Fundamentals of Business PlanningProfessor Steven E. Phelan, PhD

AGENDA

Review Simulation Results Fundamentals of Planning

• Goals:• To understand the relationship between strategy,

plan, and execution• To understand the components of a good plan• To assess the strategic readiness of select plans• To make the numbers believable

Tomorrow: Basics of Project management • Please install OpenProj (http://openproj.org/openproj)

Tools

Readings• Mintzberg “Fall and Rise of Strategic

Planning”• Kaplan/Norton “The Office of Strategy

Management”• Kaplan “Resource Capacity Planning”• McGrath/McMillan “Discovery-Driven

Planning”

MCI Case

Mintzberg on Strategic Planning

Observations:• “Strategic planning isn’t strategic thinking”

• “One is analysis the other is synthesis”• “Real strategic changes requires inventing new

categories, not rearranging old one”• “Planning is a calculating style of management,

not a committing style”• “Planning has often been used to exercise blatant

control over business managers”

Mintzberg…

The Fallacies of Strategic Planning• Fallacy of Prediction

• Can planners forecast with any accuracy?

• Fallacy of Detachment• The idea that strategy must be detached from operations• A strategy can be deliberate or emergent (and probably has

elements of both)

• Fallacy of Formalization• Formal procedures will never be able to create novel

strategies• Do we think then act or act then think? Effectuation logic…• Should be called strategic programming

Mintzberg…

Planning as Strategic Programming• Codification

• Clarifying strategies in operationally relevant terms

• Elaboration• Breaking down the codified strategies into projects and

action plans (i.e. the non-routine aspects of organization)

• Conversion• Restating objectives, reworking budgets, reconsidering

policies, and standard operating procedures (i.e. the routine aspects of organization)

• Benefits: • Focus, coordination and communication (internal/external)

Mintzberg…

Other roles for planners• As strategy finders• As analysts

• Carrying out analysis of specific issues– The quintessential MBA?

• As catalysts• Getting others to question conventional wisdom

and think about the future in creative ways

THE OFFICE OF STRATEGY MANAGEMENT

Kaplan/Norton

The Office of Strategy Management

Statistics• 67% of HR/IT department strategies don’t reflect

corporate strategy• 90% of frontline workers not compensated for

success of strategic priorities• 95% of workers don’t know or understand the

strategy• 60% of organizations don’t link budgets to

strategies• Are you surprised?

• How big of an issue is this for your organization?

OSM…

Sher’s view• “…while many people believe that chief executives

wield direct and easy influence, the reality is that any CEO has a difficult time influencing his or her organization”

• “I want to exert my influence indirectly…I don’t command any parts of the organization”

• “Information, particularly bad news, is filtered before it gets to me”

• “we were spending way too much time debating the quality of information”

• “much of management is the search for the truth”

OSM…

What good OSMs do• The OSM is a facilitating organization, not a

dictating one (uhuh!)• Roles

• Create and manage balanced scorecard• Align the organization (cascade BSCs – rare)• Facilitate monthly strategy reviews• Develop and communicate strategy• Manage strategic projects/initiatives• Integrate strategic priorities with other depts

– Budgeting, HR alignment, knowledge mgt

MCI COMMUNICATIONSPlanning for the 1990s

MCI…timeline

Evolution• 1960s to 1980 – battles with AT&T and

regulators• 1984 – decentralization to compete with

Baby Bells• 1986 – crisis• How did the strategy process evolve over

this time?

MCI…

1990s – globalization, new technologies, sophisticated customers• How should MCI alter its strategy processes

to cope with these growth opportunities?• What do you think of the goals in Exhibit 5?

RESOURCE CAPACITY PLANNING

Robert S. Kaplan

Resource Capacity Planning

MBA assessment issue• No concrete data-driven recommendations

Linking strategy to operations• Typically 90% of corporate spending on routine

operations (OpEx) vs StratEx• Four steps:

• Derive sales forecasts for strategic plan• Translate into operating plan• Use time-based ABC to forecast resources• Derive budgets for operational and capital spending

(see DA example)

DISCOVERY DRIVEN PLANNINGMcGrath/McMillan

Discovery-driven planning

New ventures…• have a high ratio of assumptions to

knowledge• often deviate from plans because

assumptions are wrong

Traditional planning bakes in assumptions• Companies don’t have hard data but proceed

as if assumptions were facts• When they do get data they often don’t check

assumptions

Discovery-driven planning

Reverse income statement• Start with required profits

• We want to generate $100K in additional profit• Necessary revenues if 10% sales margin = $1m• Allowable costs with 10% sales margin = $900K

• Calculate per unit figures• Required unit sales at $100 per unit = 10,000• % of market = 10% of US market per year• Allowable costs per unit = $90

Next steps

Estimate expenses• Cost of sales

• E.g. Unit sales / size of order = no. of orders• Sales calls per order x handling time = no. of staff

• Cost of manufacturing• Cost of shipping/warehousing• Capital expenditure/depreciation

Allows you to identify and track assumptions Plan to test assumptions at milestones with a

“keeper of the assumptions”• http://faculty.unlv.edu/phelan/MGT709/ShadBusinessPlanningModel2005.xls

Strategic Readiness Audit

You need to analyze your chosen plan for its strategic readiness• By that I mean the ability to execute on the

plan

What makes a plan more executable? • What ideas have influenced you the most in

the readings?• What things would you look for in a plan?

• What are some red flags?