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Planning and Control Systems A FRAMEWORK FOR ANALYSIS

STUDIES IN MANAGEMENT CONTROL G radu ate S ch ool o f B u sin ess A d m in istr a tio n H arvard U n iv e r sity

Planning and Control Systems: A Framework for Analysis, by Robert N. Anthony (1965) Management Control in Life Insurance Branch Offices, by James S. Hekimian (1965)

ABSTRACT

Planning and Control Systems: A Framework for Analysis The basic purpose of this volume is not to report research findings themselves but to set forth a framework which will influence the conduct of future research in the broad topic area of planning and control systems. Professor Anthony has developed this particular framework over a period of several years and has refined it to its present form by discussions with colleagues, students, and practitioners in the field. There is evidence that the framework is both useful and controversial, and it is being published in the hope that it will prove not only uuseful to those who do research on such systems, to those who design them, to those who use them, and to students ” but also that the further controversy en­ gendered will lead to refinements and improvements. The author, Robert N. Anthony, is Ross Graham Walker Professor of Management Controls at the Graduate School of Business Administration, Harvard University. This book sets up a framework that is intended to be useful in thinking about the subject of management planning and control systems, describes in some detail the distinguish­ ing characteristics of the main elements of this framework, and shows how failure to make these distinctions has led to mistakes in designing and using systems. For the past 50 years, following Fayol, the usual practice has been to identify planning and control as two separate functions of management. The author considered these func­ tions as possible main topics for a framework, but rejected them on the grounds that although they are distinguishable mental processes, they do not relate to separable major

categories of activities actually carried on in an organization, either at different times, or by different people, or for differ­ ent situations. After discussing other possibilities, the author suggests as the most useful framework one that has three main headings: strategic planning, management control, and operational control. Strategic planning is defined as “the process of deciding on objectives of the organization, on changes in these ob­ jectives, on the resources used to attain these objectives, and on the policies that are to govern the acquisition, use, and disposition of these resources.” Management control is de­ fined as "the process by which managers assure that re­ sources are obtained and used effectively and efficiently in the accomplishment of the organization’s objectives.” Some of the differences between these processes are that strategic planning is unstructured and irregular, while man­ agement control is rhythmic and tends to follow prescribed procedures; in strategic planning the relevant information is tailormade for each problem, while in management control it is developed systematically; strategic planning involves a relatively small number of people, mostly staff people, while management control involves a large number of people, mostly line people; in strategic planning the mental activity is primarily creative and analytical, while in management control it is administrative and persuasive; the principal source discipline in strategic planning is economics, while in management control, it is social psychology; and so on. When authors or practitioners fail to distinguish between these two processes, they make mistakes in (1 ) stating gen­ eralizations as if they were applicable to both processes, (2 ) applying to one process a generalization that is valid only for the other, and (3 ) giving too much emphasis to one process and not enough to the other. Examples of each of these are given. Operational control is "the process of assuring that specific tasks are carried out effectively and efficiently.” Two basic

characteristics distinguish operational control from manage­ ment control. First, operational control focuses on specific tasks or transactions, whereas management control focuses on the flowing stream of ongoing operations. Second, opera­ tional control is essentially objective, whereas management control is essentially subjective. Operational control is ob­ jective in the sense that it has to do primarily with activities for which the correct decisions can be objectively deter­ mined. At least conceptually, and often practically, a valid decision rule can be stated mathematically and programmed into a computer. Management control is essentially subjec­ tive in that decisions in this process inherently involve man­ agement judgment, and there is no objective or “scientific” way of determining the best course of action in a given set of circumstances. Mistakes are made when systems designers view manage­ ment control problems as if they were operational control problems; that is, when they fail to take into account the psychological considerations that are involved in the exer­ cise of human judgment. Two other processes, information handling and financial accounting are also discussed, primarily for the purpose of distinguishing them from management control. Information handling is defined as "the process of collecting, manipula­ ting, and transmitting information, whatever its use is to be.” Financial accounting is defined as "the process of reporting financial information about the organization to the outside world.” From his analysis of the several processes, the author draws generalizations about the over-all problem of design­ ing the best planning and control systems. Briefly, these are: (1) the starting point in construction of the over-all system should be management control, which deals with the on­ going operation of the whole enterprise. (2) The manage­ ment control system should be related to, but should not include, the processes for strategic planning, operational

control, and financial accounting; the notion of a single all­ purpose system is unrealistic. (3) The central management control system should be a financial system, since money is the only common denominator. (4) Computers and mathe­ matical models cannot be the essence of this control system. (Published by Division of Research, Harvard Business Schoal, Soldiers Field, Boston, Mass. 02163. xii + 180 pp. $4.00, 1965)

Planning and Control Systems



A FRAMEWORK FOR ANALYSIS. R o ber t N . Anthony ii»

Ross Graham Walker Professor of Management Controls

DIVISION OF RESEARCH GRADUATE SCHOOL OF BUSINESS ADMINISTRATION HARVARD UNIVERSITY Boston • 1965

© C o p y rig h t

1965

B y t h e P re s id e n t a n d F e llo w s o f H a rv a rd C o lle g e

L ib r a r y o f C o n g ress C a ta lo g C a rd

No. 65-18724

P rin te d in t h e U n ite d S t a t e s o f A m erica

FOREWORD

During the postwar years Professor Anthony has been as­ sociated, in one capacity or another, with most of the studies in the broad field of Control which have been published by the Division of Research. He has been the author of several, and he has been an active adviser for others. Consequently, this statement of a conceptual framework for the study of planning and control systems can be expected to have an important effect on later analytical studies undertaken at this School. The basic purpose of the volume is not to report research findings themselves but to set forth a framework which will influence the conduct of future research in the broad topic area of planning and control systems. Professor Anthony has developed this particular framework over a period of several years and has refined it to its present form by discussions with colleagues, students, and practitioners in the field. At least two faculty colleagues here are engaged in studies which are employing the concepts set forth herein and sev­ eral doctoral students have written or are writing disserta­ tions wherein this framework serves as a guide. One cannot say of a set of concepts of this kind that it is right or wrong; a more appropriate test is whether or not it is generally “use­ ful to those who do research on such systems, to those who design them, to those who use them, and to students.” We already have internal evidence that the framework is both controversial and useful. It is being published in the hope that it will prove useful to some in its present form and that

vi

Foreword

the controversy engendered will lead to refinements and im­ provements. This study has been supported by an allocation of funds given to the School by The Associates of the Harvard Busi­ ness School. We are ever grateful for this support. B e r tra n d F o x

Director of Research Soldiers Field Boston, Massachusetts June 1965

PREFACE

In the past four years, many persons have been good enough to comment on drafts of this study of planning and control systems. I quote two of these comments, one ques­ tioning the usefulness of the study and the other its feasibil­ ity. The first is this: I am a patient man, I believe, but my tolerance of the sort of Medieval scholasticism that speculated on 'angels per pin point’ or on orders of classification is not great. I, frankly, couldn't care less. Go ahead and publish, but don't expect me to read it. The second comment is this: Anyone who attempts to construct a framework for anal­ ysis of planning and control systems at this stage of devel­ opment is foolhardy, but if you recognize that it is fool­ hardy and if you make this recognition clear to the reader, it's worth a try. No doubt, some readers will support the feeling expressed in the first comment. Others will, I hope, go at least as far as the second comment, and agree that this attempt to construct a framework was worth trying. For the need is great. The area of management labeled Planning and Control Systems currently has scarcely any generally accepted prin­ ciples, and everyone in the field, therefore, works by intui­ tion and by folklore. It is not an area in which generalizations have already ripened and are ready to be picked and ar­ ranged in an orderly fashion.

viii

Preface

Some of my colleagues believe that an attempt to bring about a degree of order in a situation of this type is pre­ mature. Certainly, my attempt to do so had several frustrat­ ing false starts. Nevertheless, I kept recalling the point that President James B. Conant demonstrated so vividly in On Understanding Science, namely, that development of a framework or a conceptual scheme often has led to progress, even though the framework turns out to be wrong. Isolated experiences and discrete bits of knowledge are not very use­ ful. When organized into some kind of pattern, however, the pieces often illuminate one another; the whole becomes greater than the sum of its parts. The very act of organiza­ tion may show that the framework itself is defective. Never­ theless, the framework will have served a useful purpose if it prepares the way for a better one. Such a result is the most that is hoped for in the present effort. I am reconciled to the likelihood that the framework described here will not last. If, however, it points the way to something better, the effort will have been worthwhile. Acknowledgments This book does not report the results of research; rather it proposes some fairly abstract ideas. To a large extent, the version of these ideas printed here is an outgrowth of dis­ cussion and debate with colleagues at the Harvard Business School and elsewhere and with students. These include the following of my colleagues at the Harvard Business School: Kenneth R. Andrews, Norman A. Berg, Robert H. Caplan, III, C. Roland Christensen, John Dearden, Bertrand Fox, Walter F. Frese, Harry L. Hansen, Leonard Harlan, David F. Hawkins, Erich A. Helfert, Clarence B. Nickerson, Robert T. Sprouse, Richard F. Vancil, Ross G. Walker, and John R. Yeager. Others who commented were Professor Kenneth Arrow, Stanford University; Professor R. Gene Brown, Stanford University; Robert H. Deming, Black & Decker Manufactur­

Preface

ix

ing Company; Frank Gilmore, Cornell University; Professor Bertram Gross, Syracuse University; Professor James S. Hekimian, Massachusetts Institute of Technology; Dr. Wm. Travers Jerome, III, Bowling Green State University; Pro­ fessor Harold Koontz, University of California at Los Angeles; Stanley Laing, National Cash Register Company; and Pro­ fessor George Steiner, University of California at Los Angeles. I am deeply grateful to these people. Dr. James S. Hekimian and Dr. Chei-Min Paik also did a considerable amount of research in the literature for the study. So did Robert H. Caplan, III, who also did the re­ search for, and wrote, Appendix B. Miss Marian V. Sears edited several drafts of the manuscript and did considerable research in the literature as well, part of which is reported in Part I of Appendix A. In addition, she shaped and re­ shaped a good many of the ideas in the body of the book. Mrs. Mabel T. Gragg prepared Part II of Appendix A. Miss Carol Peterson, in her customarily efficient, pleasant way, typed or supervised the typing of the manuscript. Miss Ruth Norton, Editor and Executive Secretary of the Division of Research, shepherded it through the publishing process. Mrs. Nina Dolben prepared the index. Despite all this help, I must, and do, accept responsibility for the final product. R o b e r t N. An th on y Boston, Massachusetts May 1965

CONTENTS

Page

Chapter 1 . S e l e c t io n

of a

F ra m ew o rk

1

Hie Need for a Framework: Users of the Framework . . . Definitions and Limitations: Definition of System; Systems and Processes; Role of the Systems Designer; Formal and Informal Systems; Limitation to Large, Human Organizations . . . The Search for the Best Main Topics: Other Possible Frameworks . . . The Pro­ posed Framework: Strategic Planning; Management Control; Operational Control; Classification of Business Activities; Disclaimers; Information Handling; Finan­ cial Accounting . .. Summary 2.

S t r a t e g i c P la n n in g a n d M a n a g e m e n t C o n t r o l .

Strategic Planning, General Description: Long-Range Planning; Analogy with Military Strategy . . . Manage­ ment Control, General Description: The Conformance Fallacy; Acceptance in Practice . . . Distinguishing Characteristics: Relation to Other Terms; Scope of the Process; Complexities and Constraints; Degree of Structure; Nature of Information; Purpose of Esti­ mates; Organizational Relationships; Source Disci­ plines; Planning and Control; Conflict between Management Control and Strategic Planning Activ­ ities . . . Analogies and Misconceptions: Analogy with Biology; Military Strategy and Tactics; Game Theory; Long-Range Planning; Models; Excessively Broad Generalizations . . . Summary

24

Contents 3 . O p e r a t io n a l C o

n t r o l ............................................................

xi 69

General Description . . . Programmed Control: Shift from Nonprogrammed Control to Programmed Con­ trol; Correspondence between Operational Control and Programmed Control. . . Contrasts with Manage­ ment Control: Focus; Inherent Difficulties; Structure; Nature of Information; Relative Importance of Systems and Process; Judgment and Understanding; Source Disciplines . . . Analogies and Misconceptions: Anal­ ogies; Computers and Models; Confusion in the Litera­ ture; Transfer Pricing as a Case in Point; Role of Operations Research in Control Systems . . . Summary 4.

I n f o r m a t io n H a n d l i n g ............................................................ 94

Information Handling Expertise . . . Confusion in the Literature 5.

F i n a n c i a l A c c o u n t i n g ............................................................100

Confusion in the Literature and in Practice . . . Other Varieties of Accounting 6.

S o m e C o n c lu s io n s a n d I m p l i c a t i o n s ........................... 109

Conclusions Regarding the Framework . . . Some Im­ plications for Systems Design Appendix A.

N o te s o n T e r m i n o l o g y ............................................................ 117

I. “Management” by Marian V. Sears................... 117 The Search for a Common Terminology; Choos­ ing “Scientific Management” in 1910; The Contin­ uing Search for Common Terms for Changing Subject Matter; “Toward a Unified Theory of Man­ agement,” 1962; Definitions of Management; Philos­ ophy of Management II. “Planning” and “Control” by Mabel T. Gragg . 129

Contents B.

R e la t io n s h ip s b e tw e e n P r in c ip le s o f M i l i t a r y S t r a t e g y a n d P r in c ip le s o f B u s in e s s P la n n in g by Robert H. Caplan, I I I ............................................. 148

C.

W h a t I s a V a lid G e n e r a liz a t io n ?

by Robert N. A nthony...................................................................... 1 5 7 “Motherhood’ Statements; The Generality of Gen­ eralizations; Sources of Generalizations; Evidence from the Sciences; Evidence from Practice; Conju­ gate Principles . . . Tentative Guidelines

F

o o t n o t e s .............................................................................................1 6 9

In

d e x

..........................................................................................................1 7 7

CHAPTER 1

Selection of a Framework T h e N eed

fo r a

F r a m ew o rk

To be useful, material dealing with any broad subject needs to be organized within a framework of topics and subtopics. If the topics and subtopics are well chosen, the avail­ able material can be so arranged as to make it possible for one to reach conclusions generally applicable to each classifica­ tion but not applicable to the other classifications. Such con­ clusions or generalizations, furthermore, will have validity and significance impossible in the absence of such a frame­ work. For example, the nervous system is a main topic in human biology; its two major subtopics are the central (cerebro­ spinal) nervous system and the reflex (automatic) mech­ anism. Certain generalizations apply to the nervous system as a whole, whereas others apply to one of the subtopics, but not to the other. Thus, the nervous system is concerned with the transmission of impulses from sense organs to muscles; the central system, to the voluntary muscles, and the reflex system, to the involuntary muscles. Suppose an ecological study is made of a community. One way of summarizing the result would be by streets arranged in alphabetical order; another way would be by height cate­ gories of the inhabitants. Neither of these frameworks would be so useful as one based on income, race, or occupation. Within a given subject area, different frameworks can be useful for different purposes. Thus, in biology, the classifica­

2

Planning and Control Systems

tion of plants and animals by phylum, class, order, family, genus, and species is useful for some purposes. Comparative anatomy, which cuts across these classifications, provides a useful framework for other purposes. So also does the study of growth or reproduction, which cuts across in another di­ mension, and the study of evolution, which cuts in still an­ other dimension. By contrast, a study of animals classified according to the color of their eyes has limited usefulness. This book proposes a framework for the broad subject, planning and control systems. It is hoped that this frame­ work will be useful to those who do research on such systems, to those who design them, to those who use them, and to students. Users of the Framework Research. The researcher needs a classification of topics and subtopics that indicates the limits within which his find­ ings are pertinent; that is, he wants to make statements about each main topic that are valid for that topic but not for other main topics, and he wants to make statements about each subtopic that both are within the context of the general statements about the main topic and also apply to that subtopic and not to others. If these statements are in fact valid, one can apply them to a new problem (phenomenon, proc­ ess, object) by deciding where this problem fits into the framework. The statements made about the appropriate subtopic plus those made about the appropriate main topic will be relevant to the new problem if it is classified properly in the framework. The foregoing statement is, of course, only approximately correct, for however carefully the topics are defined, there will be many borderline situations for which the precise classification is in doubt. The other side of this coin is that the researcher who re­ ports on a study of a single, narrow subtopic has a difficult job unless he has an over-all and generally accepted frame­

Selection of a Framework

3

work to which to relate it. Either he must work out d e novo and explain the relevant statements for the main topic of which his subtopic is a part, or he must assume that his readers have the same understanding of the broad area that he has, which may very well not be the case. This problem is a central one in research on planning and control systems at present, as anyone who has an acquaint­ ance with the literature on planning and control well knows. For example, the hundreds of articles on expense control, or some aspect of expense control, generally fall into one of two categories. Either the author sets forth statements about control in general as a background to the specific idea he wants to present, in which case a large fraction of the article repeats statements made in numerous other articles; or he omits this background material, in which case his readers do not know which of several possible frames of reference he has in mind. If a proper framework existed, together with gen­ erally agreed upon definitions and concepts for the main topics, he could present new ideas relating to specific subtopics without all this repetition or likelihood of misinterpre­ tation. As it is, many articles dealing with problems of planning and control tend to be miniature, and necessarily superficial, treatises of the whole subject, rather than thor­ ough analyses of single aspects of it. The job of the author or researcher who deals with some aspect of a subject is made much easier if he can show how his topic fits into a larger whole. If readers are familiar with this larger structure, authors can take the essentials of the structure for granted, rather than spend time explaining them. Other Users. The systems designer and the systems user also need a framework. As new ideas come to their atten­ tion, they need some way of organizing them, of relating them to or contrasting them with ideas they already have accepted, and, if they accept the new idea, of knowing the

4

Planning and Control Systems

limits of its applicability. The student in a subject that is new to him needs a framework for a similar reason. For most subject areas, textbooks provide such a framework, and the more highly developed the subject area, the better organized are its textbooks. The area in which we are interested, plan­ ning and control systems, is so new as an organized field of study that textbooks providing a framework have not yet been written. Finally, a framework has collateral benefits—to companies in thinking about job descriptions and organization structure, to schools and other training programs in planning courses, and to libraries in classifying books and articles. D e fin it io n s

and

L im it a t io n s

The totality that this study seeks to break down into use­ ful topics is labeled Planning and Control Systems. Although the approximate meaning of this term is intuitively obvious, we need to make our intended precise meaning as clear as possible before proceeding to develop the suggested frame­ work. The words “planning” and “control” are discussed at length in a subsequent section; “system” is defined here. Definition of System The word system has many meanings. ( Even the American College Dictionary lists 13 definitions.) The first definition in W ebster s Unabridged comes close to what we intend: “A complex unit formed of many often diverse parts subject to a common plan or serving a common purpose.” There are two essential ideas in this definition: (1) the individual parts of a system are often diverse, and (2) the collection of parts forms a unity—or a wholeness—either because the parts are “subject to a common plan” or because they “serve a com­ mon purpose.” The dictionary definition of a biological sys­ tem also is relevant: “An assemblage of parts or organs of the same or similar tissues, or concerned with the same func­

Selection of a Framework

5

tion; e.g., the nervous system, the digestive system.” A plan­ ning and control system, then, consists of diverse parts that serve a common purpose, this purpose having to do with planning and control. The use of the plural—systems—for the total area signifies that in our view there are more than one planning and con­ trol systems in one organization. As will be seen, we believe that this concept is more useful than the alternative of view­ ing the separate systems as parts of one over-all entity, that is, as a single, integrated system. The distinction is not im­ portant, however, and if the reader prefers to think of the planning and control system—a single entity—he is welcome to do so. Systems and Processes It is important to distinguish between “systems” and “processes.” In brief, a system facilitates a process; it is the means by which die process occurs. The distinction is similar to that between anatomy and physiology. Anatomy deals with structure—what it is; whereas physiology deals with process—how it functions. The digestive system facilitates the process of digestion. In one sense we are interested in both structure and proc­ ess, since the structure can be understood best in terms of how it works. A description of the forms, procedures, and rules that constitute the structure considered apart from the functions they are intended to perform would be sterile. This fact is even more relevant for our subject matter than in the case of biology. In biology, structure determines proc­ ess; oxygen enters the blood stream because of the structure of the lungs, and this structure must be accepted as a given. In an organization, by contrast, the structure can be modified to fit whatever seems to be the best process; within limits, the process rather than the structure is the determinant. It would be even less realistic to divorce a discussion of systems from a discussion of the related processes than it

6

Planning and Control Systems

would be to discuss the digestive system without mentioning the process of digestion. Our study, therefore, will take up both structure and process, and indeed usually will give more attention to the latter than to the former. We discuss processes in order to facilitate an understand­ ing of systems. Such a discussion is to be distinguished from a discussion of the processes for their own sake. Planning and control systems are used to facilitate decision making, but we are here interested in the systems, rather than in the deci­ sions. People, not systems, make decisions. Role o f the Systems Designer The foregoing distinction is especially important in analysis of the proper role of the systems designer. The systems designer devises planning and control systems that will provide management with help in decision making and in the implementation or control of the decisions made. It is not his function to make marketing decisions, or pro­ duction decisions, or decisions in any management area other than the systems area. One reason for making this distinction between the deci­ sion-making process on the one hand and planning and con­ trol systems on the other hand is that this permits useful generalizations to be made about the processes or systems, generalizations that are independent of any specific activity and that are, therefore, applicable to a wide range of activi­ ties. There are similarities, permitting the development of general principles, in planning and control systems as they apply to marketing, production, research, and other business functions and also as they apply to government and other nonprofit organizations, even though the nature of the deci­ sions made varies greatly among functional areas and be­ tween profit-seeking and nonprofit organizations. Just as there is a marketing expertise, a production ex­ pertise, a finance expertise, and a general management ex­ pertise, so is there a planning and control systems expertise,

Selection of a Framework

7

or at least one can be developed. It is essential that the two types of expertise—the expertise in a function and expertise in systems that cut across functions—should not be confused with each other. The systems specialist is presumably able to help the marketing people to devise a planning and con­ trol system that will facilitate the management of the mar­ keting process, but he should resist the temptation to tell marketing management what the decision on a marketing problem should be. The systems specialist can suggest meth­ ods of collecting and analyzing the information needed for one to make sound decisions, as well as methods of com­ municating the decisions and the results obtained, but he should not do the deciding. He can suggest the kind of data for management to use in deciding on pricing policy, but he should not determine the policy itself; useful ways of pre­ paring an advertising budget, but not how much to spend for advertising or in what media; useful ways of estimating the costs of various channels of distribution, but not what channels to use; and so on. Although not everyone agrees with us, we also believe that systems design should be distinguished from—kept sep­ arate from—decisions regarding the organization structure and division of responsibilities. The way in which a company is organized obviously has an impact on its planning and control systems, but when management is thinking about the best way of organizing, this impact is only one of several factors that it takes into account. The systems designer can give useful advice on the probable impact of alternative methods of organization on the planning and control systems, but this advice relates to only one aspect of the organiza­ tional problem. Management also must consider a number of other factors, particularly the personalities of the execu­ tives involved. Thus, the systems designer, when he is working as a sys­ tems designer rather than as an over-all adviser to manage­ ment, does not say that decentralization is good, or that it is

8

Planning and Control Systems

bad. Rather, he says that if an organization is decentralized, it should use such-and-such management control systems; and if centralized, it should use different systems. In short, in designing systems, he must be prepared to accept the or­ ganizational relationships as a given. He may point out that a different organization structure would facilitate planning and control; however, if management believes that other considerations are more important and therefore decides not to change the organization, the systems designer builds the best systems he can to fit the needs of this organization. Formal and Inform al Systems A distinction also should be made between formal and informal systems. It corresponds to the distinction between formal and informal organizations. Although it would be short-sighted to overlook the practical importance of the informal ways in which things get done in an organization, in this study we are mostly concerned with formal systems. By definition, one does not design an informal system; it is created without design. And since the basic reason for our interest in planning and control systems is to design better ones, we shall tend to think in terms of formal systems— those whose structure is visible and whose operation has ex­ plicit authorization. However, we shall not overlook the ways in which informal systems impinge on formal systems and thereby affect the planning and control processes. Limitation to Large, Human Organizations Our discussion is limited throughout to systems in human organizations, that is, groups of people brought together for a common purpose. Others, principally the cyberneticists, take a broader view; they consider the common characteris­ tics of systems in individual persons, in organs, and in cells, as well as in groups of persons. We shall draw analogies be­ tween some aspects of systems in human organizations and

Selection o f a Framework

9

other systems, but they are only analogies; no attempt will be made to discuss the question of whether or not generaliza­ tions applicable to systems in organizations are also applica­ ble in a broader context. We use “organization” not in the broad sense of “any group of persons associated together/’ which includes the family and other types of small groups, but rather in the more lim­ ited sense of “administered organizations” as defined by Thompson, et al.:1 Administered organizations consist of groups that have these four characteristics: (1 ) they exhibit sustained collective action, (2 ) they are integral parts of a larger system, (3 ) they have specialized, delimited goals, and (4 ) they are dependent upon interchange with the larger system. The analysis is not limited to any particular type of organ­ ization. Much of our research has been with profit-seeking companies, but we have done enough work with government agencies and other types of nonprofit organizations to warrant a belief that the suggested framework and accom­ panying descriptions of the topics are relevant for both profit-seeking and nonprofit groups. We do exclude small organizations. Systems exist, at least in rudimentary form, in all organizations, whatever their size. Nevertheless, it is quite likely that the planning and control systems of small organizations—especially those so small that the management consists of one person rather than a group —are so different from those of larger organizations that many of the generalizations that are applicable to large or­ ganizations are not applicable to small ones, at least without considerable modification. Although the suggested framework is believed to be broadly applicable, it probably is not universally applicable. It was prepared by and discussed with people who grew up 1 Footnotes start on page 169.

10

Planning and Control Systems

in a “Western,” “well-developed” cultural environment. Pos­ sibly the environment in other cultures is such that certain conclusions are not relevant to organizations there. We have no positive evidence that such is the case, but we are mindful of the disastrous results that have sometimes occurred when an American practice was transferred without modification to some other culture. T h e S ea rch

fo r t h e

B e s t M a in T o pic s

Because the general subject area is named planning and control systems, there is a natural temptation to use as the two main divisions: (1) planning (roughly, deciding what to do) and (2 ) control (roughly, assuring that desired re­ sults are obtained). Many investigators and authors have fol­ lowed this practice. Fayol,2 for example, used the following processes or functions: planning, organizing, commanding, coordinating, and controlling, thus setting up a fundamen­ tal distinction between planning and control. Other authors have used the same or similar breakdowns. Some of these classifications are given in Appendix A. Usually, authors re­ gard these functions as occurring at every management level in the organization. Some refer to the “assignment of these activities to various executives,” as if they were discrete, sep­ arable functions. Usually, two of the functions of manage­ ment that are listed are planning and control. Our attempts to fit facts into and make generalizations on the basis of such a breakdown have led to the conclusion that the over-all title selected for the area represents a trap; it insidiously invites a classification into (1) planning and (2) control, whereas this is not a useful breakdown. The trouble essentially is that, although planning and control are definable abstractions and are easily understood as calling for different types of mental activity, they do not relate to separable major categories of activities actually carried on in

Selection of a Framework

11

an organization, either at different times, or by different people, or for different situations. Most people in an organization engage in planning—from the salesman, who decides which customer to call on next, up to the president, who is thinking about the acquisition of a new subsidiary. But the planning done by the salesman is so different in its purpose and nature from that done by the president that few generalizations can be made that apply to both, and those generalizations that are valid for both are so vague and general that they are of little help in the solu­ tion of practical problems of systems design. In organizations there also is a process called control, but the type of control that is involved in assuring that a direct production workers performance is satisfactory differs in im­ portant respects from the control exercised over, say, a re­ searcher or a private secretary. Therefore, if control were to be a major subdivision, few generalizations could be made that would apply to all aspects of the process. Furthermore, most authors describe the control process as involving, among other things, decision making, whereas de­ cision making is also clearly the essence of the planning proc­ ess. Conceptually, it is possible to break the control process into its purely control elements and its planning elements, but such a breakdown is not useful, since in practice the elements occur together. For example, consider the activities that are generally understood to be included in the process called budgetary control. This process involves a recurring cycle of activities. The cycle starts with the preparation and approval of a budget, which clearly is a planning activity. But the budget also is used as a basis for control; indeed, many con­ tend that the budgetary preparation activity is a principal means of achieving control. During the budget year, many activities occur that clearly fit the definition of control, but, simultaneously and as a part of the same process, there may occur an activity called budget revision, which is planning.

12

Planning and Control Systems

In short, planning and control activities are so closely inter­ twined in the budgeting process that to describe each of them separately is not only difficult but also pointless—point­ less because those concerned with the process usually are involved with and interested in both its planning aspect and its control aspect. Despite these difficulties, authors do attempt to construct a framework with planning and control as separate main topics. Koontz,3 for example, makes a basic distinction be­ tween planning ( “selection from alternatives”) and con­ trolling ( “measurement and correction of activities”). Note that even these two definitions overlap, since the correction of activities certainly involves a selection from alternative possibilities for correction. He goes on to say, “. . . the con­ trol process . . . involves three steps: (1) the establishment of standards; (2 ) the appraisal of performance against these standards; and (3) the correction of deviations.” Surely, the first of these involves the selection from alternatives and necessarily precedes both the measurement and the correc­ tion of activities; it is much more closely related to planning than it is to control. To the extent that the third step requires a revision of the program, which is one type of correction that Koontz describes, this also is planning. Thus, what is supposed to be a basic distinction between planning and control turns out, by its own definitions, not to be a distinc­ tion at all. Other authors, although also recognizing the same interrelationship, devote whole chapters or even whole sections of their books to separate discussions of planning and control. It should be recognized that Koontz is thoroughly aware of the existence of this overlap; in the article from which the above definitions are quoted, he says that “planning and con­ trol are so closely interconnected as to be singularly insep­ arable,” and similar statements appear in other books and articles. He nevertheless believes that a distinction between

Selection of a Framework

13

planning and control is useful, for example, in pointing up the necessity of relating controls to plans. He therefore sets forth a list of “Planning Principles” and a separate list of “Principles of Control/* Actually, Koontz* principles of planning are generally re­ lated to the broad, important types of plans that we propose to label strategic planning; they do not relate to the recur­ ring, systematic types of planning that we shall put under the heading of management control This focus on strategy can be seen in a comparison of Koontz* principles with the “prin­ ciples of military strategy” used by the military. Such a com­ parison is given in Appendix B; the match between the two sets of principles is quite close. Thus, his lists of principles seem to be based on a distinction that is not made clear in his definition. Some writers, after recognizing the interrelationship, take the opposite tack. Rathe,4 for example, points out that “it is difficult to separate planning and control.” This leads him to lump these activities together: “. . . the interplay of plan­ ning and control has become known as Management Con­ trol.” Probably he intends management control to be used in the same sense as that in which it is used in this study. The editors of Administrative Control and Executive Action5 imply that they intend the term “administrative con­ trol” to correspond approximately to what will here be desig­ nated as management control, that is, to include a type of planning. Nevertheless, the editors* definition of control is this: “the review of actual progress by comparison with the plan and observation of the variance or deviation,” and this definition excludes planning. The confusion in the literature is reflected in company practice. There is, for example, a function that some com­ panies call “production planning” and that other companies call “production control.” There often is no difference in the activities actually performed under these labels.

14

Planning and Control Systems

Other Possible Frameworks These considerations led to a search for a different way of organizing the material in the area—a framework that does not use planning and control as the main subdivisions or, on the other hand, lump together all aspects of these functions. What is needed is a framework that will permit the arrange­ ment of useful generalizations under main topics with a minimum of overlapping. Furthermore, the organizational activities classified under a given main topic should be essen­ tially similar to one another in some respects and essentially different from activities that are classified under other main topics. Over the past three years, we have experimented with vari­ ous possibilities for such a framework. Our first step was to draw from the literature several hundred statements about planning and control systems. We attempted to arrange these in some sort of sensible order. At one time, we used “struc­ ture” and “process” as the two main headings. Under struc­ ture, which we considered analogous to anatomy (what a system is), we collected comments about (a) the character­ istics of the information contained in an organization system, broken down by operating input information (e.g., costs), capital input information (e.g., capital budgets), output information (e.g., transfer prices), and combined input/ output information (e.g., return on investment), and (b ) the structure and content of reports. Under process, which we considered analogous to physiology (what the system d oes)y our breakdown was into long-range plan­ ning, short-range planning, operating, measuring results, and acting on results. It soon became apparent that the topics listed under “proc­ ess” were artificial. Authors did write about long-range plan­ ning as a separate subject, but most of them made no sharp separation among the other topics listed. Instead, they de­ scribed short-range planning, operating, measuring results,

Selection of a Framework

15

and taking action as parts of one unified process, and they preferred to discuss the process as a whole, rather than to consider any one of its parts as a separate entity. Furthermore (and in retrospect this seems obvious), many authors who wrote about the anatomy of a system, did so in terms of physiology—how it worked. We had to classify their statements under each of our two main headings, and this was a clear indication that our classification scheme was weak. Efforts to patch up this outline proved unavailing. The basic difficulty was in the main headings, and we could cor­ rect it only by making a fundamental change in them. T h e P roposed F ra m ew o rk

A brief description of the main topics in our proposed framework is given here, together with the considerations that led us to settle on this framework as the most useful one we can think of. The remainder of the book expands on this description and on the implications of the selected framework for the formulation of useful generalizations about planning and control systems. Strategic Planning To start with, we found it easy to identify two rather dif­ ferent types of planning activities in an organization. One is the type of planning mentioned above as associated with the control process, an activity related to the ongoing admin­ istration of the organization. The other type is identified by terms such as policy formulation, goal setting, and top man­ agement planning. The thought processes in each of these types of planning are similar, but in most other respects the two types are so different that almost no important generali­ zations apply to both of them. We identified this latter planning activity as the first of our main categories and labeled it strategic planning. The definition we suggest is as follows:

16

Planning and Control Systems Strategic planning is the process of deciding on objectives of the organization, on changes in these objectives, on the resources used to attain these objectives, and on the policies that are to govern the acquisition, use, and disposition of these resources.

“Objectives” are what the organization wishes to accom­ plish (in military parlance, the “mission”), and “policies” are guidelines that are to be used in the choice of the most appropriate course of action for accomplishing the objectives. The word “strategy” is used here in its usual sense of com­ bining and employing resources. It connotes big plans, im­ portant plans, plans with major consequences. Some students of management restrict the word strategy to those plans that are made in response to a competitor’s action or in anticipa­ tion of his probable reaction, but there appears to be no particular reason for making such a restriction, and the word is not used here in this limited sense. Others draw a distinc­ tion between strategy and “grand” strategy, but again, there seems to be no valid reason to set up separate categories for purposes of the suggested framework. Strategic planning is discussed in more detail in Chapter 2. Management Control Whereas strategic planning is one type of planning, there is another type that is associated with the ongoing adminis­ tration of the enterprise, but, as already pointed out, this other type is so closely associated with control activities that setting it up as a separate main category would be artificiaL For our second main category, therefore, we use a concept that combines both planning and control. As a label for this concept, we use “management control.” This label has the obvious weakness of not mentioning planning. The obvious solution, to use “management plan­ ning and control,” seems unnecessarily cumbersome, and the alternative of coining a new term seemed undesirable for reasons to be discussed in Chapter 2. Furthermore, there

Selection o f a Framework

17

seems to be increasing use of the term management control to refer to the same combination of planning and control activities that we have in mind. The definition we suggest is as follows: Management control is the process by which managers as­ sure that resources are obtained and used effectively and efficiently in the accomplishment of the organization s ob­ jectives. This definition is intended to convey three key ideas. First, the process involves managers, that is, people who get things done by working with other people. Second, the process takes place within a context of objectives and policies that have been arrived at in the strategic planning process. Third, the criteria relevant for judging the actions taken in this process are effectiveness and efficiency. These ideas, and other char­ acteristics of the management control process, are discussed in Chapter 2. Operational Control At one time, we thought that strategic planning and man­ agement control should be the two main topics of our framework. It became apparent, however, that many of the generalizations that are relevant for management control do not work well for a certain class of the organization’s activi­ ties, and that there are generalizations applicable to this class that are invalid for other activities. It also is apparent that mistakes with serious practical consequences have been made when techniques and generalizations found valid for one class of activities have been applied to the other. We there­ fore saw the need for a third main topic. We have groped for the most useful way of describing this third topic so as to differentiate it from management con­ trol, but even now are by no means satisfied with the results. One possibility was to draw a line between activities that required the use of judgment and those that could be com­

18

Planning and Control Systems

pletely governed by formal decision rules. We referred to these as nonprogrammed and programmed activities. How­ ever, this distinction eventually seemed to be less useful than a slightly different one, one that is based on the distinction between the activities properly referred to as management and activities that relate to the performance of specified tasks. We call the latter operational control and define it as follows: Operational control is the process of assuring that specific tasks are carried out effectively and efficiently. This definition is somewhat vague. It intends to convey the idea that operational control is to be distinguished from management control in at least the following key ways: (1 ) Operational control is concerned with tasks (e.g., manu­ facturing Job No. 5687; ordering 500 units of Item 84261), whereas management control is concerned with individuals, that is, managers. (2) The tasks to which operational control relates are specified, so that little or no judgment is required as to what is to be done; the activities to which management control relates are not specified, and management decides what is to be done within the general constraints of the strategic plans. In operational control, the focus is on execu­ tion; in management control it is on both planning and execu­ tion. These points are developed at length in Chapter 3. Classification of Business Activities The three processes described briefly in the preceding paragraphs are the main categories of our framework. It is unrealistic for us to expect that they are already meaningful to the reader. Our task in the remainder of the book is to make them meaningful. Exhibit 1 is given as a preliminary device for this purpose. It classifies certain planning and con­ trol activities of a business organization under our three main categories. Note that the activities listed under strategic planning are almost entirely planning activities, that those

. Selection o f a Framework

19

listed under management control are a mixture of both plan­ ning and control, and that those listed under operational con­ trol are almost entirely control activities. E x h ib it 1 E xa m ples

of

I ncluded

Strategic Planning Choosing company objectives Planning the organization Setting personnel policies Setting financial policies Setting marketing policies Setting research policies Choosing new product lines Acquiring a new division Deciding on non­ routine capital expenditures

A ct iv it ie s in

in a

B u sin ess O rgan ization

M a jo r F r a m ew o rk H eadings

Management Control Formulating budgets

Operational Control

Planning staff levels

Controlling hiring

Formulating personnel practices Working capital planning Formulating adver­ tising programs Deciding on research projects Choosing product improvements Deciding on plant rearrangement Deciding on routine capital expenditures

Implementing policies

Formulating decision rules for operational control Measuring, appraising, and improving man­ agement performance

Controlling inventory

Controlling credit extension Controlling placement of advertisements

Scheduling production

Measuring, appraising, and improving workers’ efficiency

Disclaimers At this point, we wish to make two disclaimers. First, we did not originate the classification described above. Others have used the same similar categories. -For example, Simon’s6 distinction between programmed and non­ programmed decisions essentially corresponds to our cate­

20

Planning and Control Systems

gories of operational control and management control. The distinction between policy formulation and policy execution or administration, which is a common one in management textbooks,7 corresponds to our distinction between strategic planning and management control. And increasing numbers of researchers and practitioners are using the term manage­ ment control in the same sense as that in which it is used here.8 Our second disclaimer is against implying an unwarranted degree of precision in our classifications. The lines between categories are blurred, and, as our colleagues have amply demonstrated in discussions of the framework, it is easy to find situations that do not fit clearly in a single category. We believe that these borderline situations and exceptions are not so numerous as to upset the essential validity of the categories, but there is room for disagreement on this point. Information Handling The three terms defined above comprise the three main topics in our framework. In this book, two other topics are discussed which, although not viewed here as a part of the area of planning and control systems, are related to it and need to be carefully distinguished from it. The first is called information handling. Planning and con­ trol systems use data, and generalizations about the uses of data for strategic planning, management control, and opera­ tional control properly belong under each of these headings. But quite apart from these generalizations about the use of data, some important generalizations can be made about handling data, generalizations that are independent of the intended use of the data. The whole body of generalizations relating to the design and utilization of computers is an ex­ ample. Since these generalizations cut across our three main topics, it seems desirable to collect them in a separate cate­ gory. This is defined as follows:

Selection of a Framework

21

Information handling is the process of collecting, manipu­ lating, and transmitting information, whatever its use is to be. We do not propose to discuss information handling in any­ where near the same depth as that for the other topics. Our purpose in Chapter 4 is primarily to make the point that there are both a body of generalizations and also an expertise on information handling that can usefully be separated from the generalizations and expertise relating to the other topics. Financial Accounting Strategic planning, management control, and operational control are internally oriented; that is, they have to do with activities that occur inside an organization. There is a certain amount of confusion between these processes and financial accounting, which has an entirely different orientation, as suggested by the following definition: Financial accounting is the process of reporting financial information about the organization to the outside world. Financial accounting is discussed in Chapter 5. Our ob­ jective is not to describe fully the process or the principles governing it, but rather to distinguish clearly between finan­ cial accounting and management control. The difference stems essentially from the fact that society has developed certain financial accounting principles to which all businesses are expected to adhere, whereas no such externally imposed principles govern management control information. The relationships among the five topics here defined are indicated by Exhibit 2.

22

Planning and Control Systems E x h ib it 2

P lanning

and

C ontrol P rocesses

in

O rganizations

Internally Oriented Processes

Externally Oriented Process

Financial Accounting

Su m m a ry

The purpose of this study is to suggest a useful framework for classifying topics that fall within the general subject labeled planning and control systems. Such a framework is essential to the researcher, the practitioner, and the student. The general area consists of formal planning and control systems, designed to facilitate planning and control processes

Selection of a Framework

23

in human organizations, without regard to whether the organ­ izations are profit-seeking or nonprofit in character, but ex­ cluding small organizations. The three processes designated as the main topics of the proposed framework are strategic planning, management control, and operational control. In addition, we distin­ guish these topics from information handling and financial accounting.

CHAPTER 2

Strategic Planning and Management Control The purposes of this chapter are to define the processes of strategic planning and management control, to describe the principal characteristics of each process, to distinguish be­ tween the two processes, and to show misconceptions that result when such a distinction is not made. The character­ istics of the processes and the distinctions between them are discussed together because a discussion of the characteristics is a good way of clarifying the distinctions, and vice versa. S tra teg ic P lanning , G en era l D esc r iptio n

Strategic planning is the process of deciding on objectives of the organization, on changes in these objectives, on the resources used to attain these objectives, and on the policies that are to govern the acquisition, use, and disposition of these resources. Strategic planning, as the term is used here, is a process having to do with the formulation of long-range, strategic plans and policies that determine or change the character or direction of the organization. In an industrial company this process includes planning that affects the objectives of the company; the acquisition and disposition of major facilities, divisions, or subsidiaries; policies of all types, including poli­ cies as to management control and other processes, the

Strategic Planning and Management Control

25

markets to serve and distribution channels for serving them, the organization structure ( as distinguished from individual personnel actions), research and development of new prod­ uct lines (as distinguished from modifications in existing products and product changes within existing lines), sources of new permanent capital, and dividend policy; and so on. Strategic planning decisions affect the physical, financial, and organizational framework within which operations are car­ ried on. This usage corresponds to Andrews* definition of strategy, as follows:1 . . . Strategy is the pattern of objectives, purposes, or goals and major policies and plans for achieving these goals stated in such a way as to define what business the company is or is to be in and the kind of company it is or is to be. A com­ plete statement of strategy will define the product line (in functional, not literal, terms), the markets and market seg­ ments for which products are to be designed, the channels through which these markets will be reached, the means by which the operation is to be financed, the profit objective, and the size and kind of organization which is to be the medium of achievement. Strategy can be deduced from be­ havior in the absence of conscious planning, for purpose is implied by action. It is easier, however, to work with veri­ fiable statements of purpose. The word strategy is defined in at least two other ways, both of which are narrower than the definition we intend to follow. Some students of management restrict the word strategy to those plans that are made in response to a com­ petitor’s action or in anticipation of his probable reaction. Our definition includes such plans, but it also includes many types of plans that are not primarily or even peripherally re­ lated to a competitor s actions or reactions. In military sci­ ence, a distinction is made between two types of plans, called, respectively, strategy and grand strategy. Our defini­ tion includes both types.

26

Planning and Control Systems

Our definition of strategic planning combines two types of planning that often are viewed as quite distinct from each other: (1 ) choosing objectives and (2 ) planning how to achieve these objectives. For some purposes, it is desirable to draw a distinction between these types and to classify them as principal subtopics under strategic planning. This is not necessary for the present purpose, however, as here our objective is only to identify the main characteristics of the strategic planning process for the purpose of distinguish­ ing it from the management control process. Long-Range Planning Strategic planning does not correspond to what some call long-range planning. Strategic decisions do have long-range consequences, and often, but not always, a relatively long time is required to put a strategic decision into effect. How­ ever, the distinction between long-range and short-range, insofar as this refers to the time period required to formulate and implement the plan, is not crucial to the distinction be­ tween strategic planning and management control. Not un­ commonly, the acquisition of an important subsidiary may be completed within a year of the time when the possibility was first conceived; yet the acquisition decision certainly is a strategic decision. More important, the differences in the principles that are relevant to the respective processes are only incidentally related to the time dimension. In 1965 Gen­ eral Motors is well advanced on planning its 1968 Chevrolet, but the mechanism used in this type of planning is in no essential respect different from the process of budgeting 1965s factory overhead; it is part of the management control process. But in 1965 General Motors also is thinking about introducing a turbine-powered vehicle, and this involves a rather different planning process. The long-range, short-range distinction has more validity in relation to the duration of the consequences of decisions. Strategic decisions tend to have long-term effects; often they

Strategic Planning and Management Control

27

are irreversible in the short run. But even this distinction can be stretched too far. The addition of one employee also, as a practical matter, has long-run consequences, and the re­ versal of such a decision is not always easy. A series of such decisions can have, in total, significant consequences. Analogy with Military Strategy The word strategic suggests a correspondence between the process we are describing and strategy as used in military parlance. The relationship seems to be quite close. This is fortunate for our purposes, for military leaders and re­ searchers have done more thinking about strategic principles relevant to their profession than business leaders and re­ searchers have done about theirs. Thus, business management should be able to profit from what the military has already learned and published. As an indication of the possibilities, see the brief summary of some of the principles of military strategy given in Appendix B. Even more important, the way in which the military does strategic planning, especially the functions of the staff, should be carefully explored, and in­ deed has been explored by some who are interested in pos­ sible business applications. M a n a g em en t C o n tro l , G en era l D esc r iptio n

Management control is the process by which managers assure that resources are obtained and used effectively and efficiently in the accomplishment of the organization’s ob­ jectives. “Effectiveness” is used here in Barnard’s sense:2 “Effec­ tiveness relates to the accomplishment of the cooperative purpose.. . . When a specific desired end is attained we shall say that the action is ‘effective.’ ** “Efficiency,” however, is used not in the sense of Bar­ nard ( “Efficiency relates to the satisfaction of individual motives. . . ”), but rather in its more usual engineering sense:

28

Planning and Control Systems

the optimum relationship between input and output. The more units of outputs are obtained from a given input, the more efficient is the machine or process. Koontz, Simon, and others also use Barnard’s definition of effectiveness, but not that of efficiency. The term management control is not entirely satisfactory, inasmuch as it is used to identify not only control activities (as control is defined in the dictionary) but also a type of planning. “Management cybernetics” is a possible alternative, but cybernetics is a strange word to most people in organiza­ tions, and also it is fast becoming meaningless. There is, for example, a “science” called “psychocybemetics,” which has to do with the psychological effects of plastic surgery. Pro­ gramming has been suggested as another alternative, but it connotes, we believe, a different type of activity; it is de­ scribed in Chapter 3 under the heading Operational Control. The word control in its ordinary sense has unfortunate connotations. As Beckett points out,8 it often is used in the sense of “boss, curb, dominate, enforce, forestall, hinder, inhibit, manipulate, prevail, restrain, shackle, and watch,” and these connotations are not at all realistic as descriptions of what actually goes on in a well-managed organization. The word “controller” likewise has many meanings, some of them unfortunate, for our purposes. It implies, for exam­ ple, that the controller should exercise control, which is not so; he should construct and operate a system through which management exercises control. In practice, people with the title of controller have functions that are, at one extreme, little more than bookkeeping and, at the other extreme, de facto general management. The Conformance Fallacy Several authors state that the aim of control is to assure that the results of operations conform as closely as possible to plans. We emphasize that such a concept of control is basically inconsistent with the concept used in this study.

Strategic Planning and Management Control

29

To the extent that middle management can make decisions that are better than those implied in the plans, top manage­ ment wishes it to do so. And the middle managers can in fact make better decisions under certain circumstances; to deny this possibility is implicitly to assume that top management is either clairvoyant, or omniscient, or both, which is not so. Since no one can foretell the future precisely—that is, since people are not clairvoyant—it follows that in some respects actual events will differ from the assumed events that the plans were designed to meet. Even if plans are revised frequently, the preparation and communication of revisions take time, and the revised plans therefore cannot be up-to-date in the literal sense of this term. Top manage­ ment wants middle management to react to the events that actually occur, not to those that might have occurred had the real world been kind enough to conform to the plan­ ning assumptions. Therefore top management does not neces­ sarily want operations to conform to plans. Furthermore, since people are not omniscient, their plans do not necessarily show the best course of action; they merely show what was thought of as best when the plan was made. Subsequently, someone may think of a way to improve on the plan; indeed, it is quite likely that he will do so as the facts and alternatives become clearer. If he does, he should act accordingly. For this reason, also, top management does not necessarily want operations to conform to plans. The practical implication of the foregoing statements is that conformance to plans is not the standard against which performance should be measured. “The closer the better” is not necessarily the best rule. That is why our definition of management control is worded in terms of the effective and efficient utilization of resources, rather than conformance to plans. Of course, the plans do provide a starting point for the appraisal of performance, and there can be a presumption that plans should be followed in the absence of contrary evidence. But this presumption should be rebuttable, and

80

Planning and Control Systems

the rebuttal process should not be made too difficult. To do otherwise is to run the great risk of stifling initiative and encouraging unthinking mediocrity. A cceptance in Practice Despite the semantic problems, management control does seem to be a meaningful term to people in organizations, and the fact that it includes planning as well as control elements does not, as a practical matter, bother people, except some of those who try to describe the relevant concepts in articles or books. Then confusion arises, as was pointed out in Chap­ ter 1. This confusion, however, comes from the fact that the writers try to separate the planning and control aspects of the management control process, and although this can be done conceptually, such a neat separation does not exist in practice. Although management control does involve two types of mental activity—planning and controlling—in actual oper­ ation these two are not easily distinguished. They do not serve as fruitful topics for a classification framework. D istin g u ish in g C h a ra c teristics

This section describes what seem to us to be the main characteristics of the strategic planning process and of the management control process. The two processes are dis­ cussed together in order to focus on the distinctions between them. The purpose is not to define, but rather to show that the differences are so significant that the systems designed for the two processes have substantially different character­ istics. Some of the mistakes that are made when these differences are not recognized will be described in the suc­ ceeding section. Since we shall emphasize differences, the reader may get the impression that we view strategic planning and manage­ ment control as discrete entities. This is not so. The planning

Strategic Planning and Management Control

31

and control process is in fact a continuum, and we imply a discrete dichotomy only because we believe that this is the best way to explain the distinction. A corresponding ap­ proach is necessary to describe the differences between research and development, or between management and labor, or between slavery and freedom. Management control is a process carried on within guide­ lines established by strategic planning. Objectives, facilities, organization, and financial factors are more or less accepted as givens. Decisions about next year’s budget, for example, are constrained within prescribed policies and guidelines. The management control process is intended to make possi­ ble the achievement of planned objectives as effectively and efficiently as possible within these givens. The management control process involves making deci­ sions about what to do in the future, and this is planning in the ordinary meaning of the term. But the planning decisions made in the management control process are of a somewhat different character from those made in the strategic planning process. The captain of a ship is involved in management control. His job is to take the ship to its destination as ef­ fectively and efficiently as possible. The architect who designs a new ship, the person who evolves a new concept of shipping, or the person who works out new shipping routes, is involved in strategic planning. The president of a shipping line is involved in both. As is often the case in attempts to define basic concepts, the line dividing strategic planning from management con­ trol is fuzzy. Ford’s decision to acquire Philco and thus enter new markets was a clear example of strategic planning; the decision to introduce a 1,000-pound automobile and the subsequent reversal of this decision were probably also in the strategic category. At the other extreme, clearly in the area of management control, were decisions such as the one to arrange the twin tail-lights on next year’s Ford Fairlane horizontally rather than vertically. In between these extremes

32

Planning and Control Systems

are product decisions that could be placed in either category: the addition to the line of the four-door Thunderbird, for example. A more general reason for the shading of one process into the other is that there are important interactions between them. Although budgets are prepared within guidelines that emerge from the strategic planning process, the first draft of a new budget may reveal some unforeseen relationships that cast doubt on the wisdom of the guidelines and thus result in changes in strategy. Even though the distinction may be difficult to state, it is in most instances reasonably clear-cut in practice. A food manufacturer may introduce a half-dozen or so new cake mixes in the course of a year, and all the decisions about these are made more or less routinely by people in the oper­ ating divisions acting in accordance with a set of policies governing the cake mix line; whereas the decision to intro­ duce a new product line, such as dogfood, involves quite different considerations and is studied by quite different people. Decisions on cake mixes are part of the management control process; the dogfood decision is strategic. Management control relates to current operations. Objec­ tives, policies, organization structure, product lines, plant location and capacity, and so on, all are decided in the strategic planning process. Operating people make plans, but they make them within these constraints. It follows that the designer of a management control system also accepts these same constraints. For example, he accepts and adapts to whatever organization structure the strategic planners have decided is best. He designs the system to fit the organ­ ization structure, rather than insisting that the organization structure be changed to fit the management control system. Since the management control process takes place within the guidelines of specified objectives and policies, and since these vary from one organization to another, it is inconceiv­ able that a single management control system ever can be

Strategic Planning and Management Control

33

developed that will fit all organizations. Some authors evi­ dently do not accept this conclusion. For example, the literature contains many articles arguing that direct costing is a universally desirable practice, and other articles arguing that direct costing has no merit. Both sets of arguments are too sweeping. Direct costing is useful in certain types of companies, for example, those that have made a policy decision to price certain products on a marginal income basis. It is not useful, at least for pricing purposes, in com­ panies that have decided to price on the basis of full-cost recovery. Thus, a discussion of the pros and cons of direct costing should take into account differences in companies' objectives and policies. Relation to Other Terms The distinction between strategic planning and manage­ ment control corresponds approximately to the distinction that some authors make between “administration” and “man­ agement.” For example, Ordway Tead says:4 *Administration is the process and agency which is responsible for the deter­ mination of the aims for which an organization and its management are to strive, which establishes the broad poli­ cies under which they are to operate, and which gives general oversight to the continuing effectiveness of the total operation in reaching the objectives sought.” And he goes on to say that “Management is the process and agency which directs and guides the operations of an organization in the realizing of established aims.” In these terms, strategic plan­ ning is a process used in administration, and management control is a process used in management. Chandler and Redlich,5 although using different termi­ nology, make a similar distinction. They quote a General Motors annual report that uses administration to refer to “the daily conduct of the Corporation s affairs,” and “formation of policies,” for the broader types of activities. Note that General Motors uses administration to refer to the opposite

34

Planning and Control Systems

process from Tead s. They, themselves, make a distinction between “operational functions” and “strategy determina­ tion,” corresponding to our terms, management control and strategic planning. In Executive Control—T he Catalyst? Jerome uses execu­ tive control for approximately the same concept that we label management control. Goetz divides the management function into the design of an enterprise and the operation of an enterprise.7 These terms correspond to the distinction made here between stra­ tegic planning and management control. In public administration, a distinction is often made between “politics” and “administration.”8 This fits our distinction between strategic planning and management control. Simon9 makes a distinction between decisions based on value judgments and decisions based on facts. If the distinc­ tion is taken as a relative one, this also fits our classification, since strategic planning decisions involve a preponderance of value judgments, and management control decisions, a pre­ ponderance of facts. But Malcolm10 defines a management control system as “a set of policies, procedures, and information processing which is designed to give direction to activities by clearly establish­ ing goals, by measuring progress toward these goals, and by indicating or initiating corrective action.” He apparently lumps together the central ideas of both strategic planning and management control in this definition. Scope o f the Process Ordinarily, the system that is used in the management control process is a total system in the sense that it embraces all aspects of the company’s operations. It needs to be a total system because an important management function is to as­ sure that all parts of the operation are in balance with one

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another; and in order to examine balance, management needs information about each of the parts. The strategic planning process is much less likely to relate to the totality of the organization; rather, with rare excep­ tions, a given strategic plan relates to some parts of the operation, but not all of it. For example, when the strategic planners are trying to decide whether to enter overseas mar­ kets, they must consider the ramifications of this decision throughout the organization, to the extent that there are ramifications, but only to this extent. If the domestic sales force, or the research laboratory, or the operation of a certain factory is unaffected by the decision, management needs to give no attention to these parts of the organization in making the decision. Similarly, a proposed reorganization may affect a great many people, but have no effect on financial policies, product policies, and so on. Several people have questioned the validity of the distinc­ tion that is made above. They cite two reasons. The first is that the strategic planners, more than any other group, should be seeking to optimize the effectiveness of the whole organization; to do anything less is to “suboptimize,” which is bad. We agree that conceptually it would be a fine thing to optimize the whole organization, but we doubt that people in the real world find it feasible to optimize. A strategic plan is made within the context of an ongoing organization. The process starts when someone gets an idea for doing some­ thing new, or when someone initiates a search for a better way because he is dissatisfied with the way a part of the enterprise is going. In either case the focus is on the new idea, or the part that is in trouble, not on the totality. As Steiner says:11 . . . It should be recognized that life is so complicated that it is impossible to tie together all plans into a complete coordinated set of relationships. The further out in time, the

36

Planning and Control Systems

less detail is appropriate and the looser are the relationships among parts of the planning program. In developing current operational plans, tighter relationships are possible and de­ sirable. In exceptional situations the operations, and even the ob­ jectives, of the whole enterprise may be subjected to a basic re-examination, but these are rare; they occur perhaps once or twice during the tenure of a given management team. Also, in certain types of companies it is possible to plan for the totality, or almost the totality, of the organization. An electric utility, serving a defined geographical area, with no plans for expanding into other areas or other types of busi­ ness, is perhaps the best example. In this situation, it is both feasible and desirable to make over-all plans—covering pro­ duction, distribution, finance, and personnel—for many years ahead, and to optimize, at least roughly, the whole operation. But few organizations are simple enough and operate in a sufficiently predictable environment to permit this. The second criticism made with respect to the generaliza­ tion that strategic plans tend to be partial is that such a statement may encourage planners to perpetuate a mistake that is already too common; namely, it may lead them to overlook important ramifications of a proposed plan. It is a fact that the analysis of a proposed plan should take into account all the significant consequences that the proposal will have throughout the organization; it is a fact that visualizing and assessing these changes are difficult jobs; and it is also a fact that there are many examples of plans that turned out to be poor because some important consequence was over­ looked. These facts, however, relate to the adequacy of the planning process in a specific situation. They do not weaken the validity of the generalization. To say that a given stra­ tegic plan relates to less than the totality of the operation is quite different from saying that it focuses on only one narrow aspect. The latter statement is just as invalid as the former, as a description of what goes on.

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Complexities and Constraints Although not usually total, the strategic planning process is often complex. Several aspects of the organization are involved, there are many relevant considerations, and these may involve social and political factors as well as economic matters. The plan sets precedent, and setting precedents is invariably more complicated than working within precedents. The management control process is less complex. Manage­ ment control takes place within a framework of policies and plans already decided upon. These constraints greatly sim­ plify the task of preparing an operating plan and of operat­ ing in accordance with that plan. Consider, for example, the problems of managing a chain of hotels. The strategic planner must face the problem of maintaining profitable operations in the face of changing travel habits, increasing competition from motels, increasing operating costs, changing tax regulations on entertainment, and so on. He seeks to answer such questions as these: Shall we acquire additional properties? Should they be city hotels, city motels, or motels on the periphery of the city? In what part of the country? Should we build them, or acquire them from someone else? But the manager of one hotel in the chain has a rather different, and much narrower, set of choices. The hotel exists; it has a certain location and a cer­ tain size, which he cannot change at all; and a certain clientele, staff, decor, etc., which he can change only with considerable effort and then only within rather narrow limits. His job is to do the best he can within these constraints. This is a strikingly different job from that of the strategic planner. D egree o f Structure The management control process tends to be rhythmic; it follows a definite pattern and timetable, which are repeated. In budgetary control, which is an important part of the management control process, certain steps are taken in a pre­

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scribed sequence and at certain dates each year: the dissemi­ nation of guidelines, the preparation of original estimates, the transmission of these estimates up through the several ech­ elons in the organization, the review of these estimates, final approval by top management, dissemination back through the organization, and the reporting and appraisal of per­ formance. The procedure to be followed at each step in this process, the dates when the steps are to be completed, and even the forms that are to be used can be, and often are, set forth in a manual. Although the general process of management control is a rhythmic, recurring one, specific actions are taken as the occasion warrants. The fact that each of these actions— promotion of a foreman, change of the price of a product, rearrangement of machinery, and so on—is a discrete event does not invalidate the generalization that the whole process should be viewed as a recurring flow. We can make generali­ zations about the over-all behavior of a gas, even though the individual molecules move erratically. Strategic planning is essentially irregular. Problems, op­ portunities, and “bright ideas” do not arise according to some set timetable; they have to be dealt with whenever they happen to be perceived. The appropriate analytical tech­ niques depend on the nature of the problem being analyzed, and currently there is no general approach (such as a math­ ematical model) that is of much help in the analysis of all types of strategic problems. Indeed, an attempt to introduce a systematic approach is quite likely to dampen the essential element of creativity. Few companies have a systematic approach to strategic planning.* Most companies react to changes in their envir* Stanford Research Institute estimates that the number of manufacturing companies with a fully developed and staffed “long-range planning program” does not exceed 25. (Stanford Research Institute, Conference on LongRange Planning, 1962.) Although any attempt to count the companies that follow a given practice (out of many tens of thousands of companies in all) is suspect, there is general agreement that in this case the number is tiny-

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omnent after they experience the changes; they do not have an organized means of attempting to foresee changes and to take action in anticipation of them. However, the number of companies that regard strategic planning as an important activity and one to be separated conceptually and organiza­ tionally from current operations is growing rapidly. Failure to appreciate the distinction between regular and irregular processes can result in trouble of the following type. A company with a well-developed budgeting process decides to formalize its strategic planning. It prepares a set of forms and accompanying procedures, and has the operating units submit their long-range plans on these forms on one certain date each year. The plans are then supposed to be reviewed and approved in a meeting similar to a budget review meet­ ing. Such a procedure does not work. For one thing, as al­ ready mentioned, new ideas do not originate according to a timetable, and it is unrealistic to assume that all new ideas can be collected on one date, and that the idea-generating process will then be shut off for a year. For another thing, there simply is not time enough in an annual review meeting for a careful consideration of a whole batch of strategic proposals. The strategic planners work now on one problem, now on another, according to the needs and opportunities of the moment. By contrast, it is important that next years operat­ ing budget be examined and approved as an entity so as to ensure that the several pieces are consonant with one an­ other; and in order to do this all the pieces must be brought together on a certain date, say December 14. But there is no corresponding need to cumulate proposed strategic plans and present them all at one time. They are presented for decision whenever they are ready. Except for very general checklists of essential considerations, the strategic planning process follows no prescribed format or timetable. Each problem is sufficiently different from other problems so that each must be approached differently. If there is a manual of strategic

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Planning and Control Systems

planning procedures, it should contain only broad, general statements, not a specific list of steps to take. In most com­ panies, such a manual does not even exist. As Cyert and Dill say:12 Strategic problems of this sort are by their nature complex and ill structured. For decisions about goals, for the assess­ ment of the environment, and for the basic selection of product-market strategies, current mathematical and statis­ tical techniques have little to contribute. In strategic plan­ ning, the task is much less one of making an optimal choice than it is one of being imaginative and systematic in formu­ lating alternatives from which the choice will be made. Some types of strategic planning are amenable to a certain amount of structure and regularity. The capital budgeting mechanism is the best example. Most proposed capital in­ vestments have certain characteristics in common; in essence they involve the commitment of funds now, in the expecta­ tion of earning an adequate return on these funds in the future. Various techniques are available for analysis of the expected financial consequences of such proposals; these can be explained in manuals and the proposals can follow a prescribed set of procedures. Moreover, these capital bud­ geting decisions, or at least some of them, often are made according to a prescribed timetable, and are therefore more rhythmic than are other types of strategic plans. This is because of the necessity for the strategic planners to examine, at regular intervals, the total financial implications of investment proposals, and to match these against financial resources. The foregoing discussion is not intended to minimize the importance of regular, top management strategy meetings. At these meetings management may either discuss a specific proposal, in which case the meetings are part of the strategic planning process, or merely discuss in broad terms the ques­ tion, “Where should we be heading?”, in which case the

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meetings are often the occasion for the first step in the formulation of a strategic plan. Nature of Information Since the management control process encompasses the totality of the organization, management control systems, with rare exceptions, have an underlying financial structure; that is, plans and results are expressed in monetary units. Money is the only common denominator by means of which the heterogeneous elements of outputs and inputs (e.g., hours of labor, type of labor, quantity and quality of material, amount and kind of products produced) can be combined and compared. (The Soviets once considered adopting a system in which “equivalent units of human energy” were to be used instead of money as the common denominator. In the 1930’s, the Technocrats advocated a similar common de­ nominator for use in this country. None of these alternatives is so good as a monetary system.) Some managers, especially those in eleemosynary institu­ tions (e.g., ministers, college presidents, hospital directors), find the whole concept of financial measurements repugnant. If they are to function as managers, however, they really cannot avoid working with money measurements, except in those rare situations where resources are practically unlim­ ited so that there is no need to measure the relationship between inputs and outputs. The college president may say (or feel, even if he does not choose to say it ) : “My job is to educate students; I don’t want to be bothered about money.” Nevertheless, he will have choices to make as to his educa­ tional program, and he will need a means of comparing the alternatives. For example, he must choose between, on the one hand, a large number of courses, small sections, large faculty, and low faculty salaries, and, on the other hand, a limited number of courses, large sections, a smaller number of faculty, and high faculty salaries. Educational administra­ tion also involves decisions as to the relative emphasis to be

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Planning and Control Systems

given to academic matters, athletics, alumni, scholarships, tutorials, and so on. The only way of relating all these ele­ ments for the purpose of selecting the best alternative is to reduce them to financial terms. Although management control systems have financial un­ derpinnings, it does not follow that money is the only basis of measurement, or even that it is the most important basis. Other quantitative measurements, such as enrollment, grades, market share, yields, productivity measures, tonnage of out­ put, and so on, are useful. So are nonquantitative expressions of quality, ability, cooperation, and other attributes. We simply mean that, in most organizations, money is the only denominator that can relate the various pieces to one an­ other and that a financial structure is therefore essential to the management control process. Management control systems are, or should be, coordi­ nated, integrated systems; that is, although data collected for one purpose may differ from those collected for another purpose, these data should be reconcilable with one another. In a sense, a management control system is a single system, but it is perhaps more accurate to think of it as a set of articulated subsystems. As an example, consider the cost information that is collected in many systems. Three types of cost are needed in many companies: (1 ) costs by respon­ sibility centers, which are used for planning and controlling the activities of responsible supervisors; (2) full “program* costs, used for pricing and other operating decisions under normal circumstances; and (3 ) direct program costs, used for pricing and other operating decisions under special cir­ cumstances, such as when management wishes to utilize idle capacity. “Program” is here used for any activity in which the organization engages. In industrial companies, programs consist of products or product lines, and product costs can be substituted in the above statements. Direct program costs are one element of full program costs; so these two types are easily distinguished and reconcilable.

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All that is needed is a record in which full costs are broken into direct and indirect elements. Responsibility costs cut across program costs; so at lower levels of detail the two types do not correspond to one another. They should, how­ ever, be reconcilable in the aggregate. For example, the total of a budget broken down by products should equal the total of a budget broken down by responsibility centers. Moreover, in a management control system, nonmonetary information should be reconcilable with monetary informa­ tion. Information on the number of personnel should be xelatable to information on the cost of personnel, for example. The information used in the strategic planning process is of a considerably different character from that used in man­ agement control. For one thing, strategic planning relies more heavily on external information, that is, on data col­ lected from outside the company, such as market analyses, estimates of costs and other factors involved in building a plant in a new locality, technological developments, and so on. When historical, internal data are used, they often must be recast to fit the needs of the problem being analyzed. For example, the current operating costs of a plant that are col­ lected for measuring performance and for making pricing and other operating decisions almost invariably must be re­ structured before they are useful to management in deciding whether to close down the plant Another characteristic of the information relevant for strategic planning is that much of it is imprecise. The stra­ tegic planner estimates what will happen, often over a rather long time period. His estimates are likely to have a high degree of uncertainty, and he must treat them accordingly. The estimates used in management control are not certain either. (An advertisement for a book on profit planning as­ serts: “it enables you to present management with a plan of action which makes a given profit figure not merely a target to aim at, but a near predictable certainty;” this statement is nonsense.) Although by no means precise, the estimates used

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Planning and Control Systems

in the management control process are likely to be much much closer to actual than the estimates used in strategic planning, however. The data used in the management control process have the same definitions and are put together in the same way month after month. The data relevant for deciding on a pro­ posed strategic plan are put together specifically for that plan. The need for uniform definitions of terms is therefore more important in management control than in strategic planning. For example, labor cost should have a certain prescribed, generally understood meaning in all the regular, recurring performance reports: whereas the meaning of a number that is labeled ‘labor cost” in the analysis of a pro­ posed plan usually requires interpretation; it can be under­ stood only when one knows the work elements and the method of pricing the elements that the analyst had in mind. This does not mean that problems of definition are of no concern to strategic planners, for serious misunderstandings arise when terms are implicitly defined differently by differ­ ent people, and these misunderstandings can be reduced by an agreed-to dictionary of terms whose definitions are used whenever possible. Indeed, those involved in the manage­ ment control process quickly come to understand the mean­ ing of the terms used, even if these meanings are never written down, or even if the written definition has become obsolete, which happens. In the strategic planning process, misunderstandings are more common. For example, in the TFX investigation, the Senate Committee counsel made much of the fact that Boeing submitted estimates for “cost” that were lower than those submitted by General Dynamics, as if cost had the same meaning in both sets of figures. It turned out that the figures were not at all comparable. The data needed for strategic planning depend on the nature of the problems being studied. Not all these problems can be foreseen and, even for those that can be foreseen, data

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collected regularly in a form that will be useful for an occa­ sional strategic decision are not worth the cost of collection. It is because of the varied and unpredictable nature of the data required for strategic planning that an attempt to design an all-purpose, internal information system is probably hope­ less. For the same reason, the dream of some computer specialists of a gigantic data bank, from which planners can obtain all the information they wish by pressing some but­ tons, is probably no more than a dream. Purpose o f Estimates The estimates used in strategic planning are intended to show the expected results of the plan. They are neutral and impersonal. By contrast, the management control process, and the data used in it, are intended to influence managers to take actions that will lead to desired results. In more for­ mal language, the objective of management control is goal congruence; that is, the system should be so set up that ac­ tions that operating managers take in their perceived self interest are also in the best interests of the whole organiza­ tion. This difference in purpose is subtle, but important. The difference can be illustrated by the discussion in the literature and in practice, of how “tight” an operating bud­ get should be. Should the goals be set so high that only an outstanding manager can achieve them, or should they be set so that they are attainable by the average manager? At what level does frustration inhibit a manager’s best efforts? Does an attainable budget lead to complacency? And so on. Ques­ tions of this type are highly appropriate in deciding on the nature of data in a management control system. They are psychological considerations. Activities such as communicat­ ing, persuading, exhorting, inspiring, and criticizing are an important part of the process. By contrast, the data used in strategic planning are impersonal; their purpose is to com­ municate the best estimate that can be made. If anyone

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Planning and Control Systems

thought the data were designed so as to motivate the user toward a certain course of action, he would reject them summarily. Organizational Relationships Both strategic planning and management control involve top management, but strategic planning is heavily staff ori­ ented, whereas management control is heavily line oriented. Line managers usually are not major participants in the strategic planning process; sometimes they are not even aware of the fact that a plan is being considered. There are good reasons for this. Many operating executives are by tem­ perament not very good at strategic planning. Also, the pressures of current activities usually do not allow them to devote the necessary time to such work. For competitive reasons, furthermore, it is often essential that the number of people who are aware of strategic plans be kept quite small. This distinction between the role of the operating man­ ager and the role of the strategic planner is expressed in various ways in the literature. Some examples follow; first, from Selznick:18 . . . The role of the institutional leader should be dearly distinguished from that of the “interpersonal” leader. The latter s task is to smooth the path of human interaction, ease communication, evoke personal devotion, and allay anxiety. His expertness has relatively little to do with content; he is more concerned with persons than with policies. His main contribution is to the efficiency of the enterprise. The insti­ tutional leader, on the other hand, is primarily an expert in the promotion and protection of value.. . . And this statement by Senator Henry M. Jackson:14 You know the typical week in the life of a Cabinet officer —seven formal speeches, seven informal speeches, seven hearings on the Hill, seven official cocktail parties, seven

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command dinner engagements. It is a schedule which leaves no time for the kind of reflection essential to creative plan­ ning. What they can do, should do, must do—and all that they should be asked to do—is to pass judgment on sharply defined policy issues. Of course Cabinet members have the obligation to en­ courage and back the officers in their departments who are charged with policy planning. The responsibility of the policy planner should run clearly to his departmental head. In this way staff planning can be geared into line decisions and the authority of the departmental head can support and strengthen the hand of the planner. But I am convinced that we never will get the land of policy planning we need if we expect the top-level officers to participate actively in the planning process. They simply do not have the time, and in any event they rarely have the out-look or the talents of the good planner. They cannot explore issues deeply and systematically. They cannot argue the advantages and disadvantages at length in the kind of give-and-take essential if one is to reach a solid understand­ ing with others on points of agreement and disagreement. Much investigation and analysis are needed as a basis for making a strategic decision. In some organizations, this work is done by a staff unit created for the purpose. Such a unit usually has little if anything to do with current operations and therefore is not involved in the management control process. In other organizations, one or more persons are drawn from the operating organization to work on a pro­ posed strategic plan. During the period in which they are so engaged, their activity is quite different in character from their normal operating tasks. Generalizations as to the types of person who should engage in planning are quite different, depending on whether the reference is to strategic planning or to the planning aspect of management control. The dif­ ference is essentially that between the thinker and the doer. A generalization covering both types of activities will be either invalid or so amorphous as to be useless.

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The operating organization does have a role in the strate­ gic planning process. A staff unit assigned to study a strategic problem works with the operating organization. Ideas, which are the starting point of strategic plans, may originate any­ where in the organization; a good means of encouraging the flow of such ideas to the strategic planners is of great im­ portance. The planners often seek the expert advice of members of the operating organization in the areas of their special competence. And the decisions taken must be com­ municated to—indeed, “sold” to—the operating organization before they become effective. But all of this adds up to a considerably smaller degree of involvement on the part of the operating organization than that to be discussed under the heading of management control. Not everyone agrees with the above analysis of the role of the staff. For example, Paget has said:15 . . . I think it is important to involve all elements of man­ agement in the development of the strategic plan. By management, here I mean everyone down to the third eche­ lon under the president, or thereabouts—the people whose decisions and opportunities for the exercise of judgment materially affect profit performance. These people should be consulted concerning the premises upon which planning is going to be conducted, and they should be furnished an outline of at least the basic elements that the over-all plan should include. Each unit, then, should develop its own strategic program along the lines covered in the outline. At the same time, it should suggest the yard­ stick against which progress toward these objectives is going to be measured. Although Mr. Paget refers to strategic plans, he probably has in mind either (1) the type of planning that, although covering a span of several years, occurs within the framework of given resources and policies and which we therefore in­ clude under management control or (2) the strategic plan­

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ning done by the divisions of a decentralized company, which we discuss below. Line managers are the focal points in management con­ trol. They are the persons whose judgments are incorporated in the approved operating plans, and they are the persons who must influence others and whose performance is mea­ sured. Staff people collect, summarize, and present informa­ tion that is useful in the process, and they make calculations that translate management judgments into the numbers that appear on the budget. Such a staff may be large in numbers; indeed, the controller’s department is often the largest staff department in a company. However, its importance in the management control process is not necessarily proportional to its size. The decisions, which are the important part of the whole process, are made by the line, not the staff. There is considerable support for the proposition that line managers at all levels should participate in all aspects of the management control process and for the belief that budgets imposed by top management without such participation are likely to be ineffective. This is the thesis, for example, of McGregor s The Human Side o f Enterprise.18 He described two ways of operating a company: “Theory X,” in which the organization’s function is primarily to carry out the decisions made by “the boss,” and “Theory Y,” in which the organiza­ tion participates with top management in the decision­ making process. He favored Theory Y as the better way of operating. Not everyone agrees with the proposition that operating managers should participate in the budgetary process. There is considerable evidence that managers favor such participa­ tion, but there are some doubts that the resulting high mo­ rale does in fact lead to more effective operations. Andrew Stedry writes17, “the assumption that participation is univer­ sally good, although unsupported by hard evidence, has become a cult.” This is a minority view. In any event, it is significant that the argument is based on phychological con­

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siderations that are characteristic of the management control process. It is possible, for example, that many of those who disagree with McGregor s advocacy of Theory Y have in mind its inapplicability to the strategic planning process. Although McGregor did not distinguish between the two processes, all his examples relate to management control, and none to strategic planning. As a corollary to the above, in the management control process the communication of objectives, policies, guidelines, decisions, and results throughout the organization is ex­ tremely important. In the strategic planning process, commu­ nication is much simpler and involves relatively few persons. The wide communication of the decisions and changes that result from strategic planning is obviously important, but this is part of the management control process. When a company is organized into divisions that are almost autonomous, divisional management will do strategic planning, but this is not inconsistent with the observation made above, because division management is in this case functioning as the top management of the division. The term strategic planning also is descriptive of what goes on with certain specialized activities. The process of making decisions about a research program ( as distinguished from a development program) probably resembles, in miniature, the strategic planning process for the whole organization. Top management is involved in both strategic planning and management control, but the type of activity required by one differs from that required by the other; roughly* this is the difference between creativity on the one hand, and exercising leadership on the other hand. In some large com­ panies, there is a fairly clear-cut organizational distinction between these functions, even at the very top. In some companies, for example, the chairman tends to concentrate on strategic planning and the president on management con­ trol; in other companies, the president does the former and

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the executive vice president does the latter. One large in­ ternational company has two co-equal managing directors, one primarily occupied in strategic planning and the other in management control (Again, we stress the fact that although these statements are made in the form of a di­ chotomy, the actual situation is a continuum; one process merges into the other.) Source Disciplines The principles of strategic planning have their roots in economics, whereas the principles of management control have their roots in social psychology. Economists, to the extent that they deal with business organizations at all, are concerned primarily with topics re­ lated to strategic planning rather than with topics related to management control. This is indicated by the following quotations: Joel Dean:18 “The purpose of this book is to show how economic analysis can be used in formulating business poli­ cies” William J. Baumol:19“. . . the economist is an expert model builder. Indeed, there are very few disciplines which produce model builders with such practice and such skill. This, I think, is one of the most important things which the economic theorist can contribute to the work of management science.” Hitch and McKean:20 “Traditionally, economic problems have related to the allocation of resources among broad uses, taking efficiency within firms for granted, while managerial problems have pertained to resource use within individual firms (or other organizations).** Note that all these quotations refer to characteristics of activities that have been here grouped under the heading of strategic planning; none of them refers to the ongoing, recurring, psychologically oriented activities that are charac­ teristic of management control. As Hitch and McKean point out, some people are studying what actually goes on in

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the operation of a firm, but these behavioral theorists are sociologists, psychologists, or anthropologists, not econ­ omists. It is not uncommon for an economics major in college to have difficulty in adjusting to the realities of business situa­ tions. This difficulty may well stem from the fact that his college courses dealt primarily with strategic planning, and he therefore was unaware of, or inadequately aware of, the existence of the management control process and of the distinction between this process and strategic planning. Planning and Control The above discussion makes it apparent that the mental activity called planning is involved in both strategic plan­ ning and management control. The activity called control also is involved in both processes, although it is more impor­ tant in management control than in strategic planning. The control aspects of the strategic planning process have to do with top management s need to check on the progress being made by the staff toward arriving at a decision on a problem being analyzed, to appraise the ability of those involved in the process, and to determine whether general policies are being followed in the implementation procedures. This type of control is much less systematic, much less objective, and much more difficult than control of the operating organiza­ tion. Standards of comparison are nebulous. The success of a strategic plan can be tested only against what happens over a considerable period in the future, and then only in compari­ son with the intangible “what might have been.” Sometimes a proposed plan is tested in a pilot plant oper­ ation. For example, a company may establish a miniature manufacturing plant and even an accompanying marketing organization to test the desirability of adding a new product. In such cases, the initial implementation of the plan is made the responsibility of a special group, with the facilities turned over to the operating organization only when the

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operation is running smoothly. Whether these activities are more usefully thought of as part of strategic planning or as part of management control is a debatable question. In any event, there is a considerable difference in the task of mea­ suring performance under these circumstances as compared with that of measuring performance of the operating organization. Conflict betw een Management Control and Strategic Planning Activities Strategic planning and management control activities tend to conflict with one another in some respects. The time that management spends in thinking about the future is taken from time that it could otherwise use in managing current operations; so in this indirect way, strategic planning can hurt current performance. And of course the converse also is true; if management spends all its energies putting out today's fires, strategic planning will be inadequate or nonexistent. More directly, many actions that are taken for long-run, strategic reasons make current profits smaller than they other­ wise would be. Research and some advertising expenditures are obvious examples. The problem of striking the right balance between strategic and operating considerations is one of the central problems in the whole management process. This problem is made more difficult by the fact that con­ ventional accounting systems do not provide for a clear distinction between the two types of activities. The closest approximation to such a distinction is that made between capital expenditures and operating expenses, but this is not very close. Capital expenditures include spending for routine machine replacements, and the decision to make them does not involve strategic planning; furthermore, operating ex­ penses include amounts for research, advertising, and similar items that are varied for strategic reasons.

54

Planning and Control Systems

A few companies are experimenting with an accounting system that divides the funds to be used for future spending into two categories: (1 ) operating funds, amounts required to maintain ongoing operations within a specified framework of policies, and (2 ) strategic funds, which Westinghouse Electric Corporation defines as “all expenditures except those which are necessary to sell, engineer, manufacture, and dis­ tribute today’s products using today’s methods.” The think­ ing behind such a division is explained in the following description:21 There are two basic types of long-term investments that managers can make: (1) Investments that provide a definite and recognizable cash inflow that can be estimated reason­ ably closely; these are the typical capital investments that are paid for from capital funds and do not affect present operat­ ing results. These investments do not present a conflict, because they do not affect the current operating results by which the manager is being judged. (2) Investments that do not provide a predictable future cash inflow. These further break down into two classes: (a) One is a “noneconomically justified capital expenditure,” such as a new employees' cafe­ teria or locker room, or a smoke filtration system that is not required by law. These also are purchased from capital funds and thus do not affect current operations of individual man­ agers, although the future associated expenses may affect the measurement of their performance, (b) The other type of long-term investments is that which does not involve invest­ ment of capital funds, but is a current expense. These invest­ ments direcdy affect the manager’s current performance; yet such an investment may not be expected to produce results until some future time. An example of this type of investment is employment of a higher than normal ratio of clerks to customers in a retail store, in the expectation of creating good will and thus increasing future sales. If a manager chooses to make such investments he may be furthering the general long-term goals of the organization; yet at the same time he is lowering its current performance in the eyes of his supe­

Strategic Planning and Management Control

55 riors, according to their quantitative measures. How can they judge the ultimate desirability of hiring one person with bet­ ter than average qualifications at a slightly higher salary, or paying one cent per unit more for a raw material or part in order to gain the highly intangible benefits a certain supplier provides? A nalogies

and

M isco n ceptio n s

In this section we shall use the distinguishing characteris­ tics described in the preceding section to analyze some as­ sertions that have been made about the planning and control process. If our statement of the distinguishing characteristics is correct, some of these assertions turn out to be erroneous. Analogy with Biology Several writers have suggested that biological processes are analogous to processes that go on in organizations. The analogy that is relevant to the present study is that between the control process in organizations and the nervous system in organisms.22 It may well be that facts learned about the nervous system, particularly the human central nervous system, provide some useful insights for an understanding of management control systems; however, no biological process remotely resembles the process here labeled strategic planning. A human being can, by the exercise of will power and intelligence, learn to function more efficiently, improve his health, and so on; that is, he can influence within limits the way in which he oper­ ates. But all biological organisms must accept the organs and functional systems they are bom with; they cannot change them by an exercise of will; they cannot add to them at all. An organization, by contrast, can successfully change itself. The process of deciding to do this is strategic planning; it is as if a person could consciously will the growth of a third arm or a larger brain. Biological analogies are not useful for study­ ing the process of strategic planning.

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Planning and Control Systems

Military Strategy and Tactics As pointed out above, the process of strategic planning in a business organization resembles the process of strategy formulation in a military organization. There is a natural inclination to go on and equate management control with “tactics,” as used by the military. Such an analogy has a serious defect. A military tactical maneuver has a definite beginning and end, whereas the management control process relates to a recurring cycle of operations. A business does engage in tactics in the military sense (e.g., fighting com­ petitive moves in a given market, negotiating a labor con­ tract), but these are only one part of the stream of ongoing, recurring activities to which the management control process applies. Game Theory In the mathematical theory of games, the word "strategy** figures prominently, but as used in the theory of games, strategy has a meaning that is substantially different from its meaning in the term strategic planning. In the theory of games, the strategy is a statement made by or about a player before the game begins, specifying exactly what action he will take under every conceivable situation that can arise in the course of the game. In the absence of a precise and complete formulation of these actions, the mathematical algorithm cannot be applied. The strategic plans that we are discussing apply to situations so complex that such a com­ plete specification of alternative courses of action is un­ thinkable. This difference between the complexity of real life and the relative simplicity that is essential in applying game theory probably accounts for the fact that there are few published reports of the application of the theory of games to actual business problems. Even if it is assumed that illus­ trations in texts and articles on the subject are taken from

Strategic Planning and Management Control

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