The Benefits and Pitfalls of Planning - Principles of Management

Benefits and Pitfalls of Planning

We can now discuss its benefits and pitfalls. The benefits are implicit in much of the discussion so far:
  1. Planning gives direction and purpose to an organization; it is a mechanism for deciding the goals of the organization.
  2. Planning is the process by which management allocates scarce resources, including capital and people, to different activities.
  3. Planning drives operating budgets—strategic, operations, and unit plans determine financial budgets for the coming year.
  4. Planning assigns roles and responsibilities to individuals and units within the organization.
  5. Planning enables managers to better control the organization.

Thus planning is unambiguously a central task of management. Without planning an organization would be chaotic, drifting like a ship without propulsion. Academic research seems to support this view. A study that analyzed the results of 26 previously published studies came to the conclusion that on average, strategic planning has a positive impact on company performance. Another study of strategic planning in 656 firms found that formal planning methodologies are part of a good strategy formulation process, even in rapidly changing environments.

Despite these obvious benefits, however, planning has a bad name in some circles. Managers often groan when they are told it is time for another round of strategic planning. Some management theorists assert that the best strategies arise in the absence of planning, and that planning can limit creativity and freedom of action. Moreover, there are some striking cases of organizations that pursued failed strategies despite having gone through comprehensive planning exercises.

For example, in 2000 AOL and Time Warner executed what was then the largest merger in history, valued at $166 billion. The strategic plan for the new organization, AOL–TimeWarner, called for Time Warner to distribute digital versions ofits magazines, such as Fortune, through AOL and for AOL tobenefit from Time Warner’s extensive cable TV operations, offering broadband versions of AOL via Time Warner cable. Managers stated that their goal for the merged company was to increase earnings at 25 percent per year compounded.

It didn’t work. Within three years AOL–Time Warner had taken a massive $60 billion charge against earnings to write down the value of “goodwill” associated with AOL’s assets; AOL’s subscriber and revenue growth had stalled; the stock price had fallen by over 80 percent; and all of the top managers associated with the merger had resigned. The new CEO, Richard Parsons, in an admission that the plan had failed, stated that the new goal was to grow earnings by 8–12 percent per year.

Pitfalls of Planning

Pitfalls of Planning in Business Management

THE PITFALLS OF PLANNING

Why do plans sometimes fail to produce the desired results? What goes wrong with carefully made plans such as the postmerger plans for AOL and Time Warner? There are several pitfalls managers can fall victim to when they are planning.

Too Centralized and Top-Down Some planning systems are too centralized and top-down. As a result, planners make decisions that do not take market realities into account. This can become a problem when the planners are far removed from daily operations—when they lack the knowledge that comes from a close relationship with the market. For example, General Electric used to be known for its highly centralized strategic planning process.

At one time planning was touted as a strength of General Electric. However, corporate planners often drew up plans that made no sense to business unit and operating managers. In one famous example, corporate planners analyzed demographic data, found out that family size was shrinking, and told GE’s appliance unit to start making smaller refrigerators. They did; but the smaller appliances did not sell.

The reason was that even though family size was shrinking, houses were getting larger; people had more room for refrigerators, and they preferred to buy big refrigerators that they could keep fully stocked. The planners got it wrong because they were removed from the business and failed to understand and take customer preferences into account.

Good ideas about business and operations strategy are not the preserve of top management; they can and often do emerge from lower down within an organization. Indeed, management scholars have often declared that good ideas can take root almost anywhere within an organization, even at the lowest levels, and that rather than imposing all strategy from the top, good planning systems should give lower-level employees an opportunity to suggest, lobby for, and pursue strategies that might benefit the organization.

Failure to Question Assumptions All plans are based on assumptions about the future. Sometimes those assumptions are wrong, even when the plans are first made. Other times the assumptions may have initially been reasonable, but unanticipated changes may have invalidated them. In either case the result is that the plans are no longer valid, and unless management recognizes this in a timely manner and makes adjustments, the plans will fail to produce the desired results.

For example, in the early 1980s oil prices reached record highs of $35 a barrel following supply reductions by the OPEC cartel. Oil refiners like Exxon then made investment plans based on the assumption that prices would continue to rise, hitting over $50 a barrel by the mid- 1980s. For Exxon those plans included massive investments in shale oil deposits that would not be profitable unless oil prices stayed over $30 a barrel.

As it turned out, the key assumption about oil prices was wrong. By the mid-1980s oil prices had fallen to less than $15 a barrel as new supplies came from Alaska and the North Sea; and oil prices stayed low for the next 15 years, making Exxon’s investment worthless. Ironically this experience so hurt companies like Exxon that when oil prices climbed again in the early 2000s, they initially held off on making the investments in exploration required to increase supply.

The assumption that the 1980s oil boom and bust was about to repeat itself in the early 2000s made them more cautious than they perhaps should have been.

Failure to Implement Plans often fail because they are not put into action. One of the standard quips about strategic planning is that after a planning exercise has been completed, the planning books stay on the shelf, gathering dust, never to be opened again. One reason plans are not put into action is that it is difficult to do so, particularly if the plan calls for a departure from the regular way of doing business or requires a substantial change in organizational practices.

A few years ago this author acted as a consultantfor a strategic planning process at a city-owned electric utility. The planning process was successful in that the top managers, after extensive consultation with employees, committed themselves to major strategic changes in the utility that would significantly lower costs and enhance service. However, attempts to enact the plan led to protests from unionized employees, who objected to the planned reorganization of the utility, fearing that it might jeopardize their job security.

The unions lobbied the city government, and the mayor, who did not appreciate the negative publicity, replaced the CEO of the utility with a city bureaucrat who maintained the status quo. The message to managers from that event was clear: Don’t rock the boat! The strategic plan was never implemented and is now gathering dust on a shelf somewhere.

Failure to Anticipate Rivals’ Actions Plans can fail because managers do not consider what rivals are doing. The planners proceed as if the organization has no rivals, and they make investments based on plans without considering how the value of those investments will be affected by rivals’ actions. This was a problem in the case of many dot-com companies in the late 1990s and early 2000s.

Following the success of early dot-com enterprises such as AOL, Amazon, Yahoo, and eBay, hundreds of companies entered the dot-com arena. Many of these companies had a business model based on advertising revenues.

The problem was that each company assumed that it would capture significant advertising revenues; but with many other companies chasing the same advertising dollars, there simply was not enough business to go around, and most of these companies failed. Had these enterprises looked at what their rivals were doing, they might have been more cautious about their investment plans, and the results might not have been so bad.

IMPROVING PLANNING

Dealing with the pitfalls just discussed requires that managers take a number of steps. To guard against the problems associated with centralized, top-down planning, managers need to ensure that responsibility for planning is decentralized to the appropriate level and that a broad constituency of employees has an opportunity to participate in the planning process.

An important principle of good planning is that those who have primary responsibility for putting a planinto action should also participate in formulating the plan. Thus, for example, manufacturing managers should be involved in a planning process that looks at how manufacturing processes might be reorganized to drive down unit costs, and marketing managers should help formulate a plan that calls for the repositioning of a company’s product offering in the marketplace.

As for opening up the planning process to a broad constituency of employees, here organizations can and do use a variety of mechanisms. At Google, for example, employees are asked to spend 20 percent of their time working on something that interests them away from their main jobs. Companywide, a full 10 percent of employee time at Google is spent dreaming up new projects.

Although most of these projects never become products, some do—such as Google Maps, Google mail, Google Earth, and Google books (a controversial service that lets users search inside published books). General Electric has a process known as “work out” in which lower-level managers and other employees spend three days at a retreat, without their boss, formulating ideas to improve the performance of their business unit.

They then suggest their ideas to their boss, who has to decide on the spot which ideas to pursue. This process has empowered employees, has made them feel as if they have a role in determining the plans of their unit, and has produced many ideas that improved performance at General Electric.

To try to ensure that plans are not based on unrealistic assumptions and to account for uncertainty about the future, managers can use scenario planning methods. As discussed earlier, scenario planning methods force managers to think about what they would do under different assumptions about the future. One of the great advantages of the scenario method is that it is not based on a single assumption about the future.

In addition, managers can use an independent “devil’s advocate” to question plans and their underlying assumptions, exposing any flaws or weak assumptions (we discuss this in more detail in the next section). Beyond such approaches, senior managers need the courage to walk away from plans that are no longer working because of unanticipated events and to push the organization in a new direction if that is called for.

One of the classic examples of this occurred in 1995 when Microsoft’s Bill Gates responded to the unanticipated emergence of the World Wide Web based on the Hyper Text Markup Language (HTML) by abandoning Microsoft’s established strategy for the Internet, which was based on a version of MSN that used proprietary software. Instead he stated that Microsoft would incorporate HTML language into all of its products, making them Web enabled.

To make sure plans are implemented, managers need to follow the steps of the planning model to their conclusion—drafting action plans, identifying who is responsible for putting the plans into effect, tying budgets to plans, and holding managers accountable for reaching goals. The hard truth is that plans will not work unless they are linked to goals that matter and are tied to operating budgets. Unfortunately, in many organizations the planning exercise is decoupled from the budget process and from performance reviews, which implies that the plans have no teeth.

Finally, managers need to consider how rivals will respond to their plans. One technique for doing this is to engage in strategic role-playing, where groups within the organization take on the role of competing enterprises and state how they would counter the plans of the organization.

This technique is a standard feature of Microsoft’s regular strategy conferences. At those conferences, groups assigned to take the position of Microsoft rivals draft plans to “beat Microsoft.” The idea is to generate insights into what the strategy of rivals might be and how they might respond to actions by Microsoft.


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