Tailored, Not Benchmarked: A Fresh Look at Corporate Planning

In today’s competitive environment, every company has an action plan. Yet for most managers, the processes used to create those plans don’t work. In a survey of management attitudes about such processes, three-quarters of the respondents said their company’s planning was unsatisfactory. “Strategic plans are documents that you prepare for the corporate center and later forget” is a common complaint. And yet it isn’t as if companies don’t try. Many have been refining their planning processes for 10 to 20 years, frequently benchmarking practices from corporations known to be outstanding planners. Certainly, something must be wrong with the way managers think about planning if so many corporate planning processes still generate such discontent. The problem may be the very tendency to benchmark. Taking ideas from other companies can be valuable, but it can also mislead and distract. It can prevent managers from focusing on what is unique to their situation. The result? Managers design a planning process that is a model of professional planning techniques but that fails to add value. Consider the case of one South African conglomerate I studied in detail. Its enthusiasm for benchmarking the planning processes of other companies was widely admired. During the 1980s, the chief executive sent his planning, finance, and human resources staff to courses at the best business schools. The company benchmarked planning processes against those of General Electric and other world-class companies and developed contacts with top strategy consultants. As a result, it was one of the earliest experimenters with corporate planning techniques such as portfolio planning, core competence analysis, corporate mission statements, value-based management, and parenting concepts. All those planning efforts were not just flavor-of-the-month initiatives. The company had the same chief executive throughout who was passionately committed to planning. The conglomerate did well in the boom years of the late 1980s. But in the 1990s, serious problems arose in three of its four large businesses. The chief executive and most of the senior staff were asked to leave; a more decentralized, financially focused regime was brought on board; and the supposedly leading-edge planning processes were abandoned. Despite their efforts to benchmark the best planning processes, the company’s managers had failed to deliver value. In fact, their efforts had distracted them from doing their job. Instead of chasing best-in-class models, the chief executive should have been asking, What value am I trying to add? and Is my corporate planning process specifically designed to help me achieve that goal? What Is a Corporate Planning Process? In any multibusiness company, corporate planning involves a series of interactions between the business units and the corporate center. Usually an annual process, planning starts when the corporate center distributes a timetable and guidelines to the business units. The units then draw up strategic plans for some future period, often five years or more, and then meet with the corporate center to discuss them. Finally, the corporate center and the business units work together to convert their planning efforts into operating decisions. A good planning process is unique to its company and even to the businesses within the company. It is not a generic process but one in which both analytic techniques and organizational processes are carefully tailored to the needs of the businesses as well as to the skills, insights, and experiences of senior corporate managers. A mature electrical-products business, for example, has different planning needs than a fast-growing entertainment business or a highly cyclical chemicals business. Different chief executives also may have different insights into ways to add value. Unless the planning process reflects those differences, it is unlikely to create value. As Charlie Peters, senior vice president of development and technology at Emerson Electric Company, an electronic products company praised widely for its effective planning processes, says, “Many companies come to Emerson wanting to find out what we are doing and why it works. But often, the trip is wasted. Our process works for us because of the type of impact we are trying to have on the businesses and because of our CEO, Chuck Knight—how he likes to operate and his relationship and status with the divisions. Other companies can’t duplicate that. When they try, they run the risk of turning their processes into ones that destroy value rather than create it.” (See the sidebar “How Planning Can Destroy Value.”) How Planning Can Destroy Value Is no planning better than some planning? In my experience, the answer can be yes. Bad planning actively destroys value. It wastes people’s time and money. It sends the wrong signals to managers. It can even lead managers to follow bad advice. Wasting Time and Money. For the corporate center to add value, it has to be able to coax unit managers to do things differently than they would on their own. But at many companies, business unit plans get through the process largely unscathed. How many times have you left a management meeting saying to yourself, “Well, we did a good job today—the suggestions we got from the corporate center will help us generate an extra half a million dollars in value”? Not often, I suspect. The typical corporate center simply rubber stamps the units’ proposals. A lot of time and effort is spent to no purpose. And the costs are not trivial. In one company I studied, I found that managers had spent about 300 days on planning in each business unit. At an estimated cost of $ 1,000 per manager per day, the planning process cost each unit about $ 300,000. That’s a lot to pay for a rubber stamp. Sending the Wrong Signals. In many companies, much of the bottom-up planning work is completed before there is any dialogue between business units and the corporate center. As a result, business unit managers become expert “Kremlinologists,” trying to second-guess what the corporate center expects to see. The problem is accentuated by the fact that managers are unduly anxious to get their plans right the first time around because the cost of failure is so high. Not only must they redo their plans; they also lose face with both their employees and the corporate leadership. A rumor that the company is going to be short of cash, for instance, can prompt several—often contradictory—responses. While some unit managers cut back on capital requests for the year, others increase their requests because they want to have something to take out when the corporate center makes an across-the-board cut. Or the chief executive’s speech at a management conference about the importance of doing business in Asia can cause units to boost the resources they allocate to Asian sales initiatives. If such signals are openly acknowledged as part of the planning process, then these reactions are fine. But all too often, corporate signals are unintended or misinterpreted. As a result, unit managers may submit plans that they deem to be “politically correct” but that are competitively unsound. Giving Bad Advice. In the planning process, just as with any other interaction between the corporate center and the business units, corporate executives must carefully manage their involvement. This is because they have one huge disadvantage: they have less time to master the details of any individual business. It’s fair to say that corporate executives can spend only 10 % or less of their time on advising business unit teams that are spending 100 % of their time considering the same issues. The potential for misguided advice is high, particularly in diversified companies. A corporate manager searching for growth, for example, may encourage a business unit to take its eye off cost management, and as a result the unit may lose ground to competitors. In another situation, an executive pushing for profit may cause a unit to reduce its marketing expenditures or to increase its prices, in turn creating opportunities for weaker competitors. Often the problem arises when a formula that has worked in one of the businesses is applied to another whose circumstances are subtly different. This much is clear: when it comes to planning, corporate managers must limit themselves to giving advice in areas where they know they can add value. No Single Right Way Designing a planning process is more an art than a science. There are many ways to proceed. Yet although good planning processes are individualized, they share common features. All good planning processes are clear about the value they are trying to create—they have well-defined objectives built around the insights and skills of senior corporate managers. They also have mechanisms for winning buy-in from the businesses. Let’s look at how three companies demonstrate these features in very different ways. (See the chart “Three Successful Planning Processes.”) Three Successful Planning Processes Stretching at Granada. Granada is a British conglomerate that has businesses in television programming and broadcasting, hotels, catering, and appliance rentals. Its planning processes are greatly influenced by CEO Charles Allen. As he explains, “At a catering business I previously ran, everyone was happy with a 2 % to 4 % return on sales. They believed you couldn’t get a better return in contract catering.” Under Allen’s leadership, margins increased in his former business from 3 % to 11 % . “Now,” he says, “one of my principles is not to benchmark against the industry, because you lock yourself into low ambitions. I want businesses to aim to double their profit in three years. Double it, triple it, make some quantum change. I want businesses to make a margin of 10 % or better.” Although those targets seem to come out of thin air, Allen in fact bases his numbers on personal experience. To increase the breadth of those experiences, he spends 20 days a year traveling with salespeople, working with restaurant managers, and watching television programs being made. Planning at Granada is about raising ambitions and helping the businesses get more creative in their search for ways to increase profit. So how does Allen use his insights about his businesses to design a planning process? First there is the issue of what performance measure to use. Since his objective is to raise ambitions, it is important to use a metric that can be easily understood. A complex metric, such as economic value added, has the potential to leave managers more confused than committed. So Allen uses the simplest metric of all: profit. Having selected his objective and performance measure, Allen could have chosen to limit interaction with the businesses to a single target-setting meeting. But he knew that it would take the business units several months to come up with the breakthrough ideas and emotional commitment needed to meet the profit goals. So he instituted a continual four-month process that connected planning and budgeting. Thus Granada’s planning process is carefully constructed to get the business unit managers on board. Every year in June, Finance Director Henry Staunton kicks off the process by discussing the financial projections for each business with the CEO. Allen normally stretches the numbers—and by quite a bit. Then Staunton issues a timetable for the medium-term planning reviews that are held in July, and he “leaks” Allen’s financial objectives to the business units. The stated purpose of these reviews is to discuss action plans and long-term issues, with the numbers taking a backseat. But everyone concerned is aware that the underlying purpose is to examine each business to see if it can achieve Allen’s ambitious target. The business units tend to perceive Allen’s targets as extremely demanding—even unreasonable. That is why he works carefully to maintain morale. The meetings are not inquisitions but creative debates in which humor is used to maintain a fun atmosphere. Allen keeps the analysis simple. “I am a PVC fetishist,” he explains. “I focus on price, volume, and cost.” To encourage informal discussions, Allen limits attendance to the key unit managers. He usually ends the meetings with a gracious and frequently witty thank-you speech to the teams. He uses this speech to emphasize the importance of the target. “The only problem I see is that you are likely to be a few million pounds short next year,” he says, then adds, “Why don’t we revisit this at budget time?” At the budget meeting four weeks later, Allen focuses on what can go wrong. He challenges managers to plan for contingencies. “To make sure you get 100 % , you have to aim for 105 % ,” he instructs the business units. After the budget meeting, the corporate finance function works with the business units to bridge any remaining gaps between the business units’ capabilities and Allen’s expectations. By the end of the process, managers will have committed themselves to objectives they might have considered unrealistic only four months earlier. “The buy-in we get at Granada is remarkable,” Staunton says. “Managers leave the review and budget meeting thinking, how on earth will we meet these targets? But when the budget is finalized in October, managers really believe that they can do it.” Cost Paring at Dow. At Dow Chemical Company, one of the world’s leaders in specialty and bulk plastics and chemicals, management has developed a process called bottom-of-the-cycle planning. What is special to Dow is the insight management has about how to control costs in a highly cyclical industry and the way Dow uses its corporate manufacturing function. Dow’s rationale for its bottom-of-the-cycle planning goes back to the recession of the early 1990s. At that time, the company started to incur severe financial losses, but management’s reaction was swift. By increasing capacity utilization, cutting layers of management, and eliminating unnecessary staff, Dow cut processing costs by more than 30 % . The long-term challenge was to stop the company from putting on fat again during the next boom. The chief problem is the nature of the cyclical, asset-intensive businesses that Dow is in. Management teams in such businesses are tempted to spend most of their time on big-ticket decisions that have the most obvious impact on performance. Those include decisions about building new capacity, reacting to price changes, and entering new markets. Not surprisingly, incremental improvements in processing costs—such as a 2 % saving in maintenance costs and a 5 % saving in plant overhead—can take a backseat. Yet the long-term competitive war is about these very costs, and management teams may realize that they have become uneconomic the next time the cycle hits the bottom. In the chemicals industry, prices are notoriously volatile, so annual performance is not an effective way of judging whether the businesses are doing a good job of controlling costs. Dow focuses instead on the bottom of the next cycle. For each business, Dow sets a return-on-assets target to be achieved at the next bottom and uses that figure to drive targets for annual cost reductions. The advantage of this process is that it does not require managers to predict when the next bottom will occur; instead, it requires them only to forecast what the price will be at that new low. And Dow’s managers believe they can forecast what that price will be. To reflect Dow’s capital-intensive and cyclical businesses, management needs a more sophisticated measure of profitability than Granada does. So managers at Dow use economic profit, a measure that incorporates the cost of the capital in each business. This measure helps discourage managers from bringing processing costs down by making excessive capital investments. Getting unit managers to buy in to financial targets does not require much encouragement or confrontation. Dow’s engineers find it easy to agree on the targets. But this intellectual commitment does not translate easily into continual, tough cost management, especially when larger and more immediate issues are at stake. This is where Dow’s corporate manufacturing function becomes an essential part of the process. Led by vice president of manufacturing Arnold Allemang, a straight-talking Texan with personal knowledge about how to create lean management structures, the function ensures that managers’ operating plants and sites are focusing on cost control. Although the plant managers do not report to him, Allemang has a lot of influence over their careers and can therefore capture their attention. At each of Dow’s large integrated sites, a site manager reports to Allemang. The manager has no line responsibility but is expected to monitor costs as if he did. The result is that each business unit has annual improvement plans that are more demanding than those that might have been set by the units themselves. The monitoring process is also tighter than it would have been if the business units were left to themselves. Inching Along at Emerson. Emerson Electric is famous for its robust planning process. It is unique because of the way CEO Chuck Knight and his top team help the business units find incremental profit improvements. Knight has been CEO of Emerson for more than 20 years. His long tenure gives him a unique perspective on Emerson’s business units, many of which have been part of the portfolio for the entire period. Knight’s personal insights and knowledge make it possible for him to add value to every planning discussion. Emerson’s planning process is based on a direct interaction between the CEO and each of the company’s 40 business units. Knight’s insight into Emerson’s businesses is that they can continually improve performance by tightly managing product profitability and cost. Therefore, the planning process aims at finding ways to help the businesses do that. Progress at Emerson is measured in small, regular intervals rather than in giant, intermittent strides. As Knight explains, Emerson’s processes work best in industries where a steady rhythm wins over time. Because the emphasis is on finding incremental improvements in sales and margins, the planning process uses intensive data. To prepare for planning meetings, the units produce 300- to 400-page information packets on sales growth, market segmentation, product profitability, and competitive benchmarks. These detailed packets serve two purposes. They ensure that the unit managers thoroughly examine their businesses, and they provide the base data from which Knight and his corporate team can identify trends. The core event in the process is the 12- to 14-hour meeting between Knight and each business unit. Referred to as a “contact sport,” these grueling meetings are designed to help the units choose among various opportunities and help teams commit to the plan. The atmosphere can be confrontational. Knight plays the devil’s advocate and argues points with the unit head. Then a dinner after the meeting helps smooth ruffled feathers and consolidate what has been decided. The following day, Knight writes to the unit to make clear which positions he still feels strongly about. Because the meetings are so intense, Knight limits the schedule to two planning conferences per week, and the planning process continues for eight months. At Emerson, Knight’s ability to argue with his subordinates without undermining their authority is key to getting them to change their plans. Knight’s ability to engage in full-blown arguments with his subordinates without undermining their authority is critical to getting them to support changes to their plans. This relationship creates what Knight refers to as a “blameless company.” Because everyone has agreed to the plan, there is no finger-pointing if the plan turns out to have been ill conceived. In fact, managers value the challenges and guidance they get from Knight. “He knows an incredible amount about our businesses and has so much exposure to similar kinds of situations,” says one manager of a business unit. “When Chuck pushes on an issue, he is rarely barking up the wrong tree.” Fit for Purpose Planning processes at Granada, Dow, and Emerson obviously have some features in common: the companies all prepare plans and have planning review meetings. But there are many important differences between them. In each case, the purpose of the planning is specific; hence the processes are uniquely designed. If these companies benchmarked against one another, they would likely make damaging changes. Each company is trying to create a different kind of value in a different kind of industry with different kinds of people. Take Granada and Dow. Both companies set tough targets to stretch their businesses. But the way each company gets its managers to commit to its targets differs considerably, reflecting the specific nature of each business. Dow is a plastics and chemicals company, and engineers dominate its culture. It would be almost impossible to get these managers to buy in to a target that cannot be defended logically. That is one reason why Dow’s targets are based on careful forecasting, which the unit managers conduct themselves. At Granada, on the other hand, the dominant culture reflects the much “softer” cultures of the hotel and entertainment businesses. Granada’s managers do not need to have all the numbers justified. CEO Charles Allen simply needs to sell the targets to his managers. Differences in their business portfolios also help explain why Granada and Dow make different use of their corporate centers. At Granada, the corporate center is small—a total of 45 people—and with the exception of the finance department, it takes a backseat to the units and to Allen himself. The chief explanation is that Granada’s businesses are highly diverse. Aside from finance, the corporate center does not provide knowledge and skills that add significantly to what the unit managers already know. But at Dow, the corporate center is critical because its manufacturing function is relevant to almost every operation in the company. Varying degrees of ambition also help explain some differences in the planning process. In Emerson’s businesses, for example, the desired goal is to get a small edge in cost or quality. As Charlie Peters explains, “A typical acquisition is a business making below 10 % returns that we can squeeze up to 15 % and beyond in a five- or ten-year period.” And when a company has to move in inches, details matter. That’s why Emerson’s comprehensive data packets usually cover a ten-year period and why Emerson often uses outside consultants to examine particular issues. The contrast with Granada—where dramatic changes are made on the basis of back-of-the-envelope estimates of prices, volume, and sales—is stark. The planning process is also influenced by the relationship between CEOs and their businesses. At both Emerson and Granada, the toughness of the CEOs is fundamental to the success of the buy-in process. But their interactions with business units are tailored to the needs of the company. Emerson, for example, must compete in an industry where new ideas are rare. Knight’s ability to challenge managers without disempowering them is a crucial part of getting at those ideas. That’s why Emerson’s meetings are rigorous events in which people are confronted a lot more than they are encouraged. Like Chuck Knight, Granada’s Charles Allen is a demanding CEO. But his personality suits the particular circumstances of his businesses. Granada’s industries have historically had less professional management and lower ambitions. So Allen is demanding in the targets he sets for unit managers. At the same time, because there is plenty of opportunity, Allen rallies his managers more than he bullies them, using charm as well as logic to persuade them to rise to the occasion. At Granada, Charles Allen rallies his managers more than he bullies them, using charm as well as logic to persuade them to rise to the occasion. Clearly, Granada, Dow, and Emerson might all learn something from one another—perhaps that the best corporate planning is not formulaic but idiosyncratic. Is Your Process Working? Given that planning processes must be carefully tailored, how can a company decide whether its existing processes are effective? That is not an easy question to answer. To evaluate a process, managers first need to define precisely what they are trying to achieve through planning. Only then can they assess whether the process is delivering against those ambitions. Two fundamental questions should drive the planning review. Does your planning have a clearly defined purpose? The planning processes at Granada, Dow, and Emerson all have clear purposes and create substantial value. Granada’s planning process aims for leaps in performance. Dow’s process tries to get unit managers to focus more time on processing and operating costs. Emerson pushes business units to come up with a steady stream of ideas for improving its margins and growth. These purposes emerge from senior executives’ insights about what is achievable. Granada’s Allen had experienced dramatic profit growth in his previous position. He knew that “unreasonable” targets were feasible. Knight at Emerson discovered early in his career how rigorous analysis and planning could uncover new ideas in his industry. At Dow, understanding why costs had gotten too high in 1992 led company leaders to examine the business cycle. By contrast, in companies where the sources of value are abstract, such as “improved resource allocation,” “objective second opinions,” or “better-quality strategic thinking,” value is seldom created through planning. If corporate managers have no clear insights about where the value is, they won’t know how to unlock that value through planning. Without purpose built on insight, the planning process becomes little more than an administrative exercise with more attention given to forms and formats than to substantive issues. How have managers’ decisions been affected by the planning process? Many companies ask their business unit managers whether they are satisfied with the planning process. But few try to identify how their managers’ decisions may have changed as a result of planning. It is difficult for managers, especially for those who have used the same process for many years, to judge what they would have done differently if the processes had not existed. In asking business unit managers about the impact of planning processes, therefore, special attention should be given to managers who are new to the process as well as to those who have recently come from other companies. Newcomers, such as the group managing director of Granada’s restaurant division, Don Davenport, can compare their former company’s processes with Granada’s. As he says, “In my last job, the business unit head could feel proud of going for a 5 % or 10 % improvement. At Granada, that position is untenable. People are forced to be creative. If you are going to double margins, you have to go back and rethink some of your basic assumptions.” If there are no new managers, the company needs to look closely at how the planning process is affecting the businesses. At Emerson, the corporate planning team made an effort to find out which group of businesses responded best to the planning effort; that information helped the company identify the type of business that would perform best in its portfolio. At Dow, where the length of the cycle makes it difficult to use short-term performance measures, knowing how the bottom-of-the-cycle process affects the units is critical. Interviewing managers was the best way to find out. One manufacturing executive explained, “Each time we get a new set of targets, I am convinced that they’ve gone too far. But somehow we have managed to achieve them and the business is better for it. Frankly, I have been resisting some of the cost cuts, but I have to say that I have been wrong.” Whatever the method, it is vital to know what impact the planning process is having on the businesses’ decisions. Planning Is Hard to Do The South African conglomerate whose planning efforts were described at the beginning of this article would have benefited greatly from asking itself those two questions about planning. The goal of having a world-class planning process was laudable—and common to many companies—but it was also insufficient. It failed to show how the planning process would add value. The company’s chief executive was interested in growth and globalization. But he had no idea about how to do that, and the planning processes were not tailored to that end. Taking the time to consider the impact of the planning process on managers would have helped expose some of the company’s vulnerabilities. The planning process was causing the unit managers to reevaluate their product portfolios and market positions and to focus on raising profitability. The effect of the process was to reduce growth, not accelerate it. The techniques used, such as economic value added, exposed weaknesses rather than opportunities. That left business managers with conflicting messages, making it difficult for them to buy in to any of them. Because the process was not tailored to the growth opportunities that the chief executive thought he saw, it had very little chance of having a positive influence. The Danger of Generalized Planning If the principles of good planning are so straightforward, why don’t more companies follow them? One answer may be that many chief executives do not have a clear vision on which to build their processes. Such executives and their companies may be better off with no planning process at all rather than a planning bureaucracy. Another answer may be that many executives believe that planning, particularly strategic planning, is one of the professional disciplines of a good general manager. Because general managers are, by definition, generalists, their skills are applicable to any business—or so the argument goes. This misconception may explain why so many companies—and so many general managers—are eager to benchmark their planning processes and why consulting firms charge such large fees for advice on planning. Today many planning processes are designed by people whose professional objective is to develop a generic technique that can be held up as an example of best practice. Yet in my experience, the most successful general managers are surprisingly specialized. They have succeeded by applying particular techniques. Indeed, when companies in, for example, oil, chemicals, or engineering try to transfer their planning processes, techniques, and ideas to other industries, the results are often not only less than useful but even positively detrimental. One size does not fit all. Of course, the ultimate test of any good management process is results. What stands out at Dow, Emerson, and Granada is that units meet their planned targets. Planning is not wishful thinking or hockey-stick forecasting. At Emerson, quarterly earnings have increased continuously throughout Knight’s more than 20-year tenure as CEO. At Granada, the leaps in performance, such as the increase in return on sales for the contract catering business, are common. And at Dow, performance in the current downturn has been much more robust than in the past. In contrast, the South African conglomerate, despite all its vanguard planning, seriously underperformed. While raising interesting issues, its emphasis on planning didn’t help move the businesses forward. Performance deteriorated, and weaknesses in the planning processes were in the end painfully exposed. Indeed, corporate planning processes all too frequently have a negative rather than a positive impact. But companies can avoid these negative effects by focusing on the bird in the hand rather than the birds in the bush. They would be smart to spend time on the individual needs of their businesses and the skills of their corporate managers and less time on benchmarking.

Tailored, Not Benchmarked: A Fresh Look at Corporate Planning

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