Sunday, February 15, 2004

Two ways to plan

Most large corporations seem to operate under the assumption that the best strategic plan is detailed, heavy on numbers, and tightly integrated to the expense budget. Although strategic planning was invented by the military a century before its adoption by corporations, very little of the insight into military planning has made it into the office tower.

Von Moltke wrote that "no plan survives contact with the enemy" and that strategy is "a system of expedients." This flexibility and acceptance of the unpredictable is anathema to the typical business planning process. All too often, we plan as though the we can determine what sales will be eighteen months from now, what expenses and what programs will produce those sales (by product and market).

In short, we think that the point of planning is to produce a plan that can be followed as though the organization is on auto-pilot. We want details, accountability, and milestones. And then we spend the rest of the year interpreting performance based on variance to plan.

This is not what effective planning is in the military. Colin Gray writes:

As General Dwight D. Eisenhower once observed, the principal value of military planning is not to produce ahead of time the perfect plan, but rather to train planners who can adjust and adapt to changing circumstances as they emerge.

Any business which wants to be more resilient and flexible would be smart to adopt the Eisenhower approach: planning as an educational process for people rather than a process for the production of the perfect plan.

Another problem with traditional planning is that it treats strategic problems as though they are entirely a matter of detail complexity. Yet, in reality, making and implementing strategy is a matter largely of dynamic complexity.

From Peter Senge's The Fifth Discipline:

The answer lies in the same reason that sophisticated tools of forecasting and business analysis, as well as elegant strategic plans, usually fail to produce dramatic breakthroughs in managing a business. They are all designed to handle the sort of complexity in which there are many variables: detail complexity. But there are two types of complexity. The second type is dynamic complexity, situations where cause and effect are subtle, and where the effects over time of interventions are not obvious. Conventional forecasting, planning, and analysis methods are not equipped to deal with dynamic complexity. Mixing many ingredients in a stew involves detail complexity, as does following a complex set of instructions to assemble a machine, or taking inventory in a discount retail store. But none of these situations is especially complex dynamically.

From John Sterman, Business Dynamics:

Most people think of complexity in terms of the number of components in a system or the number of combinations one must consider in making a decision. The problem of optimally scheduling an airline's flights and crews is highly complex, but the complexity lies in finding the best solution out of an astronomical number of possibilities. Such needle-in-a-haystack problems have high levels of combinatorial complexity (also known as detail complexity). Dynamic complexity, in contrast, can arise even in simple systems with low combinatorial complexity. ... Dynamic complexity arises from the interactions of the agents over time.

Competitive strategy is inherently dynamic: competitors react to each other's initiatives. Treating it as a matter of static analysis and programmed implementation is a recipe for failure.

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