to make adjustments and modifications to the strategy” (p. 251).
Below is a great video that looks at the elements of establishing metrics.

AgileTVProductions – John Hill on Establishing a Robust Metrics Program.

(

http://youtu.be/PyaYn-SDMr4

)

There was a strategy addressed in Chapter Nine: An “emergent strategy develops when an organization takes a series of actions that with time turn into a consistent pattern of behavior, regardless of specific intentions” (Planning Skills, 2014, para 4). Below is a video that goes into more on the emergent strategies:

Part 7a Developing Emergent Strategy Part 1.flv.

(

)

Most strategies are built on specific beliefs about the future. This is a problem because the future is deeply unpredictable. Worse, the requirements of breakthrough success demand implementing strategy in ways that make it impossible to adapt should the future turn out differently than planned. The result is the Strategy Paradox: strategies with the greatest possibility of success also have the greatest possibility of failure. Resolving this paradox requires a new way of thinking about strategy and uncertainty (p. 2-3).

Below is a video presented by Dr. Raynor on the strategy paradox:

Michael Raynor, Deloitte

(

http://youtu.be/Z8Q54hop85c

)

Forbes School of Business Faculty

References

Abraham, S. C. (2012). Strategic management for organizations. San Diego, CA: Bridgepoint Education, Inc.
Agile TV Productions. (2012, July 29).

John Hill on establishing a robust metrics program .

[Video file]. Retrieved from http://youtu.be/PyaYn-SDMr4

Business. (2011, April 26).

Part 7a developing emergent strategy Part 1.flv .

[Video file]. Retrieved from http://youtu.be/iHOWl9hT4sA

Darden MBA. (2008, November 7).

Michael Raynor, Deloitte

[Video file]. Retrieved from http://youtu.be/Z8Q54hop85c

Planning Skills. (2014). Emergent strategy . Retrieved from

http://planningskills.com/glossary/154.php

Required Resources

Text

Abraham, S. C. (2012). Strategic Management for Organizations. San Diego, CA: Bridgepoint Education, Inc.

Read the followings chapters in

Strategic management for organizations

· Chapter 7: Choosing the Best Strategy

· Chapter 8: Operational and Budget Planning

· Chapter 9: Implementation

Recommended Resources

Article

Fulop, M. (2010, March 15).

Facilitating strategic budget plans & resource development (Links to an external site.)Links to an external site.

[Blog post]. Retrieved from http://facilitationprocess.com/facilitating-strategic-budget-plans-resource-development

· This is a resource that examines the steps that accompany the strategic budgeting process.

Multimedia

Standford University Finance for Entrepreneurship [tonyseba]. (2011, February 2).

What is capital budgeting? (Links to an external site.)Links to an external site.

[Video file]. Retrieved from http://www.youtube.com/watch?v=2zc30NZY_TE

· This resource provides insight into capital budgeting and how it may impact the strategic planning process.

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Chapter 7

Choosing the Best Strategy

age fotostock/SuperStock

Learning Objectives

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By the time you have completed this chapter, you should be able to do the following:

Select criteria appropriate to the company and its purposes, and appreciate that a wide variety of criteria
exists.
Use the criteria in a criteria matrix to evaluate strategic-alternative bundles to help select the best one.
Recognize the differences between company, partial, functional, and operational objectives, and among
objectives, goals, and strategies.
Set company-wide objectives with more con�idence.
Decide on a strategic intent for the company and major programs required to implement the strategy.
Understand why contingency planning is necessary and how to devise meaningful triggers and
contingencies.
Appreciate why the board of directors has to be kept informed and involved throughout the strategic
decision-making process.

This chapter explains how to choose the best strategy for the company from a number of viable alternatives using carefully selected criteria
and how to argue persuasively for its adoption. It also shows how to arrive at the other strategic decisions and keep the board of directors
involved through the process.

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One of the most important common criteria for choosing a
strategy is revenue growth.

iStockphoto/Thinkstock

7.1 Selecting Appropriate Criteria

Choosing among alternatives becomes a little easier when each alternative is compared one at a time against a set of criteria. Because such
an analysis is often insuf�icient to decide an issue, the decision may eventually turn on more subjective analysis. What kinds of criteria are
appropriate? Because one of the conditions for creating a good bundle is that if implemented, it would lead to success for the company, the
criteria to evaluate the bundles should together represent what “success” means to the company and, perhaps, the overall purpose of the
company. Depending on the company and its particular situation, the criteria explored in this section are possible candidates that could be
used to examine a company’s current standing and future outlook.

Shareholder value is a fairly common criterion, not only for choosing from
among alternative strategies but also from among alternative investments. It
requires the �irm to have a model for computing shareholder value so that the
computation for each strategic alternative or investment uses common values
of discount rates and common assumptions about the future environment. In
this way, the results become comparable. Still, many managers and companies
believe that one of the principal purposes of strategic planning is to increase
shareholder value. So managers should know how to compute shareholder
value.

Additionally, strategic management and planning is based on an
understanding of the relative contribution of brands to shareholder value
(Rappaport, 1997). For example, the Coca-Cola brand accounts for 51% of the
value of the Coca-Cola Company, which also includes 3,500 other brands such
as Dasani, Sprite, and Schweppes (Coca Cola Company, n.d.). When managers
have a solid understanding of brand value, they will use this aspect of
shareholder value as a key criterion in planning.

Revenue growth is one of the most common criteria, used more often when a �irm’s revenue growth has been inadequate or �lat, or when
issues of market share and market positioning are strategically signi�icant. A striking recent example of revenue growth is illustrated by Iluka
Resources, one of 2011’s best stock-market performers. Iluka posted a 53% increase in revenue between the third and fourth quarters of

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When a company is looking at the amount of investment
money required from investors, an appropriate criterion to
consider would be return on investments and how soon the
investment may be recouped.

Dmitry Margolin/

Hemera/Thinkstock

2011 (Iluka grows, 2012). Such performance is often a strong predictor of takeover, a strategic decision made based on the revenue-growth
criterion.

Pro�itability should be used when a �irm has insuf�icient working capital or inadequate or negative cash �low, when pro�its in recent years
have been �lat or negative, or when it is highly leveraged. Leveraged buyouts (LBOs) rely on huge cash �lows and pro�its during the �irst year
following the LBO, so that the huge debt can be rapidly paid down. However, as a note of caution, it is relatively easy to “mortgage the future”
in favor of present pro�its, for example, by reducing investment in R&D or new-product development, so that, as a criterion, shareholder value
may be superior, taking into account as it does a 10-year future stream of earnings.

Firms vary in their propensity to take risk. They are more inclined to take
risks the more that risks have paid off for them in the past and when they have
suf�icient capital so that they can afford to make mistakes. But degree of risk
or riskiness as a criterion is more than this. A �irm’s culture can, for example,
be risk averse, in which case it will avoid risk even when the risk has odds of
success that appear to favor it. Risk can be analyzed and measured, but few
have the skills to perform such analyses. Instead, they prefer to make a risky
decision according to instinct, or assess risk by venturing an opinion or two
(guessing), or even ignoring any underlying risk. One way in which risk can be
discussed among a group of people who are not risk analysts is as follows:
Because all alternative bundles except “status quo” involve doing something
the company has never done before, “risk” can be used as a subjective
measure of the likelihood that it can implement the bundle successfully. Some
alternatives are sure to score higher or lower than others when risk is viewed
this way.

Amount of investment required is a practical criterion. If a particular strategic
alternative requires an amount of capital the �irm does not have or cannot
secure, then it shouldn’t even be considered a bona �ide alternative because it
fails to meet the criterion of feasibility. Of course, the �irm could borrow more

money but must be careful not to exceed some value of debt-to-equity ratio required by its creditors or increase its debt to the point where its
cash �low cannot service the debt. Obtaining equity capital may be relatively easy for a public company that has been performing well, but not

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so for a private company. In certain circumstances, the �irm could go public and raise some equity capital; in other circumstances, that may
not be possible. A �irm could �ind a partner to share some of the risk and put up some of the capital required. But in this case, pro�its resulting
from the strategy must also be shared. Finally, being acquired by the right company could provide the capital needed to �inance a strategy, but
this step is drastic and should be taken only in the best interests of the company, not just as a means of raising capital. For instance, SEOmoz
software CEO and founder Rand Fishkin provided a detailed account in his blog of his experience negotiating an acquisition that ultimately
didn’t make sense for his company (Fishkin, 2011). In its most simplistic application, all other things being equal, it makes more sense to
choose a bundle that requires less investment over another that requires more.

Even when a company can come up with the investment required by a particular alternative, an appropriate criterion might be return on
investment (ROI, a pro�itability measure) and how soon the investment can be recouped; a breakeven point in months is desirable. Clearly an
alternative with a much shorter breakeven point is more attractive to a �irm with scarce resources, and one with a higher ROI is more
attractive to a �irm for which ROI is a critical measure of performance. It may make sense to choose a bundle that requires a higher
investment if that investment can be recouped more quickly and yields a higher return, but note that these are three separate criteria and the
bundles are evaluated on each one in turn.

A �irm would choose an alternative that suited its existing corporate culture over one that needed a cultural change to make the strategy
succeed. Just as “form follows function,” so also does “culture follow strategy.” This means that changing the culture to support the right
strategy might be preferable to limiting a company to a strategy that �its the existing culture, or where the existing culture constrains the
choice of strategy. Having said that, �irms that try to change their strategy assume their culture will also change, then �ind the strategy almost
impossible to implement because the unchanged culture is impeding it. It is well known that changing a corporate culture is exceedingly
dif�icult and, for large organizations, takes a lot of time (recall the discussion in Sections 2.9 and 2.10). If every alternative considered
required the culture to change, the alternative that matched the existing company culture the most and would therefore require the least
change should, perhaps, be chosen. If a �irm does not have a core competence or competitive advantage, it should certainly try to attain one,
because competing without one results in below-average industry pro�its and a weak competitive position. Thus, the �irm should look for a
strategic alternative that would, in time, help it attain a core competence and competitive advantage. If the �irm already possesses these
attributes, then the alternative that increases the size or duration of the competitive advantage the most should be preferred.

If the industry in which a �irm competes has little or no bargaining power with its buyers or suppliers, its pro�itability will be low or subpar
and competitive conditions very dif�icult. Clearly in such a situation, increasing its bargaining power and giving it some leverage is highly
desirable. One of the most effective ways of doing this is through differentiating. So, would any of the alternatives in question increase the
�irm’s bargaining power with either its customers or suppliers?

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If there is an opportunity in foreign markets, it is important
for a company to develop a global presence, whether it is
venturing into the international market for the �irst time or
increasing market share in selected countries.

Hemera/Thinkstock

There may be issues of timing to consider among the alternatives in question.
Some alternatives are sensitive to when they are implemented, such as
accelerating introduction of a new product or entering a particular market. If
implementing an alternative now increases its likelihood of success as
opposed to doing it later, this may be reason enough to choose it. Conversely, if
doing it now reduces any advantage you otherwise might have, such as
investing in a market push just as the economy turns down sharply or when a
competitor introduces a better and cheaper product, then that may be reason
enough to reject the alternative. However, using this criterion typically
requires more data.

Which alternative will most help the company maintain or increase its
technological lead over its competitors? Or give it the technological lead it
never had? Or help it become more innovative and technologically
competitive?

As more companies realize that their biggest markets lie in foreign countries,
developing a global presence could become a prime factor, whether venturing
into international markets for the �irst time or increasing already substantial market shares in certain countries.

Clearly, some criteria make sense for some companies in certain situations, so should be used carefully. Others, such as revenue growth,
pro�itability, degree of risk, investment required, shareholder value, degree of cultural change required, and competitive retaliation apply to
almost all corporate situations.

The criteria you ultimately use in your analysis must �it the organization you are analyzing. For example, to some organizations, pro�it is the
primary indicator of success. Elsewhere, success may be measured by the number of jobs provided to the community, the percentage of pro�it
donated to charitable causes, or the reduction of waste produced during the course of operations. Most of the criteria discussed in this section
do not �it the circumstances of a nonpro�it organization. The strategic-planning process of a state university’s academic department might use
the following criteria to help it choose from among several alternatives. Alternatives must accomplish the following:

Be in the best interests of the department’s faculty
Raise the quality of education and programs
Enhance the department’s reputation with employers

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Increase the department’s �inances
Make the department more competitive externally

Discussion Questions

1. Many candidates for possible criteria were presented in this section, and it makes sense that the criteria should be related
to the company’s purposes or what “success” means to the company. Yet “timing” is one that relates to neither. Which
others of the criteria discussed have little or nothing to do with purposes?

2. Following on from question 1, why were such criteria included in the list of possibilities?
3. Which of the criteria discussed would be least likely to be useful in differentiating among alternative bundles?

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The selection of criteria and rating bundles through the
criteria matrix is an opportunity to develop the arguments you
can use to defend your preferred choice.

Francisco Cruz/SuperStock

7.2 The Criteria Matrix and Choosing the Best Strategy

One method that has been developed as a tool for evaluating strategy bundles is called the criteria matrix. It entails choosing �ive or six
criteria most important to the �irm and assigning a numerical rating as a means of identifying the best strategy. Another bene�it of creating
and using the criteria matrix is to use it as a worksheet in developing defensible and persuasive arguments for your preferred bundle.

Applying the Criteria

Experience has shown that using �ive or six criteria to evaluate the bundles makes the most sense. This range works because using too few
criteria fails to capture the complexity inherent in the bundles, and using too many runs the risk of introducing con�licting criteria and would
dilute the effect of each criterion on the �inal outcome.

Which criteria to choose is entirely up to your management team. “Playing”
with several criteria can be a useful way to learn of the bundles’ sensitivity to
various combinations of criteria. Managers should supplement this analysis
with detailed forecasts and analyses. For example, to assess which bundle
might yield the most revenue growth were each one implemented, the team
should conduct a more detailed sales forecast for each bundle over the
planning horizon (three to �ive years). Similarly, pro�itability and shareholder-
value analyses should be conducted, rather than guessing. Even though such
projections are still estimates and based on assumptions, they require more
re�lection and thought, and so should be more valuable.

Notice also that many of these criteria include purposes to doing strategic
planning in the �irst place and what the �irm perceives as success. It is �itting
that criteria used to chart the future direction of the company be as important
to an organization as its fundamental purposes and what it views as success.

The criteria matrix is used to evaluate the bundles against multiple criteria
using a scoring system that enables the results of using each criterion to be added up at the end (Table 7.1). The �irst step is to choose a set of

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criteria that makes sense for the company. These may include some of those criteria described in the previous section and perhaps others
relevant to the company and its present circumstances.

The next step is to assign a rating to each criterion on a 10-point scale. Some criteria are positively correlated and some negatively
correlated. An example of the former is revenues: an alternative that might yield high revenue growth is good for the company, but low
revenue growth is bad. The two go in the same direction so to speak (high growth = good, low growth = bad), so the criterion “revenue
growth” is positively correlated. In such instances the rating would range from 0 to plus 10. A neutral alternative would be scored 0 whereas
an alternative that would be strongly favorable to the company might be a 9 or a 10. An example of a negative correlation is “size of
investment required”: an alternative requiring a lot of investment is “bad” for the company, but a small investment requirement is “good.” The
two go in opposite directions (a lot = bad, little = good). For a negatively correlated alternative, the rating would range from 0 to minus 10.
Thus, an alternative that is not risky at all would get a 0 score, one that is moderately risky a score of perhaps minus 5, and an extremely risky
one perhaps minus 7 to minus 10. Table 7.2 lists examples of positively or negatively correlated criteria.

The rating scores are subjective estimates; the absolute value of the rating is not as important as spacing them according to an estimate as to
how close or far apart the alternatives are. It is the relative ratings that are critical. The bundles are rated against each criterion independently
of any other criterion. When all the ratings are done, the scores are added up to see which alternative has the higher (if evaluating two) or
highest total score.

Table 7.1: Criteria matrix for evaluating alternative bundles

Criteria Alternative A Alternative B Alternative C

Revenue growth (P) 8.0 8.0 9.0

Pro�itability (P) 7.0 7.5 8.5

Shareholder value (P) 8.0 7.0 8.0

Riskiness (N) -8.5 -8.0 -8.5

Investment required (N) -7.0 -9.0 -9.5

Change in culture required (N) -6.5 -8.0 -6.0

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Totals 1.0 -2.5 1.5

Table 7.2: Positively and negatively correlated criteria

Positively correlated Negatively Correlated

Revenues or revenue growth Capital investment required

Contribution to shareholder value Change in culture required

Return on investment Time to breakeven

Adverse effect on competitors Overall riskiness

Strength of value proposition

Gaining or extending a competitive advantage

Increasing its bargaining power

Table 7.3: Criteria matrix revised from Table 7.1

Criteria Alternative A Alternative B Alternative C

Revenue growth (P) 7** 8 9*

Pro�itability (P) 7** 8 9*

Shareholder value (P) 6** 7 9*

Riskiness (N) -7 -8 -9

Investment required (N) -7 -9** -8

Change in culture required (N) -7 -9** -6*

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An objective is a quantitative target to be achieved within a
speci�ied time frame.

Raymond Forbes/SuperStock

Totals -1 -3 4

*Reasons to select **Reasons to reject

Arguing Persuasively

In Table 7.1, the alternative bundle that receives the highest total is option C.
However, option A’s total score is so close to C’s that it makes arguing for C
being the best alternative open to question. This is where other
considerations come into play. If market share is particularly important to the
company (revenue growth), or pro�itability, or if the company is averse to
changing its culture a lot, then the analysis would suggest option C. But the
table also shows that option C requires the most investment, and if the �irm
might be unable to raise the needed capital, that could be the one reason to
reject it. Recall, however, that feasibility is one of the six criteria for creating
bundles, so option C should not have been quali�ied as a bundle if the needed
capital couldn’t be raised.

To avoid the situation where there are two alternatives that achieve almost
equal ratings, the choice of criteria and assigned ratings are revised until there
is a clear winner by at least three points. While this appears to be “�ixing” the
result, the process is still in “analysis” mode, which means that managers are
free to try different criteria and ratings until they are satis�ied they have a defensible strategic bundle. After all, defending and being
comfortable with the choice of strategy is what this whole exercise is about. It is that ultimate defense before top management or the board of
directors that will keep anyone from “�ixing” the ratings to yield a preordained result. A preordained or poorly argued result can be spotted a
mile away and will damage its proponent’s credibility. So while this analysis is being done, it is important to remember to choose only that
alternative that can be supported persuasively; the scoring system will help in that regard. The criteria matrix and the associated process of
selecting criteria and rating bundles against them is simply an opportunity to develop arguments to defend or “sell” the preferred choice to
others.

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The danger with using such a quantitative yet still subjective method to choose a strategic alternative is that it invites criticism precisely
because one person’s criteria and ratings may not match anyone else’s. The results are sensitive to the criteria chosen. Using shared or
consensus ratings within a group is one way to get around this problem and to try out different combinations of criteria. The principal value
of the criteria matrix, however, is to force planners to test their choice of alternatives against different criteria in case other people believe
such criteria are important. In the case of disagreement, the person who has gone through this exercise will have “done their homework” and
be able to discuss—and perhaps refute—another person’s point of view.

Effective Presentations

In this chapter, we review a number of logical and data-based concerns you should have when presenting alternative strategic
bundles to stakeholders. Undoubtedly, in order to be persuasive, you must have the data to support what you are advocating.
However, how you package and present those data are critical concerns. The con�idence and competence you demonstrate in
proposing a strategy will impact your listeners. Communication researchers and consultants Jennifer Waldeck, Patricia
Kearney, and Timothy Plax point to a rich body of research literature that examines the dynamics of persuasion and resistance.
What follows is a summary of some of that research and how it applies in your strategic-planning efforts. Employ these
researchbased strategies to help you think through your oral or written presentation style and content:

1. Assess your stakeholders’ willingness to change. Humans’ inclination to resist change has been widely documented.
Central to your persuasive effort is identifying your audience’s present position.
a. When they agree at the outset, your persuasive task is to reinforce their commitment and provide them with some
motivation to strengthen their commitment to a strategic change. As inconsistent with a corporate communication
strategy as they may seem, emotional appeals are popular and effective ways to energize and motivate others. Finally,
when dealing with stakeholders who are “with” you, you will bene�it from being direct with those supportive
individuals and telling them exactly what you believe needs to happen.

b. When dealing with a hostile or disagreeable audience, avoid direct and overt in�luence attempts. These will result in
activation of an ego-protective defense that your listeners will use to guard what they are already invested in. In these
cases, it’s important to modify your expectations and ask for only small amounts of change and slight adjustments to
thinking and behavior. For example, plan to move your audience from more to less disagreement in your initial
discussions. Second, work to establish common ground and a sense of understanding. Acknowledge areas of
agreement. Finally, be prepared to provide extensive amounts of the kinds of evidence and data discussed in this
chapter to support your position.

c. When your audience is neutral or undecided, doesn’t know much about the issues you are presenting, or is confused
and overwhelmed by the facts, your �irst objective should be to establish relevance. By providing background

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information on the issue, you can make the issue professionally relevant to stakeholders and heighten their attention.
Although evidence is important with these audiences, you must be cautious not to overwhelm or inundate them, since
there is likely to be a learning curve involved.

2. Avoid in�lammatory phrases. Steer clear of words and phrases that will make your stakeholders angry, cringe, or
uncomfortable. These semantic barriers will distract your audience from listening effectively and evaluating alternatives
fairly.

3. Use a two-sided message with refutation. A speaker is most likely to in�luence an audience by presenting both sides of an
issue and taking the time to argue against the position he/she �inds undesirable. When you do this, your constituents will
perceive you as well-informed, credible, and objective. Just be careful to be objective in opposing others’ points of view,
rather than offensive.

4. Inoculate against counterarguments. When you know there are arguments against elements of your strategy (and there
always are), it’s a good idea to inoculate the audience against them. Doing so involves identifying those arguments and
refuting each with solid evidence, often before they are even raised (because you have anticipated them). As a result, you
will arm your audience to resist them.

5. Minimize objections. Spending too much time inoculating against counterarguments detracts from the advantages of your
proposal. So just as it’s important to carefully consider the range of strategic alternatives as you are creating your bundle,
you should identify only the top two or three critical objections to address in your proposal.

6. Repeat your message using various tactics and media. Leveraging stakeholder support for a proposed strategy is rarely
accomplished in a single message. In shepherding strategy change, design a message strategy that will expose your
constituents to the ideas multiple times and in multiple formats (e.g., presentation, written proposal, podcast, interactive
Web-based summary).

In comparing Tables 7.1 and 7.3, note that the latter uses only whole numbers; since the ratings are “educated guesses” in the absence of any
data, estimating to one place of decimals belies a level of accuracy that just isn’t there. Arguments involved in the selection of a bundle consist
of two parts: (1) reasons why the preferred bundle was chosen, and (2) reasons why the other two were rejected. The best ratings in the table
are highlighted in the winning bundle. Thus, in Table 7.3, if option A were “forming new partnerships,” option B were “developing new
products,” and option C were “expanding nationally,” the argument would look like this:

“The company should expand nationally because doing so would generate the most revenue growth and pro�itability,
increase shareholder value the most, and require the least culture change. Forming new partnerships would generate the
least revenue growth and pro�itability and increase shareholder value the least, while developing new products would
require the most investment and culture change.”

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A �inal comment on the bundle analysis re�lects on how well you have crafted the criteria matrix. It could be that the bundle chosen best
meets all the criteria and one of the other two bundles falls short of all the criteria. This means a couple of things: (a) the winning bundle is so
much better than the others and the one that falls short of all the criteria is so much worse than the others that it re�lects badly on how the
bundles were created in the �irst place (they are all supposed to be good, viable bundles); and (b) the third bundle is left with no reason to
reject it, which also hurts the argument. In such a case, the criteria matrix should be reworked so that the winning bundle is still the one that
would prevail, but would not be better than the other two on all criteria.

Discussion Questions

1. Are the following criteria positively or negatively correlated?
Brand reputation
Economic value added
Changing the cost structure of the �irm
Cost of maintaining quality
Sales per square foot
Managerial turnover
Weighted average cost of capital (WACC)

2. The section advises that one should use 5–6 criteria in a criteria matrix. Discuss arguments of your own concerning why
using a smaller or larger number of criteria would or would not work.

3. Would using more criteria produce a different result? Would it inspire more or less con�idence in the result?
4. Assume you have developed a good criteria matrix and are now working on a convincing argument for your winning
bundle. But what the criteria matrix reveals, in your opinion, doesn’t make for a convincing argument. What do you do?

5. The overarching purpose of a criteria matrix is to choose a preferred “best” strategy and argue persuasively to others
(perhaps even yourself) that it is the best one. Can you think of another method or process that would lead to the same
result? Explain it.

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7.3 Deciding on Objectives

The recommendations phase concludes the strategic-planning process allowing the recommendations— and the strategy—to be
implemented. Recommendations include setting objectives, de�ining strategic intent, identifying key programs to achieve the objectives, and
exploring triggers and contingencies if things do not go as planned. Creating or revising mission and vision statements is also part of this �inal
phase if the organization’s existing statements are no longer valid, or if the organization has never had them before.

An objective is a quantitative target to be achieved within a speci�ied time frame. It may seem odd to some that setting objectives comes after
choosing a strategy. They may �ind it more logical to �irst set objectives and then choose a strategy to achieve them. Ideally, they should be set
together, that is, iteratively until they �it with each other. But that is hard to do. Deciding on a strategy �irst makes sense for three reasons.
First, it follows naturally from identifying the company’s key strategic issues, which in turn follow logically from the situation-analysis phase.
Second, by construing the selection of a strategic alternative bundle as creating a road map or direction for the company, one can then turn
one’s attention to deciding how far and how fast to go along that road (i.e., objectives). Last, deciding on the strategy �irst allows many criteria
to be used, enriching the assessment and ultimately the choice of strategy. For example, examine the timeline of strategy implementation for
the United and Continental airlines merger: http://www.unitedafa.org/news/merger/timeline/default.aspx
(http://www.unitedafa.org/news/merger/timeline/default.aspx)

In addition, there are two problems with setting objectives �irst. Where does the objective—the quantitative target—come from? Other than
the case where the current strategy is being continued, setting an objective �irst lacks a context. For example, to meet a 20% revenue growth
objective in two years may be possible by expanding internationally, but not by investing more in R&D. Yet the latter may be the better
strategy in the long run. Wouldn’t it make more sense to ask which of the two was capable of generating more revenues over the next several
years? And where did that 20% number come from?

The second problem with setting objectives �irst is that, for example, revenue growth becomes the sole criterion for picking a strategy. That is,
having set an objective, a strategy is chosen that will best enable the company to meet the objective. Wouldn’t it make more sense to use
revenue growth in this instance as one of several important criteria? Would one be as content to achieve the revenue-growth objective if the
company were also losing money?

In the end, whichever one is done �irst—the strategy or the objectives—they must both match and be consistent with one another. The
strategy determines how the company will compete and where it is going, while the objectives determine the rate of growth and how fast the
company can go (what it can achieve) given its resources, capabilities, and aspirations. Great care must be taken to distinguish objectives

http://www.unitedafa.org/news/merger/timeline/default.aspx

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One of the steps in setting objectives is to
decide on a small number of measures critical
to the �irm, such as revenues, pro�it, and debt
structure.

Stockbyte/Thinkstock

from strategies. For example, executives often talk of “high growth,” “moderate growth,” and
“low growth” strategies. Clearly, these growth “strategies” are really objectives re�lecting a
high, medium, or low increase in sales or revenues. The full range of possible business
strategies was covered in Section 3.2.

Setting Objectives

While this model advocates setting objectives after deciding on a preferred strategic
alternative, the two must be so well matched that an observer would imagine that they were
done together. It is impossible to evaluate or judge a strategy without knowing what the
objectives are, and likewise impossible to judge whether the objectives make sense without
knowing how they are to be achieved (the strategy) (Collis & Rukstad, 2008).

Consider this example. A company decides to pursue an accelerated product-development
strategy and at the same time, change its fairly conservative culture into an innovative one
that also values quality. Is this a good strategy? It is impossible to tell unless you also know
what the company is trying to achieve, that is, know its objectives. If you were now told that in
three years’ time the company expected sales to double and pro�its to increase by 50% and
that it had the resources to carry out this preferred strategy, one now has a basis for either
criticizing the strategy or believing that it will work (or even criticizing the objectives). So a
strategy without objectives is meaningless.

Consider a second example. A company whose sales have been �lat and that has been losing
money for two years wants to increase sales by 20% next year and at least break even. Are these good objectives? Again, it is impossible to tell
unless you know how the company intends to achieve them, which means knowing its strategy and programs. Merely trying to increase sales,
typically through a market-development strategy, may be insuf�icient. The company’s product may be outdated and its cost structure too high.
So with the competitive environment the company faces, it will take a well-thought-out strategy to give an observer con�idence that the
objectives could and would be achieved. Again, objectives without a strategy are meaningless.

Setting objectives is a three-step process.

Limit the Choices

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Companies have goals because they inspire
employees and external constituents to
perform better.

Stockbyte/Thinkstock

Decide on a small number of measures critical to �irm performance. These might typically
include revenues, pro�it, debt structure, and the like. There is no rule as to how many
objectives a �irm should have. But the more it has, the more dif�icult it becomes to achieve
them all and the greater is the likelihood that some objectives will con�lict with others; that is,
achieving one will result in not achieving another. About three to four companywide
objectives is typical, one of which is revenues (or market share if it can be accurately
measured) and some kind of pro�it measure: EBIT, NIBT, NIAT, EPS, ROI, ROE, ROS, or ROA—
NIAT being the most commonly used. The remaining one or two can be anything of critical
importance to the company such as sales per square foot for a retailer, operating income per
screen for a movie-theater chain, debt–equity ratio for a fairly leveraged company, and the
like. Do not include costreduction objectives as one of them because any efforts to reduce
costs will show up in improved pro�it; costreduction objectives are important only at an
operational not a strategic level. Similarly, other operational or programmatic objectives, such
as number of new products produced, percentage of international sales, number of retail
outlets served, or increasing production capacity or throughput by X%, while important,
should not be part of this set.

Set Annual Objectives

Decide on annual values for these critical measures for the next three years. This is dif�icult to
do well. Theory tells us that objectives, to be effective, should be set at a “challenging” level;
set too high, they de-motivate because people consider them impossible to achieve, and set
too low, they also de-motivate because they are too easily achieved. How does a company �ind
that perfect level? The following �ive-step process may help.

First, extrapolate from historical data to establish initial values for each objective for the next three years. This is easier to do when you have
at least �ive years of historical data available. Second, make a list of external and internal forces or changes that might act to decrease these
beginning values over time, such as intensifying competition, scarcity of borrowed funds, a conservative culture, rapidly accelerating
technological innovation in the industry with which the �irm cannot keep up, and so on. For each item, indicate, however subjectively, the
strength of the negative effect on the objective (high, medium, or low). Third, make a list of external and internal forces or changes that might
act to increase these beginning values over time such as a new strategy, companywide training, a new CEO, a change to a more productive

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culture, new quality programs, strategic alliances, a new advertising campaign, and so on. For each item, indicate, however subjectively, the
strength of the positive effect on the objective (high, medium, or low). Fourth, compare the two lists and decide, for each objective, whether
the initial value deserves to be increased or decreased and by how much, depending on the extent to which the positive effects outweigh the
negative effects or vice versa. In this way, create a “�irst cut” of each objective for each of the next three years.

Finally, get feedback from those who are going to be held accountable for achieving the objectives whether the “�irst-cut” objectives are
challenging yet achievable in the circumstances. In fact, get these people involved in the other steps too. For some companies, deciding on
strategic objectives cannot be done unless the whole range of operational objectives have been created, thought through, and approved, to
make sure that the resources to achieve them are available and that they are feasible to achieve in the time frame speci�ied. When they have
been well designed, achieving the operational objectives should result in automatically achieving the company-wide objectives.

Match Objectives to Strategy

Check that the objectives match the preferred strategy. The preferred strategy and the set of objectives must be consistent with each other.
For example, if the strategy decided upon is aggressive, the objectives set should also be aggressive. If the strategy is a turnaround, the
objectives should re�lect this unusual state, showing �irst stabilization at a lower level followed by growth consistent with the new strategy. If
the strategy is designed to maintain market position in a highly competitive, mature market, the objectives should not show high growth, but
re�lect current conditions to a high degree. If the strategy requires a period of heavy investment before it pays off, the objectives should re�lect
that reality. Remember, the objectives indicate what the company considers to be successful performance over time given the changing
realities of the industry, marketplace, and the company’s own strategies, resources, and commitments. Thus, not achieving these objectives
(indicators) means less-than-successful performance, while meeting or exceeding them indicates intended or superlative performance in the
circumstances.

Types of Objectives

The preceding discussion implicitly assumes that these are company or company-wide objectives. There are also other types of limited
objectives. Partial objectives cover only part of some activity, like international sales versus total sales. Functional objectives pertain only
to a particular function, like a sales and marketing department increasing the number of salesmen. Operational objectives are either
subsumed by higher-order objectives (like reducing costs) or are cross-functional, for example, security or systems or plant maintenance,
none of which come under any “function” (Table 7.2). All of these other types of objectives will show up during implementation of a strategy.
The value of understanding the differences is that at the strategic level, we need company-wide objectives, not functional or operational
objectives.

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Table 7.4: Partial, functional, and operational objectives

Kind of
objective

Objective Explanation

Partial Increase international sales by 10%/yr Does not address domestic sales

Increase sales from new products introduced during the past
three years to 40% of total sales

Does not address sales from existing
products

Increase sales to mass merchandisers by 30%/yr Does not address sales to other retail
channels

Functional Double the number of retail outlets Concerns only marketing

Increase throughput by 5%/yr Concerns only production

Redesign the product to reduce purchasing costs by 5% Concerns only engineering

Operational Reduce costs by 12%/yr The higher-order objective of NIAT takes
this into account

Improve quality by reducing the costs of quality by 30% Insofar as quality is measured this way, it is
subsumed by NIAT

Improve the sales “hit rate” from 2% to 6% at year-end This is an operational objective for
marketing

Typically, the most common company-wide objectives are revenues, NIAT (or other pro�it objective), and one or two other ratios or
non�inancial measures that the company as a whole commits to achieving. These might be volunteer hours donated by employees to the
community, a lowered number of quality defects, a lowered turnover rate, or improved safety and accident rates.

Objectives vs. Goals

In many companies, what we now understand to be an objective is often referred to as a goal (and vice versa). To underscore the difference as
used here, a goal is de�ined as a qualitative end-state that a company tries to achieve; for example, “to become more innovative.” Note that

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progress cannot be measured, and there is no speci�ied time frame.

Why, then, do companies have goals? Because they are intended to inspire. They should sound stirring to employees and to external
constituents. The following are some examples of goals:

Become more innovative
Make the customer #1
Take care of the environment
Produce better products
Be there for our customers
We’re going to grow
Develop a national presence
Become more ef�icient
Become lean and mean
Streamline our operations

At the same time, goals, precisely because they are not amenable to measurement, let management off the hook. There’s no incentive to follow
through. Management isn’t accountable.

Objectives are written in such a fashion that organizational members will be able to answer the question “Will we know it when we see it or
when it happens?” Organizational consultants and authors Beebe, Mottet, and Roach use four criteria for objectives (2003). First,
accomplishment of the objective must be observable; we should be able to see the results. Second, objectives must be measurable; that is,
some objective metric must yield useful data indicating that an objective has been met. Third, objectives must be speci�ic; a clearly written
objective includes precise guidelines for describing the nature of the objective and the strategies and tactics required to accomplish it. Finally,
as we’ve made clear in our discussions so far about strategic thinking, talking, and management, objectives must be feasible and attainable.
Organizations must develop objectives based on a realistic understanding of both internal and external barriers to accomplishment.

Thus, a CEO might be well advised to run a company on objectives alone. It has been said that “you can’t improve what you can’t measure,”
and there is much truth in that. Goals imply programs (for example, “produce better products” implies more R&D, engineering, better quality
control, and constant customer feedback) and operational as well as company-wide objectives. Incentives for improved performance and
results are tied to achieving objectives. Settling for a goal instead implies laziness and an aversion to accountability.

Discussion Questions

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1. Companies, both in their public statements and in the way they are managed, make extensive use of goals and objectives.
Assuming that they are de�ined as they are in this presentation, do you think that a company could be managed using just
goals? Why or why not?

2. Imagine a company whose managers collectively set objectives at a very conservative level, knowing full well the objectives
would be exceeded and all of them would get hefty bonuses as a result. How could this situation be avoided?

3. Is it possible for company-wide objectives to be set last, in effect adding up all the partial and functional objectives? If it is,
might that be better or worse than setting them �irst?

4. At a business school, overall objectives (things like number of courses taught by full-time faculty, ratio of full-time faculty
to total faculty, total funding received, etc.) are derived from annual plans of each department (�inance, operations,
accounting, HR, etc.); that is, the departmental objectives are combined to produce the school’s overall objectives. Yet the
school maintains that it does strategic planning. How would you explain to the school that it is mistaken?

5. Companies’ reward and incentive systems are attached to attaining or exceeding certain objectives, assuming that pro�its
were also achieved. But little is said or publicized about what happens when such objectives are not achieved. What kinds
of penalties would you suggest for not achieving company-wide objectives and functional objectives? How would you gain
everyone’s agreement in the �irst place for a system of penalties as well as bonuses and other rewards?

6. If it didn’t already exist in a company, would developing a system for penalizing failure to meet company objectives be
worthwhile?

7. Recall an organization you were part of (needn’t be a company). Did you have goals and objectives? What were they? Were
they taken seriously?

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In contingency planning, companies tend to look at the short
term, medium term, and long term. The standard range for

Creatas/Thinkstock

7.4 Contingency Planning

Murphy’s Law states, “If anything can go wrong, it will.” An extension of this is that it always seems to happen at the worst possible time. It is
a good idea to contemplate what could go potentially wrong in the future, which is termed a trigger, and what the company would do
differently were that to happen, referred to as a contingency.

We therefore talk about trigger-contingency pairs, typically one or two that pertain to next year— the short term—and one or two that could
occur three years from now—the long term. In reality, companies may have as many as 20 triggers and contingencies “active” at any time,
assuming they do contingency planning. The planning horizon, however, can vary considerably according to the size of the company and the
industry. For example, a company like Boeing views the next several years as “short-term,” about 10–15 years as “medium term,” and 20–30
years as “long term.” Companies in the fashion business view two weeks as “short term,” and a season (3–4 months) as “long term.” For most
companies, however, the “standard” long term of �ive years has now shrunk to three years because of the rapid pace of change, especially in
high-technology industries.

Triggers

Triggers should be external, speci�ic, and quantitative. Absent these three
quali�iers the company will not know when to invoke the contingency plan. It
is no use saying, for example, “If pro�its decline,” or “When things get tough.”
Decline how much? Get how tough? Even when trying to address phenomena
that cannot be measured—such as a competitor in�iltrating your territory, or,
for the Carmike movietheater case discussed in the previous chapter, “worse”
movies being made in a certain year—try to gauge their effect on your sales.
For example, if the unknown phenomena were to cause your sales to decline,
would you do something differently if your sales fell below target projections
by 10%, 15%, or 20%? In this way, you will monitor something you constantly
measure, and so can bring into play the contingency plan at just the right
moment.

Triggers also come from assumptions you make about the future that are
“soft”—that is, about which you lack con�idence and which are external to the

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“long term” used to be �ive years, but due to the rapid pace of
technology, it has been reduced to three years.

Good contingency plans depend on three guidelines: not
reneging on your adopted “best strategy,” not planning for
something the company is already doing, and making the
contingency a solution to the problem.

age fotostock/SuperStock

company. For example, if you are engaged in strategic planning and your
company is sensitive to interest rates, you might not know what is going to
happen to interest rates next year. You may have tried to obtain information

from various economic forecasts on this variable but, frustratingly, all of them differ in their predictions. So here is something you can do.
Simply make the assumption that interest rates are not going up next year (if economic indicators make that at least plausible), and base your
planning on that.

However, because the assumption is “soft,” create a trigger that admits the possibility that interest rates could go up: “If interest rates go up
by more than X percentage points, then . . .” the contingency plan takes effect.

Triggers can also emerge from the timing of various imminent occurrences.
For example, if new federal legislation is being created to nationalize health
care, you may be unsure if this would take place next year or two to three
years from now. So create your plans with your best assumption in mind—for
example, no health care legislation will be enacted during the period of the
planning horizon. However, because the assumption is “soft,” create a trigger,
too, that speci�ies, “If health care legislation were enacted within the next two
years, then . . .” the paired contingency will be enacted. Notice that this trigger
is quantitative. You can tell exactly when it happens and can therefore invoke
the contingency plan. Similarly, you may want to do something differently if
two competitors merge or if quota restrictions into some foreign country are
imposed or lifted.

For companies focused on increasing sales or market share, it is tempting and
understandable to create triggers having to do with not meeting revenue
objectives. To do this once is perfectly �ine, but to have such a trigger every
year gives the impression of obsessive focus in one area. Management’s role is
directing and coordinating the many aspects of a company to work together
seamlessly to create value, and indeed things could go wrong in many areas, not just in failing to make a revenue objective. A better approach
is to make a list of all the possible things that could go wrong or where your assumptions are soft, and choose the most likely of them as your
triggers. Try to choose a different trigger for the long term from what is chosen for the short term. A useful training exercise is to create one

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trigger-contingency pair based on what might cause a revenue shortfall and one an NIAT shortfall, stating one in the short term and the other
in the long term, just to practice creating realistic trigger-contingency pairs.

Contingencies

Contingencies are precursors to contingency plans. They are a response to a particular trigger; what a company should do differently if that
trigger occurred. Later, when the strategic plan has been prepared for operational implementation, the contingency should be translated into
a contingency plan complete with details as to who is responsible for it, its budget and schedule, and who must keep it relevant as conditions
change.

Good contingencies should follow three guidelines:

Do not renege on the adopted “best” strategy. For example, suppose the company chose a market-expansion strategic bundle, but there
is reason to believe it would be dif�icult to implement and pull off. If sales were to drop more than 10% from target projections at any
time, it should not set as a contingency, “Cancel the market-expansion strategy and implement a differentiation strategy.” If one does
that, it is in effect saying that the strategic bundle chosen was not a good choice, and its proponents will instantly lose credibility.
Besides, companies cannot—and should not—be in the habit of changing their strategies at the �irst sign of adversity. Strategies
typically take anywhere from two to �ive years to implement, and the organization must give the chosen strategy a chance to succeed
by not changing it until there is absolute certainty it is not working. For any new or modi�ied strategy being implemented that does not
seem to be working, it is advisable always to suspect �irst the execution of the strategy, not the strategy itself. That way the contingency
should focus on operational changes that could be made to enable the strategy to succeed, not changing the strategy itself. The
following are examples of possible operational changes:

Change the ad campaign or the advertising agency.
Replace the VP Marketing (or any senior manager).
Give the salespeople additional or more technical training.
Do additional and speci�ic market research.
Broaden the distribution channels.
Increase links to your customers and increase their switching costs.
Seek alternative suppliers.

Do not make something that the company is already doing the contingency. Think about it. What the company has been doing up to the
time the trigger is invoked is what got the company into trouble in the �irst place. If sales are not meeting expectations, do not set as a
contingency, “Continue advertising” or “Do more R&D.” The company is already doing those things, and, clearly, sales are still down. So
think of something it can do differently, that is, an adjustment to its operations or execution, one that can be implemented quickly, say,
in a couple of months.

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Make the contingency a solution to the problem implied in the trigger. If inadequate pro�its are the problem, the contingency should be
directed towards increasing pro�its, not sales. If market share is the problem, do not suggest lowering costs as the contingency, even if
it is a matter of doing something different; the two are unrelated.

Because contingencies are in fact back-up plans, they have to be spelled out in great detail, and those responsible for developing them and
carrying them out must know who they are and what they must do. Those details are added during the operational phase prior to
implementation. Companies that go this extra mile of contingency planning will reap rewards in three ways. First, they will be better
prepared for speci�ic uncertainties than companies that have no triggers and contingencies, especially if they work to adjust the contingencies
over time as conditions change to keep them current and workable. Second, they will become more adept at anticipating what might go
wrong and come up with better triggers and contingencies over time. Third, they will appreciate the need to be alert to key changes in the
environment and their company and, over time, create a more �lexible company culture.

It is effective to express a trigger/contingency pair in the form of a three-part sentence. For example:

The external cause of the trigger: “If competitors lowered their prices, . . .”
The quantitative trigger: “causing revenues to lag projections by 15%, . . .”
The contingency: “then the company should increase advertising and promotions.”

Stringing those three parts together—”If competitors lowered their prices, causing revenues to lag projections by 15%, then the company
should increase advertising and promotions”—you will �ind that this simple sentence meets all criteria for creating a good trigger and
contingency.

Discussion Questions

1. If “value” implies bene�its accruing for a certain level of costs, try to articulate the true value of contingency planning to a
company.

2. Contingency planning is needed precisely because certain assumptions about the changing environment might be “soft”
and uncertain. Yet, because of changing conditions both inside and outside the company, contingency plans—both triggers
and contingencies—rapidly go out of date. How often should a company review its contingency planning and keep things
current?

3. Triggers assume that progress toward objectives is measured constantly and that actual performance can be compared to
plan performance, say, every month. In your opinion, is this true of most companies? Comment speci�ically about NIAT
performance.

4. Typically, pro�its are computed quarterly at most, and are done so using accounting principles. To the extent you agree
with this, should pro�its ever be used as a trigger? Discuss.

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In public companies, it is important to keep the board of
directors involved in the process because they are directly
responsible to the shareholders for making strategic decisions.

Kablonk/SuperStock

7.5 Keeping the Board of Directors Involved

Strategic planning is a critical part of strategic management and singularly responsible for directing or keeping the company on the right
path. In companies that do strategic planning, a topmanagement team, led by the CEO and ideally including key operational managers, is
responsible for doing strategic planning and implementing the decisions made during the process.

In public companies, however, the board of directors is directly responsible to
the shareholders for making strategic decisions that ultimately bene�it the
company and, by extension, its stockholders. So what is the role of the board
in strategic planning and decision making? The role and level of involvement
ranges from almost nothing at one end of the scale to taking over completely
at the other, and varies from company to company.

There are two scenarios where board involvement is nonexistent or where it
“rubber stamps” executive decisions. In the �irst there is a high degree of trust
between the board and the CEO and top management. In the second the board
members have been handpicked by the CEO and agree with all his decisions.
In many such cases, the CEO is also the chairperson of the board, making the
relationship even cozier. While some companies are fortunate to enjoy mutual
trust, nothing is wrong with the latter technically or legally. Whether it is
“right” is a matter of opinion.

At the other end of the scale, takeover bids and acquisitions demand full board
involvement, and resultant decisions are made solely by the board. Bear in mind that the CEO, CFO, and one or two other key executives are
usually also members of the board.

Most companies operate somewhere in between these two extremes. Because the ef�icacy of the board-management relationship differs so
much, it is dif�icult to generalize. What would be useful instead would be to summarize some things a board could and should do to be
involved in the strategic-planning process:

If at all possible, the board should nominate a strategic-planning committee whose responsibility would be to monitor the strategic
decisions being made by top management and involve the whole board if circumstances warrant.

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In the absence of a strategic-planning committee, it may be advisable to have at least one board member present at all strategic-
planning meetings as an observer.
Have the director of strategic planning—or the CEO if one doesn’t exist—send summaries of all reports and research done in
preparation for strategic-planning meetings.
Ask probing questions at board meetings of the CEO and CFO, especially during the strategic-planning process. If the board gets an
inkling of the direction the CEO wants to take the company and it disagrees, and if each side is adamant that its direction is right, it is
the CEO who gets dismissed.
Above all, it is the board’s �iduciary responsibility to ensure that the direction and strategy the company moves in is in its best interest
and that of the stockholders; it has to do whatever it must to carry out that duty.

Discussion Questions

1. Somehow, the board of directors has to maintain good relationships with the top management of the company and yet stay
at arm’s length, so to speak, to properly perform its role of overseer. How can it best manage this tension?

2. Imagine yourself as a board member: You notice that all is not right between the CEO and the CFO and certain other board
members. What would you do?

3. Also as a board member, you have a sudden insight as to what the company might do strategically in the future. What do
you with this idea?

4. If the CEO and CFO are insider members of the board, is there any justi�ication for the board appointing a strategic-
planning committee?

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Summary

This chapter described a useful method—the criteria matrix—for evaluating alternative bundles on a number of criteria in order to select the
best one. However, choosing which criteria to use is subjective and could affect the outcome. They should be related to the purposes the
company is trying to achieve and what “success” means to the company. It therefore makes sense that using such criteria would in fact result
in the best bundle for the company. In addition, only �ive to six criteria should be used, as too few would fail to capture the complexity of a
future strategic direction and too many would dilute the impact that each criterion would have on the outcome.

The criteria matrix consists of a table with the alternative bundles as columns and the criteria as rows. Putting numbers or ratings down in
each cell must be done carefully. Positively correlated criteria should be rated on a scale of 0 to plus 10, 10 being best, while negatively
correlated criteria should be rated on a scale of 0 to minus 10, 0 being best. The magnitude of the rating is not nearly as important as the
relative ratings across bundles. Criteria for which every bundle gets the same rating should be deleted; the purpose of choosing criteria
includes their ability to differentiate the bundles. Finally, the “winning” bundle must win by at least three points or there will be dif�iculty
arguing for it as the best bundle. If this happens, the ratings and even the criteria need to be changed until it meets that condition.

After determining the bundle with the highest score, a persuasive argument must be created to convince others of the choice. The best
argument consists of two parts: why the winning bundle was selected and why the others were rejected. Reasons for selecting the winning
bundle include those criteria for which it had the best rating. Reasons for rejecting any bundle include those criteria on which it had the worst
rating. If the reasons are “unbalanced” (i.e., the winning bundle was best on all the criteria and another bundle was worst on all criteria), it
means that the bundles were poorly formed or badly rated in the �irst place. If all the bundles were good to begin with and the ratings are
realistic, the winning bundle should be best on a subset of criteria and the others the worst on other subsets.

Besides choosing a winning strategy and bundle, the company needs to make strategic decisions that include company-wide objectives,
strategic intent, major programs, and triggers and contingencies. Company-wide objectives are targets the whole company is responsible for
producing, whereas functional objectives apply only to functional departments, partial objectives are subsumed under other objectives, and
operational objectives are other kinds of nonstrategic objective. The latter three types of objectives are operational, not strategic. Objectives
are quantitative targets to be achieved in a speci�ied time frame, whereas goals are simply qualitative endstates to be achieved in the future
and, while they may sound inspirational, lack incentives and accountability.

Because things may go wrong despite the best planning, well-managed companies will do contingency planning. This involves, for each
contingency, identifying an external assumption that might be “soft” or uncertain (what could go wrong), a quantitative trigger (when should

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the company do something different to correct the situation), and what the company would do if the trigger were reached. Companies who
prepare themselves in this way fare better than those that don’t.

Finally, the board of directors has to be kept informed and involved throughout the strategic decision-making process. While their
involvement varies from hands-off to taking over the strategic decision making completely (as when responding to a takeover bid or making
an acquisition offer), boards would do well to do some of the following: strengthen their relationship with the CEO and CFO (insider board
members), appoint a strategic-planning committee, sit in on strategic-planning meetings, or receive summaries of all reports and research
done in preparation for strategic-planning meetings.

Concept Check

Key Terms

argument The argument for selecting a preferred bundle consists of two parts: (1) reasons why the preferred bundle was chosen, and (2)
reasons why the other two were rejected. The reasons are drawn from the criteria matrix.

company-wide objectives Set during the strategic-planning process that the whole company must achieve.

contingencies Back-up plans and precursors to contingency plans. They are a response to a particular trigger, what a company might do
differently if that trigger occurred.

contingency planning Counteracts Murphy’s Law (“If anything can go wrong, it will”) by contemplating what could go wrong in the future
(trigger) and what the company would do differently were that to happen (contingency).

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contingency plans Differ from contingencies only in adding operational details, like who is responsible, the budget and schedule, and who
must keep the plan current over time.

criteria matrix A matrix for evaluating alternative bundles using 5–6 criteria important to the �irm. Uses a scoring system that enables the
results of using each criterion to be added up at the end. Absolute ratings are not important, but relative ratings are. The winning bundle must
have at least three points more than any other bundle, otherwise the winning bundle cannot be defended adequately.

criteria Conditions used to evaluate alternative bundles derived from purposes to doing strategic planning and what the �irm perceives as
“success.” Must be classi�ied as either positively or negatively correlated.

criteria, negatively correlated So labeled because a bundle having less of something is “good” (opposites)—like riskiness or amount of
investment required. Bundles using such a criterion are rated on a scale of 0 to –10, 0 being best.

criteria, positively correlated So labeled because a bundle having more of something is “good” (reinforcing)—like revenue growth or
pro�itability. Bundles using such a criterion are rated on a scale of 0 to 10, 10 being best.

functional objectives Objectives that pertain only to a particular function, like increasing the number of salespeople (marketing/sales),
increasing throughput or production ef�iciency (production), reducing purchasing costs through redesign (engineering), or reducing the
weighted average cost of capital (�inance).

objective A quantitative target to be achieved within a speci�ied time frame.

operational objectives Objectives that are either subsumed by higher-order objectives (like reducing costs) or concerning, for example,
security or systems or plant maintenance, none of which come under any “function.”

partial objectives Objectives that cover part of some activity, like international sales vs. total sales, sales from new products vs. all products,
sales to mass merchandisers vs. all retail channels.

triggers Should be external, speci�ic, and quantitative.

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Chapter 8

Operational and Budget Planning

Fuse/Thinkstock

Learning Objectives

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By the time you have completed this chapter, you should be able to do the following:

Understand the differences between operational and budget planning.
Learn what this planning entails and why it must be done.
Appreciate broader operational issues such as systems and systems thinking, information systems,
building consensus, and the role of policies.
Understand who is involved in operational planning and issues involved in getting it done before the
start of the new �iscal year.

No strategy is useful unless it can be implemented, and no strategy can be implemented with any degree of success without doing operational
and budget planning. This chapter explains how to do such planning, why it’s important, and other important process issues.

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The world is made up of systems. Systems are
a set of interacting or independent

SOMOS / SuperStock

8.1 Some Broad Operational Issues

Some aspects of operational planning are more encompassing than just planning programs, projects, and tasks for people to do. These include
systems and systems thinking, management-information systems, ensuring participation in the operational-planning process, and the need
for consensus in decision making. Not only are they more encompassing but also are determinants of effective strategy execution and should
therefore be taken into account.

Systems and Systems Thinking

For the most part, our world is made up of systems—from the galactic solar system of which
we are a part, to the human body, which has many subsystems of its own, such as the immune,
reproductive, digestive, and cardiovascular systems. A system is a set of interacting or
interdependent components forming an integrated whole. Corporations are complex social
systems, consisting of individuals and units that work together (or not) to produce products
or services for their customers that ensure their survival. Complex systems are self-regulating
systems; that is, they are self-correcting through feedback. In other words, systems must be
responsive to feedback such as the company’s sales �igures, turnover, and other metrics in
order to ensure their competitive edge and survival.

Moreover, the systems approach to understanding organizations addresses the relationship
between the operation and its environment. It does so by examining the nature of the
boundaries between the organization and the outside world. The more permeable are an
organization’s boundaries, the more the organization is able to place its �inger on the pulse of
the competition, the marketplace, and industry trends. Boundaries may be created, for
instance, by employer apathy toward employee development and small travel budgets; an
organization that does not send employees to conferences and training, for instance,
establishes a less permeable boundary between the organization and the industry. Systems
with permeable boundaries are known as open systems and are preferred to closed systems
for their greater functionality and innovativeness. Viewing an organization as an open system
requires strategic thinkers to consider the complex interactions the system has with its

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components forming an integrated whole.
Corporations are complex social systems.

environment, as well as the ways in which the different units within the organization (known
as subsystems) import and export ideas, products, and other resources.

Additionally, systems are characterized by subsystem interdependence. For example, to market a product, the marketing department must
interact with the research and development team to learn what it needs to know about the product, as well as the sales team to provide the
sales strategy. In too many organizations, functional units act as if they were isolated from the others. For example, purchasing may order
parts without knowledge of production rates and inventory levels. In both strategic and operational planning, systems managers must
practice systems thinking, or the realization that affecting one part of the system affects other parts and furthermore that decisions must
bene�it the whole company and not just a particular functional area to the detriment of others. The performance of any system, including a
company, is thus never equal to the sum of the performance of its parts considered separately, but rather the product of their interactions
(Ackoff, 1986).

In operational planning, plans should be coordinated between functional units of the organization, especially those between which there is an
output-input relationship. The higher one’s position in the organizational hierarchy, the more emphasis must be placed on having a system-
wide perspective and maintaining awareness of the purposes and goals of the entire organization. Even at a basic operational level,
tremendous coordination is needed. As Russell Ackoff (1986), one of the most in�luential management thinkers of our time, says,
understanding how one unit’s activities affect and are affected by other corporate activities is a bene�it that “cannot be realized unless the
planning is comprehensive, coordinated, and participative” (pp. 202–203).

There is a class of system models called system dynamics, a detailed discussion of which is beyond the scope of this text. In simple terms,
however, dynamic systems speci�ically take into account how an organization as a complex social system behaves and changes. They are used
predictively and can be used to support strategic decisions.

Not many companies employ such models, which take time to develop, calibrate, and learn to use. More important than the actual models is
the thinking they require in terms of feedback loops; that is, these are positive if self-reinforcing in a positive direction or negative if self-
reinforcing the other way. For example, make more product, sell more product, get more money, make more product, and so on is a positive
feedback loop. When positive and negative feedback loops interact, depending on the data and kind of model created, results are often
counterintuitive.

Management-Information Systems (MIS)

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Every day, at every level in the organization, decisions are made. Earlier chapters focused on strategic decisions, while this chapter and the
next focus on operational decisions. Simple decisions require a person’s knowledge and experience or, in some organizations, an established
policy may govern decisions in routine situations. Startup �irms operate with the entrepreneur making all the decisions seemingly “off the
cuff” as speed is of the essence and the entrepreneur knows what he or she is doing.

The more complex decisions become, the less one person or even a group is able to act independently. Should special promotions in the
Southern United States be continued for another month? That would depend on how effective the promotions had been in increasing sales,
and without those data the right decision could not be made. Can production throughput be increased by 20% next year? Without knowing
the plant capacity, production costs, and sales forecasts, that question also couldn’t be answered. And these are operational decisions. We
already know that strategic decisions need a lot of data to be analyzed and processed before they are made, and even then no one will know if
the right decision was made until a couple of years later when one can see how the company performed.

With the exception of startups, no company can afford to be without a management-information system (MIS). By de�inition, it must
supply the basic information needed by managers for making decisions. The extent to which it succeeds in doing this determines the quality
of decisions made (Mason & Hof�lander, 1972). Even before the advent of computers, there were information systems, usually in the form of
reams of paper and information stored in people’s minds.

A management information system is more than a stream of unprocessed data that people can access. If it is just this, it is a databank, not an
MIS. An accounting system is an example of a databank. Likewise, �inancial statements display data—the user determines what meaning they
have.

A management-information system must be tailored to the needs of the decision-makers it serves. Cloud computing has made management-
information systems easy to create and maintain. These networked platforms make the MIS mobile, and data accessible from laptops,
smartphones, and tablets. The usefulness of the information depends on its quality, timeliness, completeness, and relevance (Jones & George,
2007). What data are needed? In what form? Collected how often? Can anyone input data into the system? Can it be trusted? Can anyone use
the system? In fact, it cannot be designed properly without �irst de�ining the kinds of decisions people make and the information that would
best serve those decision-makers. Unfortunately, the reverse is often the case, where the MIS is built on data that can be easily collected and
stored that people think will be useful for various decision-makers (Mason & Hof�lander, 1972).

Predictive information systems permit decision-makers to draw inferences and make predictions from the data. Asking the system “what
if” questions given certain assumptions gets a response in the vein of “if that were done, then this is what can be expected to occur.” The
system cannot evaluate the outcome, just provides the information. A �inancial-planning-simulation model is a good example; other examples

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An information management system must be
tailored to the needs of the decision makers it
serves. The usefulness of the data depends on
its timeliness, quality, completeness, and
relevance.

Goodshot/Thinkstock

are not even computer-based but nonetheless function as a predictive information system,
like a market-research group that analyzes data and answers decision-makers’ questions
(Mason & Hof�lander, 1972).

A more advanced type of information system is a decision-making system, which embodies
the organization’s criteria for choice and actually makes decisions on which the organization
can rely and act. A linear-program model for optimizing distribution routes to minimize costs
and use available trucks is a good example. So-called “action” information systems
automatically make the correct decisions that are acted upon immediately, like process-
control applications (Mason & Hof�lander, 1972). One example is measuring the �low of a �luid
and regulating a valve to maintain the �low at a predetermined level—an automatic control
system.

From this brief overview, it’s easy to see why management-information systems are easier to
develop for operational decisions than for strategic decision making. However, integrated
systems are found in many companies today that support operations, such as manufacturing
resource planning II (MRPII) and its successor, enterprise resource planning (ERP)
systems.

MRPII systems, used in manufacturing companies evolved from the earlier material
requirements planning (MRP), which uses forecasts from sales and marketing to determine
demand for raw materials (Figure 8.1). MRP and MRPII systems draw on a master-production
schedule, which is a breakdown of speci�ic plans for each product on a line. While MRP
coordinates the purchase of raw-materials, MRPII generates a comprehensive production
schedule that takes into consideration machine and labor capacity and coordinates
production runs with the arrival of materials. An MRPII output is a �inal labor and machine
schedule (Monk & Wagner, 2006).

Figure 8.1: Overview of MRP II

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Source: Adapted from Gunasekaran et al. (2000).

ERP is a process that aims to consolidate a company’s departments and operations into one computer system that serves each department’s
individual needs (see Figure 8.2). The goal of ERP is to create one software solution that serves to integrate the various moving parts of a
company into a uni�ied whole, through which information can be shared, acted upon, and reviewed on a company-wide basis. ERP is mainly
used in large organizations that can afford the considerable initial cost. An oft–cited example of an ERP software is customer-ordering and
delivery. A customer’s order transitions seamlessly from sales, the origin point of the deal, to inventory and warehousing, where the deal is
packaged and delivered, to �inance, where invoicing, billing, and payments are handled, and on to manufacturing, where the purchased
product can be replaced if necessary. Most of these operations, however, involve recording and updating data, not making decisions involving
judgment or prediction.

In companies with such integrated information systems, operational planning can be facilitated using data from the system and updated in
real time as conditions change. For example, integrated systems in supermarkets typically include supply-chain, inventory, and
�inance/accounting management based on Figure 8.2, but not human-resource management (HRM) or customer-relationship management
(CRM) systems. The emphasis is squarely on cost-control, which includes not stocking items not in demand and not being stocked out of any
item in demand. Used for that limited but important purpose, the system is useful since margins are quite thin overall.

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Federal Express uses a communication system that allows it to
coordinate handling an average of 5.2 million packages and
delivering them with nearly 60,000 vehicles.

JB Reed/Bloomberg via Getty Images

Larger companies �ind they cannot operate without some sort of sophisticated
information system. Federal Express (FedEx) has communication systems that
allow it to coordinate nearly 60,000 vehicles handling an average of 5.2
million packages a day. Its own controllers can override the �light plans of over
650 aircraft should bad weather or other emergencies arise. Its series of e-
business tools allows customers to ship and track packages online either on
its own or the company’s website, create address books, generate custom
reports, reduce internal warehousing and inventory-management costs,
purchase goods from suppliers, and respond quickly to customer demands
(Thompson, Gamble, & Strickland, 2004).

Information systems often extend beyond the company to suppliers, also.
Walmart is without peer in terms of managing its supply chain. For example,
its computers transmit daily sales to Wrangler, a supplier of blue jeans. From
the information transmitted and “married” to Wrangler’s own systems, the
clothing manufacturer can ship speci�ic quantities of speci�ic sizes and colors
to speci�ic stores from speci�ic warehouses—lowering logistics and inventory
costs for both supplier and customer and leading to fewer stockouts (Thompson, Gamble, & Strickland, 2004).

Figure 8.2: Overview of ERP

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Source: Enterprise Resource Planning, from SoftWeb Solutions. Reprinted by permission.

Building Consensus

Operational planning is, in essence, a string of decisions that have to be made quickly at whatever level that planning is done. Unless there is
consensus, that is, complete agreement, on a decision by a group of people, majority rule takes over. There’s nothing intrinsically wrong with
that, except that it introduces the possibility that a minority is not committed to the decision. So how can consensus be built when there is a
difference of opinion?

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If time allows, it pays to get more data on the alternatives to aid in the decision-making process; however, that is not always possible. It may
be that the lack of consensus is due not just to different opinions, but also to different positions and political ploys. It is frequently easier to
get managers and people to agree �irst that consensus is desirable (as well as possible) than it is to obtain it (Ackoff, 1986). The additional
time and effort it takes to achieve consensus is more than compensated for by the surge in motivation after agreement has been reached.

Spotlight on Group Decision Support Systems

Operational planning requires the kind of consensus and buy-in that challenges even the most competent and cooperative
human communicators. One solution that many organizations use to streamline this process is the Group Decision Support
System (GDSS). GDSS has a long history of development and applications in team-related tasks. Although the sophistication of
the interface and the platforms for these technologies have improved over the years, the documented outcomes of GDSS
implementation on decision making and group communication have remained stable over close to 30 years of research. Today,
most GDSS are supported by a web-based platform that collects, organizes, and interprets the thoughts and reactions of
individuals participating in a group decision-making effort (Roszkiewicz, 2007). GDSS replaces whiteboards and �lipcharts with
a projected image, and can tabulate rankings and evaluations (offering anonymity when desired by meeting leaders and
participants) that individuals input through their keyboards, laptops, tablets, smartphones, or specialized handheld “clickers”
compatible with the system.

In many ways, the GDSS helps level the playing �ield among meeting participants—the shy individual hesitant to disagree or
advocate for an alternative position; the dominant, outspoken opinion leader; the fault-�inder; the devil’s advocate; and so
forth. Although all these roles are important to group decision making, their individual communication styles often steer
meetings down the wrong course and lead to outcomes that are unrelated to the best interest of the organization. These
problems and other human-communication problems, such as groupthink, interpersonal con�lict, and retaliation/retribution
may be magni�ied by the popularity of web conferencing, where participants contend with apprehension about using
technology, distractions, and lowered personal cues, which research has shown to be important communication outcomes
(Walther, Loh, & Granka, 2005).

GDSS introduces discipline and structure into discussions that can go wrong due to human differences— without turning
human participants into androids. Participants have equal opportunities to express themselves in brainstorming sessions by
posting comments and thoughts to the projection screen, and vote via automated polling. But meetings supported by GDSS are
far from silent; the meeting facilitator is now freed from the tasks of recording notes and votes and can facilitate more

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meaningful conversation. Research indicates that variables such as trust, group synergy, participation, openness, truthfulness,
listening, and perceptions of cooperation are enhanced in GDSS-supported group environments (Aiken & Martin, 1994).

Further, the accuracy and ef�iciency of decision making improve when GDSS is implemented (Poole & Holmes, 1995). As
agreements and consensus are reached, the facilitator can encourage the group to continue the dialogue with the sophisticated
graphs and other visuals that GDSS produces quickly and seamlessly as people participate. Some studies indicate that strategic
decision-making time can be cut in half when GDSS is employed. GDSS-supported meetings yield results that are reliably
defensible through the patterns identi�ied and statistics compiled by the system. And, because GDSS also serves as a cloud
repository for meeting communication, participants can retrieve the ideas later.

In summary, research indicates that the implementation of online GDSS decreases negative interpersonal communication
dynamics and enhances the ef�icacy and quality of decision making and information gathering. GDSS has applications for a wide
range of organizational decision-making tasks, but can play a critical role in accurate and ef�icient strategic and operational
planning where consensus is important.

Questions for Critical Thinking and Engagement

1. You may already have experience with GDSS; even the clicker-based response systems used in some classrooms represent
a form of this type of technology. If you have experience with some type of GDSS, what is your reaction to it? Describe how
the technology was utilized by your group, and with what outcomes.

2. Describe a group decision-making experience you have had which might have been enhanced by the use of GDSS. Describe
the challenges your group encountered, and explain how GDSS might have mitigated or prevented them.

3. Although there are many bene�its to GDSS implementation, these technologies are not a panacea. What barriers to their
use might exist? What unintended problems might they introduce into the group decision-making process?

The Role of Policies

A policy is a company directive designed to guide the thinking, decisions, and actions of managers and their subordinates (Pearce &
Robinson, 2005). Policies play several roles and serve several purposes. First, it saves higher management from wasting time making
decisions that could be as well handled lower down the hierarchy. Second, it empowers people lower in the organization to make those
decisions, often where they should be made. Third, they address issues that crop up frequently, so the amount of time saved is considerable.

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Wendy’s Hamburgers’ purchasing policy allows
managers to buy locally produced fresh meat
and produce from local producers rather than
from company-owned sources.

Associated Press/Terry Gilliam

Finally, the decisions themselves could save the company money by, for example, limiting the
kinds of services offered (“Sorry, sir, our policy is to …”).

In addition, policies

establish indirect control over independent action immediately;
promote uniform handling of similar activities;
ensure quicker decisions through using standardized answers;
institutionalize basic aspects of organizational behavior;
clarify what is expected and facilitate smooth execution of strategy;
provide predetermined answers to routine problems (Pearce & Robinson, 2005).

Examples of policies include Wendy’s purchasing policy that allows local store managers to
buy fresh meat and produce locally rather than from company-owned sources. IBM has a
strict marketing policy of not giving free IBM PCs to any person or organization. Packaging-
materials giant Crown, Cork, & Seal’s R&D policy is not to do any basic research. Polaroid
Corporation has longstanding �inancial policies of never taking on any debt and never making
an acquisition. Electronic Data Systems (EDS) for many years had a customer-service policy of
empowering any employee to drop whatever that person was doing to answer a customer’s
call and take care of the problem, at least by passing it to a more quali�ied person for help
(Pearce & Robinson, 2005).

Policies should be developed in written form, widely distributed throughout the company, and
discussed at all meetings once �inalized. In written form, employees can constantly refer to
them as an authoritative source until they become second nature. Finally, policies are as
useful for what they don’t cover as for what they do. For instance, many banks have policies
that state that a loan will not be given to a customer who is already overextended.

Discussion Questions

1. Corporations and all organizations are systems; yet they themselves contain many systems. Is this possible? Explain.
2. Following on from (1), how might one manage the smaller systems to improve the functioning of the larger one?
3. How can “systems thinking” improve operational decision making?
4. If some management-information systems are simply databanks, are they really systems? Explain.

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5. Many manufacturing companies have realized signi�icant savings from using MRPII or similar systems. What would you
tell them about investing to upgrade those systems into ERP or more comprehensively integrated systems? How might the
additional costs be justi�ied?

6. In a public company, why is the accounting-information system the only system that must be audited? Would it make sense
to audit other parts of the system? Why or why not?

7. Can an information system provide a company with a competitive advantage? If so, how?
8. The point was made that consensus in decision making means total buy-in to the decision and smoother implementation.
How might you tell the difference between real consensus and several people just “going along” with the majority?

9. If consensus is desirable to achieve, whatever happened to dissent? Isn’t dissent also considered a spur to better decision
making? Discuss.

10. A bank has a policy of not validating a customer’s parking receipt unless a transaction has been completed. One day, a
customer wanted to see a bank of�icer who happened to be out of the of�ice. When he asked to have his parking permit
validated, the teller refused. What should the teller do—stick to the policy and risk losing a customer or make an
exception?

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General overview of the operational issues
implementing a new system. System dynamics
explored. Also addresses building consensus, keeping
frontline employees involved in the process.

Operational Ef�iciency Case Study:
General Dynamics

8.2 Operational Planning

Operational planning involves preparing detailed organizational plans for the
coming �iscal year. It includes programs, projects, and activities that the company
is already doing as well as new ones required by any change in strategy. Detailed
plans by organizational unit are part of operational plans. Finally, it includes
coordinating all these activities to make sure they support stated strategies.

The iterative nature of the operational-planning process means that, in practice,
draft versions of plans could go up and down the hierarchical chain more than
twice (Figure 8.3). The model depicted also combines operational and budget
planning into the same process, which is what happens in most companies;
however, because the two are signi�icantly different, they shall be discussed
separately.

At the conclusion of the strategic-planning process, the vice presidents of the
different functions, in functionally organized companies, take the strategic
decisions to their department and, with their key managers, draft functional
objectives to be achieved by the end of the next �iscal year. In other types of
organizations, key operational units get to do the same thing. For example, in
marketing, examples of operational objectives (with the addition of the
quantitative element) might be to improve salespersons’ “hit rate” of converting
sales visits into orders, increase advertising effectiveness, increase the
effectiveness of each distribution channel, and improve the effectiveness of market
research. Production objectives could be built around issues of throughput,
quality, cost-reduction, and even outsourcing.

The directives then go to the actual operating units that must meet those objectives—the sales supervisors or actual sales force for a smaller
company, the advertising department, market research, production or plant operations, quality control, and so on. Their challenge is to decide
what must be done to meet that objective by the end of the �iscal year. This may mean continuing to do what they have already been doing,
changing what they have been doing, or even changing the objective if it appears to be impossible. They must develop a series of tasks and

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Operational planning concerns detailed organizational plans
for the upcoming year, including programs, activities, and
projects the company is already doing or will start to do in the
future.

Belinda Images/SuperStock

specify who will be accountable to do what, when, and for how much, with a
clear output and summary of their efforts.

The operating units then submit their draft plan to their managers, who
coordinate with other plans in the functional area, and modify if necessary the
objectives and budgets. These then go to top management, who reviews them
with knowledge of other plans from the other functional areas. Because no
�irst draft is ever perfect and usually goes over budget, the plans are sent back
down for revision. In practice, the revision process takes place in a succession
of meetings, at the end of which planning documents are revised. After one or
two more iterations, top management approves and �inalizes the operational
objectives, budgets, and tasks before the �iscal year begins. Only if they have
changed signi�icantly might the board get involved again.

For smaller companies, project-management software exists to help in
planning projects, especially ones with lots of smaller tasks that must be done
both sequentially and in parallel. Project Evaluation and Review Technique
(PERT) has been around for a long time, and is an operational tool useful in

planning, scheduling, costing, coordinating, and controlling complex projects such as constructing buildings, assembling a machine, and R&D
projects (Siegel, Shim, & Hartman, 1992). Its most valuable use is helping project managers determine when a project will be �inished and the
likelihood that it will be completed on time. Each task is mapped on a network diagram clarifying which tasks must be completed before it
can be completed, and which other tasks require its completion �irst. With this information, PERT calculates and identi�ies a critical path
through the network which is the path that takes the longest time to complete (Siegel, Shim, & Hartman, 1992). To avoid missing a deadline,
changes could be made, and PERT would keep recalculating a new critical path until the project could be �inished on time.

Figure 8.3: Operational-planning process

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Source: From Stanley C. Abraham, Strategic Planning: A Practical Guide for Competitive Success, p. 162. Copyright © Emerald Group Publishing Limited.
Reprinted by permission.

Online project-management solutions are widely available. Most web-based project-management tools offer the same basic options, including
task-allocation and tracking, resource-allocation and management, risk management, scheduling timelines and deadlines, document archives,
and communication. Online project-management solutions offer users transparent, easy access to �iles and communications, which in turn
enables improved teamwork, enhanced time-management, and improved task ef�iciency.

Reward Systems

One more thing that must be done and that can’t be done until the detailed departmental plans are �inally approved is to put in place a
reward system that will be sure to motivate the achievement of operational, and hence strategic, objectives. This is a system of rewards that
incentivizes people to excel and achieve beyond expectations, often mis-termed a “reward and incentive system.”

Rewards are primarily (but not exclusively) �inancial and vary by hierarchical position. The following are typical, although speci�ic company
experiences can vary:

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After detailed departmental plans are
approved, an incentive and rewards program
will help motivate employees to achieve
operational objectives.

Stock connection/SuperStock

For CEOs and top executives, rewards are typically tied to companywide objectives
such as growth in revenues and earnings, pro�itability ratios such as NPM, ROA, and
ROE, and stock-price performance. They may include performance bonuses, stock
options, increases in base pay, pro�it-sharing, and perks such as mortgage loans, use of
a private jet or �irst-class travel, contribution to retirement plans, and so forth. Some
incentives such as restricted stock may include provisions called golden handcuffs
because they tie the executive to the company by prohibiting the sale of shares for a
speci�ied time period; if the executive leaves before that period is up, the shares are
forfeited (Pearce & Robinson, 2005).
The rewards given to middle managers are typically tied to functional or operational
objectives such as sales of product lines or in a particular region, quality, throughput,
cost savings, new product development, weighted average cost of capital, and myriad
others. These include performance bonuses, promotions, raises, pro�it sharing, and
possibly stock options.
Employees’ and supervisors’ rewards are generally tied to contributing to the
achievement of functional or operational objectives as team players, and may include
some combination of pro�it sharing, bonuses for exceptional and timely work, and
raises.

Other rewards, while non�inancial, are nonetheless important. Intangible rewards range from frequent words of praise (or constructive
criticism), to special recognition at company gatherings or in its newsletter, increased autonomy, and more challenging assignments.

The �inancial rewards are based on accurate measurements of company performance that, in turn, typically depend on a reliable and up-to-
date MIS. Some companies pay out rewards quarterly, but most do so annually. In creating the system, executives have to guard against the
temptation of functional departments to set their functional and operational objectives too low in order to increase their rewards for
achieving those objectives. Some experts maintain that companies should never offer a promotion as a reward for two reasons: It destroys the
company’s carefully constructed compensation system, and promotions should be given only to individuals that are ready to assume the
greater responsibility of the higher position.

The following is a useful checklist for designing an incentive-compensation (reward) system:

The performance payoff should be signi�icant—perhaps 10%–12% of base pay, while 20% will command the attention of the potential
recipient.

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Incentives should extend to all workers, not just the top executives.
The reward system should be administered with scrupulous care and fairness.
All individuals should know what the reward system is at the beginning of the year or else they won’t be appropriately motivated.
Incentives and the performance targets on which they are based should not be impossible to achieve.
Payoffs should occur as soon as possible after results have been acknowledged.
Con�ine payoffs only to results achieved. Payoffs should not be made for behaviors such as putting in long hours for a long period, or
even going the extra mile but coming up short. Once an exception is made for one person, they will be made for more, and the reward
system will quickly get out of hand (Thompson, Gamble, & Strickland, 2004).

Payoffs should never be made when the company’s pro�its are below a level to make them possible or for average or below-average
performance.

Discussion Questions

1. Some organizations (like some universities, for example) are content to keep doing what they have always done. In fact, the
strategy and companywide objectives eventually comprise their operational plans added together. How would you
persuade such organizations to do planning the other way round?

2. How does an organization speci�ically bene�it from doing operational planning? (Contrast with an organization that might
do no operational planning.)

3. Some smaller organizations operate “on the edge” and are forever “putting out �ires.” Operational planning isn’t even in
their lexicon. If you had an opportunity to talk to the president of such a company, what would you say? How might the
conversation go?

4. Restricted stock or “golden handcuff” awards designed to keep executives from leaving also have the effect of fostering
risk-averse decision making because of the downside risk borne by the affected executives. Can you see any way of
countering this effect?

5. Restricted-stock deals always bene�it executives that have them whether or not the �irm performs well. Does this way of
discouraging an executive from leaving make sense to you? Why or why not?

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In corporations, the �inance department begins the process of
estimating the company’s �inancial resources and arriving at a
budget that upper management can implement.

Wavebreakmedia Ltd/Wavebreak Media/Thinkstock

8.3 Budget Planning

Budget planning is the process of matching available organizational �inancial
resources (cash on hand, a line of credit or loan, and any investment) with
what the organization needs to spend to implement its strategies. It includes
revising requests for money from organizational units until their requests and
available resources match. What each organizational unit is �inally approved
to spend constitutes its budget.

The �inance department begins the process by coming up with a comfortable
estimate of �inancial resources that is the sum of what the company has and
could obtain (through additional borrowing or equity investment). Given
knowledge of each department’s current spending and the spending implied
by the new strategic initiatives, it further arrives at a tentative budget total for
each department or cost/pro�it center.

That budget �igure is given to each departmental vice president, who makes it
available to departmental managers as they do their planning for the year. When they come up with their initial plan to meet the functional
objectives, they itemize every dollar it might cost to do so. If their estimate equals or comes in under the budget �igure, there is no problem. If
their estimate exceeds the budget �igure, they try to adjust as much as they can, but more often will say that the job can’t be done for the
budgeted amount.

As Figure 8.3 shows, the department may get their plans back from an upper-management review with a mandate to reduce spending in
some way to match the budget. Either departmental members become creative and �ind a way to deliver the mandated reductions or they
respond that the only way to get the two numbers to match is to modify the objectives. Of course, the latter reply must include their reasoning
for the position, and their supervisor then becomes their advocate.

The revised plans are resubmitted where the CEO and top management have the bene�it of looking at all the departmental plans and budgets.
At this point, they can be persuaded that implementing the strategy will indeed take more money than they thought and see whether they can
raise the additional capital. If they can, then higher budgets are approved that match the estimated spending from all departments, and the
budget-planning process ends. If they can’t, then some or all departments are told that they must meet their objectives with the available

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budget. For example, if adding 10 salespeople was in the marketing plan to help marketing reach its sales objectives, then it might have to get
the same objective accomplished with fewer salespeople. The process ends when departmental budgets �inally match available �inancial
resources together with their commitment to achieve their functional objectives.

Normally, operational and budget planning should be enough to enable each organizational unit and, by extension, everyone in the
organization, to know what they have to do and accomplish during the coming �iscal year. However, some organizations also engage in pro�it
planning, which is the process of arriving at an estimate, month by month, of the pro�it (NIBT) the whole organization intends to achieve. For
each month, the total company budget is subtracted from estimated revenues; the sum of the monthly pro�its equals the overall NIBT
objective for the coming year. Pro�it planning is not widely used and is considered unnecessary by some strategic planners.

Reducing Costs

The budget-planning process can also be thought of as a process for reducing costs. Not only does it ensure that spending will be covered by
real �inancial resources but also is a forcing function for reducing costs. It’s human nature to take the easy route or continue doing what you
have always done. That will happen unless someone requires it to be done for less. The very requirement forces the consideration of
alternatives.

Entrepreneurs are often faced with this problem when writing their business plan and trying to seek startup capital. Their �irst pass at a cash-
�low projection often shows that the business might not make enough money, or even make any money at all, which is certainly not what the
entrepreneurs or potential investors want to hear. All the assumptions must be reexamined and, with more research and thought, revised
�igures are produced of both the revenue model and the expenses. If the revised business plan looks better but still doesn’t come close to
achieving the 20%–40% ROI required by typical investors, at this point the entrepreneur considers any and all alternatives to achieving the
targeted revenues for less cost. More attractive margins, at least on paper, won’t be possible until he or she is forced to consider lower-cost
alternatives. Having had to put so much thought into the revised estimates also makes defending them easier.

For this reason, top management’s �irst instinct in this process is to force functional and operational units to try to reduce costs. The budget-
planning process is so valuable because it forces people to try to lower costs, which wouldn’t happen any other way.

Discussion Questions

1. What risk is the organization running when it approves expenses that exceed available �inancial resources?
2. Departments of a city or other public entity are well known for trying to spend their entire budget allocations so that they
will be funded again the following year at least at the same level. If they don’t, they might be viewed as not “needing” their

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budget allocation and so be allocated a lesser amount. What is wrong with this process?
3. What do you think might happen when, midway through the year, expected �inancial resources fail to appear (for example,
when some funding from a government agency is slashed)? What options might an organization in this position have?

4. Whose responsibility is it in the organization to reduce costs?
5. How does an individual or departmental unit know that something that person or group is doing can, indeed, be done at
lower cost?

6. Following on from (5), if there is a way of knowing, why don’t all corporations avail themselves of it all the time?

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Involving all employees in the organization makes it easier to
avoid things that block new initiatives or are no longer useful
in helping the company be more ef�icient and productive.

Digital Vision/Thinkstock

8.4 Participation in Operational Planning

Just as it’s a mistake to do strategic planning only with the participation of the top-management group, so also is it a mistake to do
operational planning with just middle managers. To be sure, middle managers bear the brunt of the responsibility for operational planning
because they will be called upon later in the year to implement the plans. But make no mistake, everyone in the company is and ought to be
involved, not only in operational planning but also in carrying out the plans.

By virtue of their size, small companies have no option but to involve
everyone. Yet exceptions abound. The production manager for a small
garment manufacturer complained of being left out of the planning process
entirely. The company was being squeezed by its large customers who were
forcing the price down to maintain their own pro�itability. The customers used
the approach that if this �irm could not supply at the desired price there would
be lots of other suppliers that would. The president and co-owner of the
company was the one who made the bids to these large clients for future
business. Time and again, he bid at a price point that was below cost, because
he was convinced that he wouldn’t get the business otherwise, and he never
checked �irst with the production manager who could have advised him of
current costs and margins. The result was that it put enormous additional
pressure on reducing manufacturing costs while margins all but eroded. This
scenario was repeated many times, and this was a management team of only
two people.

In large companies, it is all too common not to involve the rank and �ile in
operational planning. In many companies, information is only divulged or

passed down on a “need to know” basis, much as in the military or police departments. People at the bottom just do what they are told; it’s
part of the job.

As the discussion of organizational change in Section 2.10 made clear, however, smooth and enthusiastic implementation of any task is not
possible unless those who are to do the work are involved in the planning. This is much easier said than done. It depends to a large extent on
the kind of culture that exists in the company. Cultures that are command-and-control or bureaucratic are by their very nature not inclined to

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involve everyone as they should, mainly because, as be�its those cultures, they have been able to do what they do without such involvement.
Open, adaptive, innovative, nimble organizational cultures as discussed in Section 2.9 would not be able to progress without involving
everyone and seeking their input, especially in planning and suggesting new ideas. This culture of openness requires the implementation of
participative leader-member behavior, which encourages supportive-relationship behavior and the open sharing of ideas during decision-
making and strategic and operational planning.

Another reason to involve everyone in the organization is to make it easier to get people to stop doing things that either get in the way of new
initiatives or are no longer useful in helping the company be more ef�icient and productive. Change involves “forgetting” about and dropping
old habits if new ones are to take their place. Change will stall or not take hold to the extent that people cannot or won’t forget what they used
to do. It is therefore wise to involve everyone; make sure they understand what they have to do and why; how their job, role, and expectations
are changing; how and why they will bene�it from the changes; and have a mechanism such as muscle memory for repeating the new
imperatives often until force of habit takes over, and the changes and improvements become second nature.

Discussion Questions

1. The ease with which everyone in the organization can be involved depends on its culture. Might involving everyone
actually change the culture? Comment.

2. This section advocated involving everyone. Surely not everyone? Would this include the people loading boxes in the
shipping dock? The janitors? The mailroom clerk? The secretaries? Comment.

3. Following on from (2), if you don’t agree that everyone should be involved, where might your cutoff be? Give reasons for
your answer.

4. Following on from (3), if you advocate a cutoff, explain why that might be superior to involving everyone.
5. “Muscle memory” is unquestionably valuable when a new habit must be learned. But how can one get rid of an old habit
that has also been engrained in the organization’s “muscles”?

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8.5 Getting It Done in Time
The operational-planning process should be timed so that by the time the new �iscal year starts, all the strategic decisions, operational plans,
and budgets have been completed. Final approval of the plans and budgets should be completed within a couple of weeks of the start of the
�iscal year. Bear in mind that both strategic and operational planning take place in addition to people’s regular daily activities. But how long
should the strategic- and operational-planning processes take?

There is no simple answer. Consider four scenarios—among many—beginning with the best or ideal situation:

The company is used to doing strategic planning, and much of the required research is done throughout the year. It is performing well
and is used to transforming strategic decisions into operational plans and can get those plans approved in one iteration. The two
processes together, especially for small to mid-size companies, take no more than two months.
Like the scenario just described, but for a well-performing larger company with more divisions and vertical layers, coordinating
operational and budget planning takes longer but still gets done within 2-1/2 months.
For a company that is not performing very well, has �inancial problems, but has some experience with strategic and operational
planning.
This company is constantly putting out �ires, lurching from crisis to crisis; strategic and operational planning take back seats, if done at
all. If anything is done, it will probably be done badly, with changes continuing to be made after “approvals” have been given. The time
frame needed for planning is impossible to estimate.

There are companies, of course, that are run autocratically, with the CEO telling everybody what to do and being the only one to approve
anything. In this situation, the combined processes shouldn’t take long at all, perhaps two to four weeks. This was not included as a scenario
in the preceding list because, although it might take the least amount of time, it doesn’t qualify as a “best” or “ideal” scenario. However, it
often works in that kind of organization.

Sometimes, the process takes longer than anticipated, and the deadline of the new �iscal year is missed. What usually happens is that the full
operational-planning process is aborted, and whatever stage it has reached is hurriedly approved. After all, the start of the new �iscal year
can’t be changed. One way around this dilemma is to shorten the approval cycle. Instead of going all the way up the hierarchy for every
approval cycle, as shown in Figure 8.3, plans should only go to a higher level when they are re�ined much further. This will shorten the
operational-planning cycle.

For an organization that has not previously done operational planning, two months is a reasonable allowance for the �irst time. In each
successive year, familiarity with the process and everyone’s ability to produce better plans should enable the company to be more accurate in
scheduling the process without any drop in quality. It is best to start strategic planning as late in the �iscal year as possible while leaving

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Budget preparation should take two to four weeks, depending
on the size of the company.

Angela Waye/Hemera/Thinkstock

enough time for decent operational and budget planning. The time frame of
three months, mentioned earlier, is a whole quarter and really, too long to
devote to planning, mainly because conditions will have changed during such
a long planning process. For a large organization that has many layers and
planning units, operational planning does take more time than anyone would
like.

Should a company ever abandon the operational-planning process if time is
running out? The short answer is no. As long as management approves what
should be allocated and achieved during the �irst month of the �iscal year,
there will be that additional month to �inish the process properly. In the next
chapter we shall consider some tools that large organizations can use to speed
up both strategic and operational planning and keep the “intrusion” of
planning in people’s busy lives to a minimum.

Discussion Questions

1. Suggest one way in which operational and budget planning could suffer if the process were rushed.
2. Imagine that the operational-planning process was well into its third month and already extant conditions had changed.
What should the company do? For example, should plans at the lowest levels be changed �irst or only those plans most
affected by the changed conditions?

3. Following from (2), should just the plans be changed or budgets as well?
4. With more experience in operational and budget planning, it should be possible to get it done in less time each year.
Exactly how important is getting it done quicker?

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Summary

This chapter explained the context and importance of operational and budget planning. Operational planning focuses on planning the
projects, programs, tasks, and activities the company needs to implement its strategies, and includes both what it already does as well as
additional programs it must do the next year. Budget planning focuses on getting all operating units to spend what they need to spend to do
what they must do without exceeding the total �inancial resources that the company has or may have at its disposal for the coming year. As
plans take shape for each operational or functional unit, they inevitably undergo changes until their estimated costs match the estimated
�inancial resources allocated to that operational unit.

Operational planning is carried out more effectively when everyone involved in the process understands that everything is part of a larger
system, that anything they do affects other parts of the system, and vice versa. That understanding, called systems thinking, is critical in
operational planning. In the same vein, having access to the right information for management decision making and action is vital—
companies couldn’t operate without such information. Many such systems are nothing more than databanks, forcing the user to make sense
of and interpret the data. Transforming them into systems such as MRP II (manufacturing resource planning II) for manufacturing companies
or the more encompassing ERP (enterprise resource planning) make such data far more useful, but they require considerable investment, not
only in capital, but also in transforming the way people work and learn.

Operational decisions should be based on consensus at each decision-making level, which means complete agreement. Getting a majority
vote, for example, means there is a minority that disagrees with the decision, which in turn means that implementation will be that much
more dif�icult.

The chapter also discussed the role of policies in an organization. These are in effect rules that guide behavior in often-encountered
situations. That way, in such situations people will make the correct decision all the time. Having the policies in writing allows people to refer
to them at any time and gives them the force of law (which, in the company, they are). Policies can cover, for example, how customers and the
environment and suppliers are treated, as well as mundane subjects like what can and can’t be included in an expense report. Operational
planning must take into account the company’s current policies.

Operational planning itself is the process by which objectives are translated into projects, programs, tasks, and activities that get
progressively more detailed the further down in the organization the process goes. Budget planning is done at the same time. Operational
units must develop their plans while staying within the budget allocated to each one, requiring �irst drafts to undergo several revisions in

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order to balance these two requirements and as they go up and down the organizational hierarchy. One of the unheralded bene�its of budget
planning is the creativity unleashed in order to reduce costs.

Finally, everyone in the company should be involved in operational and budget planning, not just the managers and supervisors. When this
happens, new ideas have a chance to surface, consensus is more likely, and implementation goes more smoothly. Operational and budget
planning have to be done fairly quickly just before the start of the new �iscal year. Doing this is dif�icult without compromising the process
and because involvement is an additional burden on top of day-to-day responsibilities. The risk with taking up to three months to do
operational and budget planning is that conditions will change during the process, requiring plans to be further changed as a result.
Experience helps, as does revising plans �irst before submitting them up the ladder for approval.

Concept Check

Key Terms

action information systems Automatically make (the right) decisions that are acted upon immediately.

budget planning The process of matching available organizational �inancial resources (cash on hand, a line of credit or loan, and any
investment) with what the organization needs to spend to implement its chosen strategies. It includes revising requests for money from
organizational units until their requests and available resources match. What each organizational unit is �inally approved to spend constitutes
its budget.

consensus Complete agreement.

critical path The path through the network that takes the longest time to complete.

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databank A stream of unprocessed data that people can access.

decision-making system Embodies the organization’s criteria for choice and actually makes decisions on which the organization can rely
and act.

ERP (enterprise resource planning) A process that aims to consolidate a company’s departments and operations into one computer system
that serves each department’s individual needs.

management-information system (MIS) A system that must supply the basic information needed by managers for making decisions.

manufacturing resource planning II (MRPII) A comprehensive production schedule that takes into consideration machine and labor
capacity and coordinates production runs with the arrival of materials. An MRPII output is a �inal labor and machine schedule. Information
about production costs, including machine time, labor time, materials used, and �inal production numbers, is delivered to accounting and
�inance via the MRPII system.

muscle memory Repeating something often enough so that muscles learn what needs to be done and it becomes second nature (they can
perform the activity without conscious thought). The concept is applicable to organizations.

operational planning Involves preparing detailed organizational plans for the coming �iscal year. It includes programs, projects, and
activities that the company is already doing as well as new ones required by any change in strategy. It includes detailed plans by
organizational unit. Finally, it includes coordinating all these activities to make sure they support stated strategies.

policy A company directive designed to guide the thinking, decisions, and actions of managers and their subordinates.

predictive information systems Permit decision-makers to draw inferences and make predictions from the data.

PERT (project evaluation and review technique) An operational tool useful in planning, scheduling, costing, coordinating, and controlling
complex projects.

reward system A system of rewards that incentivizes people to excel and achieve beyond stated objectives.

system A set of interacting or interdependent components forming an integrated whole.

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systems thinking The realization that affecting one part of the system affects other parts and that what is done must bene�it the whole and
not just a particular part at the expense of other parts.

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Chapter 9

Implementation

Ivelin Radkov/iStockphoto/Thinkstock

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Learning Objectives

By the time you have completed this chapter, you should be able to do the following:

Recognize good operational plans and distinguish them from weak ones.
Appreciate the value of tracking progress on all operational plans.
Appreciate the value of face-to-face meetings with middle managers to discuss negative variances.
Know why emergent strategies occur and how they might affect a company’s current strategy.
Manage, improve, and evaluate an existing strategic-planning process.
Understand the “strategy paradox,” showing how a company’s strength in execution can be
simultaneously its Achilles’ heel.

Implementing a strategy in the real world isn’t a leisurely swim across a calm pond on a sunny day, but rather like crossing from one bank of a
raging river to the other, encountering hidden eddies, fog, driving rain, lightning, and riptides along the way. While not impossible to reach the
other bank (the goal), the task often becomes dif�icult and one of overcoming obstacles and making constant adjustments without losing
focus or sight of the goal. Implementation is like that. Even the most brilliant strategy is worthless if it cannot be implemented.

This chapter focuses on strategy execution and its dif�iculties, and part of it is devoted to assessing, improving, and managing the strategic-
planning process itself.

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Research and development is essential to a company’s ability
to compete. It requires new initiatives to keep up with

Semen Barkovskiy/Hemera/Thinkstock

9.1 Plans by Organizational Unit

When an organizational unit gets its plans and budget approved by the level it reports to and on upward, exactly what is it that gets
approved? An operational plan is a document that speci�ies the projects or tasks that must be accomplished to achieve particular operational
objectives. Details speci�ied in operational plans include the names of those who will be involved and the individual responsible for each one,
what equipment will be needed, when each will start and end, and the estimated costs for each one. Given the level of detail required it should
come as no surprise that an operational plan can run to many pages if a large number of projects must be detailed, such as manufacturing
hundreds of product lines.

It takes contributions from everyone who will be involved in that unit’s operations to create such plans. They will make sure that continuing
current operations are included in the plans, which is easily done. What adds a level of complexity and dif�iculty is incorporating additional
tasks demanded by a change in strategy.

Consider the following scenarios, which illustrate the dif�iculty in creating operational plans when asked to do more than simply repeating
what was done the previous year:

Production. A speci�ic higher level of throughput is required to satisfy
increased demand, which will soon require capacity expansion. Can the
increased capacity requirement be met by adding additional shifts,
physically expanding the size of the plant, or building a new plant? Can
some of the additional production be outsourced? How many new
machines must be added and of what kind? How many new people
must be hired and trained, and how long might all of this take? Also,
consider the scenario where a whole new product line has been
designed and now has to be produced in addition to producing all the
other product lines. How can this best be accomplished? In both
scenarios, production capacity has to be increased.

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technology and develop new products.Research & Development. Technology advances are affecting the
company’s ability to compete. This requires new initiatives to keep up
with technology as well as continue with applied research associated with developing new products. This could mean expanding staff
and facilities or forging strategic alliances with particular universities that have the requisite capabilities to help the company. Another
option might be �inding a company with the needed technology and licensing it. Yet another possibility might be to start a conversation
with top management about possibly acquiring a small high-tech company with these capabilities and patents. What is the best way to
do this?
Marketing. The decision to expand from being a regional consumer-products company (B2C) to a national business presents a host of
operational challenges. Should the company continue to handle its own distribution or �ind a national distributor? How many new
retail outlets would it need to �ind to reach potential customers? Would it need to lease additional distribution centers or warehouses?
Which speci�ic parts of the “rest of the country” should be targeted �irst, second, and so on until the company covers all of its targeted
areas? What advertising media would be most appropriate, and does going national require television advertising? Should more
emphasis be placed on online rather than brickand- mortar sales? How can this sales objective be realized most expediently?
Finance. Consider two scenarios: In the �irst, the company has decided to invest in either a new integrated information system or a
signi�icant development of the existing one. How many more software engineers and programmers will be required? Could part of the
new system be licensed and then customized? Without intimate knowledge of the completed system, how can building it be planned
for? Should a consulting �irm be engaged with the requisite experience? Will IT staff need to be hired and trained for the other
functions? In the second scenario the company’s cash needs for the coming year exceed what it can normally access. How can it raise
more cash? Should receivables be factored? Should a larger line of credit be negotiated? Should payables be delayed? If appropriate,
should some customers be asked to prepay? Is there a way to maintain negative working capital to free up the most cash?

Ideally, operating units will have been working on these kinds of changes over a much longer period, using the formal operational-planning
period at the end of the �iscal year to �inalize its plans and match available resources before the new �iscal year begins. And its plans must be
done in some sort of networked way or using Gantt charts to show which projects or tasks can be done independently of others and which are
integral to a particular sequence.

A Gantt chart is a graphic depiction of a project schedule. Gantt charts show the beginning and end dates of each project component. Some
charts also illustrate the dependency relationships between component activities, or the dependency of one activity upon the completion of
another. Gantt charts may be used to provide up-to-date schedule status using percent-complete shadings (Figure 9.1). Gantt charts can also
be combined with PERT software to produce a critical path of projects.

When that is done, the total plans for a particular unit should be summarized according to the review period set by the company. Typically
this is each month. The review cannot begin until all the requisite data have been collected and organized, which usually takes a week after
the end of the month. Actual results are then compared to plan (expected performance and budget) along the following dimensions:

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For each project completed during the period, data show whether the objective was achieved, current and total costs, and whether the
deadline was met.
For each ongoing project, data show progress toward achieving the objective, current and cumulative costs, and a probability that the
deadline will be met.

The project leader initially does such a review, with copies given to middle managers on up to functional heads. If the data are input into a
computer system, then those managers will all have access to monthly summaries.

Figure 9.1: Example of a Gantt chart

Discussion Questions

1. Clearly, it’s much tougher to translate a change in strategy into operational plans than it is to continue with an established
strategy. In your opinion, is it acceptable to submit a plan that’s full of uncertainties? Explain your point of view.

2. Can you think of anything else that should be part of a good operational plan?

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3. Now that you know more about what is involved in coming up with a good operational plan, do you believe that strategic
planning should be done solely by top management?

4. To what extent, if any, does strategic-planning experience help an operational manager develop operational plans to
support the company’s strategies?

5. To what extent should managers be aware of what’s going on in other parts (e.g., functions) of the company while
preparing operational plans?

6. If quality or effectiveness of a project is important, how can these be incorporated into an operational plan? Or should a
separate project be developed to assess those attributes, requiring additional expenditures?

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9.2 Tracking Performance Using Metrics

Two old adages underscore why the use of metrics is so vital in organizations:

“What gets measured gets managed.”
“You can’t improve what you can’t measure.”

By way of illustration, consider the true example of a nonpro�it organization that provided educational workshops for high-school students in
an effort to reduce the teen crime rate in the area around the city in which it operated. The directors were asked how they knew how the
organization was performing and what information was reported to its sponsors periodically. They said they kept records of student
attendance at every workshop they gave, the number of workshops each week and at which school, who gave the workshops, and the content
of each workshop. In other words, what they said they were going to do and what they did was what was measured and reported. But how
effective were the workshops? What was the purpose for developing and giving them? Did the teen crime rate decline over the couple of years
that this organization was giving its workshops? And even if they did—which no one knew—was it because of the workshops?

In this example, the donor was as much at fault as the people in the organization for not insisting on better measures and better data. Clearly,
like many other organizations, this one measured what is easy to measure, not what needed to be measured. Unfortunately, those running the
programs didn’t know, or had never considered, the difference. There are many ways to measure performance, but the more systematic and
reliable the method is, the more credible the data will be in supporting strategic plans and their implementation.

Organizations mistakenly measure the results of their activities or effort, not progress toward achieving objectives. Although impact
measurement is important, process evaluation is critical to strategic management. Evaluating progress at numerous stages throughout
implementation allows the manager and his or her team to make adjustments and modi�ications to the strategy.

Operational objectives, discussed in Chapter 8, must be set carefully. Making good progress toward objectives that were set too low is of little
value and won’t implement the strategy properly. Setting them too high de-motivates the workforce and is just as bad. So let us assume that
“stretch” objectives—set at just the right level but that demand a little more from everyone to achieve—have been set all the way down the
line, plans were devised for every unit that matched its budget allocations, and that it was these plans that are now being carried out by
everyone in the organization.

How does top management monitor whether everything is “on track” or “on plan?”

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The manager’s job is to collect and organize current project
data by project.

Fancy Collection / SuperStock

The manager’s job is to collect and organize current project data for the
review period, by project, in their respective areas of responsibility. The
example shown in Figure 9.1 is a step in the right direction, but has to be
summarized for the month. For example, the �igure shows an almost
instantaneous picture for daily monitoring, a time frame and level of detail
required only by the people actually doing the work. From such daily reports
and the status of projects at the end of the month, a manager would need to
extract and summarize information on each major project, being careful to
note which projects were on schedule and under budget and which weren’t
and by how much. The latter could constitute a separate “exception” report of
negative variances (discussed in more detail later), which are projects that
have slipped their schedule or are over budget, together with additional
information on how much extra it might cost to get all of them back to meeting
their deadline.

The Budget as a Control System

Recall the vignette about Paci�ica Corporation recounted in a box in Section 2.9. As part of the rapid change in its culture, �ive original
managers, including the CFO, were replaced. The CFO was let go when it was discovered he had no idea how to budget. For six entire months,
he had fooled the CEO into believing that everything was on track. Whenever he was asked if expenses were “on budget,” the CFO would say
“Yes,” and people believed him. After about six months, with costs clearly skyrocketing, the CFO was asked again if expenses were on track
with the original budget. The real answer was no: Every month, as costs had outpaced the set budget, the CFO had simply raised the budget to
match expenses. Rather than taking action to decrease costs, he had consistently told everyone that things were “on budget.”

The budget is a control system in that it allows management to compare actual performance to a standard, measure the variance, take action
to reduce the variance, reset or update, and test again. Another example of a control system is a packaging machine that automatically �ills
boxes with a precise weight of cereal and signals the operator the moment the �illed weight exceeds or falls short by a preset small amount,
enabling immediate adjustment of the machine. In the case of a budget as control system, action is taken only if expenses exceed the budget.
Further, cumulative expenses are compared to cumulative budgets so that an operational unit that has overspent one month can “make up”
and spend less than its budget in the following month (Figure 9.2).

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One of the hallmarks of a good control system is that corrective action is taken as soon as it is found to be needed. Why wait until the end of
the year to discover that you have gone over budget? At the other end of the scale, should you check every week? That makes no sense, either.
Monthly checking is about right, and most information systems can provide such information monthly, either as needed onscreen or in a
customized monthly report sent to all operational managers.

In large organizations that have federal contracts, for example, government auditors closely examine expense reports, time sheets, and
invoices related to programs. So, for example, when a contractor requests increased funding, budget controls are in place to quickly advise
regulators as to the legitimacy of the request. In this way, the government can determine when increased expenses are justi�ied, or when to
tell its contractors to cut costs.

Addressing Negative Variances

Managers in well-run corporations make a point of meeting with their direct reports regularly to go over progress and discuss any problems.
One focus of the meeting should be variances and any exception reports that detail differences between plans or standards and actual
performance. A negative variance is an instance where a project’s progress is delayed and could miss a deadline, or where its budget has
been exceeded, or where performance comes up short of a quantitative standard or expectation.

Figure 9.2: The budget as control system

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What can be accomplished in such a meeting between a manager and a direct report? First, the manager should learn about the particular
circumstances surrounding negative variances of some projects, what might have caused the delays or budget overruns, and which other
projects might be in jeopardy as a result. They should ask questions and listen carefully to the responses. Both the manager and direct report
should note questions to which an answer could not be provided because the direct report didn’t have the necessary information.

Second, the manager and direct report should discuss potential solutions to the negative variances. Some projects can be pulled back on track
through either the direct report getting project personnel to acknowledge problems and solve them, helping them to �ind solutions, and
trying to remove obstacles that might be delaying progress. Also, if budgets are overrun, a new lower budget that compensates for the
overrun must be communicated to project personnel. The manager should focus on projects where there is a direct relationship between

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Well-run corporations have their manager’s report in every
month to track progress and discuss any problems that have
arisen.

age fotostock/SuperStock

schedule and budget. That is, where speeding them up will cost more, and
conversely, where reducing the budget results in unacceptable delays. It is in
precisely such situations that any critical-path software becomes invaluable,
because it lets a project leader or supervisor try out different alternatives
until both parameters (project time and budget) meet expectations.

Third, the manager should insist that the direct report �ile—within the next
couple of days—a revised plan containing the points that were discussed that
will bring projects and budgets back in line.

Finally, meetings represent an opportunity for the manager to strengthen a
relationship with the direct report. In most cases, the meeting is just between
the two of them (although inviting other project managers who are in a better
position to provide explanations is also common). What is the direct report
most worried about? Is the communication between them as “open” as it
needs to be? What’s really going on? Taking the time to delve a little deeper
and offer guidance and counseling is often well worth the time.

Be mindful of a couple of potential red �lags: Some managers don’t like hearing or dealing with bad news and might even tell their reports
they don’t want to hear it. So if a supervisor is repeatedly told that “everything is okay,” he or she might well suspect that it’s not. The
manager will have to dig deeper and even go to chat informally with the direct report’s colleagues and team members. A manager also needs
to be sensitive to whether a direct report is losing control of the team or his or her responsibilities. If the employee feels overwhelmed and
relatively powerless to stem the tide, a real problem exists.

This kind of face-to-face meeting with a direct report goes on up and down the hierarchy. Typically, a manager might have a half dozen to a
dozen direct reports, some fewer, some more. A manager should schedule all meetings with direct reports over the course of a day or two
before meeting with his or her own supervisor, taking on the role of “direct report.”

If this description of the organization conveys the idea that this is one massive control system, that is exactly the intent. During execution or
implementation of a strategy, doing the work and controlling the work—its quality, timeliness, and adherence to a budget—is vital. And in the
spirit of a good control system, actual performance is compared to a standard, the variance noted (especially negative variance), solutions
developed, and a correction applied as soon as possible. Data collected about performance, especially as part of an information system, are

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essential, but a control system needs more; that’s why the face-to-face meetings are imperative and why everyone in the hierarchy must
follow through and put the corrections into effect to improve performance the following month.

This description also gives the impression that managers take part in many meetings, and that too is by design. With so many meetings to
prepare for and attend, when do managers get time to do their real work? Perhaps this is the fallacy. Recall the de�inition of a manager as
“someone who gets work done through other people.” The time spent in meetings is the work. Whether that time is wasted or not is another
issue and goes directly to whether the person conducting the meeting is an effective manager. Managing well is dif�icult, challenging, time-
consuming, but ultimately very satisfying. The job gets done on time and within budget, and your direct reports grow and develop into
productive, congenial team members.

Discussion Questions

1. It’s easy to measure what training was given, to whom, by whom, how often, and whether it was within budget. What
measures would you suggest to determine the effectiveness of such training? Is it important?

2. Midway through the year, all managers are told that budgets need to be slashed. What is their likely response? Do all
operational managers line up to “make their case” for not cutting budgets on their projects? Do vice presidents and other
senior-level managers make the decisions as to where and what to cut?

3. With each manager receiving a monthly report about project progress and budget compliance, what additional bene�it is
gained from a face-to-face meeting?

4. If you were a manager who had to oversee people and projects, would you look forward to your monthly face-to-face
meetings? Under what circumstances might you dread them? If you can think of any, how could you improve the situation?

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9.3 Emergent Strategies

There is one type of strategy that occurs only during operational execution. Emergent strategies, �irst proposed by Henry Mintzberg of
McGill University, arise as a result of an organization’s response to unexpected events as a strategy is being implemented. In Mintzberg’s
terms, an intended strategy is akin to the “best” strategy that was developed in Section 6.4 and chosen in Section 7.2. Such a strategy, when
implemented, is then called a deliberate strategy. If it fails for whatever reason, it is considered an unrealized strategy (Figure 9.3).

As the deliberate strategy is executed, a pattern may emerge that was not intended when the strategy was �irst proposed. Actions that were
taken one at a time take on a cumulative effect and become a strategy. For example, a supplier serving restaurants has an opportunity to serve
a hotel, and later another hotel, and so on until it becomes clear over time that the company has diversi�ied into the related market of hotels.
That is an emergent strategy that was never a part of the strategy the company set out to implement. Combined with the deliberate strategy
of serving restaurants, it evolves into the realized strategy of serving the hospitality industry. This is also sometimes referred to as an
umbrella strategy.

There is much validity to viewing strategy in this way, from how it’s formulated to what actually happens in practice. Real life is messy and
rarely do plans actually happen the way they are intended. Few strategies are purely deliberate, just as few are purely emergent; the former
allows for no learning while the latter means no control (Mintzberg, Ahlstrand, & Lampel, 1998). Reality is some combination of the two.

Accepting the notion of emergent strategies allows the organization to learn from customers and to increase its capacity to experiment with
new ideas. That is not to say that learning doesn’t occur without an emergent strategy; one of the important byproducts of the strategic
thinking and planning process is to increase strategic learning and to update everyone’s mental models in a similar way. The very act of
implementing a strategy involves all kinds of learning, which bene�its the next round of strategic planning.

Figure 9.3: Deliberate and emergent strategies

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Source: From Stanley C. Abraham, Strategic Planning: A Practical Guide for Competitive Success, p. 157.
Copyright © Emerald Publishing Group Limited. Reprinted by permission.

Keeping one’s eyes open for a pattern that signals an emergent strategy is another way for a company to stay agile and �lexible. In times of
constant and rapid change, taking advantage of opportunities “on the run” as well as formally through strategic thinking is a sign of a healthy
company. Should the emergent strategy become so powerful as to swamp the deliberate strategy, the company can always have an impromptu
strategic-planning meeting and, with the board’s approval, acknowledge what is happening and capitalize on it with full budgetary support.

Discussion Questions

1. Is it possible for a company to experience emergent strategies all the time? Is that the same as saying that it has no
strategy? Explain.

2. Mintzberg and his associates characterize deliberate strategies as exhibiting control but no learning, whereas emergent
strategies exhibit the opposite. Do you agree? Why or why not?

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3. Do you believe that companies in general �ind it dif�icult to realize an intended strategy? If so, is it because of emergent
strategies cropping up all the time or simply poor execution?

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9.4 Managing the Strategic-Planning Process

Strategic planning is usually carried out by a group of people in a company, and a formal process needs to be established to get such a group
to coordinate their efforts and work as one. What follows is a set of guidelines for setting up and managing the strategic-planning process in a
company, building on the discussion in previous chapters, which describe a process for doing strategic thinking and strategic planning.
Insofar as the abilities of different companies to perform strategic planning and implement a formal process vary greatly, such guidelines are
dif�icult to write. A few basic assumptions were made in formulating them:

Most small- to medium-sized organizations do not have a good understanding of strategic planning and therefore either do not
perform it at all or do something they “think” is strategic planning.
Companies that do strategic planning and use a formal process could bene�it by benchmarking their process with these guidelines.
Many companies do strategic planning without re�lecting on whether it is done well or provides the organization with value. That is,
they do so without the bene�it of any strategic thinking.

Before the process of strategic planning is begun, it would be a useful exercise for members of top management to assess the company’s
inventory of needs. One device that could accomplish this is a brief questionnaire such as the following strategy quiz.

Table 9.1: Strategy Quiz: How strategic is your organization?

Answer each question either with a Yes or No by checking the appropriate column next to it. Your answers will be scored based on
the number of “No” responses.

Questions Yes No

1. Are you realizing the full potential of your company and people?

2. Do you have a �ive-year vision for your company?

3. If so, do you believe your company can achieve it?

4. Are you pleased with your company’s pro�itability over the past three years?

5. Do you believe the value of your company is increasing over time?

6. Are your company’s sales or revenues growing fast enough?

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7. Do you have enough money (including ability to borrow) to get the job done?

8. Do you have a signi�icant advantage over your competitors?

9. Are your products or services competitive?

10. Do you know what your costs are?

11. Are you getting new products to market quickly enough?

12. Does your company do strategic planning every year?

13. Can you state what your company’s strategy is and why it will work?

14. Do you have at least three opportunities you are deciding whether to pursue?

15. Do you know what your company’s principal problems are?

16. If so, do you know what to do about them?

17. Do you have a set of measureable objectives you are trying to achieve?

18. Are you getting the most out of your people?

19. Do your employees know where the company is going and how it will get there?

20. Is your company culture collaborative, innovative, and trusting?

TOTAL

Source: Stan Abraham, www.futurebydesign.biz (http://www.futurebydesign.biz/)

Whose Responsibility Is It?

In small companies that perform strategic planning, the CEO or owner typically drives the process. Occasionally this role is acknowledged as
the CEO’s most valuable contribution. For example, Livescribe, a market leader in digital pens, hired a new CEO for the speci�ic task of
strategic planning (Takahashi, 2012). Sometimes, he or she might use a consultant or an executive within the organization to conduct the
process and help the group decide on the strategies. Most small companies and new ventures, however, do no strategic planning for the

http://www.futurebydesign.biz/

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In smaller companies, the CEO usually does the
strategic planning, but in larger companies the
responsibility is delegated to a VP or group of
individuals.

Kablonk/SuperStock

simple reason that there is only one strategy possible, and the company’s energies are focused
on executing it. Examples are restaurants, retail outlets, or small service businesses. Such
companies address strategic planning only when faced with several choices or intense
competition and, for the �irst time, are put in a position of not knowing what to do.

In midsize to large companies, the job of controlling the process is typically delegated. Ideally,
there would be a director of strategic planning to manage the process. Absent such a position,
responsibility would go to whoever the CEO believes can do a good job or has some
experience with strategic planning such as the CFO or a functional vice president. If no one
wants the assignment or feels able to do it, someone from outside may be brought in to do it.
If manufacturing, R&D, and distribution can be outsourced, so can facilitating the strategic-
planning process. However, only planning and conducting the process and achieving its
purposes should be subcontracted to a consultant. The actual decisions cannot be; the CEO
and managers, who alone are accountable for acting on those decisions and achieving the
company’s objectives, must make them. Some organizations, such as Air France (Air France,
n.d.), form ad hoc or standing committees to focus on strategic planning. Others, like
Mitsubishi (Mitsubishi Electric, n.d.), employ a vice president or C-level executive to direct
strategic planning and related initiatives.

The person in charge should make sure all those involved understand what they have to do
and give them time to do it. Part of the process is creating standard reporting formats that
everyone understands and that facilitate comparisons with later years. At the outset they
should establish a schedule for the process and then enforce it unless a company crisis
intervenes. The individual managing the process must remember that these planning tasks
are superimposed on people’s regular jobs and are likely to produce negative attitudes and

reactions. Only if those involved see the activity as crucial for the company and worthy of being taken seriously by everyone will they be
motivated to do a good job.

Choosing the Process

Whatever process the company uses for strategic planning must meet certain criteria. Key company managers, particularly the person in
charge of the process, must understand it—what it is, what is involved, who should be involved, why it is needed, and how to realize the

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bene�its from using it. The process must be perceived as appropriate and feasible for the company in terms of sophistication, complexity, and
culture. The company must be prepared to commit to the process and its outcomes. All involved must agree to take it seriously and
implement those strategies and decisions that result from the process.

The person in charge should explore several different approaches, or invite several consultants who specialize in this area to discuss their
approaches.

Hiring a consultant to help with doing strategic planning the �irst time is prudent. Ceding this control (and worry) frees managers and
executives to participate in the process. Furthermore, a consultant can control the quality of the discussion and strategic ideas that are
proposed, as well as ensure that real data and analyses are used as much as possible rather than opinions and conjecture. Finally, a consultant
can act as facilitator to make sure that all voices are heard, not just one or two people who might dominate discussions. A neutral facilitator is
more likely to ensure that people are not just saying what they think the CEO wants to hear, which is a major problem in many companies.
Ideally, a consultant should be trusted and one with whom the CEO is comfortable— someone who can do a good job of guiding participants
in the strategic-planning process that is the best �it for the company. An effective consultant should deliver bene�its to the process that
outweigh the fees charged.

A Suggested Strategic-Planning Process

The following process would work with �irms of almost any size. It is generic and can be tailored to �it a particular company. The process has
10 basic steps; some of them could be broken down into sub steps (Figure 9.4). Perhaps the most crucial element in strategic planning is to
involve the right people, particularly those who will be called upon to implement the plan. People— depending upon their experience,
background, and role in the company—going through the same process of strategic planning will make completely different decisions and
achieve completely different results. It is crucial, therefore, to consider carefully who is involved in the process. As has been discussed, it
would limit the effectiveness of the process and of implementation to limit the planning group to just the top management; managers two or
three levels down should also be included. If this yields a number that becomes unwieldy for simple meetings, it may be necessary to limit the
number that participate or cascade the meetings from one level to the next to accommodate everyone. What is crucial is to obtain as many
different perspectives in the planning process as possible as well as the involvement of people who implement the strategies. The value of a
professional facilitator becomes more pronounced the larger the group of people involved in the process.

Strategic planning is only meaningful if the company fully intends to implement the decisions taken. A common waste of time and money is
for a company to bear the cost of top managers meeting at a retreat, sometimes with an expensive facilitator, making important decisions, on
which no one then follows up. The result is business as usual. One can only conjecture some possible reasons for why this happens. Perhaps

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The biggest waste of a company’s time and money is to pay for
a top managers’ meeting at a rural retreat center and no one
follows up on implementing any of the business discussed.

Associated Press/Douglas C. Pizac

“going through the motions” of strategic planning soothes some executives’
consciences. Perhaps they believe that “doing the planning” is all there is to it,
a belief that no one has bothered to correct for them. Perhaps it is the golf
game at the resort where the retreat is held that has their real interest.
However, it is a waste of time just to go through the motions so a commitment
to the process and implementation are requisite elements.

There are a few key strategic decisions to be made, or at least revisited. The
�irst is to con�irm a commitment to a vision to which the company aspires. The
outcome of the process is deciding on the best strategic bundle in the
circumstances. That may even happen to be what the company is currently
doing. After that, overall companywide objectives are set. Finally, major
programs that are to be implemented and resource allocations are developed
in detail.

Follow through will be much more likely if the participants see these decisions
as being the best that could be made, that they are feasible yet challenging to
achieve, that some urgency attaches to getting them implemented, and that
they would result in a stronger and more competitive company. Focusing on a
small set of objectives increases the chances of them being attained and

lessens the likelihood of con�lict between objectives that might occur with a larger number. A limited set of objectives would also help focus
the company.

The following description of each step in the process shown in Figure 9.4 includes some pointers for making the whole process successful.

Figure 9.4: A suggested strategic-planning process

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Source: From Stanley C. Abraham, Strategic Planning: A Practical Guide for Competitive Success. Copyright © Emerald Group Publishing Limited. Reprinted
by permission.

Situation Analysis (a)

Certain key categories of data need to be collected in this initial research step. Any time that data are collected it is best to obtain a copy of the
source document or at least a complete citation of the source. It should be self-evident that it is best to get the most recent data possible. If
forecasts can be obtained, the source should be recorded, because it has a huge bearing on the credibility of the forecast itself. Finally, key
people in the company should be appointed to act as gatekeepers for particular categories of data, and everyone in the organization should
know who they are. Everyone can then send items of information or leads about a particular category to these gatekeepers. If done
throughout the year, this �irst step is not needed; otherwise, one must allow suf�icient time to collect and analyze the data and prepare useful

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summaries. Every month, these gatekeepers should summarize and make sense of the data collected to-date, which is then sent to everyone
on the planning team.

Substantial preparation should be done for each step. Research and data collection must be based on fact or analysis, not on opinion. Where
data cannot be obtained, for example, on competitors that are privately held, make assumptions and move on. Paying for critical data such as
economic forecasts or competitive intelligence may be worth considering as it could be an investment. Also consider adding an economist or
competitive-intelligence professional to the company’s permanent staff if it turns out to be cost-effective.

Situation Analysis (b)

Each gatekeeper should make a summary presentation of what is going on in his or her particular category. Such presentations should be
based on the data collected and analyzed during the previous 12 months and should include numbers, trends, graphs, and sources wherever
possible. The gatekeeper should interpret all the data and conclude with the most signi�icant and relevant facts and trends that will affect the
company. This is one way of educating the planning team about changes and implications arising in that particular category. The presenters
should encourage questions in order for complex issues or trends to be understood or challenged. This process should appeal to companies
that like structure; an alternative is a series of strategic conversations, discussed in Chapter 2.

Synthesis

This step allows the participants to list all critical uncertainties, that is, the key strategic issues that could have a positive or negative impact
on the company. “Critical” means those issues that must be addressed in the ensuing strategic plan. Everyone’s suggestions should be
solicited �irst before combining or eliminating any issue.

Create the Strategic-Alternative Bundles

This is a creative activity well suited to an extremely diverse group of people. Ideally it would include representatives from different
functional areas and levels of the company, with very different business and industrial backgrounds, newer members of the organization, and
seasoned veterans. Starting with the list of strategic alternatives and working in small groups, each group should come up with its version of
alternative bundles and check to see that they meet all four criteria.

When the small groups have designed the proposed bundles, these can be assesed and debated by the entire planning assemblage. The idea is
to synthesize the efforts of the various subgroups into a �inal grouping of three or four really good bundles that meet the criteria. Experience
has shown that this step always takes longer than expected to do well. One idea to force an intelligent critique of the alternatives is to

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After completing a situation analysis, each manager or
gatekeeper should make a brief 30-minute presentation on his
or her particular category.

Digital Vision/Photodisc/Thinkstock

“murder-board” them. Assign a subgroup to tackle each alternative bundle,
and instruct them to come up with all the reasons they possibly can as to why
that alternative would not work. It is amazing how this extra step adds a
humiliating dose of reality to the process, can result in important
modi�ications to the bundle in question, and can even cause one bundle that
was going to be considered by the group to be discarded.

Choose the Best Bundle

Select a subset of �ive to six relevant criteria. Evaluate the bundles on each
criterion. The entire group of participants should reach consensus that
whichever bundle is �inally selected really is the best one in the circumstances,
and why. Ultimately, everyone should understand that this is how the
company will compete over the next three to �ive years.

Set Companywide Objectives

As discussed earlier, this is a three-step process. Depending on the preferred
key indicator, such as revenues, NIAT, market share, and D/E ratio, the company needs simply to answer the question, “How far do we want to
go this next year and in each of the next two years toward implementing the chosen strategic bundle?” It will depend on the �irm’s current
resources and those it could additionally access, as well as the nature of the chosen strategies. In addition, it will depend on whether the
competitive environment is becoming more dif�icult or any other threats are looming. Based on how the company has been doing in the
recent past, the objectives should be set at a challengingly high level while still being achievable. Most importantly, those who must be
accountable for achieving these objectives should agree to the level at which they are set, and that level should be challenging.

Of course, the model assumes a participative way of setting objectives; some CEOs still reserve the right to do this on their own. However, a
wise CEO knows that when managers charged with implementing a strategy set their own objectives, they are more likely to achieve them.

Design Major Programs and Contingencies

Some of these major programs are included in the chosen bundle, while others may need to be added. It is this list of programs that will guide
the creation of the operational plans. “Contingencies” here refer to the trigger/contingency pairs that were discussed in Section 7.4.

Prepare Detailed Operational Objectives and Plans

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One of the more complex steps in the analysis is preparing a
detailed account of your operational objectives and plans.

Dmitriy Shironosov/iStockphoto/Thinkstock

p p j
This is one of the more complex steps in the process, but there are many ways
to create operational plans. Given the companywide objectives and major
programs already identi�ied, the directors of functional units (e.g., marketing,
production, �inance) and other support units (e.g., materials lab, purchasing)
take these as mandates to their respective staff and get them to generate
detailed operational plans that would contribute to achieving the objectives
and chosen bundle (business model). At a minimum, these plans should
include the following:

A timeline of speci�ic tasks the unit will undertake during the year
A proposed budget to accomplish them by task and month
Speci�ic details as to who will be participating in these activities and, in
particular, the person who will be responsible for each activity
A list of additional resources, human and material, that will be required
to complete the proposed tasks

Perform a Final Check

Once these plans have been drafted, they should be reviewed by top management and/or the director of strategic planning to check their
feasibility, verify that the requested budgets do not exceed available funds, and con�irm that completing all the planned activities will, in fact,
achieve the overall objectives for the company. This mixture of top-down and bottom-up planning may have to endure one or more iterations
before the operational plans and budgets are �inally approved. For this reason, be sure to allow enough time to complete this process properly
and break it down into components as shown in that �igure.

Assess the Process

Those who participated in the strategic-planning process should be asked to complete a detailed questionnaire about how well the process
went and the quality of the decisions made. The following section discusses measures for improving the process.

Discussion Questions

1. You work for a company that has never done strategic planning. Describe the steps you would take to persuade the CEO
that going to the trouble of putting a process in place would really bene�it the company.

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2. In your opinion, what might be the most dif�icult part of the strategic-planning process for a company to develop
competence in? Explain your answer.

3. If you had to choose from these two alternatives, which would you choose: good data but poor decision making, or
untrustworthy data but good decision making? Why?

4. If a company did operational planning well but had no strategic direction, could it be successful? If it could, why bother
doing strategic planning?

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9.5 Improving the Strategic-Planning Process

Strategic planning is, at its heart, a process for arriving at strategic decisions and achieving some purpose. However, unlike other processes,
the output is not widgets; it is nothing less than the future of the company. Assuming that improving the process will improve the quality of
strategic decision making in the future, it should be reviewed every year to see where improvements might be made. Such a review should
include every aspect of the process—the quality and adequacy of the data and analyses, whether enough expertise was at hand or applied, the
quality and extent of the discussions, the degree to which mental models were changed and uni�ied, whether the key strategic issues were
properly identi�ied and well understood, and so on.

Questions for Improving the Process

The following questions should help in assessing the strategic-planning process and making improvements for the following year.

Situation Analysis

1. Were suf�icient data collected for various parts of the situation analysis? If not, which particular parts were shortchanged?
2. Was enough time allowed for data collection? Where would more time allowed have been bene�icial?
3. Was enough analysis performed on the data? If not, where would more analysis have been bene�icial?
4. Were credible sources used for data and forecasts? If not, for which kinds of data were they not credible?
5. For those analyses that used subjective estimates, was there consensus as to how those analyses turned out? Where particularly did the
subjectivity affect the credibility of the analytic �indings? Were the opinions of some people given undue weight over those of others?

6. Would the use of outside experts have improved any part of the situation analysis (e.g., having an economist talk to the managers about
economic trends for the coming year)?

7. Did the participants in general understand the terms and terminology used in the situation analysis (e.g., core competence)? Were there
any terms or concepts that caused confusion?

Strategic Analysis

8. Were enough key strategic issues identi�ied? If not, what might have been added?
9. In hindsight, did the key issues identi�ied really represent the most critical issues facing the company? If not, why not? Which ones were
left out? Was the omission an oversight, or were some people afraid to articulate it?

10. Did the strategic issues re�lect the kind of long-term strategic thinking that participants imagined should have occurred? If not, why not?
11. Were the strategic-alternative bundles suf�iciently creative and realistic?

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Richard Hobson/iStockphoto/Thinkstock

12. When creating them, were participants unduly in�luenced by what the company is currently doing, by its current strategies, or by what
participants believed the CEO really wanted? If so, how could this be corrected in the future?

13. Did everyone who could have contributed usefully to the process of creating these alternative bundles actually do so? If not, how could
this be corrected?

14. Were the criteria used to evaluate the alternative bundles reasonable for this company? If not, which others should have been used?
15. Did the analysis that was used comparing the alternatives against the criteria produce a believable result? Why or why not?
16. Which of the alternative bundles might the company have been advised to pursue other than the one chosen? Why? Was every point of

view given fair consideration? If not, why not?
17. During the sessions choosing a preferred strategic bundle, were participants allowed ample opportunity to express their feelings,

agreements, or misgivings? If not, why not?

Recommendations

18. Were the objectives that the company decided on for the next year appropriate and
achievable? If not, why not?

19. Are the objectives for three years from now appropriate and reasonable? Are they
unattainable as stated, “stretch” objectives (challenging yet attainable), set without much
careful thought (e.g., an extrapolation of last year’s), or set too low? Why or why not?
What should they have been?

20. Are those who participated pleased and excited about the direction the company is taking
now as a result of the strategic-planning exercise? If not, why not?

Some General Questions

21. Did the whole process take too long? Why? Where could it have been shortened?
22. Did the process stick to the original schedule? If not, where did it deviate? Might the

schedule have been unrealistic?
23. If the process did not keep to the original schedule, were there any adverse effects?
24. What lessons were learned about the process this year that might be put to good use next

year?
25. Has the company’s knowledge of strategic planning increased? How do you know? If not,

why not?
26. Was everyone who participated in the process substantially “on the same page,” or did

the process conclude with a number of people in signi�icant disagreement? If the latter,
how might such disagreements be addressed more fully and resolved?

27. Overall, is the company better off for having been through this strategic-planning
exercise? Why or why not?

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After putting together your situation analysis,
you should distribute a questionnaire to your
employees to help you better assess the
strategic-planning process.

The person responsible for the process should distribute a questionnaire with the preceding
questions (or a similar set) to all participants in the process. The responses should be
analyzed and the results presented with constructive commentary and suggestions for what
should be changed the following year. The analysis and suggestions for change should be
discussed at the meeting and consensus sought as to which changes should be implemented. Unless such a debrie�ing takes place, changes
made to the process might be resented; in addition, it serves an educational purpose.

Discussion Questions

1. Participating fully in a strategic-planning process is unquestionably a learning experience. Do you think that special
training beforehand would make a difference? Why or why not?

2. If strategic-planning participants are sent materials ahead of the process, what should they contain?
3. After a couple of annual iterations of improving the process, an observer might be forgiven for thinking that the process
was good enough not to change any more. Give some reasons why that would be wrong.

4. Why is achieving consensus at the post-planning debrie�ing meeting advisable?

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9.6 Assessing the Strategic-Planning Process

Bene�its do not accrue automatically every time a company engages in strategic planning; they are more likely to be realized if they are
consciously sought. Both strategic planners and the consultant facilitators advising them should strive to ensure that these bene�its are
realized. The extent to which they are realized, therefore, constitutes an excellent assessment.

The 10 Bene�its

The 10 bene�its of effective strategic planning may also be viewed as criteria for assessing whether a company is doing strategic planning
effectively. The 10 bene�its are organized to follow the Association for Strategic Planning’s rubric of “Think—Plan—Act.”

The 10 Bene�its of Effective Strategic Planning

“Think”

1. A shared understanding of external changes
2. The ability to anticipate future external changes
3. The ability to search for a better strategy or business model

“Plan”

4. Having a strategic vision
5. Choosing the best strategy from among viable alternatives
6. A constantly improving strategic-planning process
7. Having the board of directors on the same page

“Act”

8. Becoming a stronger competitor
9. Having an adaptive, innovative culture
10. Having all programs aligned with the vision, strategy, and company objectives

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Source: Abraham, S. (2010, February 23). Ten Bene�its of Effective Strategic Planning—and Why You Should Want Them All.
Presentation at the 2010 ASP National Conference, Pasadena, CA.

1. A Shared Understanding of External Changes

To use a military analogy, just as con�licting accounts about an enemy’s strength, position, and deployment make it dif�icult to devise a
winning strategy, so too does the absence of a shared understanding of external changes and their impacts on the company make the crafting
of a winning strategy extremely dif�icult. Because changes occur continuously, the only way to keep up with them and even anticipate some is
to monitor them year round, and to keep the strategic planning group and board of directors informed as to key changes and developments in
all areas. One person should be responsible for each area and be trained to collect and summarize data in useful form. A summary for the year
with emphasis on recent trends should be prepared in advance of the annual strategic-planning meetings and be distributed to participants.
To the extent this is done well the company’s decision making will improve.

2. The Ability to Anticipate Future External Changes

A number of well-known techniques enable an organization to explore “soft” assumptions about the future and provide additional options for
planning. These include scenario planning, forecasts, and simulations (Section 3.4). It may be that the �irm would be advised to engage a
consultant that specializes in one of these areas, or pay attention to forecasts that have earned a good reputation over time. Expressed
another way, the bene�it here is that the resulting information can guide the �irm toward actions that enable a preferred scenario to occur, or
develop a contingency in case a hoped-for scenario does not occur.

3. The Ability to Search for a Better Strategy or Business Model

A company not actively seeking a better strategy is not doing a good job of strategic planning, and its strategic decisions will not be good ones.
How else is a company to �ind a “blue ocean” or situational monopoly with no competition? How else could it guard against being disrupted
by a company outside the industry or even plan a disruption itself in a proactive move? How else could it gain a competitive advantage it lacks
or strengthen one it already has?

For every different strategy and business model contemplated, someone in the organization should assess its costs, feasibility, bene�its, and
risks on an ongoing basis. The results of such assessments play directly into the strategic-decision-making process. Except when the �irm

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Your strategic vision should be realistic, achievable within a
speci�ied time frame, inspirational, concise, and memorable.

Helder Almeida/iStockphoto/Thinkstock

needs to act immediately because the decision just won’t wait, the information can wait until the annual strategic-planning process comes
around.

4. Having a Strategic Vision

Every organization that wants to endure should have a strategic direction and
strive to become something. Succeeding is more likely if there is a clear vision
and if everyone knows what it is and is motivated to help the organization get
there. Visions should be realistic (achievable within a set time frame, 5 or 10
years is typical), concise, inspirational, and memorable. They sometimes
include a value statement, although listing values separately is more common
(Section 2.1).

The real bene�it of a clear vision statement is to get everyone in the
organization on board and wanting to achieve it; and though cumbersome,
everyone in the organization should also have had a hand in creating it or at
least providing feedback before it is adopted. As soon as the organization is
close to achieving its vision, it should be changed, being careful to go through
the same process of getting buy-in from everyone before adoption.

5. Choosing the Best Strategy from Among Viable Alternatives

Choosing from the best options available is a bene�it, as it allows people to trust the decision that was made and have faith in the direction the
company is headed. This is bene�icial only if the strategic planning process generate good viable alternatives and a decision-making process
for selecting the best one.

Having said that, such a “best strategy” doesn’t guarantee success. It must be well executed for the �irm to succeed. It is much easier to “sell”
the strategy down the line in a company and motivate a high level of execution if people know why it is the best from among the options
considered.

6. A Constantly Improving Strategic-Planning Process

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The bene�it of improving the process should be clear: better strategic decision making. This might entail involving different people, getting
better information, stimulating more spirited discussions and encouraging diverse views, or even using computer software to include inputs
from everyone quickly (Warden & Russell, 2001). Without thoughtful annual improvements, an organization is likely to allow its strategic
planning to become a rote exercise that is taken ever less seriously and one that participants, for those very reasons, resist wanting to
participate in.

7. Having the Board of Directors on the Same Page

For public corporations and nonpro�its—and quite a few but not all privately held companies—it is imperative to ensure that the board of
directors approves of all strategic decisions before any move to implement them is made. In fact, there are instances where the strategic
decision comes from the board as in resisting a takeover bid or deciding to acquire another company. In the typical case where strategic
planning is done by a top-management or strategic-planning team, there has to be some mechanism for the board to be kept apprised of the
process. In 2005, management consulting �irm McKinsey & Co. polled over 1,000 directors and discovered that strategy coordination between
the CEO and the board was the number-one cause for the success or failure of CEO appointments (Felton & Keenan Fritz, 2005). In some
companies, the CEO is also chairman of the board, and so automatically serves as the desired link.

Boards of directors may have a strategic-planning committee whose chair would attend the meetings of the management group and keep the
board informed. The bene�it, of course, is knowing that the strategic decisions made are in the best interests of the stockholders in the case of
a public corporation or the sponsors and clients in the case of a nonpro�it organization. Ultimately it is the board that has responsibility for
the strategic direction of the organization.

8. Becoming a Stronger Competitor

If strategic planning is done well and the strategy properly executed, then the company will become a stronger competitor. This, of course, is
the principal bene�it for doing strategic planning in the �irst place. Many things have to contribute for this bene�it to be realized. For example:

Knowing how your industry and markets are changing
Anticipating and meeting customers’ needs
Getting more customers to buy your product or service
Creating or improving a core competence
Knowing what your competitors are up to and outdoing them
Defending one’s position against attack from competitors
Looking for “blue oceans” or monopolies with no competitors
Looking for opportunities to disrupt the industry before someone else does

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Apple Computer’s culture encourages innovation and new ideas
to look for the “next big thing.” Apple values learning from
mistakes, sharing experiences, and developing ideas, no matter
what the source.

Miguel Medina/Stringer/AFP/Getty Images

Cultivating a strong brand and staying true to it

Management knows that the company is a stronger competitor if it achieves gains in revenues and market share, and maintains high brand
equity, or achieves other established measures of success the company holds dear.

9. Having an Adaptive and Innovative Culture

When a company has been following the same strategy for some time, the culture adapts to that strategy and gets it to work. However, if some
major change is deemed necessary, such as pursuing a new strategy or adopting a new technology or manufacturing process, and the culture
remains what it always was, then the change will not succeed. A mismatched culture is one of the principal reasons why changes and new
strategies fail, and it is widely acknowledged that it is dif�icult to change a culture. The reason that it is dif�icult is that change imposed from
above results in a lot of resistance. Many companies in this predicament resort to wholesale changes in personnel to change the culture.

With an adaptive culture, that draconian measure is not necessary. An
adaptive culture is one that is willing to change if the reason for doing so
makes sense. It is a culture that values open communication, education,
teamwork, and individual initiative. Companies that have adaptive cultures
make the necessary changes over time and succeed.

An innovative culture does not simply encourage innovation and new ideas
and look for the next “big thing.” It also puts a high value on learning from
mistakes and giving people permission to make mistakes. Innovative cultures
encourage the sharing of experiences and developing ideas no matter their
source. Two of the best examples of innovative cultures are Apple Inc. and
Google.

It would be dif�icult to make strategic decisions and implement them if the
culture were not adaptive and innovative. The converse, of course, is also true.
Making good strategic decisions that call for change and smooth execution will
force the culture to be adaptive and innovative. Hiring people with similar
traits will ensure that this desirable culture endures.

10. Having All Programs Aligned with the Vision, Strategy, and Company Objectives

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The importance of aligning everything the company does with its vision, strategy, and companywide objectives was discussed in the context
of operational and budget planning (Chapter 8). The bene�it is the assurance of knowing that completing all programs, projects, and activities
as planned will result in the strategy being implemented and the vision and company-wide objectives being fully realized (barring unforeseen
circumstances).

In too many companies, what employees in the different functional areas and operational units actually do has little to do with the strategy
that’s in place, because little or no effort was expended to make sure that the two were aligned. As a result the strategy fails or “business as
usual” triumphs. When operational planning is done, critical elements include performance measures (to track progress), appropriate
training, and reward and incentive systems.

Discussion Questions

1. Of the 10 bene�its discussed in this section, which of them, in your opinion, are most often unrealized and why?
2. Which of these bene�its, again in your opinion, are most dif�icult to realize and why?
3. Do you believe that there are any bene�its that companies are less interested in realizing, hence probably won’t?
4. In what ways are these 10 bene�its different from the annual improvement cycle recommended in Section 9.5?

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9.7 Raynor’s Strategy Paradox

According to Michael E. Raynor, some traditional strategic-analysis tools that have been taught for years and are in widespread use (including
some discussed in earlier chapters) are passé and could even be counterproductive. He speci�ically identi�ies Michael Porter’s �inding that a
commitment to competitive strategy is the single most important ingredient of any plan (Porter, 1980), and Gary Hamel and C. K. Prahalad’s
(1994) revelation of the power of a core competence.

These management tools are, in fact, powerful only if one can predict a future discontinuity with some certainty, which no one can, especially
in an unstable economic climate, or in an environment of constant change and technological innovation. For example, consider a company
such as Mozilla, which relies on open-source development for its �lagship product, the Firefox browser. Older models of forecasting the future
and strategically planning with those forecasts in mind simply won’t work for an organizational model such as this.

The argument is that the commitment it takes in �inancial resources and organizational adaptation to implement a strategy or develop a core
competence is so signi�icant and time consuming that, when the world inevitably changes, the typical organization cannot adapt quickly. The
very strategies that at one time were responsible for a company’s success will then seed its destruction. That is Raynor’s strategy paradox
(Raynor, 2007).

The solution, according to Raynor, is not to focus on the strategy, but to manage uncertainty so that, whichever way the world changes, one
can adapt, survive, and prosper. Raynor illustrates, with the ill-fated story of the failure of Sony’s Betamax, what happens when a company
focuses on its well-constructed strategy and fails to heed external changes and manage uncertainty (Abraham, 2007). In 1977, Sony had a
choice of competing or collaborating with Matsushita, which produced the VHS recorder. Sony had a 60% share of the market, and its
Betamax was the best product for recording a TV show and replaying it at a later time (”TV shift”). Then Fox Studios put 50 of its �ilms on
both Beta and VHS for people to watch at home. Watching a movie at home required a simple cheap playback device, not the complexity of a
TV-shift device that could also record. To its detriment Sony didn’t adapt. By 1985, VHS had become the new standard and Betamax had less
than a 10% market share, which continued to decline. In 1988, Sony pulled the plug on Betamax, a good product with an initially sound
marketing plan, but which did not rapidly adapt to market shifts.

Microsoft, on the other hand, has the budget to pursue myriad strategic options, which it can then exercise (develop and quickly try to
become the leader) or abandon as appropriate. For instance, although it may not have happened soon enough for early adopters of
Microsoft’s much-criticized Vista operating system, the company had the resources to put in place Windows 7 as a means of responding to the
widespread problems with Vista. Call it hedging one’s bets if you will, but Raynor calls it managing uncertainty.

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How, then, is this uncertainty managed, and who should do it? Here, Raynor drew on the pioneering work done by Elliott Jacques, developer
of the ”requisite organization” concept. Jacques investigated why people’s pay at different organizational levels differed, and what was
considered ”fair pay.” His research showed that people who had to make decisions based on a longer time horizon were appropriately
perceived as deserving higher pay. Thus, for this reason alone, people at higher levels in an organization were paid more than people at lower
levels. Raynor piggybacked on this concept and developed a model of requisite uncertainty. Figure 9.5 summarizes the key levels in an
organization and the time horizon over which they tend to make decisions. Raynor is not concerned, here, with compensation. Instead, the
exhibit shows that the decisions made with long time horizons (about 20 years) in mind address the greatest strategic uncertainty and, he
says, the board of directors should be responsible for making them. The next level down, corporate management (5- to 10-year horizon),
explores new markets, technologies, and business models; their job is not to decide how to succeed, but rather that the company be
positioned to succeed regardless of what the future holds. Division management (two-to �ive-year horizon) chooses the strategy and how they
should be implemented. Finally, line and functional managers (with a time horizon restricted in range to less than one year) focus on
implementation of strategies already decided on. Notice that from top to bottom of the exhibit, the management imperative shifts from
”uncertainty” to ”commitment.” A company must not only implement strategies already in play but also, by managing uncertainty, always
keep itself in position to change to another strategy should changing circumstances warrant.

Figure 9.5: Raynor’s model of requisite uncertainty

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Source: From Stanley Abraham, “At ASP, Raynor on managing uncertainty, plus some highlights of lessons from practice,” Strategy and Leadership, Vol. 35 No.
4, 2007, Exhibit 2, 46. Copyright © Emerald Group Publishing Limited. Reprinted by permission.

Discussion Questions

1. Does Raynor’s strategy paradox negate this book’s premise of good strategic planning at the heart of strategic
management? Why or why not?

2. Raynor says that the solution is to manage uncertainty. Isn’t that the purpose of strategic thinking? Doesn’t strategic
thinking try to get a handle on the future and soft assumptions (uncertainties) about the future?

3. Raynor’s model of requisite uncertainty, whereby the company continues to execute its strategy while upper levels of
management worry about the future, advocates that the board of directors worry about the long-term future. Does this
sound realistic to you? Why or why not?

4. Following on from question 3, if the board doesn’t see this as within its purview, who do you think should worry about the
company’s long-term future?

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Summary

Some organizations don’t create operational plans as they would consist of just doing whatever the company is already doing. For most
companies, however, change is constant and the push to become a stronger competitor and reduce costs is never ending. Creating operational
plans also involves dif�icult choices; the plan must get the job done, be within the company’s technical and capacity means to do so, and be
done for the lowest cost within the allocated budget. Operational plans include projects and programs the company is currently doing as well
as new ones and changes in the way current projects are being done. The plan for each project should include start and end dates, equipment
needed or used, people involved, who is accountable, and estimated costs for all elements by month.

It’s conventional wisdom that nothing gets managed or improved that isn’t measured. Tracking progress of all projects is therefore critical to
keep them “on track and on budget.” Care needs to be exercised to make sure that the right things are being measured. If a better trained
workforce is a goal, knowing how many lectures or workshops are given and how many people attended won’t help; a way has to be found of
measuring increased effectiveness or capability. For many standard measures, especially in manufacturing and project management, software
such as Gantt charts and PERT networks with a continually updated critical path.

Managers meet face-to-face with their direct reports regularly to discuss negative variances that have resulted from the previous month’s
operations. Negative variances include projects that have either missed their deadlines or have a higher probability of missing them or have
exceeded their budgets. The meetings are vital for managers to understand the causes for such variances and discuss possible solutions. In
addition, it’s an opportunity to strengthen relationships and understand their direct reports better. Just like classical control systems that are
corrected as soon as possible if untoward variances occur, so also in operational management must variances be identi�ied and then corrected
as soon as possible. After having met with all direct reports, the manager later takes on the role of direct report when a similar meeting is
held with his or her supervisor. Managing is getting things done (right) through people, and such meetings are a critical part of a manager’s
job.

While executing a strategy, changes may result in activities being done or opportunities pursued that, in retrospect, bear little resemblance to
the original “intended” strategy. Such new activities could form an “emergent strategy,” �irst described by Henry Mintzberg, and, together with
the strategy being implemented (“deliberate” strategy), turn into the �inal “realized strategy.” When intended or deliberate strategies fail, they
are considered “unrealized.” Agile or adaptive cultures are best able to handle such real ongoing changes in stride.

Although not an operational plan per se, the strategic-planning process must nevertheless be managed, especially as it is done in addition to
managers’ regular responsibilities. It is the responsibility of the CEO or possibly designated vice president but never a consultant, even

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though a consultant might facilitate the process. The person responsible for the process should survey all participants, analyze the responses,
and report to a debrie�ing meeting to discuss proposed improvements. A consensus on the proposed improvements should be obtained
before implementing the changes for the following year.

Finally, implementing a strategy that is working and in which considerable investment has been made might, if conditions abruptly change,
also be a company’s Achilles’ heel, because such a company would �ind it very dif�icult to change as quickly, like a large oil tanker trying to
make a quick turn. This is Raynor’s strategy paradox. His solution is to manage uncertainty better, meaning to not only keep executing its
successful strategy but also spend more time looking further ahead (10–20 years) in an effort to get as much lead time as possible to allow
the organization to change accordingly. Planning at the CEO and board levels, according to Raynor’s “model of requisite uncertainty,” should
exclusively be concerned with �iguring out what the company should be doing 5-20 years into the future.

Concept Check

Key Terms

control system Comparing actual performance to a standard, measuring the variance, taking action to reduce the variance, resetting or
updating, and testing again. Corrective action should be taken as soon as it is found necessary.

deliberate strategy The intended strategy, operationalized and executed.

emergent strategies Strategies a company pursues during implementation that were never a part of the intended strategy.

Gantt chart A graphic depiction of a project schedule. Gantt charts show the beginning and end dates of each project component. Some charts
also illustrate the dependency relationships between component activities, or the dependency of one activity upon the completion of another.

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negative variance An instance where a project’s progress is delayed and could miss a deadline, or where its budget has been exceeded, or
where performance comes up short of a quantitative standard or expectation.

Raynor’s model of requisite uncertainty The decisions made with long time horizons (about 20 years) in mind address the greatest
strategic uncertainty. A company must not only implement strategies already in play but also, by managing uncertainty, always keep itself in
position to change to another strategy should changing circumstances warrant (with the board and top management worrying about how to
cope with changes that might occur over the longer term).

Raynor’s strategy paradox When the world inevitably changes, the typical organization cannot adapt quickly; the very strategies that at one
time were responsible for a company’s success then seed its destruction. That is the strategy paradox.

realized strategy A combination of deliberate and emergent strategies. Also known as an umbrella strategy.

unrealized strategy A failed strategy.

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