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T h e study of corporate strategy within graduate schools of business has been under way for
many years. With the growing complexity of the world and with the increased size of business firms,
the need for planning and the development of a corporate strategy h a s become recognized in
the business firm. While many areas of management have been subjected t o scientific analysis, the
strategy area continues to be characterized by a commonsensical, judgmental approach. This paper
is an attempt to impose structure upon the various problems inherent in the process of
formulating, implementing, and monitoring corporate strategy in modern business firms. We begin
by identifying the relevant considerations in the strategic planning process and then discussing the
manner in which formal models can prove useful to executives in dealing with various subproblems. T
h e paucity of valid, normative propositions in the corporate strategy literature indicates t h e need f
o r a more scientific approach to this important field.
T h e nine major steps that constitute the strategic planning process are as follows: ( 1 )
formulation of goals; ( 2 ) analysis of the environment ( 3 ) assigning quantitative values to the
goals; ( 4 ) the microprocess of strategy formulation; ( 5 ) the g a p analysis; ( 6 ) strategic
search; ( 7 ) selecting the portfolio of strategic alternatives; ( 8 ) implementation of the strategic
program; ( 9 ) measurement, feedback, and
contro1.l This paper will review these nine steps a n d present selected ideas that demonstrate
how the strategic planning process could be im-
proved through use of analytical procedures. T h e nine steps should not
b e viewed as a once-and-for-all process of strategic planning, but, rather,
as a continuous, ongoing p r o ~ e s s . ~ T h e whole procedure is a dynamic * Distinguished
professor of finance and economics, New York University,
and president, Carnegie-Mellon University, respectively.
1. The s e nine steps into which we have subdivided the strategic pl anning
process a r e consistent with some viewpoints expressed in the cur r ent l i t e r a tur e .
They a r e not , however, specifically t aken f r o m any single source. They represent
o u r cha r a c t e r i z a t ion of the probl em based upon o u r knowledge of the l i t e r a tur e ,
discussions with corpor a t e executives, a n d pa r t i c ipa t ion in the process itself. Some
othe r a t t empt s t o present a conc eptua l f r amework f o r the strategic planning process
a r e presented in George A . Steiner, Top M a t ~ a g e m e t l t Plarlriirig ( N e w Y o r k :
Ma cmi l l an Co., 1 9 6 9 ) , c h a p . 2.
2. Thi s point is apt ly illustrated in H. Igor Ansoff, "Towa rd a Strategic T h e o r y
of the Firm," in B~rsirressS t r a t e g y , ed. H . Igor Ansoff (Ba l t imor e : Penguin Books,
1 9 6 9 ) , esp. fig. 6. T h a t pl anning should be viewed a s a cont inuous , ongoing process
is clearly stated in the following quot a t ion "Guide t o Business Planning," a bro-350 The
Journal of Business
feedback process that has neither a beginning nor an end; it is merely
for expository convenience that we label the first step as formulating
corporate goals.
I. FORMULATION OF GOALS
The first step in the strategic planning process can be viewed as the
development of the arguments in the corporate utility f u n c t i o n 3 This
specification is made by the coalition responsible for the top-level man-
agement of the c ~ r p o r a t i o n . ~ Corporate goals must stem from partici-
pants within the organization5 T h e goals of a small firm under control
of a single entrepreneur a r e determined solely by him. T h e goals of a
large corporation under control of professional managers a r e determined
by a coalition which typically includes the chairman of the board, the
president, and a select group of the more important vice presidents. The
group is characterized as a coalition because no one dominates it in the
way that a single entrepreneur may dominate his organization.
T h e final set of arguments in the utility function for the corpora-
tion must be accepted by the individuals who a r e responsible f o r im-
plementing the policy of the corporation. This acceptance can be induced
in a variety of ways that have been characterized by organization theo-
rists as "side payment^."^ A t this stage, the goals are specified in qualita-
tive rather than in quantitative terms. Some goals relate to measurable
entities such as earnings per share, total sales, share of market, return on
investment, rate of growth in sales, rate of profit growth, and so forth.
Other goals represent management aspirations which are more difficult
t o measure: for example, a desire to be the most advanced electronics
firm in the United States, a desire to be a leader in community improve-
ments, a desire to be ecologically responsible, and so forth.7
chure printed in 1969 (primarily for internal u s e ) at Westinghouse Electric
Corporation: "Planning . . . must be a continuous process o f evaluations, decisions,
and actions. That does not mean that management must continually recycle the
whole formal planning process, or that constant revision o f data is required. But
management must be continually sensitive t o changes that can significantly a f f e c t
previously planned actions. . . . a corltinual review is required to assess the potential
impact o f current events and current decisions on future performance; but that
will not be done i f only one short span o f time within the year is reserved as
'planning time.' . . . sustained efforts-in reviewing data, reevaluating plans, and
assessing performance-are required throughout the year" ( p . 7 ) .
3. A model o f discretionary managerial behavior based on the notion o f a
corporate utility function has been developed in Oliver E . Williamson, T h e Eco-
nomi c s o f Discretionary Behavior: Managerial Objectives in a T h e o r y of the Fi rm
(Englewood C l i f f s , N.J.: Prentice-Hall, Inc., 1 9 6 4 ) , chap. 4 .
4. See Richard M . Cyert and James G . March, A Behavioral T h e o r y o f the
Fi rm (Englewood C l i f f s , N.J.: Prentice-Hall, Inc., 1 9 6 3 ) , chap. 3.
5 . Thi s statement does not imply that the goals o f the corporation are neces-
sarily identical with the goals o f any participants in the organization. See, e.g.,
H . A. Simon, "On the Concept o f Organizational Goal," Admini s t rat i v e Science
Quarterly 9 , no. 1 ( June 1 9 6 4 ) : 1-22.
6. Cyert and March, pp. 29-32.
7 . A detailed discussion o f the variety o f goals pursued by business firms is
provided i n Steiner ( n . 1 a b o v e ) , chaps. 6-7. 3 5 1 Formulation, Implementation, & Monitoring
I n the formulation of corporate goals, the relationships between
those goals and the goals of the participants in the organization should
be considered by the coalition. If all participants had the same goals and
the same perception of the means t o achieve them, then there would be
no problem in formulating a goal structure for the organization. Simi-
larly, if all participants completely accepted the goals of some single
individual (such as the chief executive), the organizational goal structure
could be easily understood. However, most organizations consist of in-
dividual participants having sets of personal goals that are different from
each other's and from the organization's goals. I t is clear from even
casual observation that there is no formal weighting process by which
the goals of each participant are incorporated into the goal structure in
a systematic fashion. Fur the r , it is also clear tha t each individual does
not have an equal vote in determining the goals of an organization.
Nevertheless, if the organization is to function effectively, its goals must
in some sense be an amalgam of the goals of the participants.
A frequent phenomenon in organizations is the formation of sub-
units and of subunit goals. These subunits, which a r e usually work
groups, become the object of the participants' identification. Group
norms arise and may exert more influence over the individual than the
organizational goals. T h e norms of the group may at some time be in
conflict with the organizational goals and the subgroup actions contrary
to the interests of the total organization. Still the individual may, in fact,
substitute the goals of this subunit for the organizational goals. Hence,
in formulating organizational goals, the coalition should consider the
effect that they will have on subunit goals and on the potential formation
of subunits.8
Clearly the corporate goals must be viewed from the standpoint of
the social values that are held by members of the coalition. I t is necessary
to differentiate between the social goals that are proper for the organiza-
tion to hold and those that a r e proper for the individual participant to
hold. F o r example, there may be a conflict for some firms between pol-
lution control and profit. This conflict becomes particularly strong when
the society has not passed the appropriate laws which embody its social
values and the corporation is left with the problem of voluntarily reduc-
ing its profit in order to contribute to some social goal. I t is not clear
whether the organizational coalition can properly take actions that reduce the profit of the
organization in order to achieve a set of social
goals that the coalition itself holds. Most corporation executives take
the position tha t they d o not have the right to impose their own social
values on stockholders, but they d o have a right to fight as individuals
for particular kinds of legislation even though the effect of the legislation
is to reduce the corporation's profit. There are also an increasing number
8. See Richard M. Cyert and Kenneth R. MacCrimmon, "Organizations,"
in T h e H a r ~ d b o o k o f Soc ial P s y c h o l o g y , ed. Ga rdne r Lindsey and Elliot Aronson,
2d ed. (Reading, Mass.: Addison-Wesley Publishing Co., 1968) , 1: 591-93. 352 T h e J o u r n a l
of Business
of attempts t o get stockholder approval of particular strategies that will
achieve social goals. I n the final analysis, however, business firms a r e
profit-seeking organizations, a n d society depends o n them t o seek profit
as a means of achieving t h e optimum allocation of resources."
I n s umma r y , we have stressed t h e fact that goal formulation is a
process of determining the arguments in the corporate utility function.
T h e particular set of goals that the corporation selects must t a k e i n t o
account the personal goals of t h e members of the organization and t h e
goals of subunits. T h e coalition must also consider the problem of social
goals a n d t h e extent t o which they a r e going t o be represented in t h e
corporate goal structure. I n this first step of the strategic planning p r o -
cess, n o attempt is ma d e t o assign quantitative values t o the set of
elements in t h e goal structure.
11. E N V I R O N M E N T A N D T H E F I R M 1 °
T h e organization and the environment a r e parts of a complex interactive
system. T h e actions t a k e n by the organization can have important effects
o n t h e environment, a n d , conversely, t h e outcomes of the actions of t h e
organization are partially determined by events in t h e environment.
These outcomes and the events that contribute t o them have a major
impact o n the organization. E v e n if the organization does not respond
t o these events, significant changes in t h e organizational participants'
goals and roles c a n occur.ll
Most organizations attempt to learn f r om interaction with t h e en-
vironment a n d respond t o changes caused by the environment. B o t h the
learning and response a r e easiest when the environment is disjoint. I n
such cases, t h e causal links among the sectors of the environment a r e
relatively short a n d events in o n e sector a r e likely t o have only minor
effects o n events in other sectors. T h e organization can then usefully
partition such a disjoint environment and consider the sectors in isola-
tion. F o r example, a multinational firm selling products under different
brand names in each of several countries can change policy in o n e market
and analyze the effects without considering interactions with other mar-
kets. T h e learning a n d response a r e more difficult f o r the organization
when the environment is complex and long chains of causal links and
events in o n e sector have profound effects o n other sectors. I n such an
environment, the organization must consider t h e whole sequence of pos-
9. Social Re spor~s ibi l i t i e s o f Busir1ess Corporatio11s ( a s t a t ement o n na t iona l
policy by t h e Re s e a r ch a n d Policy Commi t t e e of t h e C o m m i t t e e f o r E c o n o m
ic
Deve lopment , N e w Y o r k , J u n e , 1971 ) .
10. S o m e of the ma t e r i a l i n this section ha s been directly t aken o r pa r aphr a s ed
f r o m Cye r t a n d h l a c C r i m m o n , pp. 593-602.
1I . A n ext ended discussion of the m a n n e r in which roles a n d tasks within a n
organi z a t ion should be influenced by the envi ronment is presented in P a u l R .
Lawr enc e and J a y W. Lor s ch, Orgarlizatiorl arrd Erlvirorrrnerrt: Marragirlg Di f f e r -
erztiatiorz arrd lrltegratiorz ( B o s t o n : Division of Re s e a r ch, G r a d u a t e School of Busi-
ness Admini s t r a t ion, H a r v a r d University, 1 9 6 7 ) . 3 5 3 Formulation, Implementation, &
Monitoring
sible effects of any action it takes. F o r example, large steel companies
must consider the effects that a price increase will have on various sectors
of the environment-on labor unions, competitors, consumers, and gov-
ernment.
T h e parts of an environment that are relevant differ according to
t h e type of organization. F o r the business firm, economic conditions a r e
of prime importance. When the economy is in an expansionary period,
many possible actions can yield the necessary resources to allow the firm
to survive and grow. Conflict with other organizations in the environment
will b e minimized since all organizations can readily meet their basic
resource requirements. Conflict within the organization will also gen-
erally be reduced because the preferences of the various coalition mem-
bers can be more easily satisfied. An expanding economy not only makes
it relatively easy for the firm to attain its current goals, but also offers t h e
possibility for the firm t o expand its goal set. T h e degree to which the
goal set is expanded depends on the expected duration of the favorable
economic conditions. Such a change in goals may lead to some internal
conflict as the various coalition members assert their own preferences.
However, these internal conflicts will not b e seriously disruptive, since the
firm's increased resources permit all coalition members to achieve higher
levels of utility.
I n contrast, when economic conditions are unfavorable, goal attainment becomes more difficult
and the firm will devote increasing at-
tention toward its goal set. Continued failure to meet its goals without
any apparent possibility of increasing resources generally results in a
reduction of goal values. I n the face of economic adversity, typical firm
responses are to tighten operations by postponing expansion plans, en-
gaging in cost-cutting drives, reducing the number of participants, and
so on. T h e extent of these actions depends on the amo u n t of slack in the
organization. At the beginning of unfavorable economic conditions, the
organization will usually have considerable slack accumulated during
more favorable times. If economic conditions continue at a low level f o r
a n extensive period of time, it becomes increasingly difficult to remove
slack without reducing services that were previously considered essential.
Eventually this set of events will lead to changes in the organizational
structure. Some roles may be eliminated completely and other roles may
b e extensively modified. Serious internal conflict among the individual
participants will occur and will result in participants leaving the orga-
nization both voluntarily and involuntarily.12
12. Examples of the manne r in which adverse economic circumstances c a n
lead t o extensive organi z a t iona l changes have been described in Williamson, chap.
6. A mor e detailed exampl e of the disruptive influences t h a t a sudden adverse
e conomi c envi ronment c an have o n a n organization is the impa c t of the crisis of
1920 o n Ge n e r a l Motor s . Thi s point is dr ama t i c a l ly illustrated in the following
quot a t ion f r om Al f r ed D. Chandl e r , Strategy arid Strrictlire: Chapt e r s irz t h e Hi s tor y
of t h e Arnericari Eriterprise ( N e w Y o r k : Doubl eday, 1 9 6 6 ) , ". . . the automobi l e
ma r k e t had collapsed . . . but , by the end of Oc tobe r [1920], the s i tua t ion had 354 T h e
J o u r n a l of Business
T h e impact of changing economic conditions is reduced if t h e orga-
nization is prepared for them. Thus, organizations attempt to plan a h e a d ;
as a basis for planning, forecasts must b e made of future changes in
economic conditions. These forecasts a r e , of course, more a c c u r a t e ~wh e n
the economic environment is relatively stable over time. T h e organiza-
tion has more difficulty in learning the structure of the environment and
accurately predicting its future states when the environment is highly
volatile. Unfortunately, these a r e the circumstances when forecasts are
most essential.
F o r whatever planning horizon the firm uses, it is necessary to make
predictions for the entire planning period. I n particular, it is necessary
to make predictions of various aggregate economic variables which are
relevant for the firm. These aggregates include GNP, price indices, un-
employment rates, and similar measures of the state of the economy at
benchmark dates during the planning period. It is desirable that these
predictions be made at the corporate level and transmitted to the operat-
ing units of the firm as a basis for their specific planning. I n this way, all
planning activity of the firm is conducted under a uniform set of predic-
tions. T h e predictions will not necessarily be single-valued estimates. T h e
firm may find it useful to develop several plausible alternative economic
scenarios and to require its operating units to formulate plans for each
alternative.'"
I n addition to aggregate economic predictions, it is necessary for
the firm to make predictions about future conditions in the industries
a n d markets in which it operates. A n industry forecast is usually made
in terms of the total dollar sales expected for the industry. ~ r o m such
forecasts, the firm can predict its future sales over the planning period
by making assumptions about t h e market shares that it will obtain. I n
making these assumptions the firm must make predictions about t h e
behavior of its present and potential competitors.14 Estimates must be
made of the prices competitors will charge, of their advertising policies,
a n d of the product changes competitors will make. I n this regard it is
highly useful f o r firms to maintain a n elaborate information system o n
their competitors. Relevant information o n competitors can b e obtained
f r om public sources such as financial statements, f r om information
be come so serious tha t ma n y Ge n e r a l Motor s manage r s were having difficulty
finding cash to cover such immedi a t e needs a s invoices a n d payrolls. . . . dur ing
the crisis, the prices of Ge n e r a l Motor s stock plumme t ed. T h e n c ame Dur ant ' s
disasterous a t t empt to sustain the price by buying Ge n e r a l Motors' stock o n credit
which led t o his financial difficulties a n d his r e t i r ement a s president o n Novembe r
20, 1920. T e n days l a t e r , Pi e r r e d u P o n t took over t h e presidency. . . . onc e h e
agreed t o serve, Pi e r r e acted quickly and firmly. T h e d a y a f t e r he took office, he
began a systematic review of the corporation's position and probl ems . An d one of
his very first a c t s was t o approv e the plan ~ * o r k e do u t b y A l f r e d Sloari whi ch
de f ined arl orgarzizatior~al s t ruc tur e f o r Gerzeral Motors" ( p . 157, italics a d d e d ) .
13. F o r a survey of various approa che s t o forecasting the f u t u r e envi ronment ,
see Steiner ( n . 1 a b o v e ) , c h a p . 8.
14. T h e impor t anc e of analyzing compe t i tor s is stressed in S. Tilles, "Making
Strategy Explicit," in Ansoff ( n . 2 a b o v e ) , pp. 186-90. 3 5 5 Formulation, Implementation, &
Monitoring
gathered from the firm's salesmen, and from executives who meet rival
executives at professional meetings. All of these sources can be utilized
to build u p a data base on each of the firm's major competitors.
111. ESTABLISHMENT OF
QUANTITATIVE TARGETS
After goals have been qualitatively formulated and after the environ-
mental analysis has been completed, the firm's coalition is in a position
to establish quantitative targets.15 Quantitative targets essentially impute
quantitative values to those previously formulated goals that are capable
of being stated in quantitative terms. These quantitative targets are often
usefully established for planning purposes in terms of rates of growth.
Thus one goal may be tha t the firm's profit should grow at some specific
annual rate over the planning horizon. Part of the process of establishing
quantitative targets also involves weighting the importance of the various
targets. Thus, the firm conceivably might weight achievement of its sales
goal more than achievement of its profit goal. This weighting is impor-
tant when the firm may be in a position t o achieve some but not all of
its goal set. Given the weighting it is then possible to specify strategies
which are appropriate when it is impossible t o attain all the various tar-
gets. Goals stated in terms of absolute levels rather than rates of change
require target dates t o be specified. I t is generally necessary f o r a plan
t o have values for the relevant goals specified for various benchmark
dates. This is frequently done, permitting the firm t o project pro forma
balance sheets and profit and loss statements for the individual years
within the planning horizon.
One useful heuristic for planning is the process of "backward induction."16 This approach
requires that a specific set of desired values
be established for the various goals for the final period of the planning
horizon, for example, 5 years f r o m now. The planners specify, for in-
stance, the values the firm should have for sales, profit, capital invest-
ment, and so on during the fifth year. O n the basis of these specifications,
the planners work backward t o see where the firm must be in the fourth
year if it is t o achieve the goals in the fifth year and so on back t o the
first year of the plan. This process of backward induction is a useful
addition t o the planning process. I t enables the planner to establish a
viable plan for the entire planning horizon. Several iterations may be
required, and, in this process, goals may be modified.
We have discussed the establishment of quantitative targets from
the perspective of the corporation as a whole. Frequently, however, it is
also desirable t o establish quantitative targets for various collections of
15. Cf . Russell L. Ackoff, A C o n c e p t o f Corporat e Planning (New Yo r k :
J o h n Wiley & Sons, 1970) , chap. 2.
16. An explanation of backward induction is presented in Morris H. DeGroot ,
O p t i m a l Statistical De c i s ions (New York: McGraw-Hill Book Co., 1970) , pp.
277-78. 356 The Journal of Business
operating units within the corporation, for example, groups or divisions,
by disaggregating the previously established corporate-wide targets.
This description of the first three planning steps completes the
macrophase of the planning process. The next step is to have each oper-
ating unit within the firm formulate its own set of plans.
IV. THE MICROPROCESS OF
STRATEGY FORMULATION
The fourth major step in the planning process can be referred to as "the
microaspects of strategy formulation." Each operating unit in the cor-
poration formulates its own strategic plan over the relevant time horizon.
The time horizon chosen for strategic planning will vary depending upon
the nature of the firm, but 5 years is a typical time horizon for strategic
planning in business organizations. I t often will be desirable for some
qualitative aspects of the strategic plan to be formulated over a 10- or
20-year horizon, even though detailed quantitative projections may be
made only for an intermediate-term time horizon such as the next
5 years.
Before each operating unit can develop its own strategic plan, it is
necessary for the senior executives of the corporation (or their staff
members) to provide the managers of the operating unit with some back-
ground information.17 This centrally provided information should con-
sist of at least the following items:
a ) Some guidelines concerning the nature of the strategic plan-
ning process should be provided. The emphasis should be put on actively
involving relevant executives in the planning process in order to focus
their attention on strategic considerations. Especially a t the level of the
operating units, there is a tendency for managers to worry primarily
about immediate problems. A formalized planning process is necessary
to induce managers to think seriously about long-term strategy for the
operating unit.
b ) The relevant goals that top management wants the operating
unit to be concerned with should be explicitly stated.
C ) All operating units should be provided with the results of the
broad analysis of the economic environment undertaken in corporate
headquarters. T o the extent that relevant technological or product-market
forecasts were centrally made, these should also be transmitted to appro-
priate operating units. There may be economies in having some of the
technological and product-market forecasts made centrally even though
they are relevant only to particular operating units in the corporation.
O n the basis of this corporate information, each operating unit
should develop its own strategic plan, in both qualitative and quantitative
1 7 . A n interesting discussion of o n e proc edur e f o r coordina t ing the pl anning
done a t various levels in a corpor a t ion is provided i n Ackoff, pp. 133-37. 357 Formulation,
Znzplernentation, & Monitoring
terms. A major activity which each operating unit must undertake in
developing its strategic plan is a critical, thorough analysis of the environment for its own particular
mix of products and markets. A reason-
ably broad definition of the operating unit's product-market mission
needs t o be adopted for this purpose. Given this broad view of its
product-market posture, the operating unit must attempt t o analyze its
external environment to discover significant economic, market, and tech-
nological developments. As part of its environmental analysis, the operat-
ing unit must identify its major present and potential competitors. I n
addition, the cperating unit should make an internal analysis to uncover
those areas in which it has had problems and successes in the past in
order to diagnose hitherto unrecognized strategic obstacles and oppor-
tunities. I n the light of these external a n d internal analyses, the operating
unit must then determine where its c o n ~ p a r a t i v e advantage exists.
This analysis should result in a set of recommended strategic pro-
grams f o r each operating unit. Several types of recommendations may be
relevant. These might involve pricing strategy, product-line strategy,
marketing strategy, programs of cost reduction for existing products a n d
markets, new products to be developed, new markets to be entered,
major research and development expenditures, major advertising cam-
paigns, a n d major physical investments. I n proposing the operating unit's
diversification into additional products and markets, recommendations
should be made as to whether this diversification should be accomplished
by means of internal growth o r through external acquisition. Enough
detailed information should b e given in the verbal discussion and the
quantitative projections so that executives a t higher levels in the corpora-
tion can independently determine the impact of undertaking, postponing,
o r rejecting each element in the recommended strategic plan.
V. THE "GAP ANALYSIS"
T h e fifth major step consists of aggregating upward the strategic plans
formulated by each operating unit to obtain aggregate strategic plans for
the corporation as a whole and for any relevant subdivisions. This upward
aggregation of the specific quantitative projections made by each operat-
ing unit for the next 5 years can readily be done by a process of simple
summation. Equally important, however, is the upward aggregation of
the qualitative, verbal aspects of each operating unit's strategic plan. T h e
hierarchical pattern utilized in the upward aggregation process should
be carefully chosen to make the most logical sense for the particular
corporation. I t might first involve consolidating the operating units into
departments, then consolidating the departments into divisions, then
consolidating these divisions into groups, a n d , finally, consolidating the
groups into the corporation. Of course, the number of levels present in
this upward aggregation process, a n d the particular labels attached to
each level of consolidation, will differ from firm to firm. The Journal of Business
Table 1
A n Example of a Perceived-Gap Matrix
Time Periods in the Planning Horizon
Corporate Goals Year 1 Year 2 Year 3 Year 4 Year 5
Total sales revenue