REPORTS

"GETTING VALUE FROM

STRATEGIC PLANNING": THE ENCORE
The Conference Board's 1989 Strategic
Planning Conference
By B e r n a r d C. Reimann

The strategic manager must start with a clear long-

L
ast year's conference focused on the some of the
ways in which corporate planning experts can add term vision and then achieve a balanced trade-off with
value to their line organizations. The theme was short-term results. A high-growth firm must invest heavily
so well received that the conference planners decided to in its future at the expense of short-term results, but can
offer an encore this year. Once again I will approach this only succeed if this trade-off is fully appreciated by
review essay from the perspective of a planning executive investors. For more stable businesses, short-term earnings
looking for new ways to add value to his or her firm. must be built into the long-term plan — this then provides
The underlying theme of this conference was that the a score card to monitor monthly progress.
role of staff planners is changing, which makes it The strategist also needs a "broad, world view."
imperative to find new or improved ways to add value Raytheon's Seismograph division illustrates the importance
to the organization. Conference chairman Walter Schaffir of this global view. Without this broad perspective its
kicked off the conference by predicting that strategic managers might not have noticed the global consolidation
planning will, indeed, have arrived, once line managers trend among their competitors. To "sidestep" these
have become its principal practitioners. This shift in line/ powerful worldwide competitors, Seismograph developed
staff roles is no longer news, but bears continuous a strategy of focusing on its unique strengths in third
reinforcement, since it means fundamental changes in generation information processing. They have positioned
the roles of staff planners as well as line managers. themselves in a growing niche market on a global scale.
Sarney concluded that as strategic managers, we must
Managing Strategically keep striving to:
One important way for planning specialists to add value ■ build long term value for our businesses
is to help line managers, used to focusing on short term ■ fully communicate our vision and strategy to achieve
operating issues, to manage more strategically. Dr. George that vision
Sarney, Senior Vice President and Group Executive at ■ stay involved with our organization in fine tuning
Raytheon shared his views of what strategic management our strategy
means to an operating executive. Contrary to popular ■ embrace the challenge of balancing future vision
opinion, he sees no conflict between the short and long with short-term results.
term. In fact, managing strategically means appreciating To him, "creating value is what strategic management
that "short term results must be linked to long-term is all about."
vision." It also means communicating this linkage to all
stakeholders and getting the entire organization to The Strategic Profile
participate. Michel (Mike) Robert, founder of Decision Processes
International, provided a useful model of the elusive
concept of strategic vision. Based on talking to a number
Bernard C. Reimann is Chairman and Professor of the De- of CEOs, and even sitting in on some of their strategy
partment of Management and Labor Relations at Cleveland sessions, his firm has developed the concept of a Strategic
State University, Cleveland, Ohio. His new book, Managing Profile. [see his book, The Strategist CEO (Quorum
for Value: A Guide to Value-Based Strategic Management, Books, Westport, CT, 1988)] This profile is the CEO's
published by The Planning Forum, Oxford, Ohio, is ex- vision of what the organization should be like, articulated
cerpted in this issue of Planning Review. in a way that makes it a guide for others to follow. It
40 Planning Review
 can serve as the basis for integrating both strategic and Planners can also help identify the business unit's critical
operational planning. success factors (CSF)— the actions and capabilities that
The strategic profile is the "output from strategic can achieve a competitive advantage. According to
thinking" and should identify "what to emphasize and Soldner, GMs of particular businesses often get these
what to de-emphasize." It should provide a "picture" wrong. If so, planners must find this out and make the
of what the firm wants to pursue (or not) in terms of line managers aware of their true CSFs (very
products and services, customers, markets, and geography diplomatically, of course). Planners must also be
(that is, global vs. domestic). advocates. That is, they must know enough to be willing
But, unless operating managers share the strategic and able to stick their necks out and stand behind a
picture, it's very difficult to allocate resources without particular position.
ending in a "tug of war." The strategic profile should What is the single most critical characteristic of a good
guide operating executives in deciding which opportunities planner? According to Soldner it is good interpersonal
to chase — almost like a "filter embedded in their heads." skills, since the planner must be able to deal effectively
This shared vision then can become the root of all with line managers and other staffers to get the job done.
decisions, or the "strategic heartbeat" of the business. Finally, the planner has the right to have some
Robert concluded by proclaiming that many of the most expectations from the boss as well. The boss should be
popular techniques applied to strategic management have willing to get involved in planning, be open-minded, and
been "conceptually flawed." The portfolio planning matrixes support the planner when dealing with the line. Most
of the Seventies, as well as the competitive strategy and importantly, the boss must be willing and able to help
shareholder value approaches of the Eighties, have been the planner move back to the line. This is critical, because
"myopic." Focusing only on the wealth of the shareholders the nature of the planner's job means that he or she will
is sheer "folly." True strategic management means "ruffle some feathers" in the line. And, when a good
concentrating on the health of the business, which will line job opens up, managers will tend to pick someone
automatically help the shareholders in the long term. they feel most comfortable with, not someone "who's
In response to a question, all three speakers insisted been giving them all this grief."
that the firm's strategy should not be kept secret from
lower managers and employees. People won't implement The Soft Side of Planning
strategies they don't understand. Besides, they'll find out
eventually anyway, but if they have to find out by trial Is planning becoming obsolete as an organizational
and error, it'll cost the organization much more than it's function? Recent research suggests that firms might
worth to protect the secrecy of the strategy. As Schaffir actually be better off if they abandoned their formal
put it: "[Secrecy] will confuse the staff more than the planning processes altogether. And, in fact, staff planners
enemy!" have often been among the first to feel the ax in corporate
restructuring or downsizing.
The Planner and His/Her Boss However, a key point brought out in both last year's
Gerald Soldner, a Vice President of GTE, started off conference and this one was that formal planning is not
this session about planners and their boss by pointing out being eliminated, but simply moved to the line. That is,
that the general manager or CEO has to be the real planner, large firms are recognizing that planning doesn't really
otherwise planning becomes a mere academic exercise. belong at the distant corporate headquarters, but where
Where does that leave the staff planner? He or she should the action is: at the level of the general manager of the
be the GM's "alter ego" and the one that actually does individual business unit or division.
the work of preparing the plans. But, the GM has to take But where does that leave us as professional planners?
ownership. At GTE this means the GM actually has to It turns out that all is not lost, if you can change your
sign the final plan. ways to make sure you add real value by helping,
Strategic planning should be done at the lowest practical educating, and supporting your line bosses and colleagues
level, typically the individual business unit. However, in their often unfamiliar and uncomfortable dual roles of
general managers have a tendency toward "puffery" and doers and planners. A provocative session on "the soft
unrealistic projections. Here the planner can add value side of planning" shed some important light on this
by helping them face reality. But, since GMs usually fundamental change in the way planning is done in
have rather substantial egos that bruise easily, planners organizations. A respected academic shared some research
must avoid the temptation to show off how smart they results about the poor performance record of formal
are at the expense of the GM. They must be sensitive to planning, and two experienced line managers provided
organizational politics and deal with the operating useful insights about why this might be and what to do
managers directly rather than going up the line. about it.
March/April 1989 41
 William Starbuck, ITT Professor of Creative are based on poorly designed mail surveys, without any
Management at NYU, and a noted authority on control over who answers the questions. A thorough review
organizations, shocked many in his large audience by of the literature actually shows that results from this
proclaiming that "formal planning generally does not research are quite mixed, with no consistent relationships
contribute to profits in a predictable w a y . " True, between planning and performance indicators such as
forecasting and strategizing may be "fascinating activities growth or profitability. In fact, Starbuck has found that
that contribute to building an organization." Unfortunately, the better the research method, the lower the relationship
formalizing plans can turn them into "millstones." between planning and performance.
What about all those well-known research studies that One explanation is the fact that planning is really a
purport to show that planning pays off? It turns out that sword with two very sharp edges. If well done, it can
most of these studies are simply "bad research." Many be great, but if not, everyone will "run together toward
poor goals." That is, planning can work equally well in
both directions. Another problem is that organizations
often amplify individual misperceptions. Managers tend
Shareholder Value to oversimplify and rationalize. Since they often stake
their careers on their decisions, managers have strong
This is one of three key extracts — on shareholder
value, strategic alliances (on page 44), and product motivations to conceal errors, especially from superiors.
development (on page 47) — from the Conference As a result, top managers "are the folks least in touch
overview. with what's going on."
A useful approach to focusing the enterprise involves What organizations really need is lots of good, informal
improving shareholder value. This term has been used communication. This is exactly what a recent study by
as a euphemism for wholesale restructuring. Ideally, Grinyer and Norburn found. The amount of informal
however, the process answers shareholders' demands communication (such as talking vs. memos) in the firms
for immediate high returns on investment while letting they studied was positively correlated with profits. And,
the company make the technology investments it needs the greater the diversity among the types of information
to compete 10 years in the future. communicated, the stronger the relationship.
We have developed methods to help multidivision According to Starbuck, planning can be a liberating
corporations increase company value. The key is to
activity as well as an inhibiting one. The more flexible
look closely at the varying contributions each business
makes to that value. and informal the process, the less inhibiting and,
Briefly, we identify foundation businesses and the therefore, the more effective it is likely to be. Finally,
long-cycle investment businesses, which are needed a "reorientation" plan that threatens to take you into
to position the company for the future. new waters will be difficult to accept by line managers.
Next, we separate high-return from low-return Change is threatening to "power holders," who much
foundation businesses using one main criterion: prefer "natural extensions" of the status quo. So,
contributions to shareholder value based on cash flow planners should avoid major, disruptive reorientations
return on investment above the cost of capital. We and focus on small, incremental changes.
have found the increase in shareholder market value
over time to be closely related to the real cash flow Buying In
return.
After we work through this analysis for a company,
Given Starbuck's definition of formal planning, its
we typically recommend what steps they should take
to expand high-return businesses by perhaps relaxing spotty performance record should be no great surprise.
return-on-equity standards, steps to focus development The term "formal plans" calls up a vision of the volumes
programs for long-term investments, and steps to build of strategic plans that gather dust on the shelves of so
small high-return businesses through acquisition. many corporations. How many line managers really read
All these steps can reduce uncertainty because they these plans, let alone operate by them? Is it any wonder
emphasize the company's strengths—which are not that these managers and their associates would react
necessarily its traditional core businesses. Indeed, as negatively to a survey about the effectiveness of these
companies such as B.F. Goodrich and Primerica have plans? Or that they might perceive these "commandments"
discovered, focusing the enterprise sometimes involves from corporate as stone neckties rather than blueprints
turning it inside out. for the future? Could it be that what Starbuck's research
reveals is not the inadequacy of the formal planning process
Charles R. LaMantia
President and CEO per se, but the way it has been implemented? The
Arthur D. Little, Inc. comments of the two practitioners in this session suggest
that the culprit is, indeed, not planning itself, but the

42 Planning Review
 way in which some planners go about applying the process. However, corporate planners have to get operating
Phyllis Kramer, a senior vice president with Bank people to "buy in." This means paying careful attention
Leumi, had the following message for staff planners: to the interpersonal, "soft side" of planning, with constant
You are responsible for getting line managers to "buy awareness of the different perspectives of planning and
in." This means getting commitment not to the strategic operating people. What's a good test of the degree of
plan, but to implementing it and integrating it with their buy-in? The R&D budget. Did they rob R&D to make
operational plans and budgets. A major selling and their quarterly numbers? It takes a strong person to admit
educational effort is needed to get the line actively to top management: "We didn't make our numbers."
involved. Top management also has to buy in. They (Because they didn't want to take anything from the agreed-
can't say: "Here, do all these wonderful things," and upon R&D budget.)
then proceed to cut your budget. If management keeps Finally, the job of planning is not delegatable and the
sending such mixed messages, the strategic plan will CEO has to be the "final keeper of reality." A strategic
become just a document — or just a "formal plan," in plan that says: "There's no hope, get out!" is very
Starbuck's terms. uncommon, yet may reflect harsh reality. In a situation
Kramer also provided some insights about why line where competition has escalated or markets have collapsed,
managers may find it so difficult to go through an effective there's no use hiring more salesmen, and lowering prices.
planning exercise. "It's necessary to be absolutely and Only the CEO can make this kind of judgment. In response
brutally honest with yourself, and this can be a hard pill to a subsequent question, Frey pointed out that if the
to swallow," she exclaimed. "You can't depend on your CEO refuses to face up to this kind of reality, his company
friends for your market research, just to be safe." You will "go into the tank."
have to go directly to your customers to get the "brutal
truth." In her bank, they organized focus groups to educate Planning to Create Shareholder Value
lending officers about the real needs of their customers.
The end result of going through a systematic strategic Many corporations have had a difficult time pleasing
planning exercise "got senior management on board" their shareholders of late. They have seen the market
and helped them to look at their markets in different value of their stock slide with often disastrous
ways. consequences: hostile takeovers, leveraged buyouts, or
some equally painful "restructuring" to avoid such
Kramer concluded that the real value-adding role of
unwelcome advances. Some of the most venerable names
planners is to get a "buy-in" so that line managers can
in corporate America have been affected in one way or
begin to think strategically.
another: Beatrice, Brunswick, Goodyear, Kraft, Pillsbury,
The "Prepared Mind" and RJR Nabisco, just to name a few.
Not surprisingly, many firms have begun to worry
Donald Frey is currently a professor at Northwestern about "planning to create shareholder value," the topic
but, as former CEO of Bell & Howell, is amply qualified of this promising session. Alexander R. Lehman, Vice
to speak about planning from a line manager's perspective. President of Investor Relations at Whitman Corp. (the
He quoted Louis Pasteur's famous dictum, "chance favors former IC Industries) led off by outlining four alternatives
the prepared mind," to introduce his theme. In a fast- for increasing value:
moving business, the strategic plan will be obsolete by ■ Improve the returns on capital already employed.
the time you write it down. But, it's the mechanics of ■ Reduce the cost of capital — usually by increasing
writing the plan — analyzing markets, competition, and leverage.
technological changes — that prepares the mind. ■ Invest only in projects where returns exceed the cost
Both bottom-up and top-down planning are important, of capital.
and it's up to the CEO to "mesh" the two. It's no good ■ Reduce capital investment by abandoning uneconomic
to have strategic planning take place just at the corporate activities.
level — this level doesn't make or sell the products. But, Corporate raiders tend to focus on cash flow potential
"it's tough to find line managers who can operate the and unused debt capacity, since these are the key drivers
business and also do a good job of allocating resources of value. They also like diversified firms, which tend to
for the future. Superb tacticians usually don't make good be undervalued by the market and can easily be restructured
strategists. They may need backup from the corporate to yield their true value.
planning team. To take an extreme case, you can't expect The most successful firms in shareholder value terms
a general manager to take cash out of a dying business." are highly focused "pure plays." Investors award the
In this type of situation, the perspective of the corporate highest market to book multiples to firms that concentrate
staff planner is needed. on one business. Meaningful inside ownership is looked
March/April 1989 43
 at favorably also, since this provides an incentive for
good management of shareholder assets. And, of course,
The Dominant Business Model being in attractive markets helps too.
of the 90s: Strategic Alliances?
W h y Debt Beats Sex
Although hostile takeovers are destructive, we think
that consolidation is inevitable in many of the industries G. Bennett Stewart III, co-founder of Stern Stewart &
we analyze. Co., offered some provocative thoughts about financial
In this environment, the traditional choice has been restructuring in general and the use of debt in particular.
"acquire or be acquired." I believe, however, that By financial restructuring he means any actions that affect
our times call for a less Darwinian view of industrial only the right-hand side of the balance sheet. He expressed
evolution. This view would give most companies in his initial surprise that a change in the right-hand side
most industries a different long-term choice: "merge alone can have such a major impact on a firm's market
or ally." performance.
Alliances may be the dominant business model of A classic case is that of the spinoff of a division to
the last decade of this century, just as monopolies create separate shares. Just the announcement of such a
were in the late 19th century and conglomerates were move frequently results in a significant increase in the
in the 1960s and 1970s. Current information technology combined value of the firm's shares. Why does this
has virtually wiped out the communications obstacles
happen? One reason frequently given is that the spinoff
that used to make global alliances difficult. The
formation of strategic alliances has grown rapidly in allows investors to see hidden assets more clearly.
the last few years. However, this doesn't explain the fact that the price
While it is too soon to tell whether alliances are increase typically occurs well before the new information
working much better than they have in the past, many becomes available.
companies believe they have no choice but to try them. Stewart feels that a far more plausible explanation has
In information technologies, large research consortia to do with the extensive use of debt in financial
such as the Microelectronics and Computer Technology restructuring. He outlined four major reasons why
Corporation and Sematech are U.S. industry's response increased debt "beats sex" for creating shareholder value.
to the collaboration of Japanese competitors. Pooling
research capacity is a promising idea, but it remains ■ Debt saves taxes. In fact, if a company has so much
to be seen whether U.S. companies can overcome debt that its interest costs are equal to its profits, it pays
their traditional aversion to cooperating with their no corporate tax at all, just like a partnership. Investors
competitors. then become like limited partners and avoid the double
Transnational alliances are now becoming more taxation of dividends.
common. Like political alliances, some are well ■ Debt imposes management discipline. Investors are
established and have withstood the test of time. Others afraid that companies with lots of discretionary cash flow
are more tenuous and less likely to develop. will waste it on poor existing businesses, or worse yet,
Today we have Honeywell Bull joining French, on ill-advised diversification. If it goes to interest
American, and Japanese partners in the information payments, at least investors know the extra cash won't
systems business. There are comparable examples in be squandered on ventures like Standard Oil's Kennecot,
all global industries. These relationships among equals Exxon's Office Systems, or Mobil's Montgomery Ward.
in the top tiers of their markets would have been
inconceivable 15 years ago, when business was defined ■ More debt means more motivated manager/owners.
as, at most, a national activity in most industries. Lowering the equity base with more debt makes it much
Managing these alliances well calls for diplomatic easier for management and employees to acquire a
skills that few American corporations seem to have significant stake. A major component in the appeal and
fostered in their employees. Americans like to know success of management-led LBOs is the chance for
who is in charge and have difficulty dealing with the managers to get substantial ownership, which then
ambiguities in ownership and decision making that motivates them to do whatever it takes to make the firm
may characterize alliances. We will be carefully succeed.
watching the progress of major alliances such as ■ More debt improves fit and focus. Stiff repayment
Honeywell Bull to see if these approaches are successful schedules force management to take a close look at the
responses to uncertainty. business portfolio and sell units that don't fit. Usually
Charles R. LaMantia this brings about a more focused business that can be
President and CEO
more effectively managed. Cross-subsidies, where the
Arthur D. Little, Inc.
strong businesses prop up the weak, can be eliminated.
Quipped Stewart: " I t ' s not the analysts that find
44 Planning Review
 conglomerates difficult to follow, it's management." most of this increase.)
In summary, debt provides an "organizational Whitman Corp. (formerly I.C. Industries) is another
imperative" to manage resources efficiently. Equity is Sasco investment that subsequently rewarded shareholders
relatively soft, but with hard debt, falling earnings quickly with some beneficial restructuring moves. By focusing
set off a crisis. In Stewart's words: "Debt is a just-in- on high return consumer products businesses, it has
time financial system." averaged a 25% total annual return to its shareholders
for the past three years (vs. 13% for the S&P 500).
Value Investing Garcia pointed out that long-term value creation requires
that managers become true partners with investors. Among
Lee Garcia of the investment firm, Sasco Capital, other things this means that accounting measures like
described how his firm screens investments on the basis ROI or ROE, which may be fine for internal controls,
of long-term value creation potential. In particular, these are no longer enough. These traditional measures don't
screens are designed to ferret out companies that are ripe tell the whole economic story that interests the investor.
for value enhancing restructuring moves. (Either by its That's why value investors like Sasco Capital look at the
own management or by a raider). free cash flow a business can generate, not its accounting
The first screen looks for "financial underperformers" returns.
with a clear "value gap." Typical would be a company
like W. R. Grace which, despite its good returns, had Rewarding Managers for Creating Value
been falling far short of its growth potential. This raised
the possibility that the firm was unable to fund all of its Planning to create value for shareholders is one thing,
businesses — especially the ones with the best growth realizing that value is quite another. In the previous session
prospects. This first value screen generally pares the we learned that restructuring the balance sheet and the
starting universe of about 6,000 companies to between business portfolio can enhance shareholder value
400 and 500 undervalued candidates. dramatically. But how can the firm, restructured or not,
keep creating value for its shareholders and the rest of
The second screen identifies the 50 to 100 undervalued its stakeholders over time? Real economic value is derived
companies, which are also highly diversified, into both from the business units that generate the actual cash flows.
high- and low-growth business segments. Again, a firm In order to keep these businesses doing the things that
like W. R. Grace may have high return and growth will create value, their managers ought to be rewarded.
"jewels" like its specialty chemicals business. Sometimes Therefore, this session dealing with the controversial issue
these businesses alone are worth as much or more than of how to compensate executives for creating shareholder
the current market value of the whole company. Typically value was a timely one.
the portfolio will also contain a number of lower growth
and return businesses, like W. R. Grace's agricultural Management Compensation Group's Louis Brindisi is
chemicals and natural resources divisions. And it may a leading authority on executive compensation and a
also include some very high-growth but low-return favorite source of quotes for major business publications.
businesses that are destroying value (such as W. R Grace's He pointed out that in today's environment it's "create
retail and restaurant businesses). value or else" for operating managers. Top executives
are increasingly concerned about the corporation's
Thus, the companies that pass this second screen are
vulnerability to takeovers and have become like "internal
ideal candidates for restructuring. However, to make sure,
raiders," looking for weak businesses to divest or
Sasco analysts actually visit the facilities of these finalists
restructure. They also want to be able to reward business
and interview some of their top managers. Only about
executives for creating value. However, according to
thirty companies will pass this final test to qualify for
Brindisi, "You don't reward for good planning, but you
Sasco's value portfolio.
do reward for good results." The key issue here is, how
It turned out that W. R. Grace management apparently do you measure value-creation results for a business unit
recognized its problems back in 1984 and began a program without an independently traded stock to establish its true
to correct them before a raider did. The company sold value?
its problematic retail and restaurant businesses, wrote off
its agricultural chemicals and parts of its natural resource Surrogate Stock Plans
business. This resulted in a much more focused firm with
substantially greater earning power. In spite of a large A number of pay programs focusing on business level
drop in October 1987, W. R. Grace shares have increased value creation have emerged recently. They typically use
by about 50% since the restructuring began. (Sasco LBOs as models. The idea is to simulate a significant
Capital's screens identified the company as a viable ownership stake by business managers. A common scheme
investment in 1985, so that its customers benefited from is to establish some sort of "surrogate stock" that gives
March/ April 1989 45
 managers an "ownership opportunity" much like an LBO. The company has found the integration between the
If the business performs well in shareholder value terms, performance grid and three-year strategic plans quite a
the value of the surrogate stock increases, and so does challenge. The plan also provides a tight link between
the manager's stake. The program is long term (usually corporate and business goals — there's "no more slack."
5-7 years) and gives the manager an uncapped opportunity Managers are under a lot of pressure to set realistic
for gains, just like an LBO. objectives — no more "hockey sticks." As one would
Some alternative variations include simulated options expect, poor performers get no payoff, and may wind
(which focus on changes in value) or shares (which focus up getting restructured or divested sooner than they would
on total value). A manager's "ownership" interest can without the new system. However, in this case, "sooner
either be granted or purchased. Purchase is preferable, is better" in terms of value creation.
since it requires the manager to put his or her money "at On the brighter side, the plan has had more winners
risk." Valuation of the surrogate shares (options) is usually than losers. Last year, "lots of dollars came out" — a
done annually, and any grants can be made up front, or total of $9.1 million, in fact, with 150 out of 203 business
annually. units taking part. This year it looks like 155 of 224
The core of such a program is the valuation method businesses will split awards of $9.2 million. Wouldn't
used. One way to establish a true market value is to spin you like to manage a business for Westinghouse?
off the business and create a real traded stock. Since this Goff emphasized that Westinghouse had to build up
is rarely practical, an acceptable surrogate market valuation the right "culture" among its operating managers to
is needed. Whatever method is chosen, it's vital that plan understand and appreciate value creation. This took time
participants be able to track the value of their "stock." and a major re-education effort. By the time the new
Also they must be able to see the links between their value-based reward system was introduced, the shareholder
actions and value creation. value concepts were well understood and "internalized"
The most common method for establishing business by the affected managers. Moreover, business units had
value is based on financial theory and looks at such things been given enough "self reliance" to have some control
as spreads between returns and the cost of capital or over their own destinies.
discounted cash flows. This economic valuation approach What happens when executives are transferred, or their
is also gaining increasing acceptance among financial units restructured? Typically, their gains are pro-rated
analysts and money managers as a way to establish the and new "shares" granted. What about functional staff
true value of stock investments. executives? They are granted stock options only and just
at the corporate level. Goff admitted that Westinghouse
Pay for Value at Westinghouse has had to learn to manage this new compensation process
the hard way, but most managers feel it's quite fair now.
Edwin Goff, Director of Total Compensation at
Westinghouse Electric Corporation described the
innovative plan that his company has come up with for
rewarding its managers on the basis of value creation. It
is a type of surrogate stock plan based on a DCF valuation
methodology. This type of valuation is explained in my
book, Managing for Value. The DCF formula estimates
business value based on cash flows over a three year
planning period. The formula relates business unit value
to financial measures that operating managers can readily
understand and track. The focus is on IAT (income after
tax) and total investment. Each business gets a
"performance grid" that relates these two financial
variables to a shareholder value creation "multiplier"
(See Exhibit 1).
Each "share" of the business is valued at $100 times
this multiplier. The actual payout is cumulative and occurs
at the end of a three-year period. Each year, a new grant
of shares is made, so that executives always have two
grants outstanding. Since the payout is "by the numbers,"
Westinghouse is very careful to keep track of any changes
in internal accounting or tax rates and make adjustments.
46 Planning Review
 Valuable Insights Otherwise we planners run the risk of seeing our well-
laid plans simply gather dust on the managers' shelves.
What new insights did I gain from this conference? Or, what's worse, we may develop an adversary
Perhaps the most significant and unexpected one was relationship with line managers who resist the idea of
how important interpersonal skills have become for staff implementing "our" plans, rather than "theirs."
planners. So many of the speakers, especially the senior I also learned more about the popular and complex
executives, emphasized this fact that it's hard to dismiss. approach known as value-based planning (or the
It's also a worrisome thought for those of us who want shareholder value approach). In one session I was surprised
to be staff planners. Most of us have neither the training to hear that some experts still feel that if you run your
nor the inclination to be diplomats or salespeople, yet business well, shareholder value will follow automatically
this is exactly what these line executives want us to be. (Michel Roberts). But, other sessions showed me that
Planners must sell line managers on the value of planning, the effective translation of business value to shareholder
teach them how to do it, and make it as easy as possible value requires a good understanding of the whole value-
for them. And they must accomplish all this while creation process.
remaining sensitive to organizational politics. Could it Finally, I gained a better appreciation of some key
be that a lack of interpersonal, selling, teaching, and global environmental trends and the likely organizational
political skills is among the reasons why the planning responses. In particular, the luncheon speaker, Dr. Charles
function has fared so poorly in corporate restructuring? R. LaMantia, got me to thinking about the likely spread
Another, related insight concerns the importance of of global alliances and the impact this development might
keeping the planning process as informal and flexible as have on my industry, my firm, and even my own job.
possible, and of involving the line from the beginning. (See boxes, pages 42, 44, and 47.) □

Product Development
In our view, getting product development right the is not as important as achieving and maintaining a strong
first time requires an integrated product-creation process, market position over the life of the product or technology.
driven by the customer, in which marketing and R&D One of the best examples of relentless innovation can
cooperate through every step. Marketing's involvement be observed at JVC, which founded the videocassette
should not end when it gives its wish list to R&D. recording industry and the now universally accepted VHS
Similarly, R&D and engineering should not wait to begin format. To be certain that JVC would stay at the top in
their involvement at the specification stage. Instead, they terms of innovation, Mr. Takano, the manager of JVC's
should be actively involved in all phases of development, video business, has not hesitated to announce its innovation
including product definition and strategy. program year after year, preventing competitors from
Small interdisciplinary teams with autonomy and seizing the initiative.
multifunctional capability have proved to be the most Innovation must inspire the entire product-development
effective way to develop new products. As Peter Drucker and process-development activity. But we must remember
has argued, the best R&D is business-driven and tied that innovation is not a code word for the big breakthrough
inseparably to other functions. Therefore, departments — the transistor or the semiconductor chip. It also
throughout the company must communicate well so that embraces small improvements. In studying manufacturing
a fit exists between marketing, product performance, sales, industries, we have found the most effective route to
and service. product development is often through smaller incremental
Manufacturing is an important component of successful improvements in product and process rather than larger
product development. Products must be developed and quantum changes.
engineered with careful consideration of the manufacturing The M.I.T. Commission on Industrial Productivity has
processes and the competitive productivity and quality pointed out that U.S. companies have had a tendency to
standards. In this area, flexibility—the ability to adapt over-innovate on product and under-innovate on process.
to changes in the market—is vital to surviving uncertainty. This emphasis is misplaced, since as a group,
Flexible manufacturing systems allow for quick incremental improvements in processes can have the
prototyping, which in turn reduces lead time. greater impact on productivity, quality, and
Most successful product innovators sustain their competitiveness.
leadership through a simple formula: keep perfecting and Charles R. LaMantia
out-innovating the competitors through continuous President and CEO
improvement of product and process. Being there first Arthur D. Little, Inc.

March / April 1989 47