Stern School of Business, New York University, New York, NY 10012-1126, USA

Abstract: Strategic planning has insignificant effects on profits for four reasons. First, formalization undercuts planning's contributions. Second, nearly all managers hold very inaccurate beliefs about both their firms and their market environments. Third, no one can forecast accurately over the long term. Fourth, several fundamental barriers make it very difficult to attain high profits through strategic actions. However, planners can make strategic planning more realistic and can use it to build healthier, more alert and responsive firms. They can make sensible forecasts and use them to foster alertness; exploit distinctive competencies, entry barriers, and proprietary information; broaden managers' horizons and help then develop more realistic beliefs; and plan in ways that make it easier to change strategies later.

Keywords: corporate strategy, forecasts, perceptions, plans, strategic planning, strategies

Reference to this paper should be made as follows: Starbuck, W. H. (1992) 'Strategizing in the real world,' International Journal of Technology Management, Special Publication on Technological Foundations of Strategic Management, 1992, 8(1/2): 77-85.

This article takes an iconoclastic position — that planning and strategizing generally make unimportant contributions to profits. This assertion has four bases: One is the formality with which most firms plan. Formalization undercuts planning's potential contributions. A second basis is the fundamental barriers to achieving measurable gains through forecasting and strategizing. These barriers mean that strategizing cannot usually have visible, intended effects on profits. A third basis is the high frequency of large errors in managers' beliefs about their own firms and their market environments. When managers strategize, most of them are trying to run imaginary firms in imaginary markets. A fourth basis is the impossibility of making accurate long-range forecasts, and thus of anticipating strategies' consequences.

Leading management textbooks preach that actions produce more benefits —

if managers construct sturdy rationalizations before they act,

if firms behave in consistent ways, and

if managers turn long-range predictions into formal plans.

These prescriptions express fanciful ideas about managers' knowledge and about the results of formalization. As a result, the prescriptions turn plans and strategies into millstones [1].

Strategic planning can help firms operate more effectively. To do so, the strategizing must preserve uncertainty and allow for contingencies. This, in turn, implies that strategic planners should not take their activities too seriously, and they should advocate common sense in a world that often shuns it.

"The war in Vietnam is going well and will succeed."

— Robert McNamara, 1963

Everyone does some strategizing informally, and plans and strategies are often beneficial. The practical issue is: How much better is it to strategize formally? The best research shows that, on the average, formal strategizing doesn't increase profits enough to discern.

Many studies have looked at the relationships between formal strategic planning and profitability. Unfortunately, most of these studies have been quite poor, and the best of them remains an early one.

Grinyer and Norburn [2] studied only 21 firms, but they chose these very carefully and gathered valid and extensive information from several executives in each firm. They made four key findings, two of which are immediately relevant.

First, profitability correlates inconsistently and meaninglessly with the degrees to which senior executives agree about their firms' objectives or their personal responsibilities. The correlations ranged from .40 to -.40. This inconsistency illustrates the point that consensus can be as harmful as beneficial when there is no way to assure that the objects of consensus are good.

Second, profitable firms are about as likely to plan informally as formally, and the same is true of unprofitable firms. Firms' profitability correlates only very weakly with the formality of planning (r = .22). To give a sense of what this means, Figure 1 graphs such a correlation.

When one first sees them, Grinyer and Norburn's findings are more than a bit difficult to accept — especially if one teaches or practices strategic planning! Yet, the findings do make sense. There is no reason strategizing should generally produce high profits.

Strategic planning is a two-edged sword that is as likely to reduce profits as to raise them. When strategies reflect accurate assessments and forecasts, everyone is working together to achieve difficult, but possible, goals, while ignoring irrelevant distractions. This is the best of all worlds. But strategic planning also can produce the worst of all worlds. It does this by inducing everyone to work intensely to achieve the wrong goals, while overlooking unexpected opportunities. If negative outcomes happen about as often as positive outcomes, strategic planning will have negligible effects on the average.

Chakravarthy and Lorange [3] used the adjective 'integrative' to denote formal strategic planning. They observed that 'integrative' planning works only when two conditions hold: (1) the business faces a predictable environment, and (2) the business has several distinctive competencies. When these conditions do not hold, they said, integrative planning is not only ineffective, it is counter-productive.

Few businesses have several distinctive competencies, and a later section of this paper explains why no business can predict its environment beyond the short term.

"I think there is a world market for about five computers."

— Thomas J. Watson, 1948

First, most firms compete against skilled competitors that have access to much the same information. These competitors can either anticipate strategic moves or react to them promptly, so it is very difficult to gain meaningful competitive advantages through strategizing as such.

Second, the strategies that can produce significant profits are illegal, immoral, or impractical. Most businesses will not pursue them. High-profit strategies are all variations on monopoly power. Although these strategies have proven themselves very effective, U.S. laws bar nearly all monopolizing strategies, so firms risk anti-trust actions if they adopt them. The legal forms of monopoly — such as patents, first moves, and geographic locations — give either small advantages or transient ones. Patents and first moves also tend to be quite expensive, so the benefit-to-cost ratios are often poor, and firms do not use these strategies repeatedly for long periods.

Third, formal strategizing often focuses on big issues involving large sums and many people. These are nearly always long-term issues, yet the long term never unfolds as expected. Thus, planners expend effort countering threats that never turn into actual problems, and on dreams that never become real opportunities.

Fourth and most importantly, most firms use formal strategic planning to build strong consensuses and to establish strong commitments. However, this use of strategic planning makes unrealistic assumptions about people's knowledge and about their abilities to forecast accurately. Consensus is dangerous unless the strategies are sure to produce wanted outcomes. For strategizing to produce wanted outcomes, the strategists need to have realistic beliefs about their firms' capabilities and their market environments. However, the evidence is that:

"Gaiety is the most outstanding feature of the Soviet Union."

— Joseph Stalin, 1935

Managers' beliefs often diverge widely from objective observations. Of course, some managers see some aspects of their worlds accurately. But most managers misperceive so greatly that, averaged across many managers, their beliefs correlate hardly at all with objective data.

Payne and Pugh [4] compiled data that suggest that most people (including managers) see their own firms inaccurately. Payne and Pugh reviewed scores of studies in which researchers had asked firms' members to characterize their firms' structures and cultures. They found:

Different members of a firm disagree so strongly with each other that it makes no sense to talk about an average belief.

Members' beliefs about their firms correlate very weakly with measurable characteristics of their firms.

I was reassured to learn, as you may be, that people do know whether they are working in large firms or small ones!

Two studies have inadvertently produced disquieting evidence about the accuracy of managers' beliefs about their market environments. Both studies asked middle and top managers to describe the stabilities of their markets. They then compared these beliefs with stability indices calculated from the firms' financial reports and industry statistics. The correlations between managers' beliefs and objective measures were all near zero and were as likely to be negative as positive.

Tosi, Aldag and Storey [5] analysed data from 102 middle and top managers from diverse firms: correlations of managers' beliefs with stability indices ranged from -.29 to +.04.

Downey, Hellriegel and Slocum [6] got data from 51 heads of the divisions of a large conglomerate: correlations of managers' beliefs with stability indices ranged from -.17 to +.11.

In principle, by playing one person's error off against another's, firms might compensate for the biases of individual people. However, firms often amplify biases. First, misperceptions are often shared. Some get their unrealistic beliefs by talking with their colleagues. Second, organizations emphasize communication, and easily communicated ideas oversimplify. Third, formal strategizing encourages managers to construct rationalizations for their actions before-the-fact. These rationalizations then have to be reconciled with actual events, through processes that involve much distortion. Fourth, people's careers depend upon the evaluations of strategic actions, so managers strive to conceal bad outcomes. Fifth, social pressures induce managers to espouse positions dishonestly [7]. Sixth, firms' formal reporting systems foster misperceptions by emphasizing financial and numerical data, by highlighting successes and rationalizing failures, and by crediting good results to superiors. Finally, top managers' beliefs get more weight than those of subordinates, although top managers have much less contact with current markets and technologies than do their subordinates. Top managers also get much of their information through channels that bias upward messages to de-emphasize bad news and to emphasize good news. Indeed, people in hierarchies listen to their superiors more than they do to their subordinates, and they talk to their superiors more than they do to their subordinates. Thus, top managers mostly hear echoes of their own voices [8].

"Prediction is very difficult, especially about the future."

— Niels Bohr

Although almost everyone can make accurate short-range forecasts, no one can predict accurately beyond a few months ahead. When it comes to foretelling the future, there are no true experts. In his classic book on forecasting, Armstrong [9] advised:

"Expertise beyond a minimal level in the subject that is being forecast is of little value in forecasting change. This conclusion represents one of the most surprising and useful findings in this chapter. It is surprising because emotionally, we cannot accept it. It is useful because the implication is obvious and clear cut: Do not hire the best expert you can — or even close to the best. Hire the cheapest expert."

Since the 1950s, the U. S. government has poured many millions of dollars into intricate, computer-based economic forecasting models. The teams that developed these models have spent hundreds of man-years. They have included some of the world's most respected economists. They have used elegant statistical methods. They have not lacked financial or computation resources. Major industrial firms pay large sums for the predictions generated by these models. Thus, these models represent the very best in economic or social forecasting.

Elliott [10] compared the four most famous of these economic forecasting models with two naive forecasts. One naive forecast, the no-change one, says that GNP in three months will be the same as GNP today. This no-change forecast was as accurate as three of the four computer models. The more accurate naive forecast, a linear trend, says that the GNP trend over the last three months will continue for the next three months. This linear-trend forecast was as accurate as the best computer model, which was the simplest one.

Surely, if these elaborate economic forecasting models say so little, one would be very foolish to expect more of any forecasting method.

Makridakis and various colleagues [11] compared 24 statistical forecasting methods by forecasting 1001 series. They found that simple techniques generally work well. Complex methods tend to mistake random noise for meaningful events, so they issue many false alarms. Complex methods forecast most poorly where situations are changing rapidly or where random noise is large. Complex methods work best for stable situations that contain little random noise — where any method would be accurate.

Makridakis and colleagues found that no-change forecasts beat others 38-64% of the time. Also, no-change forecasts were less likely to make large errors than any other method. Yet, the most accurate forecasts came from exponential smoothing with de-seasonalized data. This method beat every other one at least 50% of the time. Exponential smoothing is a straight-line projection that assumes data include random noise and that filters the noise by averaging. The averaging usually gives more weight to newer data.

Thus, the findings of Makridakis and colleagues resemble those of Elliott.

"I cannot imagine any condition which could cause this ship to flounder. I cannot conceive of any vital disaster happening to this vessel."

— E. J. Smith, Captain of the Titanic, 1912

As the foregoing observations show, real-life strategic planning takes place in treacherous contexts quite unlike those assumed in management textbooks. So, what can planners do to strategize realistically?

Since the preceding section discussed forecasting, let's begin there.

Forecasts are partly self-fulfilling prophecies. Because conservative forecasts may lead firms to achieve less than they could, accurate forecasting can be a mistake. Some managers use forecasts to motivate exceptional efforts. But strategic planners must keep balance. Consistently biased forecasts not only lose their motivation value, people learn to distrust them. Accurate forecasts, on the other hand, may help firms identify important threats and opportunities.

Narayan Pant and I [12] formulated several recommendations for forecasting accurately. Five key recommendations are:

1 Allow for seasonality.

2 Use simple methods.

3 Try 'no change' and 'no change in the trend.'

4 Average several forecasts.

5 Assume today is not a turning point.

If today is a turning point, we will not know so until tomorrow . . . if then. The studies of forecasting show that it is very difficult to identify turning points while they are occurring. Any analytic framework that can say 'something quite different has begun to happen' also has the strong propensity to cry wolf.

Probably the most important thing strategists can do to use forecasts well is to forecast both the best that can happen and the worst, and then to generate plans for both extreme possibilities. This approach makes people aware of the diversity of what might happen; it reduces the tendency to assume that forecasts will come true; and it motivates alertness for information about how events are actually developing. Firms often overlook important opportunities or threats simply because these were not forecast; so firms need to spot surprises, not just to confirm expectations. Yesterday just might have been a turning point. Recall Herbert Hoover's observation on Black Friday in 1929, that the "fundamental business of the country . . . is on a sound and prosperous basis."

Economic theory says that almost the only ways to benefit from strategizing involve using resources that other firms lack. Thus, firms ought to identify or develop competencies that make them distinctive, and then to turn these into competitive advantages. Some firms can take advantage of entry barriers that protect them from competitors, and sometimes firms can create such barriers. Proprietary information can also, in principle, give a firm an edge. Firms can generate proprietary information, keep it proprietary, analyse it with proprietary techniques, and encourage strategists to use it.

These are much easier said than done, however. It may be very expensive or technically impossible to create distinctive competencies or entry barriers. Few firms (but there may be a few) can make profitable first moves repeatedly. When a firm begins to put its strategy into effect, competitors can react to the actual behaviour rather than to their theories about it. Proprietary information and proprietary information processing techniques are rare. For example, even if firms do not know their competitors' costs exactly they can likely estimate those costs accurately enough. Similarly, all sensible methods of data analysis yield similar inferences.

The most important asset of strategic planning can be the very process of strategic planning. Planning can make managers aware of possible contingencies, broaden their horizons, induce them to look where they have not been looking, and expose top managers to inputs from lower levels. The results include better organizations as well as better strategizing.

Recall that Grinyer and Norburn made four significant findings, only two of which were discussed above. The other two findings concerned strong correlates of profitability:

Managers in more profitable firms make greater use of informal communication, whereas managers in less profitable firms communicate primarily through formal reports (r = .40).

Managers in more profitable firms use diverse information when evaluating their firms' performances, whereas managers in less profitable firms get their information mainly from formal reports (r = .68).

The implications for strategic planning are self-evident.

The first part of this paper presented evidence that most managers misperceive their firms and their market environments. So, there is opportunity for strategic planning to educate managers about the actual properties of firms and market environments, by gathering and analysing objective data.

Such education requires persuasion as well as evidence. Objective data become more valuable as managers' current beliefs become more unrealistic, yet people grow less willing to accept information the more it deviates from their beliefs. In fact, people tend to interpret nearly all information as confirming their beliefs. In firms, beliefs may be shared by many, and so social support may make beliefs rigid [13].

Strategic planning also creates diverse opportunities to improve the flows of information upward. Porter and Roberts [8] reviewed literature showing that top managers do not listen carefully to their subordinates. People in hierarchies talk upward and listen upward: they send more messages upward than downward, and they pay more attention to superiors than to subordinates. They also overestimate how much accurate information they do transmit upward, and they tend to tell the boss what the boss wants to hear.

Because managers do misperceive their firms and environments, and because firms tend to exaggerate these errors, explicit strategies often make actions less realistic and less responsive to unexpected events. Therefore, it is useful to allow for deviating from plans and for changing strategies in response to new information. Strategic planning can make it easier to do both:

1 Avoid building strong rationales. Strong rationalizations make behaviours inflexible and make it difficult to evaluate outcomes.

2 De-emphasize the long term. Long-range forecasts incorporate much larger errors than short-range forecasts.

3 Minimize formalization. Formalized plans incorporate larger errors than do informal plans, and managers revise formalized plans much less often than informal plans.

4 Emphasize informal communication. Perhaps profitability correlates positively with informal communication because informal communication produces truer understanding.

5 Foster trust and good feelings. Because plans and strategies are so faulty and yield such vague benefits, only foolish managers would stake their careers on plans or turn planning meetings into battlefields. Indeed, consensus may itself be a liability, insofar as it induces managers to focus too narrowly and to underestimate the actual uncertainty of future events.

In 1981, Donald Regan, then U. S. Secretary of the Treasury, captured the essence of realism when he observed of President Reagan's economic program: " . . . the President's program will begin to bear fruit even before it is enacted."

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2 Grinyer, P. H. and Norburn, D. (1975) 'Planning for existing markets: perceptions of executives and financial performance,' Journal of the Royal Statistical Society, Series A, Vol. 138, pp. 70-97.

3 Chakravarthy, B. and Lorange, P. (1991) Managing the Strategy Process, Prentice-Hall, Englewood Cliffs, NJ.

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9 Armstrong, J. S. (1985) Long-Range Forecasting: From Crystal Ball to Computer, second edition, Wiley-Interscience, New York, p. 91.

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13 Nystrom, P. C. and Starbuck, W. H. (1984) 'To avoid organizational crises, unlearn,' Organizational Dynamics, Vol. 12 (Spring), pp. 53-65.