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Louis Gerstner: A Practical Take On Strategic Planning

To celebrate fifty years of its quarterly magazine (now online of course), McKinsey & Co is going back through some of its best articles to find the ones that still resonate today. Louis Gerstner, who once said that “the last thing International Business Machines Corp. (NYSE:IBM) needs right now is a vision,” before leading the company’s turnaround as its CEO, worked at McKinsey earlier in his career and had the same skeptical view of vague “forecast planning” even then.

Gerstner isn’t actually opposed to strategic planning, but he argued that too often these programs “offer no overview, no analyses of external trends, and no perceptive insights into company strengths and weaknesses,” in an article first published in the December 1973 of McKinsey Quarterly and re-issued today.

“Forecast planning of the sort I have described can usually be identified by leafing through a company’s planning documents,” he wrote. “Pages and pages of accounting information, detailing five years of financial forecasts with little or no explanatory material, are one earmark.”

Strategic planning should be decision-oriented

Gerstner argues that what sets aside strategic planning from mere extrapolations is the presence of decision making. If the entire process of gathering data, analyzing trends, and figuring out where you want the company to be five years from now doesn’t result in concrete decisions on what the company should be doing today, then there wasn’t much point to the exercise. Gerstner understands why executives aren’t always eager to do this: making definitive decisions often means hanging your career on a decision that isn’t obviously correct (or there wouldn’t have been the need for so much work to reach your conclusion in the first place). For companies that promote their best line managers quickly and tie compensation to short-term metrics such as stock movement, there isn’t even an incentive for managers to take such a long-term risk.

“The leap from plans to decisions is an entrepreneurial step that cannot be reduced to a routine,” writes Gerstner.

Focusing on external risk is one way to force decision making

One way to deal with this problem is to make sure that the strategic planning process is designed with a decision-oriented approach from the get-go. To break free of the ‘momentum’ planning that simply extends whatever’s happening today a few years into the future, Gerstner recommends focusing on external risks that could upset those plans. Changing competitive strategies and environmental conditions (such as political or macro risk) are difficult to predict, but identifying outcomes that could derail your company’s strategy, and then working on contingency plans to deal with them is one way to engage senior management.