CHAPTER 16 Financial Planning and Forecasting
16-1 STRATEGIC PLANNING
Management textbooks often list the following as the key elements of a strategic
plan:
- Mission Statement. Many but not all! rms articulate a mission statement. GE
does not have one, but it states that its chairman’s letter in the annual report
serves this purpose. In his letter, Jeff Immelt discusses his goals for GE’s major
businesses and for the! rm as a whole. Not surprisingly, Immelt indicated that
he wants the various businesses to achieve high growth rates, high pro! t mar-
gins, and high rates of return on invested capital, all with the ultimate goal of
increasing GE’s stock price. - Corporate Scope. Corporate scope de! nes the lines of business the! rm plans to
pursue and the geographic areas in which it will operate. Some! rms deliber-
ately limit their scope on the theory that it is better for top managers to focus
sharply on a narrow range of functions as opposed to spreading the company
over many different types of businesses. Academics have studied which is the
better choice. Some studies suggest that investors generally value focused
! rms more highly than diversi! ed ones.^2 However, if a! rm is successful in
combining a group of diversi! ed businesses so that they help one another, as
GE tries to do, the result may be synergistic effects that raise the value of the
overall enterprise.^3 In any event, the stated corporate scope should be logical
and consistent with the! rm’s capabilities. - Statement of Corporate Objectives. A! rm’s statement of coporate objectives is
that part of the corporate plan that sets forth the speci! c goals that operating
managers are expected to meet. Like most! rms, GE has both qualitative and
quantitative objectives. For example, here is a key statement from Immelt’s
2006 letter to stockholders:
We expect our businesses to achieve 10%+ earnings growth most years, with
long-term returns on equity of 20%. We expect our businesses to be industry
leaders in market share, value, and pro! tability.
GE has a history of selling off units that do not meet its objectives and of replac-
ing underperforming managers, but GE also rewards managers generously
when they meet their targets.
- Corporate Strategies. GE has several broad corporate strategies. One is to be
highly diversi! ed by both products and geographic scope in order to achieve
earnings stability and! nancial strength. Its management believes that! nancial
strength will lead to a low cost of capital, which will bene! t all its units. Also,
since GE’s management believes that the company should be at the forefront in
Mission Statement
A condensed version of a
firm’s strategic plan.Mission Statement
A condensed version of a
firm’s strategic plan.Corporate Scope
Defines a firm’s lines of
business and geographic
areas of operation.Corporate Scope
Defines a firm’s lines of
business and geographic
areas of operation.Statement of Corporate
Objectives
Sets forth specific goals to
guide management.Statement of Corporate
Objectives
Sets forth specific goals to
guide management.Corporate Strategies
Broad approaches
developed for achieving a
firm’s goals.Corporate Strategies
Broad approaches
developed for achieving a
firm’s goals.(^2) See, for example, Philip G. Berger and Eli Ofek, “Diversi! cation’s E" ect on Firm Value,” Journal of Financial
Economics, Vol. 37, no. 1 (1995), pp. 39–66, and Larry Lang and René Stulz, “Tobin’s Q, Corporate Diversi! cation,
and Firm Performance,” Journal of Political Economy, Vol. 102, Issue 6 (1994), pp. 1248–1280.
(^3) The dictionary de! nition of synergy is a situation where the whole is greater than the sum of the parts, and it’s
sometimes called the 2! 2 " 5 e" ect. GE has a jet engine business and another business that produces gas
turbines for electric power generation. Those businesses are similar enough so that new developments in one
can bene! t the other. One has to wonder, though, how GE’s jet engine business bene! ts its Universal-NBC
entertainment unit. GE’s management argues that its diversi! cation stabilizes its revenues and pro! ts, and that
this resulted in a triple-A bond rating and a relatively low cost of capital for all its businesses. A number of
academic studies dispute this conclusion, though, with the academics arguing that it is easy for stockholders to
diversify and better to have top managers focus on one business. Interestingly, GE’s April 2008 earnings shortfall
brought forth calls for the company to be broken up into more cohesive units whose managers could focus on
products and markets that they knew very well.