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Tuesday, September 27, 2005

A Fresh Look on Corporate Planning

“One size does not fit all.” This describes the limitations of external benchmarking. The article, Tailored, Not Benchmarked: A Fresh Look at Corporate Planning, describes the potential results of benchmarking and three companies’ corporate planning strategies. Generalized planning and standard benchmarking commonly employed by many corporations typically fail to add the desired value to a firm. Andrew Campbell noted that benchmarking would most likely negatively impact a company by mismatching it’s own internal environment to another company’s incompatible planning methods. Consequently, companies should look internally to understand what value they wish to add and whether their current planning processes are designed to achieve their goals.

Campbell described the corporate planning process as a series of interactions between the business units and the corporate center where planning originates at the corporate center and comes to fruition by corporate working closely with the business units. A good planning process would carefully tailor processes to the needs of the business and skills, insights and experiences of corporate management. In essence, only unique planning processes can create success for the company.

One South African conglomerate, mentioned in the article, experienced poor results due to benchmarking. The company subsequently replaced management, decentralized operations and abandoned benchmarking processes altogether. They had attempted to model themselves after the “best-in-class” models, only to find that the model did not correspond to the company’s goals.

Campbell mentioned that Granada, Dow Chemicals and Emerson Electric each use distinctly different methods of corporate planning and find success for their individualized goals. They focus on internal strengths and exploit them for corporate benefits rather than gathering information from the external environment through benchmarking.

Granada, a hotel and entertainment conglomerate, strives to increase profits. The CEO, Charles Allen, constantly pushes his employees to achieve better than average returns. Consequently, performance is measured by profits. Allen encourages people through a laid-back sell approach and setting “unreasonable” goals.

Dow Chemicals, a plastics and chemicals company, strives to reduce costs within the operational units. The main performance measure is economic profit, which incorporates the cost of capital. The main planning technique is bottom-of-the-cycle planning, which exploits the cyclical nature of the chemicals industry. Managers must understand that the decisions for building new capacity, entering new markets and reacting to price changes may adversely affect the company in a downturn in the cycle. Therefore, managers are encouraged to improve processing costs, i.e. maintenance, to meet return-on-assets targets during the bottom of the volatile chemical industry cycle.

Emerson Electric focuses on incremental profit improvements. The CEO, Chuck Knight, has a hard-edged approach to motivate managers. He becomes somewhat confrontational, playing the devil’s advocate, during planning sessions. His managers generally develop a plan based on the confrontations with Knight. However, Knight generally develops the main thrust of the plans. As Campbell noted in the article, “Knight’s ability to argue with his subordinates without undermining their authority is key to getting them to change their plans.” Knight provides a somewhat unorthodox, yet effective method to corporate planning.

Granada, Dow and Emerson all use uniquely tailored methods to corporate planning. Consequently, these companies have experienced operational success and increased firm value. However, the planning process also needs to be evaluated for its effectiveness during planning review. The plan should have a clearly defined purpose. It should also be evaluated by how it effects managerial decisions. The main goal of corporate planning is to add value. Since value is specific to each company, external benchmarking may prove ineffective or even disastrous. Campbell noted that companies should “focus on the bird in hand rather than the birds in the bush.”

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