Here is a brief excerpt from a classic article written by Louis V. Gerstner, Jr. for the McKinsey Quarterly, published by McKinsey & Company. In it, he proposes four guidelines to help strategic planners make the crucial leap from plans to decisions. To read the complete article, check out other resources, learn more about the firm, obtain subscription information, and register to receive email alerts, please click here.

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One of the most intriguing management phenomena of the late 6os and the early 70s has been the rapid spread of the strategic-planning concept. Except for the so-called computer revolution, few management techniques have swept through corporate and government enterprises more rapidly or completely. Writer after writer has hailed this new discipline as the fountainhead of all corporate progress. In 1962, one published report extolled strategic planning as “a systematic means by which a company can become what it wants to be” (Stanford Research Institute). Five years later, it was called “a means to help management gain increasing control over the destiny of a corporation” (R. H. Schaffer). By 1971, praise of strategic planning verged on the poetic; it had become “the manifestation of a company’s determination to be the master of its own fate . . . to penetrate the darkness of uncertainty and provide the illumination of probability” (S. R. Goodman).

It is not surprising, therefore, that one company after another raced to embrace this new source of managerial salvation. As a result, most major companies today can boast a corporate-planning officer, often with full attendant staff. It seemed appropriate to ask some chief executives whether strategic planning has lived up to its advance billings. Three anonymous reactions were as follows:

o “Strategic planning is basically just a plaything of staff . . .”

o “It’s like a Chinese dinner: I feel full when I get it, but after a little while
I wonder whether I’ve eaten at all!”

o “Strategic planning? A staggering waste of time and money.”

Some CEOs, of course, would disagree with these comments, and certainly few if any would agree publicly. But the fact remains that in the large majority of companies corporate planning tends to be an academic, ill-defined activity with little or no bottom-line impact. Observations of many companies wrestling with the strategic-planning concept strongly suggest that this lack of real payoff is almost always the result of one fundamental weakness, namely, the failure to bring strategic planning down to current decisions. Before describing this problem and some possible ways to overcome it, I shall briefly define what I mean by the term strategic planning.

Many strategic-planning programs begin with the extension of the annual operating budget into a five-year projection. This can be a valuable exercise, particularly for institutions that have operated on a yearly or even monthly planning cycle. Most companies, however, soon discover that five-year operational and financial forecasts, in and of themselves, are ineffective as strategic-planning tools for a fundamental reason: they are predicated on the implicit assumption of no significant change in environmental, economic, and competitive conditions.

In other words, they are purely extrapolative projections and, by practically everyone’s standards, fall far short of real strategic planning. They offer no overview, no analyses of external trends, and no perceptive insights into company strengths and weaknesses—elements that both theorists and practitioners would agree are central to real corporate planning.

Forecast planning of the sort I have described can usually be identified by leafing through a company’s planning documents. Pages and pages of accounting information, detailing five years of financial forecasts with little or no explanatory material, are one earmark. Graphs of projected future performance also tend to follow a predictable pattern; i.e., if recent performance has been good, the forecast calls for more and more of the same—on into eternity. On the other hand, if performance has been poor, the forecast will allow for a year or two to effect the inevitable turnaround, and then—off to eternity. (The manager doing the forecasting hopes, of course, that he will get promoted before the two-year period is up.)

Working with forecasts like this, executives tend to dismiss the second, third, fourth, and fifth years as irrelevant and continue to concentrate solely on the current year, that is, the annual budget. Most companies seem to have passed beyond forecast planning, and its weaknesses are fairly manifest—namely, a preoccupation with accounting data as the principal output of a planning program and the assumption that the future, at least in relation to general economic indexes, will closely resemble the past.

Recognizing these weaknesses, many institutions have introduced a more rigorous planning program aimed at defining or redefining the basic objectives, economics, competitive profile, and outlook of the company. These formal strategic-planning processes show a distinct family resemblance. They usually begin with an assessment of environmental trends and an analysis of the company’s strengths and weaknesses. A statement of corporate goals is then developed. From these three elements, a juxtaposition between the organization’s present position and its desired position is derived; comparison of the two positions defines the well-known strategic gap. Finally, plans are developed to close the gap and bring the two positions together.

Of course, the steps required to arrive at the statements of present and desired position are quite detailed. Such an effort is inevitably painful and time consuming, but it may be necessary in the first planning cycle. Barring major changes inside or outside the company, subsequent plans can be considerably shorter. Since the specific elements of a good strategic plan have been described in many texts, I shall not dwell on them here. Instead, I shall move on to the central question of why strategic planning so often fails to pay off and what can be done about it.

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Following the widespread introduction of data processing in the 1950s, many companies sooner or later were obliged to recognize that the promise of this great management tool was stubbornly refusing to materialize. Real, tangible return on investment was low or nonexistent. Today, a great many companies have largely overcome this problem. Not without a struggle, they have substantially brought their computer systems under control, and most of these managements are a good deal wiser for the experience. The most successful among these companies would, I believe, include at least the following among the lessons they have learned:

o The effort must be integrated directly into the important decision-making activities of the company. Each potential new project must pass the “so what?” test.

o The chief executive holds the key to success; commitment and leadership is absolutely necessary.

o The payoff when it works is substantial and it can be measured in dollars and cents. All of these lessons apply to strategic planning. When it is focused on current decisions, under the leadership of a committed CEO, it works. And when it works, we may be sure that the payoff will show on the bottom line.

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Here’s a direct link to the complete article.

Lou Gerstner, former CEO of IBM, is an alumnus of McKinsey’s New York office. This is an adapted version of an article reprinted from the December 1972 issue of Business Horizons by permission of the copyright holder, the Kelley School of Business, Indiana University.