5-Year Plans Often Ignore the Real World

The financial vice president had some good news for his colleagues. After much work on the budget, it was clear that the company could meet its goal for substantial growth in profits over the next two years. “We just put off the spending we planned for those years until the next two,” he said.

Disarmingly simple. Also a succinct commentary on the elaborate annual exercise that corporations now insist on putting themselves through. It’s called updating the five-year plan.

As if by magic, this planning process is designed to ensure the kind of annual growth most U.S. companies feel compelled to achieve year after year to keep shareholders, takeover artists and any other potential critics at bay.

What does this effort really achieve? There are many who say it achieves nothing. “Five-year plans were exotic 10 years ago,” says Robert D. Paulson, managing director of the Los Angeles office of McKinsey & Co., a big management consulting firm. “Now everyone has one and we’re no better off.”

The idea behind the five-year plan, of course, is to help a corporation develop a long-term strategy. Financial resources are supposed to be matched against spending plans and revenue projections, all based on a careful assessment of what lies ahead in the economy and the company’s lines of business.

In theory, it should be a useful exercise. It frequently isn’t, because the strategy setting often takes a back seat to making certain the bottom line comes out according to some preconceived notion of how big profits should be.

Thus, if the company has been promising analysts that its profits are going to grow by 8% to 10% a year, then the plan will most certainly wind up with those numbers, realistic or not.

“A forecast that calls for anything but improving profits year after year is culturally unacceptable, even in cyclical industries,” Paulson observes.

Just how chained to an artificial growth rate can companies become? Even when they have a surprisingly strong year, they insist on tacking on the standard 8% to 10% increase for the year after.

When inflation was running at a high level, it was relatively easy to meet such goals simply by raising prices. Now, with much more price resistance in the marketplace, the only way to do it is to cut expenses.

In consequence, as incongruous as it sounds, companies with record results impose hiring freezes, put off important expansion projects and generally tighten the belt. The result can be a loss of momentum, making the task of meeting the goal even tougher. One big risk in the whole process is that five-year planning take the place of continuous assessment of conditions. In effect, the plan substitutes for the real world. This has led companies to go ahead with factory expansion plans, simply because they were in the budget, even when market conditions had changed. It also produces a slowness to act when new opportunities come along.

Management experts observe that in many cases the planning process involves top manangement and the financial staff to the exclusion of the middle management people actually faced with carrying out the plan. Middle managers may have some say early in the process but not during it.

There’s a false assumption that “responsibility for organizational success lies primarily on the shoulders of top management,” Robert H. Hayes, a Harvard Business School professor, pointed out in a recent New York Times article.

Hayes also argued that the cart gets put before the horse in some cases--companies set plans, then try to develop the capabilities to meet them instead of the other way around. He contended that corporate leaders might ask why, in the past, when planning occupied a lot less time, the nation’s industrial capabilities were more the envy of the world than they are today.

To some extent, the problem reflects the attitude of modern professional management that the main task is to manage money rather than factories and products. Hence, the numbers become more important than the assumptions used to arrive at them. General economic forecasts get more attention than customer behavior and competitive forces. The result: a lot of time uselessly diverted from really running the company.