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Formal Strategic Planning – Does it Really Help?

Formal Strategic Planning – Does it Really Help?

Some experts recommend that firms should adopt a flexible (informal) approach to developing marketing strategy. Formal planning, they say, can be a straight jacket that harms performance, especially when there is much uncertainty and change. Research has shown this to be incorrect.

Before I explain how formal planning procedures can be helpful, it is important to note that not all approaches to formal planning are useful. Consider Porter’s Five Forces, experience curves, mission statements, focus groups, SWOT, scenarios, and portfolio matrix methods like BCG. These methods are very popular; using Google, I searched for these terms plus the word “planning” and found from 940 sites for experience curves to 2,330,000 sites for scenarios. However, I am unaware of any evidence that these procedures lead to better planning. On the contrary, there is evidence that some of these procedures are actually harmful to performance.

Although there exist some ineffective formal planning procedures, there are also many others that work.

To identify effective formal planning procedures, I reviewed research on corporate planning. This led to the development of a five-step formal planning process with explicit (written) procedures for:

  1. Determining the firm’s long-range objectives
  2. Generating alternative strategies
  3. Evaluating alternative strategies
  4. Monitoring implementation and outcomes
  5. Gaining commitment from those who will be affected by the plan

Laboratory studies with small groups show that use of each of these steps improves group performance.

But does this five-step process help in large organizations? To address this, I searched for comparative empirical research on corporate planning procedures in firms and other organizations. Some of these studies looked at performance (e.g., profits) after formal planning procedures were introduced. Others compared organizations that used these procedures with those that did not. Also, in an experimental study, organizations received funds for planning, but for half the organizations the funds were contingent on following the five-step planning process.

Overall, formal planning was more profitable in 20 studies (including the experimental study) and harmful in only 3 (there were 5 ties). What is remarkable about these results is that with the exception of the experimental study, none of the organizations followed all aspects of the formal planning process. In many cases, one might judge the implementation of the process as poor. And, of course, there were often factors other than the planning process that might affect performance.

Since completion of my reviews, I have become aware of 14 recent studies, and formal planning was superior in 13 of them. Thus, despite problems with implementation and assessment, formal planning was associated with better performance in nearly 80% of the 42 studies and poorer performance in fewer than 8% of them.

It is important to note that formal planning works best under certain conditions.

Judging from the research gathered, formal planning is only expected to be useful for situations involving:

  • Large changes such as for mergers, or when new products are introduced, or when a firm makes major changes in its marketingHigh uncertainty, such as when facing changes in the economy or changes in government regulations
  • High complexity, where different parts of an organization need to work together
  • Inefficient markets, where prices do not provide signals

Because these conditions are common, many organizations could use some or all of the five-step process to improve performance. Descriptive studies of planning show, however, that few organizations use aspects of this five-step procedure. I have never encountered an organization that uses all five steps, so I would appreciate hearing about such organizations.

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