5 Drucker 1959

LONG-RANGE PLANNING*^ Challenge to Management Science PETER F. DRUCKER This paper attempts to define long-range planning as the organized process of making entrepreneurial decisions. It tries to answer three questions asked by managers and management scientists when they hear the phrase "long-range planning": What long-range planning is and what it is not; why it is needed; and what is needed to do long-range planning. The paper concludes with a brief statement why long-range planning can be considered a major oppor- tunity for, and challenge to. Management Science. It is easier to define long-range planning by what it is not rather than by what it is. Three things in particular, which it is commonly believed to be it emphatically is not. 1) First it is not "forecasting". It is not masterminding the future, in other words. Any attempt to do so is foolish; human beings can neither predict nor control the future. If anyone still suffers from the delusion that the ability to forecast-beyond the shortest time span is given to us, let him look at the headlines in yesterday's paper, and then ask himself which of them he could possibly have predicted ten years ago. Could he have forecast that by today the Russians would have drawn even with us in the most advanced branches of physical sciences and of engineering? Could he have forecast that West Germany in complete ruins and chaos then would have become the most conservative country in the world and one of the most productive ones, let alone that it would become very stable politically? Could he have forecast that the Near East would become a central trouble spot, or would he have had to assume that the oil revenues there would take care of all problems? This is the way the future always behaves. To try to mastemaind it is there- fore childish; we can only discredit what we are doing by attempting it. We must start out with the conclusion that forecasting is not respectable and not worth- while beyond the shortest of periods. Long-range 'planning is necessary precisely because we cannot forecast. But there is another, and even more compelling reason why forecasting is not long-range planning. Forecasting attempts to find the most probable course of events, or at best, a range of probabilities. But the entrepreneurial problem is the unique event that will change the possibilities, for the entrepreneurial * This article is based on a paper given before the Fourth International Meeting of the Institute of Management Sciences, held in Detroit, October 17-18,1957. * Received August 1958. 238 LONG-BANGE PLANNING 239 universe is not a physical but a value-imiverse. Indeed the central entrepreneurial contribution and the one which alone is rewarded with a profit, is to bring about the unique event, the innovation that changes the probabilities. Let me give an example—a very elementary one which has nothing to do with innovation but which illustrates the importance of the improbable even for purely adaptive business-behavior. A large coffee distributor has for many years struggled with the problem of the location and capacity of its processing plants throughout the country. It had long been known that coffee prices were as important a factor in this, as location of market, volume, or transportation and delivery strategy. Now if we can forecast anjrthing, it is single-commodity prices; and the price fore- casts of the company economists have been remarkably accurate. Yet the decisions on plant location and capacity based on these forecasts have again and again proven costly blunders. Extreme pricing events, the probability of which at any one time was exceedingly low, had, even if they lasted only for a week at a time, impact on the economics of the system that were vastly greater than that of the accurately forecast "averages". Forecasting, in other words, obscured economic reality. What was needed (as the Theory of Games could have proven) was to look at the extreme possibilities, and to ask, "which of these can we not afford to disregard?" The only thing atypical in this example is that it is so simple. Usually things are quite a bit more complex. But despite its (deceptive) simplicity it shows why forecasting is not an adequate basis even for purely adaptive behavior, let alone for the entrepreneurial decisions of long-range planning. 2) The next thing to be said about what long-range planning is not, is that it does not deal with future decisions. It deals with the futurity of present decisions. Decisions exist only in the present. The questipn^that faces the long range planner is not what we should do tomorrow. It is what do we have to do today to be ready for an uncertain tomorrow. The question is not what will happen in the future. It is: what futurity do we have to factor into our present thinking and doing, what time spans do we have to consider, and how do we converge them to a simultaneous decision in the present? Decision-making is essentially a time machine which synchronizes into one present a great number of divergent time spans. This is, I think, something which we are only learning now. Our approach today still tends toward the making of plans for something we will decide to do in the future. This may be a very enter- taining exercise, but it is a futile one. Again, long-range planning is necessary because we can make decisions only in the present; the rest are pious intentions. And yet we cannot make decisions for the present alone; the most expedient, most opportunist decision—let alone the decision not to decide—^may commit us on a long-range basis, if not perma- nently and irrevocably. 3) Finally, the most coromon misconception of all, long-range planning is not an attempt to eliminate risk. It is not even an attempt to minimize risk. Indeed any 240 PETER F. DRUCKER such attempt can only lead to irrational and unlimited risk and to certain disaster. The central fact about economic activity is that, by definition, it commits present resources to future and therefore highly uncertain expectations. To take risk is therefore the essence of economic activity. Indeed one of the most rigorous theorems of economics (Boehm-Bawerk's Law) proves that existing means of production will jdeld greater economic perfomaance only through greater un- certainty, that is, through greater risk. But while it is futile to try to eliminate risk, and questionable to try to mini- mize it, it is essential that the risks taken be the right risks. The end result of successful long-range planning must be a capacity to take a greater risk; for this is the only way to improve entrepreneurial perfomaance. To do this, however, we must know and understand the risks we take. We must be able to rationally choose among risk-taking courses of action rather than plunge into uncertainty on the basis of hunch, hearsay or experience (no matter how meticulously quantified). Now I think we can attempt to define what long-range planning is. It is the continuous process of making present entrepreneurial {risk taking) decisions systematically and with the best possible knowledge of their futurity, organizing systematically the efforts needed to carry out these decisions, and measuring the results of these decisions against the expectations through organized, systematic feed-back. II "This is all very well," many experienced businessmen might say (and do say). "But why make a production out of it? Isn't this what the entrepreneur has been doing all along, and doing quite successfully? Why then should it need all this elaborate mumbo-jumbo? Why should it be an organized, perhaps even a separate activity? Why in other words, should we even talk about 'long- range planning', let alone do it?" It is perfectly true that there is nothing very new to entrepreneurial decisions. They have been made as long as we have had entrepreneurs. There is nothing new in here regarding the essentials of economic activity. It has always been the commitment of present resources to future expectations; and for the last three hundred years this has heen done in contemplation of change. (This was not true earlier. Earlier economic activity was based on the assumption that there woiild be no change, which assumption was institutionally guarded and de- fended. Altogether up to the seventeenth century it was the purpose of all human institutions to prevent change. The business enterprise is a significant and rather amazing novelty in that it is the first human institution having the purpose of bringing about change.) But there are several things which are new; and they have created the need for the organized, systematic, and above all, specific process that we call "long- range planning".' ' "Long-range planning" is not a term I like or would have picked myself. It is a mis- nomer—as are so many of our terms in economics and management, such as "capitalism". LONG-BANGE PLANNING 241 1) The time span of entrepreneurial and managerial decisions has been lengthen- ing so fast and so much as to make necessary systematic exploration of the un- certainty and risk of decisions. In 1888 or thereabouts, an old and perhaps apocryphical story goes, the great Thomas Edison, already a world figure, went to one of the big banks in New York for a loan on something he was working on. He had plenty of col- lateral and he was a great man; so the vice-presidents all bowed and said "Certainly, Mr. Edison, how much do you need?" But one of them, out of idle curiosity asked, "Tell me, Mr. Edison, how long will it be before you have this new product?" Edison looked him in the eye and said, "Son, judging from past experience, it will be about eighteen months before I even know whether I'll have a product or not." Whereupon the vice-presidents collapsed in a body, and, despite the collateral, turned down the loan application. The man was obviously mad; eighteen months of uncertainty was surely not a risk a sane businessman would take! Today practically every manager takes ten or twenty year risks without winciQg. He takes them in product development, in research, in market de- velopment, in the development of a sales organization, and in almost anything. This lengthening of the time span of commitment is one of the most significant features of our age. It underlies our economic advances. But while quantitative in itself, it has changed the qualitative character of entrepreneurial decisions. It has, so to speak, converted time from being a dimension in which business decisions are being made into an essential element of the decisions themselves. 2) Another new feature is the speed and risk of innovation. To define what we mean by this term would go far beyond the scope of this paper. But we do not need to know more than that industrial research expenditures (that is, business expenditures aimed at innovating primarily peacetime products and processes) have increased in this coimtry from less than $100 million in 1928 to $7 or 8 billion in 1958. Clearly, a technologically slow-moving, if not essentially stable economy has become one of violent technological flux, rapid obsolescence and great uncertainty. 3) Then there is the growing complexity both of the business enterprise in- ternally, and of the economy and society in which it exists. There is the growing specialization of work which creates increasing need for common vision, common understanding, and common language, without which top management decisions, however right, will never become effective action. 4) Finally—a subtle, but perhaps the most important point—the typical businessman's concept of the basis of entrepreneurial decision is, after all, a misconception. "automation", "operations research", "industrial engineering", or "depreciation". But it is too late to do anything about the term; it has become common usage. »For a discussion see my new book "The Landmarks of Tomorrow" (Harper and Brothers, New York, 1958). 242 PETER F. DRUCKEH Most businessmen still believe that these decisions are made by "top manage- ment". Indeed practically all text books lay down the dictum that "basic policy decisions" are the "prerogative of top management". At most, top management "delegates" certain decisions. But this reflects yesterday's rather than today's reality, let alone that of tomorrow. It is perfectly true that top management must have the final say, the final responsibility. But the business enterprise of today is no longer an organization in which there are a handful of "bosses" at the top who make all the decisions while the "workers" carry out orders. It is primarily an organization* of professionals of highly, specialized, knowledge exercising autonomous, re- sponsible judgement. And every one of them—whether manager or individual expert contributor—constantly makes truly entrepreneurial decisions, that is, decisions which affect the economic characteristics and risks of the entire entre- prise. He makes them not by "delegation from above" but inevitably in the performance of his own job and work. For this organization to be functioning, two things are needed: knowledge by the entire organization what the direction, the goals, the expectations are; and knowledge by top management of what the decisions, commitments, and efforts of the people in the organization are. The needed focus—one might call it a model of the relevants in intemal and external envircmment—only a "long-range plan" can provide. One way to summarize what is new and different in the process of entre- preneurial decision-making is in terms of information. The amount, diversity, and ambiguity of the information that is beating in on the decision-maker have all been increasing so much that the built-in experience reaction that a good manager has cannot handle it. He breaks down; and his breakdown will take either of the two forms known to any experimental psychologists. One is with- drawal from reality, i.e., "I know what I know and and I only go by it; the rest is quite irrelevant and I won't even look at it". Or there is a feeling that the imiverse has become completely irrational so that one decision is as good as the other, resulting io paralysis. We see both in executives who have to m.ake decisions today. Neither is likely to result in rational or in successful decisions. There is something else managers an(i management scientists might learn from the psychologists. Organization of information is often more important to the abihty to perceive and act than analysis and understanding of the in- formation. I recall one exjjerience with the organization of research-planning in a pharmaceutical company. The attempt to analyze the research decisions— even to define alternatives of decisions—was a dismal failure. In the attempt, however, the decisions were classified to the point where the research people could know what kind of a decision was possible at what stage. They still did not know what factors should or should not be considered ia a given decision, nor what its risks were. They could not explain why they made this decision * For a discussion of this "new organization" see again my "The Landmarks of Tomor- row" mentioned above. LONG-RANGE PLANNING 243 rather than another one, nor spell out what they expected. But the mere organization of this information enabled them again to apply their experience and to "play hunches"—with measurable and very significant improvement in the performance of the entire research group. "Long-range plaiming" is more than organization and analysis of information; it is a decision-making process. But even the information job cannot be done except as part of an organized planning effort—otherwise there is no way of determining which information is relevant. I l l What then are the requirements of long-range planning? We cannot satisfy all of them as yet with any degree of competence; but we can specify them. Indeed, we can—and should—give two sets of specifications: One in terms of the characteristics of the process itself; another in terms of its major and specific new-knowledge content. 1) Risk-taking entrepreneurial decisions, no matter whether made rationally or by tea-leaf reading, always embody the same eight elements: a. Objectives. This is, admittedly, an elusive term, perhaps even a meta- physical one. It may be as difficult for Management Science to define "objectives" as it is for biology to define "life", "^et, we will be as unable to do without "ob- jectives" as the biologists are unable to do without "life". Any entrepreneurial decision, let alone the integrated decision-system we call a "long-range plan", has objectives, consciously or not. b. Asmmptians. These are what is believed by the people who make and carry out decisions to be "real" in the intemal and extemal universe of the business. c. Expectations,—the future events or results considered likely or attainable. These three elements can be said to dejine the decision. d. Altemaiive courses of action. There never is—indeed, in a tme uncertainty situation there never can be—"one right decision". There cannot even be "one best decision". There are always "wrong decisions", that is, decisions inadequate to the objectives, incompatible with the assumptions, or grossly improbable in the light of the expectations. But once these have been eliminated, there will still be altematives left—each a different configuration of objectives, assumptions and expectations, each with its own risks and its own ratio between risks and rewards, each with its own impact, its specific efforts and its own results. Every decision is thus a value-judgment—it is not the "facts that decide"; people have to choose between imperfect altematives on the basis of uncertain knowledge and fragmentary understanding. Two altematives deserve special mention, if only because they have to be considered in almost every case. One is the altemative of no action (which is, of course, what postponing a decision often amounts to); the other is the very important choice between adaptive and innovating action—each having risks that differ greatly in character though not necessarily in magnitude. e. The next element ia the decision-making process is the decision itself. 244 PETER F. DRUCKER f. But there is no such thing as one isolated decision; every decision is, of necessity, part of a decision-structure. Every financial man knows, for instance, that the original capital appropri- ation on a new investment implies a commitment to future- and usually larger- capital appropriations which, however, are almost never as much as men- tioned in the proposal submitted. Few of them seem to realize, however, that this implies not only a positive commitment but also, by mortgaging future capital resources, linoits future freedom of action. The structuring impact of a decision is even greater in respect to allocations of scarce manpower, such as research people. g. A decision is only pious intention unless it leads to action. Every decision, therefore, has an impact stage. This impact always follows Newton's Second Law, so to speak; it consists of action and reaction. It requires effort. But it also dislocates. There is, therefore, always the question: what effort is required, by whom, and where? What must people know, what must they do and what must they achieve? But there is also the question—generally neglected—what does this decision do to other areas? Where does it shift the burden, the weaknesses, and the stress points; and what impact does it have on the outside; in the market, in the supply struc- ture, in the community, and so on. h. And, finally, there are remits. Each of these elements of the process deserves an entire book by itself. But I think I have said enough to show that both, the process itself and each ele- ment in it, are rational, no matter how irrational and arbitrary they may appear. Both