From Strategic Planning to Strategic Management

Our previous discussion of the evolution of management systems easily gives the impression of a logical untroubled progression from one system to another. In fact, the progression was slow, turbulent, and accompanied by setbacks, whenever the new system disturbed what Machiavelli described as the ‘historical order of things’ within the firm. The evolution of first strategic planning and then the evolution of strategic management described in this chapter are examples of such disturbances.

Doubts About Strategic Planning

The history of management systems is a succession of inventions. As new challenges arose, progressive firms invented and tried new ways of managing. Some of the new systems failed, some succeeded, and other firms imitated successful systems. Out of such pragmatic trial and error processes grew the body of systems that we described in Chapter 3. As is typical of inventions, they were like a medicine man’s potions, treating symptoms rather than the underlying causes. If the treatment worked, it was used until new symptoms appeared. If it did not work, the treatment was discredited and the search started again.

As discussed in Chapter 3, long range planning was the firm’s response to the pressures of rapid growth, size, and complexity . In the 1950s, this configuration of factors reached a point where it was no longer possible to rely on budgeting for preparing the firm for its future competitive challenges and expansion needs. Long range planning was the answer that quickly proved itself to be useful, and was accepted by most large firms and a substantial number of medium-sized ones.

Strategic planning , which was invented in the 1960s, less than ten years after long range planning, had a very different history. It will be recalled that the stimulus was saturation and decline of growth in a number of firms. At the time, reasons for the saturation/decline were poorly understood. But it was clear that it was both undesirable and dangerous to plan the firm’s future on the basis of extrapolation of past trends, as is done in long range planning .

As the reader will see, strategic planning is a multifaceted, complex, and time-consuming process, much more so than long range planning. But it was just another in a series of inventions which, while superficially logical, offered no proof that the substantial investment of the firm’s energy which it required would prove worthwhile.

Early results were discouraging. Usually imposed on the firm by an enthusiastic chief executive, strategic planning was poorly understood by the involved managers, perceived as ‘another form-filling exercise’ for the sole benefit of the corporate office . New strategies were slow to produce results; the new strategic investments turned out to be larger than anticipated. Strategic planning encountered resistance from the affected managers who tried to avoid and to sabotage it. When the enthusiasm of the chief executive manager waned, and he turned his attention to other matters, the sabotage frequently succeeded to the point of causing a regression to a previous (budgeting or long-range planning) system.

Does Planning Pay?

Among the many criticisms of strategic planning, the fundamental one was that it was a poor invention and that, even if well installed and used by the firm, it does not produce any improvement in the firm’s performance. Critics who advanced this view argued that when the environment was extrapolated, long range planning produced no harm and might even do some good. But, when the environment turned turbulent, firms were advised to avoid formal planning and make their decisions ‘organically’ on the basis of managerial intuition and experience (Mintzberg 1973-C).

Proponents of strategic planning refused to accept this view and some of them turned to research in an effort to prove that properly installed strategic planning can more than pay for itself in terms of better performance.

One of the earliest research studies asked the question whether strategically planned mergers and acquisitions produced better results than ad hoc acquisitions based on intuitions and experience. The findings of this study are summarized in the next two sections (Ansoff et al. 1970-C).

Design of the Study

The study was designed to investigate the relationship between performance and the growth methods used by large US manufacturing firms during the twenty-year period 1947–1966. The study focused on firms that used acquisitions as a primary vehicle for growth. The first part of the study examined behavioral characteristics of acquisitions including planning, search, evaluation, and integration processes used by the different firms. These characteristics were investigated by means of an extensive questionnaire.

The behavioral characteristics were nest related to performance based on financial data furnished by the S&P Compustat tapes. The questionnaire and the financial performance analyses were structured to permit comparison of the pre-acquisition and post-acquisition performance. That is, the performances of firms before they entered a merger were compared to the post-acquisition performance. Then, a correlation was made of the typical patterns of acquisition behavior with the changes in performance.

The questionnaire was divided into two sections: The first part sought subjective descriptions of the acquisition activity, and the second requested objective information from company records. It was requested that the first part be completed by someone who was directly involved in the acquisition program, and the second part to be completed by a staff analyst.

Ninety-three responses were received from a mailing of 412 questionnaires, a response rate of 22.6%. These 93 firms had acquired 299 other firms during the acquisition programs under investigation. However, over 66% of the acquiring firms made only one or two acquisitions.

The questionnaire was designed to explore two different types of acquisition planning behavior. The first type, strategic planning , determines whether and what types of acquisition the firm should seek. This includes an explicit statement of objectives and of the diversification strategy. The second type is operational planning. This includes establishing procedures for search, standards for evaluation of candidates, procedures for post-acquisition integration, and allocation of responsibilities and resources to the acquisition activity. The study measured performance differences on thirteen variables. These are shown in Fig. 4.1.

../images/435756_3_En_4_Chapter/435756_3_En_4_Fig1_HTML.gif — Fig. 4.1
Performance variables

Results of the Study

The questionnaire singled out eight characteristics of managerial behavior during acquisition activity. Four of the characteristics described the process of systematically establishing plans, and four described the systematic execution of plans such as search for opportunities, evaluation, and integration of acquisitions into the parent firm.

The results of the questionnaire revealed that firms that planned their acquisitions also planned their execution. On the other hand, firms that made acquisitions opportunistically did little or no execution planning. Therefore, it was possible to subdivide the sample into two categories: planners and non-planners.

Analysis of financial performance of planners vs. non-planners along with thirteen measures in Fig. 4.1 shows that planners performed overwhelmingly better than non-planners. This is demonstrated in Table 4.1 that shows the ratios of post-acquisition to pre-acquisition performance for the two groups. In particular, the planners notably outperformed the non-planners on sales growth, earnings growth rate, earnings/share growth rate, and earnings/common equity growth rate.

Table 4.1

Performance variables pre-/post-acquisitions

	Planners	Nonplanners
Performance variables	n = 22	n = 41
Sales growth	2.64	−6.08
Earnings growth	17.51	0.05
Earnings/share growth	16.70	−1.24
Total assets/growth	−1	−2.55
Earnings/common equity growth	12.08	3.43
Payout ratio growth	5.21	−3.14
Total equity growth	−0.86	−5.5
Earnings/total capital growth	10.97	4.47
Stock price growth	−0.03	7.33
Debt/equity growth	−2.11	−0.33
Price earnings growth	−0.28	−0.98
Debt/equity growth	0	−0.06
Payout ratio	−0.04	0.06
Price/equity ratio	0.18	0.52
Total equity	23.49	31.52
Earnings/total equity	−0.01	−0.03

The principle findings may be summarized as follows:

1.
Firms take two distinct approaches to acquisition planning. The first is an un-planned opportunistic approach and the other a systematic planned approach. If a firm fails to plan any phase of the program, it is likely to forego planning altogether. If a firm does plan a phase, it is likely to plan all phases.
2.
Firms that do plan tend to use these plans and to exhibit deliberate and systematic acquisition behavior .
3.
On all relevant financial criteria, planners significantly outperformed the non-planners.
4.
Not only did planners do better on the average, they performed more predictably than non-planners.

The Chandlerian Perspective

Since the original study, which is summarized above, several other research studies arrived at substantially the same conclusion, which is that the difficulty encountered by strategic planning was not due to the fact that it is a poor instrument. On the contrary, once strategic planning is installed in a firm, it can help produce significant improvements in performance. As a result, attention began to shift from the question of ultimate effectiveness to the transitional difficulties encountered by strategic planning: the resistance to planning , the implementation delays, the chronic profitability lags.

In early planning literature, the prescriptive offered for overcoming the resistance was to secure enthusiastic support of top management. However, cumulative experience showed that while top management enthusiasm was essential for starting strategic planning, this enthusiasm was no reflected in the behavior of the affected managers. For all of the enthusiasm of Mr. McNamara, and Presidents Kennedy and Johnson, the generals and admirals in the Defense Department stubbornly continued to resist PPBS, making sure that PPBS was effectively rolled back to the antecedent politically based budgeting system once Mr. McNamara left the secretary’s chair.

Thus, it became increasingly evident that top management support is a necessary but not sufficient condition of assuring the effectiveness of strategic planning within a firm. Fortunately, a basic insight into the other necessary conditions was provided by the seminal work of Alfred D. Chandler, Jr., an American business historian (Chandler 1962-F).

Professor Chandler focused his research on the first half of the twentieth century and on the manner in which firms responded to major discontinuities in their environments. As he studied in meticulous detail four very different, successful American firms, he began to perceive a very similar pattern in their responses. An extension of the study, in less detail, to another forty firms showed the same pattern. Later, other researchers replicated Chandler’s findings in studies of European firms.

Although during Chandler’s period of interest strategic planning did not yet exist, the typical response found in his studies sheds important light on the problems encountered by strategic planning.

1.
Firms resisted discontinuous environmental strategic change by refusing to recognize it until after the change made a significant impact on their performance.
2.
When the need for a new strategic response was finally recognized, the development of a new strategy was slow, through trial and error, taking as long as ten years.
3.
After the new strategy was installed, the expected profits were slow to materialize, in spite of strong competitive efforts in the marketplace.
4.
Management eventually arrived at the conclusion that the chronic unprofitability problem was due, not to a bad strategy, but to the mismatch between the historical organizational structure and the new strategy of the firm. This triggered a major reorganization.
5.
Some researchers who sought to duplicate Chandler’s results focused their attention on the strategy–structure sequence, perhaps because of the somewhat misleading title of Chandler’s book: Strategy and Structure. But the process of internal adaptation to the new strategy did not stop with the organizational structure .
6.
The new structure induced dysfunctions and tensions within the firm. Managers lacked skills and knowledge needed for performing in the new roles defined by the structure; the historical information system no longer served the needs of the new roles; the historical reward system did not encourage the new risk-taking that was now expected from managers. This historical management system was ineffective in solving the problems posed by the new strategy.
7.
These deficiencies were discovered and remedied, one at a time, over a period of years.
8.
The period of organizational adaptation to the new strategy could take as long as ten years, in addition to the preceding period of the development of the new strategy.

The total duration of strategic and organizational adaptation took from ten to twenty years. Once the dual adaptation was complete, the four major firms in Chandler’s sample remained leaders in their respective industries for a long time.

Four Stages of Evolution

Using Chandler’s findings, we can now explain the difficulties encountered by strategic planning and also show how they can be resolved through a broader concept of strategic management.

The historical evolution of the firm’s strategic response is illustrated in Fig. 4.2. The first line of the figure is the reactive Chandlerian sequence that we have just described. An environmental discontinuity ΔE was followed by adaptation of a strategy ΔS, which took some five to ten years, and then by adaptation of capability ΔC (usually with a change in structure), which took another five to ten years.

../images/435756_3_En_4_Chapter/435756_3_En_4_Fig2_HTML.gif — Fig. 4.2
Four stages of evolution

The companies studied by Chandler were among the most successful American firms: DuPont, General Motors, Sears, and Standard Oil of New Jersey. All of them emerged from the adaptation stronger than before and remained profitable for many years thereafter. Thus, it could be argued, together with some management researchers, that the reactive unguided Chandlerian process is the best way to adapt the firm to environmental discontinuities.

The counterargument is that Chandlerian adaptation , which was fast enough for the early days of the twentieth century, is too slow for the present. The frequency and speed of discontinuities both increased to a point where reactive, organic adaptation is now likely to leave the firm at least one adaptation cycle behind the external reality, somewhat like a dog trying to catch its tail.

‘Smart’ business firms perceived this difficulty in the 1960s and invented strategic planning which anticipates the environmental threats/opportunities and puts in place a responsive strategy in advance of their arrival. Thus, it can be said that strategic planning reversed the first Chandlerian gap (between environment and strategy) from reaction to anticipation.

However, strategic planning failed to address the problem of the second gap: between strategy and capability. It will be recalled that the original strategic planning approach was based on the assumption that new strategies should take advantage of the historical strengths and should avoid historical weaknesses of the firm. Thus, it was assumed that the historical capability could remain the same while strategy changed. This was not an unreasonable assumption in the early days of strategic planning, when the focus was on diversification by acquisition, because the new merger partners brought with them the capabilities needed for the new strategy. But even then, the problem of incompatibility between the management capabilities of the parent company and the subsidiary began to be recognized as a potential depressor of profitability of the firm (Ansoff 1988-B).

As the environment became progressively more turbulent and differentiated, reliance on historical strengths became further questionable for two reasons:

1.
Some firms were unable to find diversification opportunities that made use of the firm’s historical strengths.
2.
Even more importantly, changing turbulence in the firm’s historical business often turned its historical strengths into weaknesses.

Whenever the environment change was discontinuous (e.g., a replacement of the historical technology by a new and drastically different one, such as the evolution of the cell phone from its nascent beginnings in 1973 to the discontinuous development of the smartphone in 1992 when IBM introduced the Simon Personal Communicator).

In such cases, if strategic planning was used to determine a new strategy, as shown in the second time line of Fig. 4.2, the time gained through the planning of strategy was lost in the Chandlerian reactive adaptation of the capability, accompanied by resistance, delays, and chronic unprofitability of the new strategy. (It is of interest that the five-to-ten-year capability lag, found by Chandler early in the twentieth century, corresponds closely to the five-to-seven-year time delay that was found in the second half to the twentieth century, necessary to implant strategic planning into the firm.)

As previously discussed, until the 1970s, the successive management systems were invented within firms in response to pressing but poorly understood challenges. Consultants and academics had little to contribute to these inventions because the appropriate theoretical insights were lacking.

Since 1970, the post-strategic planning developments began to be influenced by the new understanding of strategic phenomena contributed by Chandler and other researchers, as well as by problem-solving technologies developed by leading management consulting companies.

This work led to the concept of strategic management, described in Chapter 1 and illustrated in line III of Fig. 4.2, which was a direct outgrowth of important theoretical contributions made by Herbert Simon and other researchers in organizational behavior. The first international conference on strategic management was held in 1973 in Nashville, Tennessee, with sponsorship from IBM and the General Electric Company. The first book on strategic management (Ansoff et al. 1976-F) was the outcome of this conference. A wide interest within academia in strategy formulation (particularly the work of Henry Mintzberg) and in the strategy–structure relationship began to offer new insights into the nature of strategic behavior and suggestions for improving its effectiveness.

Thus, the reversal of the second Chandlerian gap shown in line III of Fig. 4.2 can be said to come as much from new theoretical insights as from practical inventions within the firms.

Lines III and IV of the figure show two complementary forms of strategic management : strategic posture planning , which is a logical extension of strategic planning, and real-time issue management , developed in the late 1970s, which permits the firms to respond to surprising changes that are too fast to be captured by periodic strategic positioning exercises. In the rest of this chapter, we focus on strategic posture management . In Part IV, we shall deal with real-time strategic responses.

Theoretical Underpinnings of Strategic Posture Management

As line III of Fig. 4.2 shows, strategic posture management concerns itself simultaneously with both the strategy and the capability needs of the firm. Forecasts are made not only of future threats and opportunities , but also of the kind of capabilities that will be essential for success in the future environment.

As shown, the new capability is designed to support the future strategy. But, in turbulent environments, additional flexibility can be built into the new capability to provide an effective and timely response to surpriseful events.

The concepts of strategic management presented in this book are built upon a coherent and empirically supported theoretical foundation. This foundation was developed by Ansoff (1979d-F) who has expanded Chandler’s findings into general theoretical propositions about strategic behavior of organizations. The key dimensions of the theory are the following:

The theory covers so-called environmental serving organizations (ESOs), including firms and nonprofit institutions. No generalizations are made about behavior of the ESOs as a class. The theory is contingent in the sense that it relates internal characteristics of ESOs to their external behavior on the one hand and success or failure or different behaviors to the levels of external turbulence on the other.

Propositions are developed that explain differences in strategic behavior between profit-seeking firms and nonprofit institutions.

Strategic behavior is explained in terms of three interacting rationalities: economic, behavioral, and political.

The process of ESOs’ response to discontinuities is explained in terms of interaction between the vital moving force, the general management , and internal resistance force of the organization.
Managers are not idealized. A variety of behaviors by managers is described, ranging from change-generating to inert.
The timeliness of response to external challenges is explained in terms of the environment, strategy, capabilities (ESCs) perceptions of the environment (myopic or foresight).
The outcome (success or failure) of strategic response to discontinuous changes is explained by the ultimate match or mismatch of three variables: the level of environmental turbulence, the aggressiveness of the ESOs’ strategy, and the responsiveness to change in the ESOs’ internal capability.
Scales of turbulence , aggressiveness, and responsiveness are developed which permit the ESO to determine the degree of match or mismatch.

In this book, we translate the theoretical propositions into practical tools for managing the firm’s adaptation to discontinuities. These tools are based on the strategic success theorem that has been proven by empirical research .

I.
For optimum potential profitability, the aggressiveness of the firm’s strategy must match the turbulence of the environment. By aggressiveness we mean the degree of discontinuity that the firm introduces into succeeding generations of its products, technologies, marketing concepts.
II.
To assure optimal realization of the profitability potential, the responsiveness of the firm’s general management capability must match the aggressiveness of its strategy. By responsiveness we mean the degree of discontinuity in environmental changes that management is prepared to perceive, accept, and is capable of processing.
III.
To assure optimal effectiveness of the new capability, the components of the capability must be supportive of one another. By components we mean skills and mentality of managers, culture of the firm, its power structure, its information system, and structure.
IV.
The resistance to strategy–capability change is proportional to the difference between the historical and the new capability profiles .
V.
To assure an optimal transition to the new strategy capability, the process should be managed in a way that anticipates, minimizes, and controls resistance.
VI.
If a change in strategic aggressiveness of behavior is not accompanied by the appropriate capability change, there will be a tendency to reject and reverse the change. The strength of this tendency will be proportional to the difference between the historical culture and power structure and the culture/power structure needed to support the new strategy.
VII.
To assure stable behavior under the new strategy, the capability components should be aligned with one another and with the firm’s new strategy.

Summary

Strategic planning, a logical, analytic process for choosing the firm’s future position via-a-vis the environment, was invented by firms that sought to avert saturation of growth and technological obsolescence.

Unlike its predecessor, long-range planning, strategic planning is a much more complex and organization-disturbing process. On frequent early occasions, the introduction of strategic planning into the firm encountered resistance and failed to produce the desired improvements in the firm’s performance.

This raised the question of whether strategic planning was useful, or whether organic adaptation , based on managerial intuition and experience, was not a better method for responding to strategic challenges.

A number of research studies showed that strategic planning, when properly installed and accepted by management, did produce superior improvements in performance.

Other research studies showed that resistance occurred when the firm made a discontinuous change in its strategy, and that the resistance was due to a mismatch between the new strategy and the historical management capability.

A new and research-proven approach called strategic management is now gaining acceptance in firms. It consists of two complementary management systems: strategic posture management and real-time issue management . Both of these will be discussed in detail in the remainder of the book.

Exercises

1.
Having read this chapter, the director of planning in your firm reacts in the following manner: ‘As I see it, this new label ‘strategic management’ simply means adding an implementation box to the strategic planning flowchart. We’ve always been implementing anyway, so I don’t see what all this fuss is about.’ He asks you to prepare a memorandum of two pages or less that will explain to him the differences between strategic planning and strategic management, and tell him why and when the latter should be used instead of the former. Prepare such a memorandum.
2.
When change is slow and Chandlerian reactive trial and error adaptation will assure timely strategic adaptation, are there any reasons for replacing the trial and error process by a systematically planned process? If there are, prepare a list of the reasons.

4. From Strategic Planning to Strategic Management