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Effect of economic planning on business decisions
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Long Range
Planning
Vol. 10
August
1977
Effect of Economic Business Decisions
Planning on
Sarbhnsh C. Jhz*
The fact that the United States has not faced an economic perplexity of current dimensions since the depression days hardly needs any emphasis. The current economic slowdown is significant because no recovery measures which may be applied to cure the economy are in sight. Since the Great Depression, especially after World War it, Keynes’ economic theories have successfully been applied in the U.S., as also in other countries of the Free World, to put the economy back on path to recovery. Unfortunately. Keynesian measures do not seem to cope with the current economic woes. Apparently, new ways need to be sought and emplo yed to get the economy back on track. Among many new ideas that have been advanced to restore economic growth, one is national economic planning by which the Government would play an active role in setting goals for the economy and devising means to reach them. The purpose of this paper is to report the findings of a study that the author undertook to probe the opinions of chief executive officers of the largest U.S. corporations on the whole idea of national economic planning in the United States. This study is based on interviews with 23 chief executives officers (CEOs) in different industries. Table 1 shows the background of these CEOs. Specifically, the author refers to such questions as: What positive and negative attitudes do the chief executive officers maintain toward national economic planning; what difficulties do they think will have to be surmounted to accomplish national economic planning in the U.S.; what influence may national economic planning have on various business decisions; and how may national economic planning affect corporate strategy 7
Attitudes Toward Planning Why Business Suspects Ecottonric P/ntrning? Business oppose the whole idea of economic planning for may reasons, which range from fear of increasing government interference in the decisions of companies to doubts about government’s ability to undertake economy-wide planning. Various reasons for hesitation among businessmen to accept economic planning are summarized below. *The author is Associate Professor ot marketing at the University of Connecticut, U.S.A.
(1) About one-third of my respondents strongly indicated that state economic planning is a negation of American value system. Nutured in the traditions of the free enterprise system, they suspect planning as a step towards building a totalitarian state. Planning, it has been asserted, may hamper the individual freedom which is close to an American heart, because it calls for government to make decisions for the consumers, and because it makes the state as an entity which defines goals and deserves people’s sacrifice and devotion. While proponents of planning propose undertaking democratic planning, almost everyone in in our sample stressed that economic planning as a normative concept emphasizes ‘common good’ which may be used by planners to justify increasing government control in the future. For example, if the money market fails to respond as expected, the government may impose stringent measures on banks which may be just a step short of nationalization.
(3)In
a free econoiy, many executives pointed out, capital flows to those industries which utilize it most efficiently. Interference by the state in this free flow may lead to a decline in the overall efficiency. For example, by rescuing Pan Am, the government would have denied some of the normal flow of capital to a more efficient industry. Thus planning may impose heavy economic costs which the taxpayer will have to pay.
(4) Planning, it is feared, may enhance the scope of political manouvering in economic decisions, which will be counterproductive in the long run. As an illustration, the decision to ‘break General Motors’ may be made on value judgment alone, under the aura of political influence, without addressing the question to economic realities. (5) It is also feared that planning may lead to price fixing and other forms of cartelizations of industry through requiring individual firms to provide proprietary information to others_ Thus competition as it is known now would become obsolete.
Effect of Economic
on Business Decisions
Some
(6)Finally,
almost half the CEOs, I interviewed, emphasized that planning, in fact, may lead to more economic woes. The government may set ambitious planning targets divorced from hard economic realities, the fulfillment of which may result in high inflation. Suppose a housing target of half a million units is established. If economic circumstances stagnate housing development, the government may engage in inflationary measures for at least a partial realization of this target.
Table
Planning
3. Respondents’ (Chief Executive Officers’) Background
(a)
Company’s Sales (year ending in 1975) $100 or less $100-250 $250-500 $500-750 $750-1000 $1 ooo+
in Millions of Dollars 2 s 3 5 5
(2)
Total 23 (b)
Major Lines of Business Appliances 3 Automotive Building Materials (cement, wood, paint, heating and plumbing, roofing, etc.) z Chemicals Electrical, Electronics (heavy equipment, components, 1 radio and TV sets, etc.) Food Processing (baked goods, canned and packaged 2 foods, dairy products, condiments, etc.) 1 Food and Lodging General Machinery (machine tools, industrial machinery, 2 metal fabricators, etc.) 1 Leisure Time Industries Natural Resources (fuel) : Office Equipment, Computers 1 Paper 1 Personal Care Products (cosmetics, soap, etc.) Special Machinery (farm, construction, materials handling) 2 1 Utilities (telephone, electric, gas)
. to be built
Total 23
What Business Likes About Planning? Planning as such has come to be recognized as an important activity among business organizations. As has been claimed: ‘No self-respecting growth company today can afford to be without planning capability’l. Thus the tool of planning is neither new nor without merit for the businessmen. As a matter of fact, about 40 per cent CEOs in my research feel that perhaps national planning is the answer to current economic problems. The following reasons were advanced in support of national economic planning in the United States. (1) Modern, large and complex organizations have to have plamling to guide their destiny. They believed that if business corporations can grow faster through long range planning, a government as an organization, large as it may be, can do the same. If we consider planning as a generic term referring to any activity which seeks to achieve an objective in future time, it must have wider applications to be useful at the level of government.
(4)
Di$jcdties
Anticipated
I interviewed
bricks concept
43
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Long Range PluminS Vol. 10
the basis of a stereotype trivial.
August 1977
response would have been
However, almost everyone we interviewed mentioned that a variety of difIiculties would have to be surmounted if the United States were to undertake economic planning. These dif?iculties make the executives question the feasibility of undertaking national economic planning in the United States. The difficulties that were noted were both conceptual and procedural.
(1)Accurate
long term forecasting, it was pointed out, constitutes a basic ingredient in planning. But the past record of economists has been far from encouraging in making forecasts. In a large and complex economy, such as the U.S., there are too many exogenous and behavioural variables which affect the shape of things to come and these may not be easily reduced to quantitative equestions for developing a predictive macroeconomic model. Another problem here concerns the reliability of information that national economic planning will generate. For example, one important source of information for planning would be business corporations, but there is no guarantee that companies would provide correct information.
(2)Our
political system, it was asserted, inhibits any attempts at national economic planning. If the Congress and the Presidency are controlled by different political parties, disagreements are bound to arise on various planning issues. The failure to decide on a single energy policy is a case in point. In the midst of such disagreements between the executive and the legislative branches of the govemment, decisions would be made by an incoherent series of compromises which would not be healthy planning. As against our political system, in a parliamentary setup that unites legislative and executive power, planning has a much better chance to succeed.
(3)Another
difficulty relates to management of information. In a large and complex economy like the United States, gathering, processing, analyzing, and disseminating endless amount of data, despite all the advances in the field of data processing, will be an arduous task. Planning authorities may be so bogged down with data management that by the time it is in usable from, the data might become outdated and irrelevant due to environmentai changes.
(4)A
basic dif&ulty that may arise in undertaking national economic planning is to set limits of planning. Government, for example, deals with a wide variety of subjects-defense, education, welfare, etc .-which, while not strictly economic, have deep economic underpinnings. The question arises, what are all the areas that should be planned. There is a cut off point beyond which government planning might be d&ult to manage, and over the toleration level of the society to accept. But determination of the cutoff point may be far from easy.
(5)Another
difficult question that would need a decision is what role state and local governments would play vi&-vis national economic planning. Should each state and local government also undertake economic planning in its respective area? If yes, how could state and local plans be co-ordinated with the one at the national level? What if some state and local governments decide not to plan at all? If two states do planning and if conflicts of interest arise between them, whose plan might supersede the other? Again, such questions become pronounced as a result of our form of government. As one chief executive officer of a large company with sales over $1 billion, who desired anonymity said :
Planning no doubt is a tool which can be applied in any political system. As such there is nothing wrong if the United States were to resort to planning for setting its economic house in order. But the real question is if our particular system is amenable to such an exercise. Apparently, it would be much easier to do planning in a political system such as in the Soviet Union. Even in Great Britain it may somehow work out. But in the United States it would appear to me to be a futile effort.
(6)National
economic planning, many executives asserted, would add new dimensions to the country’s economy. Via this route, the large corporations may de&e greater benefits than the smaller units. To begin with, executives in large corporations may be associated with one of the working committees of the planning organization which would open the doors for their corporations to have firsthand knowledge of thinking at the government level. Second, in-house capabilities present in large corporations would augur well for attaching meanings to various statistics and reports that the planning organization may make public. This way smaller companies may find it difficult to operate successfully in the midst of national economic planning. At least this would be so during the first few years.
(7)Planning
has a reference to the future. But while a government may last several years, its future is dependent on current yearly achievements. Thus there is likely to be a con&t between the planning interests and government’s own viability. As Chamberlain has said :
The initiation of actions and the allocation of resources looking to future specific goals are, however, only part of the current plan, which must also include provision for the satisfaction of the present wants of a society composed of competing interests and tastes, and still preserve the actions and allocations necessary to future objectives-general magnitudes sutlicient to permit a politically satisfactory division among competing groups. But the categorical objectives-the magnitudes which embody the rates of growth in national income and which determine how much there is to allocate-ever/time themselves depend on long-run policies which can be made effective, such as those concerning rates of saving and investment, policies which have been chosen because they make possible not only a rate but a pattern of growth. The succession of short-run objectives-mostly of a categorical nature-themselves are determined by more distant goal?.
Effect of Economic
(8)Decision
on the time-horizon of planning poses another difficulty. Should planning cover 4 years, 5 years, or what? There is no plausible answer to this question. Usually businessmen and countries plan on a five-year cycle basis. But in our system of govermnent where the term of a Congress is Z-year and that of the President is Cyear, 5 years as a frame of planiiing reference may not suit. What if 1 years planning is undertaken, (even though 4 years will be too short a time), and approved by the present Congress but is not acceptable to the next Congress1 If we go for a longer period, the new administration may not lend support to the plan approved by the previous administration. In such a situation, the whole planning effort will be a waste of resources.
(9)National
economic planning, no matter how purely economic it is in nature, must have certain social aspects as well. In that case, determination of the cost-benefit relationship of social programs t/is-&vis economic alternatives for allocation of resources would be problemsome. For example, determination of benefits of establishing a business enterprise in a ghetto arca as against in an economically viable area may be difficult to measure in strictly economic terms. This means national economic planning may lead to overall inefficiencies in the economy. A big question that may arise is to what extent subordination of economic efficiency, and in turn slowing of overall growth, is acceptable for creating equality conditions for depressed sections of the society.
Busmess uecuons m the Midst of Economic Planning National economic planning in the United States currently is only at the talking stage. The real effect of it 011 business decisions can be examined only after planning has been in force for a number of years, because the structure of the plan and the planning process will be decisive factors in determining the effect of national economic planning on business decisions. Thus the effects of economic plamling on business decision, as discussed below, are based on familiarity with national economic (a) executives planning in the United’ States, as propounded by Senators Humphrey and Javit? : (b) their perceptions about the operation of economic planning in the U.S. and its impact on business decisions; and finally (c) their knowledge of economic planning in other free countries, particularly France and Japan, as it affects the business secm1-.
National economic planning in the U.S. will have both direct and indirect effects for business. Direct effects are those that bear upon business decisions as a result of planning activity without being channeled through other mechanisms or institutions. Indirect effects emerge via the route from the planning activinto some department of the government to business’ and
Planning
on Business
Decisions
45
industry. For example, the plan may outline a variety of concessions for companies undertaking energy-oriented activities to meet the objective of self-sufficiency in energy. This may then be considered as a direct effect of economic planning for a company interested in the field of energy. As against this, the plan may indicate that government (via the line authority) will take appropriate legislative measures to create tariff barriers if the balance of payment is unfavourable. Via this route, assuming the U.S. incurs a heavy negative balance of trade, new import duties may be levied on a variety of products, such as automobiles. Then, for a business dealing in imported cars this will be an indirect effect of economic planning. Major direct effects of economic planning in the U.S. on business decisions that came out of my study are the decision, effect following three : effect on investment on market potentials, and effect on goal orientation.
6nc area where businessmen feel national economic planning will have definite impact is investment decision. Various reasons advanced for this conclusion are summarized below: Btrilt-in Den~artd. The planning document would indicate demand in various sectors. This indication would encourage a company to consider a particular area for entry or expansion through new investments. Tax Break. To achieve implementation of planned targets, the government may resort to privileged tax treatment in selected areas through investment credit or permitting writeoff of invested dollars in a short period. This fiscal measure would weigh heavily with businessmen in making their investment decisions. Rece@otz irz the Cnyitnl Market. A company desiring to raise money in the capital market could expect a better reception if the project for which money would be used happened to be one that economic planning had Via this route again, planning labeled as important. may influence investment decisions. _4klubility qjGovcrrrnwlzt Shidy. In order to encourage developments in specific fields, such as energy resources, the government may provide with a variety of subsidies. Apparently, a firm will seriously consider investing in a field, if otherwise it falls within its scope, where such a subsidy is available. The above description need not imply that national economic plamling will have bearing on investment decisions across-the-board. A company can always rely on self-financing or other sources of fmancing, if an investment proposal appears desirable r&h-rk the company’s own corporate strategy. An interesting comment on national economic planning’s impact on investment decision was made by the chief executive offker of a multi-national corporation, whose company derives 55 per cent of its revenues from
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Long Range
Planning
Vol. 10
August
1977
overseas operations. According to him, national economic planning may only partially influence investment decision in a multinational corporation, since such a company would examine an investment proposal in the global context and not just the United States. Inasmuch as U.S. national economic planning will be based on information pertaining to U.S. only, it may not have as much significance for a multinational corporation, since such a corporation must consider the happenings worldwide. E&ct on Market Potentials Almost every organization goes through the process, whether formally or intuitively, of projecting market potential for various products and deriving company sales goals from it. If the U.S. does practice national economic planning, the planning organization would work out forecasts regarding how many automobiles, refrigerators, power generators, hospital beds, etc., the country would need in a future time period. This sort of information would in itself constitute total market potential for different categories of products. Alternatively, every organization will have government statistics available on market potentials. This way all competitors in an industry would work out their market shares from the same base, which wouId mean minimum error in forecasting company sales. Theoretically, government statistics would set the upper limit on what the market may require. Many executives, however, see a variety of problems in accepting government statistics at face value. To begin with government statistics may be based on wrong assumptions. Second, exogenous variables may change the economic climate. Even if it is argued that planning should be able to monitor changes in the U.S., environmental changes outside the U.S. could produce imbalances in the U.S. as well. After all, this country is interwoven with the global society in so many ways that market potentials based on U.S. conditions alone may lose significance in the face of changes elsewhere. Not only that, the planned target would be static and would disregard consumer or customer motivations. In a free society, however, customer may shift his/her choices for various reasons, say for example, in response to a company’s promotional program. Such a contingency would not be reflected in government statistics. Also competition is not limited to only between members of an industry, but may emerge between industries as well. Such an eventuality might not be considered by the planning organisation. To illustrate the point, the CEO of a fast-food restaurant chain said; ‘Instead of opting for a ski vacation in the Alps, I might buy a vacation home in a dream city, something of the kind now being built in Houston’. This way a housing company would come ahead of an airline company. This point might be missed in arriving at national planning targets. Finally, planning targets would indicate market potentials for the planning duration, some type of a longterm target. For planning authorities, if year-to-year
targets were missed. there would bc little discomfort, as long as long-term targets were achieved within limits. For a company, however, short-term variations from predicted sales might accumulate into huge deficits in the long run, which might prevail on the organizational survival. In brief, a company should accept government information or market potentials only with a grain of salt. J+t ofz Co~zl Oricntatiorz Through setting planning goals, the government would virtually make it obligatory for a business to engage in some sort of goal setting and to undertake a planned look ahead. This way business corporations would come to attach a new sense of importance to corporate planning. While planning in business corporations has come to be accepted as desirable, many times companies pay lip service to it. But government planning should strengthen the role of planning in a company as an essential activity, not something which is only desirable. As a chief executive officer of a $2 billion company has said: We are among the top planning type companies in the world. Our vice-chairman who reports to me is responsible for looking to the future solely. Yet, I must admit, we live in a day-to-day environment. This reduces our planning to be reactive-type than premeditative.
Stated differently, with a view to keeping abreast of economic planning, companies would not only plan but align their plans in some fashion to the national economic planning. Via this route, then, a company would be able to (a) discover areas of operations where traditional choices may be undesirable; (b) look around for alternative courses of action; and (c) take advantage of available opportunities that may be generated by planning with force and farsight. Indirect l??cts It was mentioned earlier that indirect effects of economic planning on business decision making emerge out of actions of various government departments. As shown in Figure 1, actions of government departments would come to bear upon business decisions by changing the prospective of the business environment. Specifically, government may influence the business world in three ways: (a) changing competitive climate, (b) participating in economic activity, and (c) imposing different types of controls. While these environmental happenings may impinge on different facets of corporate life across the board, they would bear heavily on five decisions area: (a) pricing decisions, (b) diversification moves, (c) research and development decisions, (d) leadership style, and (e) freedom of entry. Pricirzg Decision. Inflation has been considered the major economic woe worldwide, which sets in motion a chain of other economic problems. To sustain economic growth, whenever inflation is feared to be on the rise, a government may resort to price controls. For an individual firm, pnce controls could have varied effects. If a firm has raised its prices, to take care of increasing
Effect of Economic Indirect impact of National Economic Planning on Business Decisiins
I Departments
Decisions
47
I
I I Business Environment 0
Competition
l
Government Participation Activities Economic
l
Government
in
Controls
i Business Decisions
l
Pricing Decision Diversification Move Rand D Perspective
l
Leadership
l
Freedom of Entry
l l
Figure
on Business
company interested in diversification may find it worthwhile to search for clues in government quarters, intelligently on a continual basis. It does not mean that traditional methods of looking around for diversification opportunities will become obsolete. But opportunities at the level of government may be more lucrative.
National Economic Planning
Actions of Government
Plamling
Style
1.
costs just prior to the imposition of controls, it may safely steer through the control period without being hurt. Alternatively, if the major cost constituents of a price firm’s product have not risen significantly, control would not matter much. However, if a firm’s product costs increase substantially, and if its prices have not gone up simultaneously, price controls could impose upon profits severely. As a matter of strategy, therefore, the pricing decision, along with the tradltional decision criteria, would come to depend heavily on price control expectations. To safeguard against a sudden government action, a firm may decide to include in final price a certain percentage to cover ‘price control’ cost. Not implicit here, however, is how such a cost factor might be computed. The interviewed CEOs felt that in the case of products whose variable cost constitutes a high percentage of total cost, a markup for price control cost will be more necessary and may be substantial. Dioersifiratio~~Moves.
111
the
1960s diversification into unrelated fields became an important route for businesses to seek growth. This route for business expansion may lose significance if government planning becomes a reality in this country. This conclusion is based on the premise that in a government-oriented economy embracing too many unrelated activities may become unmanageable for a rirm because of a variety of interactions with the government at various levels. Even when a firm may decide on diversification, government, through its participation in economic activities, may become an important source of diversification opportunities. Government participation in economic activities may result from a desire to achieve certain social objectives, regional balanced growth, and stable economic growth. An example is government’s sponsorship of the Tennessee Valley Authoriry. A
Executives also noted that national economic planning may give rise to a new type of organization, perhaps called ‘joint-sector enterprise,’ wherein government and the private sector may enter into partnership. Mention. was made of many types of businesses that could bc entrusted to joint sector enterprises. This included post office, health organizations, and other service organizations. Research and Detdopetzt. According to a McGraw-Hill study’, about $35 billion was spent on R & D in 1975. This figure is expected to increase to $60 billion in 1985. Mainly government supports R & D. However, as a result of national economic planning. the share of R & D by private sector may further decline. R & D is a long route to growth that initially may require huge doses of investment during the develop mental period, which may run into decades. Inasmuch as the perspective of economic planning might change every four. years, i.e., a change in presidency might lead to different economic emphasis, firms may find it too risky to commit themselves in investment-intensive research projects. Decline in business interest in R & D may have a side effect of increasing the length of product life cycles. Strategically then, a product should return more dollars on its investment than it might do now. Thus R & Doriented products should cost less to the consumer. But as some respondents claimed, extension of product life cycles would have repercussions on life style and standard of living. Since assigning of monetary values to standard of living and life style, as affected by fewer new products is difficult, it would become more of a question of value judgment. Leadership Style. The leadership style determines the mode of performance of three executive functions which are: preservation of the organization, control of organization response to deviations from expectations, and planning future corporate expectations. Innovation and change characterize the leadership style of successful organizations. About two-thirds of chief executives whom I questioned felt that government planning will discourage both innovation and change. Altematively, preservation and control of the organization will become the major concern of corporate leaders. While organizations, in response to government planning, may become more goal-oriented as far as day-to-day operations are concerned, planning of future corporate expectations, and development and motivation of the organization toward these expectations would become secondary. This is because government planning would create psychological, if not real,
Long Range
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Vol. 10
August
1977
uncertainties about future happenings. Coupled with the uncertainties, there will always be the fear of ‘erratic’ government measures. Uncertainty and fear would hardly be conductive to innovation. Left to themselves, organizations would plan and commit themselves ambitiously, adapting to environmental constraints that may come on the horizon. But with government at the helm of economic affairs in a big way, a new sense of security would become pronounced that would subordinate the formulation and implementation of ambitious goals to a Iower level role. Freedom of Entry. In a free economy, any firm is at liberty to enter any field of operation. The market mechanism determines whether the company can get needed finances for the operation, and whether or not the firm is able to run it profitably. For example, because of the ease of entry, our airlines complete with each other nationally and internationally, something not found elsewhere in the world. Virtually in every field, competition and profit encourage organizations to venture into new fields. Despite IBM’s across-theother business equipment manuboard superiority, facturers continue to be in business. Likewise, American Motors is still surviving. Such examples can be easily found everywhere. Considering government to be a large corporation, if it undertakes planning it might discover that competition, while a healthy economic institution, is rather expensive to support. A question may come up, for example, whether over-capacity in an industry is worth it for the sake of competition. Suppose it is determined, out of the planning process, that in a certain future period, this country would need 2 million computers. If the present capacity is 3 million, should the government encourage diversion of excess capacity in computers to another area through divestments. If the answer is yes, which firms should engage in divestments. The government might decide that only the most efficient firms and stay in business, which would hurt competition place restrictions on the freedom to conduct a business.
What Government Planners may Learn From Business Planners? The business leaders participating in my study indicated that planning, at best, is a difficult task to undertake. Planning in the business world, however, has come a long way since it began to be practiced some twenty yea& agd. Therefore ihe government planners, most resnondents felt. would do well to dwell over some harh realities about planning which businessmen have learned with experience.
(1)The
primary benefit of planning is in the process, not in the plan itself. The document is soon obsolete, as the assumptions on which the written plan is based begin to crumble; and sections of the document must be updated continuously. There is significant benefit, however, in forcing managers to
think ahead and to visualize the implications of todays actions (changes) or inactions (doing the same thing). Thus, if the government were to plan, an attitude of flexibility should be maintained in basing actions and inactions entirely on planned targets which may have become obsolete.
(2) The
most useful focus of planning is in product-line planning by division managers, and in resource allocation (funding development expense and capital expenditures) by the chiefexecutive officer. The sum of the product line plans is the explicit corporate plan. In the government context, the planning should be initiated at the level of various major units within a government department, and the sum of unit plans would constitute the departmental plan. For example, within the Department of Interior, planning may start for each unit such as the Park Service. Alternatively, government planning should not amount to be a blueprint of U.S. future perspectives prepared by a few experts directly attached to the White House, and then, relayed to digerent departments indicating what they are supposed to achieve at some future time period.
(3)Planners
do not plan, being inherently staff people, without authority: they induce and assist planning by product-line division managers who must carry out their own plans as approved by the chief executive officer. The correlary of this lesson is, if the chief executive officer does not support the Obviously, planning process, it will not work. there must be a strong commitment by the President, his cabinet, and congressional leaders that planning is necessary and that it should become an integral part of decision making in government. This message should be duly communicated to all others in the organisation.
(‘9 Too
much planning all of a sudden is going to rock the boat. Planning questions long-established current ways of doing things, and requires new perspectives throughout the organization. Too many changes in the organization, at a fast pace, may induce pains which lead people to avoid planning. To be precautionary, therefore, planning should be introduced in small doses.
(5)Planning
should be a continuous process so that assumptions and targets may be updated from time to time. Like in industry, a fixed cycle planning process, say for instance, yearly cycle, would work well in government as well, which would permit a perpetual revision of the plan.
(6)Planning
has to be custom made. No planning system has ever been worked out that may work out in all business firms. As a matter of fact, two firms belonging to the same industry, with almost may find different planning similar perspectives, systems useful. Thus, the federal government has to evolve its own system of planning. To assure that care should be taken that concern over techniques may not divert planners and managers from the
Effect of Economic fundamental substantive purposes of planning. In the absence of this, manipulation of numbers becomes more important than the meaning of numbers.
What
Government
Might Do?
Overall, about one-third chief executive officers who agreed to help us on this study totally rejected the idea of having any form of economic planning in the United States. The remaining two-thirds viewed some sort of economic planning as a constructive measure. They felt that lack of early recognition of future difficulties explains the source of many of society’s major problems and that better information and planning could be the means for providing some of the missing advance warning and calling attention to future consequences of todav’s actions or lack of action. As one respondent put it: ‘Congress-and government as a whole-needs advance planning to take intelligent action: it is as simple as that.’ They share with many the fear that government planning might lead to control, but felt that we needed a more factual understanding of how planning might work in the American economy so that we could base our views on something concrete rather than on fears or expectations that may be groundless. These CEOs recommend three alternative routes to national economic planning which may be pursued in the United States: Q Planning
on a trial basis
*
Selective
planning
k
Directional
planning
Many CEOs recommend a carefully developed trial plan prepared by a temporary task force. The task force, it was emphasized, should be prevented from converting itself into a permanent agency; it might have a two-year charter to produce the plan and then would automatically be disbanded. Evaluation of the effectiveness of the planning process could then proceed without an existing agency to contend with. Once the plan was produced, they recommend sufficient time be provided for proper evaluation of the test-enough time for subsequent events to show whether the plan provided constructive guidance or reached conclusions belied by actual developments. The trial attempt, it was believed, would lead to the following outcome: (a) everyone will better understand the advantages and limitations of the planning concept in our economy, and the organizational and operational aspects of the planning process; (b) no permanent, self-perpetuating bureaucracy will be created until there is greater consensus on the merits of planning; its nature and objectives, and the real needs, functions and costs of such a bureaucracy; (c) the trail plan itself will be useful output providing valuable insights into our economy, our problems, and our opportunities;
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(d) the process will show the enormity of the task, and may well encourage more attainable and less all-encompassing objectives and scope in future legislative proposals. Selective Pluming Another viewpoint presented by a sample of CEOs is that of selective planning whereby national planning may be undertaken in ‘strategic’ areas only, such as energy requirements, space program, balance of payments, and so on. The.y.argue that to plan is an American way of life. Universrtles, foundations and the private sector engage in planning on a regular basis. At the federal level, the Department of Commerce and the Department of Labour are actively involved in economic planning; and the Economic Policy Board, the Council on International Economic Policy, the Council of Economic Advisors, the Office of Management and Budget, and the Congressional Budget Office all deal with economic forecasts. It will be desirable, however, to further strengthen national economic planning at the federal government level in ‘key’ areas through a co-ordinated effort directed towards the achievement of some overall national objectives. The respondents strongly felt that the selective planning should be accomplished through existing agencies of the federal government. Directional A handful for better departments tive officer
Planning of CEOs emphasized that there statistics on the economy by now producing them. As the of a machine tool company said
was a need the various chief execu:
One of the underlying causes of the current recession was excess inventory accumulation. Yet we did not have current and reliable figures on inventory accumulation by industrial sector. Data on raw material and energy resources supplies (broken down as to inventory, proven reserves, and estimated unfound reserves) are going to be more and more useful. Wage rates by skill level, by industry, by location, might be useful; and govemment estimates ofthe impact ofwage rates by skill level (including the minimum wage) on prices of goods and services by industry will be helpful. It was stressed that provision of timely and reliable statistical information which the government might provide should go a long way in helping various departments of the government as well as the private sector to make their individual plans more realistic. And if the individual components of the economic system do a good job in planning their moves ahead, the apex organization, i.e., the government as such does not have to plan.
To make the statistics more viable, however, both Congress and the Executive Branch at the same time may make explicit the long-range implications of government programs, both current and proposed. All too often, government programs are initiated to meet a current need without forecasting the growth, or the cost, of the impact on the economy. What is needed is a proper co-ordination of these programs, built upon well-defined goals. In summary, there is room for
50
Long Range Planning
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1977
improving planning data, planning techniques, and forecasting, and government can be of real help in these areas. Alternatively, the government should help in seeking improvements in the areas listed above. This would provide directional help to various government agencies and the private sector to make advances in doing realistic planning; which obviously would obviate the necessity of government herself engaging in planning.
Summary In recent months a new idea has emerged in many quarters for reviving economic health of the nation. It has been proposed that to cure economic problems this country should undertake national economic planning. This paper reports the findings of a study planned to look into the viability of economic planning in the United States vi+bvis business corporations. Twenty-three chief executive officers in different industries were interviewed to probe their opinions on the subject of national economic planning. About one-third respondents totally rejected the idea of economic planning. The rest did see something useM in it but questioned the feasibility of economic planning in the socio-political-economic set up of the United States. The CEOs co-operating on this study emphasised a number of points which make them like or dislike economic planning. Various difficulties associated with operationalizing economic planning in the U.S. were also stated.
The respondents indicated both direct and indirect effects of economic planning on business decisions which are summarized in this paper. The direct effects are-effect on investment decision, effect on market potentials, and effect on goal orientation. The indirect effects included edict on pricing decision, diversification moves, R & D prospective, leadership style and freedom of entry. Finally, the paper discusses respondents’ views on two other aspects-what government planners may learn from business planners, and what government might do to evaluate the usefulness of economic planning in the United States.
Rt$mws (1) George A. Steiner, ‘Rise of the Corporate Planner’, Harvard Business Review, p. 134, September-October
(1970).
Economic Planning Proposal (Washington D.C. : American Enterprise institute for Public Policy Research, 1975). p. 12.
(2) The
(3)
Leon Keyserling in Notes from the Joint Economic Committee, 1, (19), 17, July (1975).
(4)
Neil W. Chamberlain, Privet8 and Public Planning. Hill, New York, p. 57 (1965).
(5)
Chamberlain, op. cit., pp. 77-78.
(6)
Senators Hubert Humphrey and Jacob Javits introduced a bill in the Congress titled ‘The Balanced Growth and Economic Planning Act of 1975’ on May 21, 1975. The bill was referred to the Joint Economic Committee, which held hearings on June 11 and 12, 1975.
(7)
The American Economy: PIOSp8CtS for McGraw-Hill, New York (1975).
Growth
McGraw-
to
1988.
Long Range
Planning
Vol. 10
August
1977
Effect of Economic Business Decisions
Planning on
Sarbhnsh C. Jhz*
The fact that the United States has not faced an economic perplexity of current dimensions since the depression days hardly needs any emphasis. The current economic slowdown is significant because no recovery measures which may be applied to cure the economy are in sight. Since the Great Depression, especially after World War it, Keynes’ economic theories have successfully been applied in the U.S., as also in other countries of the Free World, to put the economy back on path to recovery. Unfortunately. Keynesian measures do not seem to cope with the current economic woes. Apparently, new ways need to be sought and emplo yed to get the economy back on track. Among many new ideas that have been advanced to restore economic growth, one is national economic planning by which the Government would play an active role in setting goals for the economy and devising means to reach them. The purpose of this paper is to report the findings of a study that the author undertook to probe the opinions of chief executive officers of the largest U.S. corporations on the whole idea of national economic planning in the United States. This study is based on interviews with 23 chief executives officers (CEOs) in different industries. Table 1 shows the background of these CEOs. Specifically, the author refers to such questions as: What positive and negative attitudes do the chief executive officers maintain toward national economic planning; what difficulties do they think will have to be surmounted to accomplish national economic planning in the U.S.; what influence may national economic planning have on various business decisions; and how may national economic planning affect corporate strategy 7
Attitudes Toward Planning Why Business Suspects Ecottonric P/ntrning? Business oppose the whole idea of economic planning for may reasons, which range from fear of increasing government interference in the decisions of companies to doubts about government’s ability to undertake economy-wide planning. Various reasons for hesitation among businessmen to accept economic planning are summarized below. *The author is Associate Professor ot marketing at the University of Connecticut, U.S.A.
(1) About one-third of my respondents strongly indicated that state economic planning is a negation of American value system. Nutured in the traditions of the free enterprise system, they suspect planning as a step towards building a totalitarian state. Planning, it has been asserted, may hamper the individual freedom which is close to an American heart, because it calls for government to make decisions for the consumers, and because it makes the state as an entity which defines goals and deserves people’s sacrifice and devotion. While proponents of planning propose undertaking democratic planning, almost everyone in in our sample stressed that economic planning as a normative concept emphasizes ‘common good’ which may be used by planners to justify increasing government control in the future. For example, if the money market fails to respond as expected, the government may impose stringent measures on banks which may be just a step short of nationalization.
(3)In
a free econoiy, many executives pointed out, capital flows to those industries which utilize it most efficiently. Interference by the state in this free flow may lead to a decline in the overall efficiency. For example, by rescuing Pan Am, the government would have denied some of the normal flow of capital to a more efficient industry. Thus planning may impose heavy economic costs which the taxpayer will have to pay.
(4) Planning, it is feared, may enhance the scope of political manouvering in economic decisions, which will be counterproductive in the long run. As an illustration, the decision to ‘break General Motors’ may be made on value judgment alone, under the aura of political influence, without addressing the question to economic realities. (5) It is also feared that planning may lead to price fixing and other forms of cartelizations of industry through requiring individual firms to provide proprietary information to others_ Thus competition as it is known now would become obsolete.
Effect of Economic
on Business Decisions
Some
(6)Finally,
almost half the CEOs, I interviewed, emphasized that planning, in fact, may lead to more economic woes. The government may set ambitious planning targets divorced from hard economic realities, the fulfillment of which may result in high inflation. Suppose a housing target of half a million units is established. If economic circumstances stagnate housing development, the government may engage in inflationary measures for at least a partial realization of this target.
Table
Planning
3. Respondents’ (Chief Executive Officers’) Background
(a)
Company’s Sales (year ending in 1975) $100 or less $100-250 $250-500 $500-750 $750-1000 $1 ooo+
in Millions of Dollars 2 s 3 5 5
(2)
Total 23 (b)
Major Lines of Business Appliances 3 Automotive Building Materials (cement, wood, paint, heating and plumbing, roofing, etc.) z Chemicals Electrical, Electronics (heavy equipment, components, 1 radio and TV sets, etc.) Food Processing (baked goods, canned and packaged 2 foods, dairy products, condiments, etc.) 1 Food and Lodging General Machinery (machine tools, industrial machinery, 2 metal fabricators, etc.) 1 Leisure Time Industries Natural Resources (fuel) : Office Equipment, Computers 1 Paper 1 Personal Care Products (cosmetics, soap, etc.) Special Machinery (farm, construction, materials handling) 2 1 Utilities (telephone, electric, gas)
. to be built
Total 23
What Business Likes About Planning? Planning as such has come to be recognized as an important activity among business organizations. As has been claimed: ‘No self-respecting growth company today can afford to be without planning capability’l. Thus the tool of planning is neither new nor without merit for the businessmen. As a matter of fact, about 40 per cent CEOs in my research feel that perhaps national planning is the answer to current economic problems. The following reasons were advanced in support of national economic planning in the United States. (1) Modern, large and complex organizations have to have plamling to guide their destiny. They believed that if business corporations can grow faster through long range planning, a government as an organization, large as it may be, can do the same. If we consider planning as a generic term referring to any activity which seeks to achieve an objective in future time, it must have wider applications to be useful at the level of government.
(4)
Di$jcdties
Anticipated
I interviewed
bricks concept
43
44
Long Range PluminS Vol. 10
the basis of a stereotype trivial.
August 1977
response would have been
However, almost everyone we interviewed mentioned that a variety of difIiculties would have to be surmounted if the United States were to undertake economic planning. These dif?iculties make the executives question the feasibility of undertaking national economic planning in the United States. The difficulties that were noted were both conceptual and procedural.
(1)Accurate
long term forecasting, it was pointed out, constitutes a basic ingredient in planning. But the past record of economists has been far from encouraging in making forecasts. In a large and complex economy, such as the U.S., there are too many exogenous and behavioural variables which affect the shape of things to come and these may not be easily reduced to quantitative equestions for developing a predictive macroeconomic model. Another problem here concerns the reliability of information that national economic planning will generate. For example, one important source of information for planning would be business corporations, but there is no guarantee that companies would provide correct information.
(2)Our
political system, it was asserted, inhibits any attempts at national economic planning. If the Congress and the Presidency are controlled by different political parties, disagreements are bound to arise on various planning issues. The failure to decide on a single energy policy is a case in point. In the midst of such disagreements between the executive and the legislative branches of the govemment, decisions would be made by an incoherent series of compromises which would not be healthy planning. As against our political system, in a parliamentary setup that unites legislative and executive power, planning has a much better chance to succeed.
(3)Another
difficulty relates to management of information. In a large and complex economy like the United States, gathering, processing, analyzing, and disseminating endless amount of data, despite all the advances in the field of data processing, will be an arduous task. Planning authorities may be so bogged down with data management that by the time it is in usable from, the data might become outdated and irrelevant due to environmentai changes.
(4)A
basic dif&ulty that may arise in undertaking national economic planning is to set limits of planning. Government, for example, deals with a wide variety of subjects-defense, education, welfare, etc .-which, while not strictly economic, have deep economic underpinnings. The question arises, what are all the areas that should be planned. There is a cut off point beyond which government planning might be d&ult to manage, and over the toleration level of the society to accept. But determination of the cutoff point may be far from easy.
(5)Another
difficult question that would need a decision is what role state and local governments would play vi&-vis national economic planning. Should each state and local government also undertake economic planning in its respective area? If yes, how could state and local plans be co-ordinated with the one at the national level? What if some state and local governments decide not to plan at all? If two states do planning and if conflicts of interest arise between them, whose plan might supersede the other? Again, such questions become pronounced as a result of our form of government. As one chief executive officer of a large company with sales over $1 billion, who desired anonymity said :
Planning no doubt is a tool which can be applied in any political system. As such there is nothing wrong if the United States were to resort to planning for setting its economic house in order. But the real question is if our particular system is amenable to such an exercise. Apparently, it would be much easier to do planning in a political system such as in the Soviet Union. Even in Great Britain it may somehow work out. But in the United States it would appear to me to be a futile effort.
(6)National
economic planning, many executives asserted, would add new dimensions to the country’s economy. Via this route, the large corporations may de&e greater benefits than the smaller units. To begin with, executives in large corporations may be associated with one of the working committees of the planning organization which would open the doors for their corporations to have firsthand knowledge of thinking at the government level. Second, in-house capabilities present in large corporations would augur well for attaching meanings to various statistics and reports that the planning organization may make public. This way smaller companies may find it difficult to operate successfully in the midst of national economic planning. At least this would be so during the first few years.
(7)Planning
has a reference to the future. But while a government may last several years, its future is dependent on current yearly achievements. Thus there is likely to be a con&t between the planning interests and government’s own viability. As Chamberlain has said :
The initiation of actions and the allocation of resources looking to future specific goals are, however, only part of the current plan, which must also include provision for the satisfaction of the present wants of a society composed of competing interests and tastes, and still preserve the actions and allocations necessary to future objectives-general magnitudes sutlicient to permit a politically satisfactory division among competing groups. But the categorical objectives-the magnitudes which embody the rates of growth in national income and which determine how much there is to allocate-ever/time themselves depend on long-run policies which can be made effective, such as those concerning rates of saving and investment, policies which have been chosen because they make possible not only a rate but a pattern of growth. The succession of short-run objectives-mostly of a categorical nature-themselves are determined by more distant goal?.
Effect of Economic
(8)Decision
on the time-horizon of planning poses another difficulty. Should planning cover 4 years, 5 years, or what? There is no plausible answer to this question. Usually businessmen and countries plan on a five-year cycle basis. But in our system of govermnent where the term of a Congress is Z-year and that of the President is Cyear, 5 years as a frame of planiiing reference may not suit. What if 1 years planning is undertaken, (even though 4 years will be too short a time), and approved by the present Congress but is not acceptable to the next Congress1 If we go for a longer period, the new administration may not lend support to the plan approved by the previous administration. In such a situation, the whole planning effort will be a waste of resources.
(9)National
economic planning, no matter how purely economic it is in nature, must have certain social aspects as well. In that case, determination of the cost-benefit relationship of social programs t/is-&vis economic alternatives for allocation of resources would be problemsome. For example, determination of benefits of establishing a business enterprise in a ghetto arca as against in an economically viable area may be difficult to measure in strictly economic terms. This means national economic planning may lead to overall inefficiencies in the economy. A big question that may arise is to what extent subordination of economic efficiency, and in turn slowing of overall growth, is acceptable for creating equality conditions for depressed sections of the society.
Busmess uecuons m the Midst of Economic Planning National economic planning in the United States currently is only at the talking stage. The real effect of it 011 business decisions can be examined only after planning has been in force for a number of years, because the structure of the plan and the planning process will be decisive factors in determining the effect of national economic planning on business decisions. Thus the effects of economic plamling on business decision, as discussed below, are based on familiarity with national economic (a) executives planning in the United’ States, as propounded by Senators Humphrey and Javit? : (b) their perceptions about the operation of economic planning in the U.S. and its impact on business decisions; and finally (c) their knowledge of economic planning in other free countries, particularly France and Japan, as it affects the business secm1-.
National economic planning in the U.S. will have both direct and indirect effects for business. Direct effects are those that bear upon business decisions as a result of planning activity without being channeled through other mechanisms or institutions. Indirect effects emerge via the route from the planning activinto some department of the government to business’ and
Planning
on Business
Decisions
45
industry. For example, the plan may outline a variety of concessions for companies undertaking energy-oriented activities to meet the objective of self-sufficiency in energy. This may then be considered as a direct effect of economic planning for a company interested in the field of energy. As against this, the plan may indicate that government (via the line authority) will take appropriate legislative measures to create tariff barriers if the balance of payment is unfavourable. Via this route, assuming the U.S. incurs a heavy negative balance of trade, new import duties may be levied on a variety of products, such as automobiles. Then, for a business dealing in imported cars this will be an indirect effect of economic planning. Major direct effects of economic planning in the U.S. on business decisions that came out of my study are the decision, effect following three : effect on investment on market potentials, and effect on goal orientation.
6nc area where businessmen feel national economic planning will have definite impact is investment decision. Various reasons advanced for this conclusion are summarized below: Btrilt-in Den~artd. The planning document would indicate demand in various sectors. This indication would encourage a company to consider a particular area for entry or expansion through new investments. Tax Break. To achieve implementation of planned targets, the government may resort to privileged tax treatment in selected areas through investment credit or permitting writeoff of invested dollars in a short period. This fiscal measure would weigh heavily with businessmen in making their investment decisions. Rece@otz irz the Cnyitnl Market. A company desiring to raise money in the capital market could expect a better reception if the project for which money would be used happened to be one that economic planning had Via this route again, planning labeled as important. may influence investment decisions. _4klubility qjGovcrrrnwlzt Shidy. In order to encourage developments in specific fields, such as energy resources, the government may provide with a variety of subsidies. Apparently, a firm will seriously consider investing in a field, if otherwise it falls within its scope, where such a subsidy is available. The above description need not imply that national economic plamling will have bearing on investment decisions across-the-board. A company can always rely on self-financing or other sources of fmancing, if an investment proposal appears desirable r&h-rk the company’s own corporate strategy. An interesting comment on national economic planning’s impact on investment decision was made by the chief executive offker of a multi-national corporation, whose company derives 55 per cent of its revenues from
46
Long Range
Planning
Vol. 10
August
1977
overseas operations. According to him, national economic planning may only partially influence investment decision in a multinational corporation, since such a company would examine an investment proposal in the global context and not just the United States. Inasmuch as U.S. national economic planning will be based on information pertaining to U.S. only, it may not have as much significance for a multinational corporation, since such a corporation must consider the happenings worldwide. E&ct on Market Potentials Almost every organization goes through the process, whether formally or intuitively, of projecting market potential for various products and deriving company sales goals from it. If the U.S. does practice national economic planning, the planning organization would work out forecasts regarding how many automobiles, refrigerators, power generators, hospital beds, etc., the country would need in a future time period. This sort of information would in itself constitute total market potential for different categories of products. Alternatively, every organization will have government statistics available on market potentials. This way all competitors in an industry would work out their market shares from the same base, which wouId mean minimum error in forecasting company sales. Theoretically, government statistics would set the upper limit on what the market may require. Many executives, however, see a variety of problems in accepting government statistics at face value. To begin with government statistics may be based on wrong assumptions. Second, exogenous variables may change the economic climate. Even if it is argued that planning should be able to monitor changes in the U.S., environmental changes outside the U.S. could produce imbalances in the U.S. as well. After all, this country is interwoven with the global society in so many ways that market potentials based on U.S. conditions alone may lose significance in the face of changes elsewhere. Not only that, the planned target would be static and would disregard consumer or customer motivations. In a free society, however, customer may shift his/her choices for various reasons, say for example, in response to a company’s promotional program. Such a contingency would not be reflected in government statistics. Also competition is not limited to only between members of an industry, but may emerge between industries as well. Such an eventuality might not be considered by the planning organisation. To illustrate the point, the CEO of a fast-food restaurant chain said; ‘Instead of opting for a ski vacation in the Alps, I might buy a vacation home in a dream city, something of the kind now being built in Houston’. This way a housing company would come ahead of an airline company. This point might be missed in arriving at national planning targets. Finally, planning targets would indicate market potentials for the planning duration, some type of a longterm target. For planning authorities, if year-to-year
targets were missed. there would bc little discomfort, as long as long-term targets were achieved within limits. For a company, however, short-term variations from predicted sales might accumulate into huge deficits in the long run, which might prevail on the organizational survival. In brief, a company should accept government information or market potentials only with a grain of salt. J+t ofz Co~zl Oricntatiorz Through setting planning goals, the government would virtually make it obligatory for a business to engage in some sort of goal setting and to undertake a planned look ahead. This way business corporations would come to attach a new sense of importance to corporate planning. While planning in business corporations has come to be accepted as desirable, many times companies pay lip service to it. But government planning should strengthen the role of planning in a company as an essential activity, not something which is only desirable. As a chief executive officer of a $2 billion company has said: We are among the top planning type companies in the world. Our vice-chairman who reports to me is responsible for looking to the future solely. Yet, I must admit, we live in a day-to-day environment. This reduces our planning to be reactive-type than premeditative.
Stated differently, with a view to keeping abreast of economic planning, companies would not only plan but align their plans in some fashion to the national economic planning. Via this route, then, a company would be able to (a) discover areas of operations where traditional choices may be undesirable; (b) look around for alternative courses of action; and (c) take advantage of available opportunities that may be generated by planning with force and farsight. Indirect l??cts It was mentioned earlier that indirect effects of economic planning on business decision making emerge out of actions of various government departments. As shown in Figure 1, actions of government departments would come to bear upon business decisions by changing the prospective of the business environment. Specifically, government may influence the business world in three ways: (a) changing competitive climate, (b) participating in economic activity, and (c) imposing different types of controls. While these environmental happenings may impinge on different facets of corporate life across the board, they would bear heavily on five decisions area: (a) pricing decisions, (b) diversification moves, (c) research and development decisions, (d) leadership style, and (e) freedom of entry. Pricirzg Decision. Inflation has been considered the major economic woe worldwide, which sets in motion a chain of other economic problems. To sustain economic growth, whenever inflation is feared to be on the rise, a government may resort to price controls. For an individual firm, pnce controls could have varied effects. If a firm has raised its prices, to take care of increasing
Effect of Economic Indirect impact of National Economic Planning on Business Decisiins
I Departments
Decisions
47
I
I I Business Environment 0
Competition
l
Government Participation Activities Economic
l
Government
in
Controls
i Business Decisions
l
Pricing Decision Diversification Move Rand D Perspective
l
Leadership
l
Freedom of Entry
l l
Figure
on Business
company interested in diversification may find it worthwhile to search for clues in government quarters, intelligently on a continual basis. It does not mean that traditional methods of looking around for diversification opportunities will become obsolete. But opportunities at the level of government may be more lucrative.
National Economic Planning
Actions of Government
Plamling
Style
1.
costs just prior to the imposition of controls, it may safely steer through the control period without being hurt. Alternatively, if the major cost constituents of a price firm’s product have not risen significantly, control would not matter much. However, if a firm’s product costs increase substantially, and if its prices have not gone up simultaneously, price controls could impose upon profits severely. As a matter of strategy, therefore, the pricing decision, along with the tradltional decision criteria, would come to depend heavily on price control expectations. To safeguard against a sudden government action, a firm may decide to include in final price a certain percentage to cover ‘price control’ cost. Not implicit here, however, is how such a cost factor might be computed. The interviewed CEOs felt that in the case of products whose variable cost constitutes a high percentage of total cost, a markup for price control cost will be more necessary and may be substantial. Dioersifiratio~~Moves.
111
the
1960s diversification into unrelated fields became an important route for businesses to seek growth. This route for business expansion may lose significance if government planning becomes a reality in this country. This conclusion is based on the premise that in a government-oriented economy embracing too many unrelated activities may become unmanageable for a rirm because of a variety of interactions with the government at various levels. Even when a firm may decide on diversification, government, through its participation in economic activities, may become an important source of diversification opportunities. Government participation in economic activities may result from a desire to achieve certain social objectives, regional balanced growth, and stable economic growth. An example is government’s sponsorship of the Tennessee Valley Authoriry. A
Executives also noted that national economic planning may give rise to a new type of organization, perhaps called ‘joint-sector enterprise,’ wherein government and the private sector may enter into partnership. Mention. was made of many types of businesses that could bc entrusted to joint sector enterprises. This included post office, health organizations, and other service organizations. Research and Detdopetzt. According to a McGraw-Hill study’, about $35 billion was spent on R & D in 1975. This figure is expected to increase to $60 billion in 1985. Mainly government supports R & D. However, as a result of national economic planning. the share of R & D by private sector may further decline. R & D is a long route to growth that initially may require huge doses of investment during the develop mental period, which may run into decades. Inasmuch as the perspective of economic planning might change every four. years, i.e., a change in presidency might lead to different economic emphasis, firms may find it too risky to commit themselves in investment-intensive research projects. Decline in business interest in R & D may have a side effect of increasing the length of product life cycles. Strategically then, a product should return more dollars on its investment than it might do now. Thus R & Doriented products should cost less to the consumer. But as some respondents claimed, extension of product life cycles would have repercussions on life style and standard of living. Since assigning of monetary values to standard of living and life style, as affected by fewer new products is difficult, it would become more of a question of value judgment. Leadership Style. The leadership style determines the mode of performance of three executive functions which are: preservation of the organization, control of organization response to deviations from expectations, and planning future corporate expectations. Innovation and change characterize the leadership style of successful organizations. About two-thirds of chief executives whom I questioned felt that government planning will discourage both innovation and change. Altematively, preservation and control of the organization will become the major concern of corporate leaders. While organizations, in response to government planning, may become more goal-oriented as far as day-to-day operations are concerned, planning of future corporate expectations, and development and motivation of the organization toward these expectations would become secondary. This is because government planning would create psychological, if not real,
Long Range
18
Planning
Vol. 10
August
1977
uncertainties about future happenings. Coupled with the uncertainties, there will always be the fear of ‘erratic’ government measures. Uncertainty and fear would hardly be conductive to innovation. Left to themselves, organizations would plan and commit themselves ambitiously, adapting to environmental constraints that may come on the horizon. But with government at the helm of economic affairs in a big way, a new sense of security would become pronounced that would subordinate the formulation and implementation of ambitious goals to a Iower level role. Freedom of Entry. In a free economy, any firm is at liberty to enter any field of operation. The market mechanism determines whether the company can get needed finances for the operation, and whether or not the firm is able to run it profitably. For example, because of the ease of entry, our airlines complete with each other nationally and internationally, something not found elsewhere in the world. Virtually in every field, competition and profit encourage organizations to venture into new fields. Despite IBM’s across-theother business equipment manuboard superiority, facturers continue to be in business. Likewise, American Motors is still surviving. Such examples can be easily found everywhere. Considering government to be a large corporation, if it undertakes planning it might discover that competition, while a healthy economic institution, is rather expensive to support. A question may come up, for example, whether over-capacity in an industry is worth it for the sake of competition. Suppose it is determined, out of the planning process, that in a certain future period, this country would need 2 million computers. If the present capacity is 3 million, should the government encourage diversion of excess capacity in computers to another area through divestments. If the answer is yes, which firms should engage in divestments. The government might decide that only the most efficient firms and stay in business, which would hurt competition place restrictions on the freedom to conduct a business.
What Government Planners may Learn From Business Planners? The business leaders participating in my study indicated that planning, at best, is a difficult task to undertake. Planning in the business world, however, has come a long way since it began to be practiced some twenty yea& agd. Therefore ihe government planners, most resnondents felt. would do well to dwell over some harh realities about planning which businessmen have learned with experience.
(1)The
primary benefit of planning is in the process, not in the plan itself. The document is soon obsolete, as the assumptions on which the written plan is based begin to crumble; and sections of the document must be updated continuously. There is significant benefit, however, in forcing managers to
think ahead and to visualize the implications of todays actions (changes) or inactions (doing the same thing). Thus, if the government were to plan, an attitude of flexibility should be maintained in basing actions and inactions entirely on planned targets which may have become obsolete.
(2) The
most useful focus of planning is in product-line planning by division managers, and in resource allocation (funding development expense and capital expenditures) by the chiefexecutive officer. The sum of the product line plans is the explicit corporate plan. In the government context, the planning should be initiated at the level of various major units within a government department, and the sum of unit plans would constitute the departmental plan. For example, within the Department of Interior, planning may start for each unit such as the Park Service. Alternatively, government planning should not amount to be a blueprint of U.S. future perspectives prepared by a few experts directly attached to the White House, and then, relayed to digerent departments indicating what they are supposed to achieve at some future time period.
(3)Planners
do not plan, being inherently staff people, without authority: they induce and assist planning by product-line division managers who must carry out their own plans as approved by the chief executive officer. The correlary of this lesson is, if the chief executive officer does not support the Obviously, planning process, it will not work. there must be a strong commitment by the President, his cabinet, and congressional leaders that planning is necessary and that it should become an integral part of decision making in government. This message should be duly communicated to all others in the organisation.
(‘9 Too
much planning all of a sudden is going to rock the boat. Planning questions long-established current ways of doing things, and requires new perspectives throughout the organization. Too many changes in the organization, at a fast pace, may induce pains which lead people to avoid planning. To be precautionary, therefore, planning should be introduced in small doses.
(5)Planning
should be a continuous process so that assumptions and targets may be updated from time to time. Like in industry, a fixed cycle planning process, say for instance, yearly cycle, would work well in government as well, which would permit a perpetual revision of the plan.
(6)Planning
has to be custom made. No planning system has ever been worked out that may work out in all business firms. As a matter of fact, two firms belonging to the same industry, with almost may find different planning similar perspectives, systems useful. Thus, the federal government has to evolve its own system of planning. To assure that care should be taken that concern over techniques may not divert planners and managers from the
Effect of Economic fundamental substantive purposes of planning. In the absence of this, manipulation of numbers becomes more important than the meaning of numbers.
What
Government
Might Do?
Overall, about one-third chief executive officers who agreed to help us on this study totally rejected the idea of having any form of economic planning in the United States. The remaining two-thirds viewed some sort of economic planning as a constructive measure. They felt that lack of early recognition of future difficulties explains the source of many of society’s major problems and that better information and planning could be the means for providing some of the missing advance warning and calling attention to future consequences of todav’s actions or lack of action. As one respondent put it: ‘Congress-and government as a whole-needs advance planning to take intelligent action: it is as simple as that.’ They share with many the fear that government planning might lead to control, but felt that we needed a more factual understanding of how planning might work in the American economy so that we could base our views on something concrete rather than on fears or expectations that may be groundless. These CEOs recommend three alternative routes to national economic planning which may be pursued in the United States: Q Planning
on a trial basis
*
Selective
planning
k
Directional
planning
Many CEOs recommend a carefully developed trial plan prepared by a temporary task force. The task force, it was emphasized, should be prevented from converting itself into a permanent agency; it might have a two-year charter to produce the plan and then would automatically be disbanded. Evaluation of the effectiveness of the planning process could then proceed without an existing agency to contend with. Once the plan was produced, they recommend sufficient time be provided for proper evaluation of the test-enough time for subsequent events to show whether the plan provided constructive guidance or reached conclusions belied by actual developments. The trial attempt, it was believed, would lead to the following outcome: (a) everyone will better understand the advantages and limitations of the planning concept in our economy, and the organizational and operational aspects of the planning process; (b) no permanent, self-perpetuating bureaucracy will be created until there is greater consensus on the merits of planning; its nature and objectives, and the real needs, functions and costs of such a bureaucracy; (c) the trail plan itself will be useful output providing valuable insights into our economy, our problems, and our opportunities;
Planning
on Business
Decisions
49
(d) the process will show the enormity of the task, and may well encourage more attainable and less all-encompassing objectives and scope in future legislative proposals. Selective Pluming Another viewpoint presented by a sample of CEOs is that of selective planning whereby national planning may be undertaken in ‘strategic’ areas only, such as energy requirements, space program, balance of payments, and so on. The.y.argue that to plan is an American way of life. Universrtles, foundations and the private sector engage in planning on a regular basis. At the federal level, the Department of Commerce and the Department of Labour are actively involved in economic planning; and the Economic Policy Board, the Council on International Economic Policy, the Council of Economic Advisors, the Office of Management and Budget, and the Congressional Budget Office all deal with economic forecasts. It will be desirable, however, to further strengthen national economic planning at the federal government level in ‘key’ areas through a co-ordinated effort directed towards the achievement of some overall national objectives. The respondents strongly felt that the selective planning should be accomplished through existing agencies of the federal government. Directional A handful for better departments tive officer
Planning of CEOs emphasized that there statistics on the economy by now producing them. As the of a machine tool company said
was a need the various chief execu:
One of the underlying causes of the current recession was excess inventory accumulation. Yet we did not have current and reliable figures on inventory accumulation by industrial sector. Data on raw material and energy resources supplies (broken down as to inventory, proven reserves, and estimated unfound reserves) are going to be more and more useful. Wage rates by skill level, by industry, by location, might be useful; and govemment estimates ofthe impact ofwage rates by skill level (including the minimum wage) on prices of goods and services by industry will be helpful. It was stressed that provision of timely and reliable statistical information which the government might provide should go a long way in helping various departments of the government as well as the private sector to make their individual plans more realistic. And if the individual components of the economic system do a good job in planning their moves ahead, the apex organization, i.e., the government as such does not have to plan.
To make the statistics more viable, however, both Congress and the Executive Branch at the same time may make explicit the long-range implications of government programs, both current and proposed. All too often, government programs are initiated to meet a current need without forecasting the growth, or the cost, of the impact on the economy. What is needed is a proper co-ordination of these programs, built upon well-defined goals. In summary, there is room for
50
Long Range Planning
Vol. 10
August
1977
improving planning data, planning techniques, and forecasting, and government can be of real help in these areas. Alternatively, the government should help in seeking improvements in the areas listed above. This would provide directional help to various government agencies and the private sector to make advances in doing realistic planning; which obviously would obviate the necessity of government herself engaging in planning.
Summary In recent months a new idea has emerged in many quarters for reviving economic health of the nation. It has been proposed that to cure economic problems this country should undertake national economic planning. This paper reports the findings of a study planned to look into the viability of economic planning in the United States vi+bvis business corporations. Twenty-three chief executive officers in different industries were interviewed to probe their opinions on the subject of national economic planning. About one-third respondents totally rejected the idea of economic planning. The rest did see something useM in it but questioned the feasibility of economic planning in the socio-political-economic set up of the United States. The CEOs co-operating on this study emphasised a number of points which make them like or dislike economic planning. Various difficulties associated with operationalizing economic planning in the U.S. were also stated.
The respondents indicated both direct and indirect effects of economic planning on business decisions which are summarized in this paper. The direct effects are-effect on investment decision, effect on market potentials, and effect on goal orientation. The indirect effects included edict on pricing decision, diversification moves, R & D prospective, leadership style and freedom of entry. Finally, the paper discusses respondents’ views on two other aspects-what government planners may learn from business planners, and what government might do to evaluate the usefulness of economic planning in the United States.
Rt$mws (1) George A. Steiner, ‘Rise of the Corporate Planner’, Harvard Business Review, p. 134, September-October
(1970).
Economic Planning Proposal (Washington D.C. : American Enterprise institute for Public Policy Research, 1975). p. 12.
(2) The
(3)
Leon Keyserling in Notes from the Joint Economic Committee, 1, (19), 17, July (1975).
(4)
Neil W. Chamberlain, Privet8 and Public Planning. Hill, New York, p. 57 (1965).
(5)
Chamberlain, op. cit., pp. 77-78.
(6)
Senators Hubert Humphrey and Jacob Javits introduced a bill in the Congress titled ‘The Balanced Growth and Economic Planning Act of 1975’ on May 21, 1975. The bill was referred to the Joint Economic Committee, which held hearings on June 11 and 12, 1975.
(7)
The American Economy: PIOSp8CtS for McGraw-Hill, New York (1975).
Growth
McGraw-
to
1988.