Chap 8

• 1. Strategic Planning

2. Nature of Strategic Planning Strategic Planning is process of deciding on the programs that organisation will undertake and on approximate resources that will be allocated to each program over next several years Relation to Strategic Planning: after management arrives at goals of the organisation in strategy formulation, strategic planning process then takes goals and strategies as given and develops programs to carry out strategies and achieve goals efficiently and effectively 3. Nature of Strategic Planning studies made during planning process may indicate desirability of changing goals or strategies, while formulation usually includes a preliminary consideration of programs that will be adopted as a means of achieving these goals strategic planning is systematic, having annual process with prescribed procedures & timetables; while strategy formulation is unsystematic in a formal strategic planning process, an important first step often has to be to write descriptions of organisations goals and strategies 4. Nature of Strategic Planning Evolution of Strategic Planning: a few companies started formal strategic planning systems in late 1950s, but early efforts were failures required data was much detailed than was appropriate, staff people rather than line people did most of the work participants spent more time filling in forms than thinking deeply about alternatives currently, many organisations appreciate advantages of making a plan for next 3 to 5 years 5. Nature of Strategic Planning Benefits of Strategic Planning: framework for developing annual budget: It facilitates optimal resource allocation decisions in support of key strategic options management development tool: Formal system forces managers to take time to think on important long-term issues means of aligning managers with corporate strategies: Debates, discussions and negotiations during planning process 6. Nature of Strategic Planning Limitations of Strategic Planning: planning can end up becoming a form filling bureaucratic exercise, devoid of strategic thinking organisation may create a large strategic planning department and delegate preparation of strategic plan to that staff department it is time consuming and expensive A formal strategic plan should have features like: top management is convinced that strategic planning is important 7. Nature of Strategic Planning organisation is relatively large and complex considerable uncertainty about future exists, but organisation has flexibility to adjust to changed circumstances in summary, formal strategic planning process is not needed in small, relatively stable organisations Program structure and content: in most industrial organisations, programs are product families, plus R & D, general and administrative expenses, not in existing products 8. Nature of Strategic Planning in service organisations, programs correspond to types of services rendered by the entity typical strategic plan covers a period of five future years rupee amounts for each plan show approximate magnitude of its revenues, expenses and capital expenditures if strategic plan is structured by business units, the Charter, specifying boundaries within which business unit is expected to operate, is also stated 9. Nature of Strategic Planning Organisational Relationships: in some organisations, controller organisation prepares strategic plan, as they may be skilled primarily in detailed analytical techniques required in fine-tuning annual budget & analysing variances between actual & budgeted amounts in other organisations, separate planning staff may support in analytical skills and broader outlook that may not exist in controller set up headquarter staff members should facilitate, not intervene in strategic planning process 10. Nature of Strategic Planning Top management style: some Chief Executives prefer to make decisions without benefit of a formal planning apparatus In some companies, Chief Executive want some overall plan for business, but by temperament has an aversion to paperwork In other companies, senior management prefers extensive analysis and documentation of plans and formal part of system is relatively elaborate Designers must correctly diagnose style of senior management and fit the system accordingly 11. Analysing Proposed New Programs Proposals for programs are essentially either reactive or proactive Ideas for new programs can originate anywhere in the organisation i.e. CEO, planning staff etc. Planners should view adoption of program not as a single all-or-nothing decision but rather as a series of decisions, each one a relatively small step in testing and developing proposed program Planners should have full implementation and its consequent significant investment only if tests indicate about proposals good chance of success 12. Analysing Proposed New Programs Capital Investment Analysis: there are atleast four reasons for not using PV in analysing all proposals: proposal is obviously very attractive estimates involved are so uncertain that PV calculations cannot draw reliable conclusions rationale for the approach is something other than increased profitability there is no feasible alternative to adoption either NPV or IRR is found for analysis 13. Analysing Proposed New Programs Rules: companies usually publish rules and procedures for approval of capital expenditure proposals of various magnitudes rules also contain certain guidelines for preparing proposals and general criteria for approving proposals Avoiding manipulation: sponsors who know that their project with negative NPV is not likely to be approved may have a gut feeling that project should be selected 14. Analysing Proposed New Programs in some cases, sponsors may make optimistic estimates of sales revenues or reduce allowances for contingencies in some of cost elements analyst may place reliance on sponsors having an excellent track record Models: there are specialised techniques like risk analysis, sensitivity analysis, simulation, scenario planning, game theory, option pricing models etc. planning staff should know such methods and use them in situations when required 15. Analysing Proposed New Programs Organisation for Analysis: decision to proceed with proposal may require a succession of development and testing hurdles to be crossed before full implementation expert systems use computer software in analysis of proposed programs software for expert systems permits each participant to vote on an explicitly rank, each of criteria used to judge the project computer then tabulates results and uncovers misunderstandings and raises queries to be solved 16. Analysing Ongoing Programs Value Chain Analysis: from strategic planning perspective, concept highlights three potentially useful areas: Linkages with suppliers Linkages with customers Process linkages within value chain of the firm SUPPLIERS SUPPLIERS FIRMSUPPLIERSCUSTOMERSFIRM CUSTOMERS CUSTOMERS 17. Analysing Ongoing Programs Process linkages with Value Chain of the Firm: individual activities within a firm are not independent but rather are interdependent efficiency of design portion of value chain can be improved by reducing number of separate parts and increasing their ease of manufacture efficiency of inward portion i.e. preceding production, can be improved by reducing number of vendors, by Just-in-time deliveries, by having computer system placing automatic orders etc. 18. Analysing Ongoing Programs efficiency of production portion can be improved by increased automation, by rearranging machines into cells and by better production control systems efficiency of outward portion (i.e. from factory door to customer) can be improved by having customers place orders electronically, by changing locations of warehouses etc. Such efficiency-oriented initiatives involve trade-offs e.g. direct computer orders may speed up delivery but order filling costs may increase 19. Analysing Ongoing Programs Activity-Based Costing: sixty years ago, most companies allocated overhead costs to products by means of plantwide overhead rate based on direct labour hours today, an increasing number of companies collect costs for material-related costs e.g. storage, seperately from other manufacturing costs, collected from individual departments in these cost centers, direct labour costs may be combined with other costs, giving conversion 20. Analysing Ongoing Programs with conversion costs, new system assigns R & D, general and administrative and marketing costs to products basis of allocation or cost driver, for each of cost centers reflect cause of cost incurrence ABC concept is not particularly subtle or counter intuitive, but in line with common sense advocates of ABC maintain that a meaningful assessment of full cost today must involve assigning overhead in proportion to activities that generate it in long run 21. Analysing Ongoing Programs Use of ABC information: it may show that complex products with many separate parts have higher design and production costs than simple products many engineering change orders have higher unit costs than other products information on magnitude of such differences may lead to changes in policies relating to full line v/s focused product line, product pricing, make or buy decisions, adding/deleting products 22. Strategic Planning Process This process involves the following steps: Reviewing and updating the strategic plan: first step is to review and update the strategic plan agreed to last year Actual experience for first few months of current year is already reflected in accounting reports and these are extrapolated for current best estimate of the year as a whole Deciding on assumptions and guidelines: updated strategic plan incorporates broad assumptions as growth in GDP, labour rates etc. 23. Strategic Planning Process updated strategic plan contains implications on revenues, expenses and cash flows of existing operating facilities and changes in facilities like opening new plants, expanding or closing plants it also shows amount of new capital likely from retained earnings and new financing objectives are stated seperately for each product line and are expressed as sales revenue, as a profit percentage/return on capital employed principal guidelines are assumptions about wage and salary increases, selling prices etc. 24. Strategic Planning Process Management meetings: Many companies hold an annual meeting of corporate and business unit managers, often called summit conference, to discuss proposed objectives and guidelines First Iteration of Strategic Plan: Business units and other operating units prepare their first cut of strategic plan, including different operating plans from those included in current plan such as change in marketing tactics; these are supported by reasons 25. Strategic Planning Process Completed Strategic Plan consists of income statements; inventory, accounts receivable and other key balance sheet items; quantitative information on sales and production; expenditures for plant & other capital acquisitions; any unusual cash flows; number of employees and a narrative explanation and justification Analysis (of first iteration): when headquarters receive business unit plans, they aggregate them into overall corporate strategic plan 26. Strategic Planning Process headquarter people examine business unit plans for consistency also headquarters staff and their counterparts in business units resolve some of these questions by discussion and report others to corporate management, where, they are basis for discussions between corporate and business unit managers in many cases, sum of business unit plans reveals a planning gap from planning numbers, headquarters can develop planned cash requirements for whole organisation 27. Strategic Planning Process Planning gap can be closed by: finding opportunities for improvements in plans make acquisitions review the corporate objectives Second Iteration of Strategic Plan: Revision of plans of only certain business units may be required, limited to change in assumptions and guidelines that affect all business units Some companies do not require a formal revision from business units, changes are negotiated and 28. Strategic Planning Process Final Review and Approval: A meeting of senior corporate officials usually discusses the revised plan at length Plan may also be presented at a meeting of the Board of Directors Chief Executive Officer gives final approval Approval has to come prior to beginning of the Budget preparation process because the strategic plan is an important input to that process