University of PennsylvaniaScholarlyCommonsMarketing PapersWharton School1-1-1983Strategic Planning and Forecasting FundamentalsJ. Scott ArmstrongUniversity of Pennsylvania, [email protected] this and additional works at: http://repository.upenn.edu/marketing papersPart of the Marketing CommonsRecommended CitationArmstrong, J. S. (1983). Strategic Planning and Forecasting Fundamentals. Retrieved from http://repository.upenn.edu/marketing papers/123Postprint version. Published in The Strategic Management Handbook, edited by Kenneth Albert (New York: McGraw-Hill 1983), pages 1-32.The author asserts his right to include this material in [email protected] paper is posted at ScholarlyCommons. http://repository.upenn.edu/marketing papers/123For more information, please contact [email protected]
Strategic Planning and Forecasting FundamentalsAbstractIndividuals and organizations have operated for hundreds of years by planning and forecasting in an intuitivemanner. It was not until the 1950s that formal approaches became popular. Since then, such approaches havebeen used by business, government, and nonprofit organizations. Advocates of formal approaches (forexample, Steiner, 1979) claim that an organization can improve its effectiveness if it can forecast itsenvironment, anticipate problems, and develop plans to respond to those problems. However, informalplanning and forecasting are expensive activities; this raises questions about their superiority over informalplanning and forecasting. Furthermore, critics of the formal approach claim that it introduces rigidity andhampers creativity. These critics include many observers with practical experience (for example, Wrapp,1967). This chapter presents a framework for formal planning and forecasting which shows how they interactwith one another. Suggestions are presented on how to use formal planning for strategic decision making. (Forsimplicity, references to planning and forecasting in this chapter will mean formal strategic planning andforecasting.) Planning is not expected to be useful in all situations, so recommendations are made on whenplanning is most useful. Descriptions of forecasting methods are then provided. Finally, suggestions are madeon which forecasting methods to use when developing plans for a company.DisciplinesMarketingCommentsPostprint version. Published in The Strategic Management Handbook, edited by Kenneth Albert (New York:McGraw-Hill 1983), pages 1-32.The author asserts his right to include this material in [email protected] journal article is available at ScholarlyCommons: http://repository.upenn.edu/marketing papers/123
Strategic Planning And Forecasting FundamentalsJ. Scott ArmstrongFrom Kenneth Albert (ed.), The Strategic Management Handbook.New York: McGraw Hill, 1983, pp. 2-1 to 2-32.Individuals and organizations have operated for hundreds of years by planning andforecasting in an intuitive manner. It was not until the 1950s that formal approaches becamepopular. Since then, such approaches have been used by business, government, and nonprofitorganizations. Advocates of formal approaches (for example, Steiner, 1979) claim that anorganization can improve its effectiveness if it can forecast its environment, anticipate problems,and develop plans to respond to those problems. However, informal planning and forecasting areexpensive activities; this raises questions about their superiority over informal planning andforecasting. Furthermore, critics of the formal approach claim that it introduces rigidity andhampers creativity. These critics include many observers with practical experience (for example,Wrapp, 1967).This chapter presents a framework for formal planning and forecasting which shows howthey interact with one another. Suggestions are presented on how to use formal planning forstrategic decision making. (For simplicity, references to planning and forecasting in this chapterwill mean formal strategic planning and forecasting.) Planning is not expected to be useful in allsituations, so recommendations are made on when planning is most useful. Descriptions offorecasting methods are then provided. Finally, suggestions are made on which forecastingmethods to use when developing plans for a company.Where possible, the advice on planning and forecasting is supported by relevant research.In some areas much research exists. (For a review of the psyc hological literature on forecastingand planning, see Hogarth and Makridakis, 1981.) In many areas, however, little research hasbeen done.Various aspects of formal planning and forecasting are illustrated here by using thestrategic decision by Ford to introduce the Edsel automobile in 1957. In this situation, formalplanning and forecasting would have been expected to be useful. Judging from publishedaccounts by a participant at Ford (Baker, 1957) and an observer (Brooks, 1969), Ford did not useformal planning and forecasting for the strategic decisions involved in the introduction of theEdsel. (Of course, having decided intuitively to proceed, they did carry out operational planningfor the production of the car.) The introduction of the Edsel is regarded as one of the largestbusiness errors of all time. Ford itself lost 350 million. Their dealers also lost a substantialamount. Is it possible that formal planning and forecasting might have protected Ford from sucha large strategic error?With acknowledgments to Richard C. Hoffman IV, Spyros Makridakis, Deepak Mehta and RobertFildes, who provided useful comments on various drafts of this chapter. Support for this paper wasprovided by IMEDE in Lausanne, Switzerland.
Figure 2-1 provides a framework to conceptualize strategic planning within a company.A scanning of the environment yields relevant data for the “Data Bank.” This data bank (orinformation system) would contain such data as government regulations, demographic indicators,industry sales, the resources of the company and of its competitors, and information on availabletechnologies for production. Ideally, these data would be assembled in a central location, such asin a filing cabinet, chart room, or computer.The left- hand side of Figure 2-1 examines planning. A variety of planning processes canbe used. These will be described in more detail below. The planning processes draw uponinformation from the data bank (evidence on the current situation) and also upon the forecastsevidence on what will happen in the future). The two-way arrow from “Data Bank” to “PlanningProcesses” indicates that the planning process, to a large extent, dictates what information isrequired. It is recommended that formal planning start with the planning process rather than withthe data.The planning process produces a set of plans. These describe objectives and alternativestrategies. One strategy is selected as a basis for action. In practice, the actions actually taken bythe company can deviate substantially from the intended strategy. The actions lead to results,both intended and unintended. A record of these results is kept in the data bank.The right-hand side of Figure 2-1 examines forecasting. To make forecasts for acompany, it is necessary to have information about the company's proposed strategies (thus thearrow from “Plans” to “Forecasting Methods”). An examination of the forecasting methods,then, will help determine what data are required (thus the two-way arrow from “Data Bank” to“Forecasting Methods”). The forecasting methods, to be described in more detail below, yield aset of forecasts. What will happen if the company attempts strategy A and environment Xoccurs? How likely is environment X? How much confidence can we have in the forecast? Theseforecasts are then used as inputs to the planning process.Note the distinctions between forecasting and planning. Planning provides the strategies,given certain forecasts, whereas forecasting estimates the results, given the plan. Planning relatesto what the firm should do. Forecasting relates to what will happen if the firm tries to implementa given strategy in a possible environment. Forecasting also helps to determine the likelihood ofthe possible environments.The remainder of this chapter discusses the items in the two circles on Figure 2-1, thePlanning Process and Forecasting Methods.2
DESCRIPTION OF THE STRATEGIC PLANNING PROCESSFormal strategic planning calls for an explicit written process for determining the firm'slong-range objectives, the generation of alternative strategies for achieving these objectives, theevaluation of these strategies, and a systematic procedure for monitoring results. Each of thesesteps of the planning process should be accompanied by an explicit procedure for gainingcommitment. This process is summarized in Figure 2-2. The arrows suggest the best order inwhich to proceed. The need for commitment is relevant for all phases. The specification ofobjectives should be done befo re the generation of strategies which, in turn, should be completedbefore the evaluation. The monitoring step is last. The dotted line indicates that, to some extent,the process is iterative. For example, the evaluation may call for going back to the generation ofnew strategies, or monitoring may require a new evaluation of strategies.3
The various steps of the planning process are described below along with some formaltechniques that can be used to make each step explicit. (Although commitment is the first step, itis easiest to discuss this last.) This discussion is prescriptive; it suggests how planning should bedone. Numerous accounts are available of how formal strategic planning is done (for example,see Wood, 1980, and the extensive review of the descriptive research by Hofer, 1976).Specify ObjectivesFormal planning should start with the identification of the ultimate objectives of theorganization. Frequently, companies confuse their objectives (what they want and by when) withtheir strategies (how they will achieve the objectives). For example, suppose that a companydesires to make money for its stockholders. To do this, it decides to build a tunnel through amountain in order to charge tolls to automobiles. They plan to complete the tunnel in five years.On the way through the mountain, they strike gold. To mine the gold, activities on the tunnelmust be suspended. Does the company pursue its objective of making money or does it stay withits strategy of tunnel building? What would your organization do?The analysis and setting of objectives has long been regarded as a major step in formalstrategic planning. Informal planners seldom devote much energy to this step. For example, inBaker's (1957) summary of the Edsel, less than 1 percent of his discussed concerned objectives.Unfortunately, the identification of objectives is a difficult step for organizations. It is evendifficult for individuals. The simplest way to demonstrate this is the following: Ask yourself toset objectives for your use of this chapter. Write your objectives. Be specific. Find measurableobjectives. Set time deadlines for implementing changes. It is possible (for example, you couldhave as an objective that you will take action within the next month on at least one technique toimprove the strategic planning of your organization), but it is stressful.The difficulties in setting objectives have led some observers to recommend that formalplanners ignore this step. The recommendation here is just the opposite. Significant time andmoney should be allocated to the analysis of objectives. This difficult step might be aided by useof an outside consultant to help the group focus only upon the objectives. The question can also4
be attacked by asking what results would define successful performance by the company over thenext twenty years. At this stage, no concern should be given as to how to achieve the objectives.Companies pursue many objectives and planners should explicitly recognize all of theimportant objectives of the system. One way to help ensure that the analysis of objectives iscomprehensive is to use the stakeholder approach. This calls for a listing of all groups thatcontribute resources to the firm. Then a description is provided of the objectives of each of thesestakeholders.Applying the stakeholder approach in the Edsel case, the following groups would beincluded: creditors, stockholders, employees, consumers, suppliers, dealers, and the localcommunity. In many cases, these groups will have conflicting objectives. The planners wouldwrite out the objectives for each group, for example, return on investment (ROI) forstockholders; stability, good wages, and good working conditions for employees; safe andreliable products at a low price for consumers; ROI for the dealers. Specific measures would thenbe established for each objective (for example, ROI should exceed 10 percent per year after taxesin real dollars). In contrast to this stakeholder approach, Ford's informal approach led to a narrowobjective: “to obtain 3.3 percent to 3.5 percent of the auto market” (Baker, 1957). Explicitconsideration was not given to other stakeholders.A strengths and weakness analysis should then be conducted. This calls for an inventoryof the organization's resources (such as financial, marketing, production). What do they havenow and what do they plan to have? The objectives would then be drawn from what is desired(stakeholder analysis) and what is feasible (strengths and weakness analysis).The written statement of objectives should start with the ultimate objectives. Thesegeneral objectives would then be translated into more specific objectives so that each decisionmaker can see how to contribute to the overall objectives. In addition to being specific, theobjectives should be measurable (Latham and Kinne, 1974). The objectives would includestatements on what is desired and when. Thus, the marketing department can refer to theplanning manual to determine its rol