INTRODUCTION

Prior to the recent shift to long-range planning in business and industry, the main task of the top executive
was viewed as adopting the business organization to changing environmental conditions. This approach
was developed during the period between World Wars I and II, when unpredictable and violent economic
fluctuations meant adaption or failure.

There were some milestones that marked the development of this approach. Henri Fayol, a French
industrialist, first defined it in the early 1920's, when he attributed much of his success as an industrialist
to conducting what he called a general survey as the basis for an important decision, as stated by Luther
Gulick and L. Urwick (1937). Management consultants employed a similar method in a service to clients,
popularly known during the 1920's and 1930's as the "General Survey." This consisted of a size -up of the
business situation with respect to the following:

a. the outlook for the economy and the industry;

b. the competitive situation;

c. the financial and operating picture of the business organization; and

d. analysis of sales, production, costs, product development and the executive organization.

The size-up was followed by recommendation for actions, possibly involving the further services of the
management consultant. Such general surveys were usually requested only when the management of a
business organization had encountered deepening problems and was not certain of how to solve them.
In the early 1930's, James O. Mckinsey, one of the pioneers among management consultants and later
Chairman of the Board of Marshall Field and Company, described the top management approach which
had grown out of his experience as "adaptation to changing conditions", Melvin T. Copeland enlarged
upon this concept in his papers “The Job of an Executive.”

From the 1920’s to 1950’s, the general characteristics of Top management practice, particularly among
small business, but by no means limited to them, was to decide on a course of action in the light of a
situation facing the business organization at a particular period of time. In this particular approach,
concern was mainly on immediate profits and adaptability to meet changes in current environmental
conditions. In fact, there was seldom a clear concept of objectives or long-range plans to which
management was committed. Objectives at the beginning of a new business organization were frequently
forgotten as the business grew and became more complex. Plans made at some point in the existence of
a company either became obsolete or forgotten as the organization adapted to changing conditions, and
changes in direction sometimes went unrecognized by management.

Thus, planning was initiated only when management sensed that serious policy problems existed, such as
a threat to the organization’s competitive position or an increase in the number of difficulties. But there
was no strategy for alerting the top executive that such a policy problem existed, and as long as business
activity was satisfactory, top management was not particularly concerned about the future.

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TRADITIONAL APPROACH TO POLICY FORMULATION

The traditional top-management approach to determination of objectives presupposes a size-up of the

situation of the business organization. Once a size-up had been made, objectives could be determined
and provide direction and unity of purpose for the development of a program of action covering the
various activities of the business organization. This program of action, when expressed as broad policies,
was thought of as a master plan. This general process is shown below

SIZE UP OF THE SITUATION AS A

WHOLE SITUATION

DETERMINATION OF OBJECTIVES

FINANCIAL MARKETING PRODUCTION RESEARCH AND

PROGRAM PROGRAM PROGRAM DEVELOPMENT
PROGRAM

TRADITIONAL APPROACH TO POLICY FORMULATION

Size-ups were made in various ways, depending on the orientation of people involved, the way the
business organization was organized, and the position of the organization in terms of its growth and place
in its industry There were times a departmental approach was used. It was to divide the sizing-up process
along departmental lines is the business organization had a centralized organizational structure. In other
situations, it was more appropriate to carry out the size-up in terms of products, particularly if the
business organization was decentralized. Some instances, the sizing-up process could usefully follow a
historical analysis of major decisions. Perhaps the most common size -up approach was along
departmental lines, because in the period when the traditional approach was generally employed, most

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business organizations were centralized and, therefore, were organized by major functions, such as:
marketing, production, finance, and research and development.

As shown below, the traditional approach to the sizing-up process is based on functions. It shows the
analytical process that was required to reach a diagnosis of the business organization's prospects and
problems. Analysis of the total situation was broken down into an analysis of the competitive situation,
which included consideration of economic conditions and outlook, together with analyses of various
functions. Under each function in the breakdown, significant findings were noted and classified. An effort
was made to reach a conclusion in each major function because of the analysis of the significant findings
for that function.

These separate conclusions were then combined, and an effort was made to derive, inductively, the
overall diagnosis to which the conclusions in the various functional analyses gave rise. Specific attention
was paid to interrelationships that might be significant for the entire business organiz ation. With the
importance of clear thinking and sound reasoning, some executives found it useful to test their reasoning
by resorting to the intellectual rigor of the professional's brief. This meant recasting the conclusions and
evidence disclosed in the analysis into a logical argument. Out of this prudence, sizing up, inductive
process came a diagnosis of the business organization's prospects and problems, which could serve to
determine objectives for the future.

Some executives and consultants found it useful to look at the competitive situation first, through this
process, followed closely by analysis of the financial and operating situations. They think a size -up of these
two areas often provided measuring sticks or raised pertinent questions, which s erved to sharpen the
analysis of other functional areas. Furthermore, many analysts found it helpful to defer the size -up of the
executive organization to the last, because of the light that was shed on management performance by the
analysis in the office functional areas.

Sizing-Up the Situation of the Business Organization as a Whole

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The moment a size-up had been made, the chief executive faced the task of deciding on a course of action.
Determination of objectives required choice between alternative ways of solving the problem diagnosed
in the size-up. Prescription followed diagnosis, and once determined, the objectives defined the course of
action for the business organization. The objectives provided direction for the development of a program
specifying sequence and timing of actions.

ILLUSTRATION OF TRADITIONAL APPROACH

An illustration of the size-up approach is presented below (hypothetical sizing-up situation of a company)

A. Sizing-up of Situation
a. What is the competitive situation?
• Some of the network and cable users of the industry’s end products, such as telephone
companies.

• General network is absorbing small independent network companies.

• Some of the larger network and cable companies tend to be owned by major suppliers of
wire or insulation and smelting and refining companies.

• Many network and cable companies have carried on extensive expansions in recent years.

• The market for network wire and cable appears to be dwindling while the industry’s
capacity to produce them is increasing.

• In the light of the above trends toward vertical integration and overexpansion, the
company faces stiffer competition.

b. What is the financial and operating situation?

• The current ratio is satisfactory at 2.42.

• The acid-test ratio is satisfactory at 1.38.

• The relationship of long-term debt to equity is reasonable.

• Return on stockholders' Investment, while sporadic, has been good.

• The company's sales are off less than the industry in the current year.

• From the above financial data, it may be concluded that the company is in a sound
financial condition, and earnings have been satisfactory in recent years.

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c. What is the marketing situation?
• The company is not ready for new requirement on network cabling.

• The company is apparently not able to compete with respect to flexible cords and wire.

• The company has lost a big part of its share of the market in cord sets, perhaps because
of its insistence on too high quality.

• It appears the company is losing out on Spira-Flex because of patents running out, a poor
pricing policy, and increasing competition.

• Competitors are underselling the company on broadcast wire because of excessively high
quality; too narrow a line, and an increasing number of competitors.

• Heavy-duty lightning cords look promising, but sale through one distributor looks
questionable.

• Electronic connectors are of questionable value, with 100M pesos sunk in development
and no prospect of an early solution.

• Printed circuits show questionable promise.

• Although power cable looks promising, the company is doing little to develop this market.

• Only two companies (Insulated and Triangle) sell exclusively through distributors.

• About four out of eight competing companies have sales offices.

• Two out of eight competing companies have warehouses.

• Four out of eight competing companies have no distributors at all.

• General Cable attributes its great success to establishment of sales offices and stock
distribution centers.

• It seems that the company is drifting badly in the critical area of product policy, and the
company's excessive reliance on distributors is to be questioned.

d. What is the production situation?

• Cruz has cut inventories and the costs of materials.

• He has made important progress in improving plant efficiency.

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 • He has established a tighter rein over capital spending.

• He has plans to overhaul the organization of the production department and to improve
controls and planning.
• It appears that he will be able to handle employee relations satisfactorily.

• In the light of the above, it is concluded that the production function is not a major
problem area currently.

e. What is the research and development situation?

• The company was first in the development of neoprene for cable wire (1955).

• It was the first to get approval for one of its new flexible cords insulated with synthetic
compounds (1959).

• In 1958, the company began the manufacturer of plastic-sheathed network cable, which
the Electric Company later adopted as an industry standard.

• A new method of color-coating cords, primarily for network cable, was developed.

• Laboratory personnel and facilities are usually numerous for a company the size of
Insulated.

• The above evidence points to the conclusion that the company’s research and
development activities are adequate.

f. How effective is the executive organization?

• The company is suffering from the lack of a clear, overall sense of direction, there being
no long-range plan.

• Lack of sense of direction has resulted in a confused organization, which lacks the basis
for effective coordination of the various functions from an overall point of view.

• Effective functioning of the organization is further handicapped by the president’s lack of

interest in holding regular executive meetings or providing for a systematic flow of
information between departments.

• The lack of effective strategy and structure is resulting in less than adequate control, in
as much as there is no sound basis for establishing budgets.

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 • From the above it is concluded that the president’s ad hoc approach to administration is
limiting the effectiveness of the executive organization.

g. What is the summary of the size-up? Since:

• Competition is likely to grow keener because of the trends toward vertical integration and
the cost.

• The company is drifting badly in the critical area of product policy, and is out of step with
the industry in connection with its distribution policy, and.

• Production is now under control with Cruz as its head,

• The executive organization is handicapped by the president's ad hoc approach to

administration.

It is therefore concluded that the principal problems of the company stem from the failure of the president
to manage in accordance with a long-range plan. Revision of present policies about products and
distribution is required.

A. Plan

a. The president should adopt as his top-management approach, the philosophy of managing in
accordance with a long-range plan.

• A strategy should be determined.

• The organization structure should be adjusted to fit that strategy.

• Control mechanisms should be developed that are compatible with the strategy and
structure.

• Activity participation of the executive organization should be fostered during formulation

of the new approach and in the subsequent administration.

b. With respect to strategy, some general guidelines are recommended.

• In the light of the strength, weaknesses, opportunities, and threats (SWOT), in the field of
network and cable, and the company's competence and resources in that field, the
company should concentrate on specialized insulated network and cable products in the
fields of networks and cable, secondary power cable, Spiral-Flex, and heavy-duty lightning
cords.

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 • It should change its marketing approach to direct selling (personal/E-
mail/internet/telemarketing).
• It should consider the appropriateness of printed circuits and electronic connectors,
neither of which appears consistent with the company’s distinctive competence and
resources.

TRANSITION TO STRATEGY FORMULATION

1. Inadequacy of open-End Administration

It is very clear from the preceding description of the traditional approach to policy
formulation that the administrative process was incomplete. If the process were extended by
adding organization and control steps, as shown below, the process would remain open ended.
There was a definite tendency for top management to size-up the situation, starting at the very
base, formulate objectives and programs of action, organization to carry out the plans, exercise
executive control, but then continue to follow the procedures decided upon until serious
problems made it necessary to size-up the situation again.

In the 1950's it became increasingly clear that a new approach to policy formulation was
urgently needed. The job of sizing-up the situation was growing steadily to become more and
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 more complex and critical as technological change accelerated and as environmental factors
affecting the ability of business organizations to survive in a more competitive world increased in
number and complexity. It was recognized that the traditional approach was inadequate:
• Concern for short-term problems would have to shift to plans for capitalizing on long-term
opportunities;

• Sizing up the situation as a basis for a new course of action would have to give way to
reappraising existing policies in the light of the changing environment;

• Sporadic diagnosis would have to be replaced by constant surveillance; and

• Concern for immediate profits and adaptability to meet changes in current conditions needed
to shift to focus on long-range return on investment, flexibility and stability. In other words,
occasional preoccupation with such questions as "Where are we?" and "Where are we going?'
needed to be replaced by such questions as "Are we making satisfactory progress with respect
to plan?" In short, what was needed was a new approach: management in accordance with
long-range plan; as stated by George A. Steiner (1963).

2. Completing the Administrative Cycle

The most significant characteristic of the new approach has been that executives are now
managing in accordance with a constantly up-dated strategic plan. As a consequence, the size-
up of the situation has been replaced by reappraisal of present policies. The effect of this
change is a shift from an open-end, short-run approach to a closed-loop, long-range approach,
which is illustrated below.

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 As shown, the size-up of the situation can be thought of as a springboard, and as long as appraisal
of present policies closes the loop, the system continues to cycle. Feedback and constant
surveillance serve to keep the business organization's long-range plans constantly before
management. Thus, reappraisal of present policies takes the place of the size-up of the situation.
It examines the same areas, but analysis is focused on the possible of continuing the present
policies, given trends and developments in the business environment and existing internal
operating and results. Reappraisal of present policies may disclose an inadequate strategy,
inappropriate organizational structure or processes, or ineffective management performance.

3. Shift in Emphasis to Strategy Formulation

Accompanying the change from sporadic size-up to frequent and often regular reappraisal, there
has been a shift in emphasis from diagnosis to formulation, particularly with respect to strategy.
According to Peter Drucker(1954), management attention has been focused more on the seizing
of opportunities than on the solution of problems. As a result, more emphasis has been placed on
the evaluation of alternative courses of action, where maximization of performance objectives is
sought.

In the evaluation of alternative courses of action, management may have the assistance of tools
and techniques from management science. However, before significant progress can be made in
applying management science to policy formulation, there must be a better understanding of the
structure of the problem itself.

Some approach to structure of the general problem of policy formulation, developed by Frank F.
Gilmore and Richard G. Brandenburg (1962), is summarized below. In this model, the relationship
between the business organization and its competitive environment is expressed by the strategy
of the business. Three basic components comprise the strategy:

a. Economic Mission

Formulating the economic mission is concerned with the kind of business the business
organization should be in, and what its performance objectives should be.

b. Competitive Approach

Formulating a competitive approach is finding the product-market-sales approach that

will accomplish the economic mission, and deriving pertinent goals in the various areas of
the business.

c. Program of Action

Formulating a program of action involves a search for efficient means of implementing

the competitive approach.
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The reappraisal phase answers the question of when and to what extent the strategy should be
modified. In summary form, the process works as follows: Current strategy is reappraised from
time to time in the light of internal operating results, economic trends, competitors, actions, and
technological developments. With the strength, weaknesses, opportunities and threats (SWOT)
disclosed by this reappraisal, it then becomes appropriate to ask three questions designed to
disclose when and in what respect strategy should be changed. If a new economic mission were
considered sound, the competitive approach would be questioned. If the competitive approach
seemed appropriate, the process would continue in this manner until the appropriate area for
revision was identified and new strategy was formulated. But it might be concluded that the
overall current strategy was sound; then no revision would be made at a later date. The dashed
lines indicate the feedback of operating results (part of the control process) and updating of
current strategy as a result of formulation.

This framework for strategy formulation, expanded into forty-four steps, is examined in detail
that thirty-two of the forty-four planning tasks specified in the complete model have to do with
formulation, as distinguished from diagnosis, indicates the magnitude of the shift in interest that
has taken place.
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