Chapter 4 - Planning

CHAPTER 4

FOUNDATIONS OF PLANNING

STRATEGIC PLANNING

DECISION MAKING

I. FOUNDATIONS OF PLANNING

Definition of Planning

• Defining the organization’s goals, establishing

an overall strategy, and developing a hierarchy

of plans to achieve goals

Planning is concerned with ends (what is to be done)

as well as with means (how it is to be done).

Purposes of Planning

• Provides direction

• Reduces uncertainty

• Minimizes waste and redundancy

• Sets the standards for controlling

Goals and Plans

Goals (also Objectives)

Desired outcomes for individuals, groups, or entire

organizations

Provide direction and evaluation performance criteria

Plans

Documents that outline how goals are to be

accomplished

Describe how resources are to be allocated and

establish activity schedules

Types of Goals

• Financial Goals Are related to the expected internal financial performance of the

organization.

Wider profit margins

Higher returns on invested capital

Rise in stock price

Stable earnings

• Strategic Goals Are related to the performance of the firm relative to factors in its

external environment (e.g., competitors).

Large market share

High industry ranking

Low costs related to customers

Leader in technology and innovation

• Stated Goals versus Real Goals

Broadly-worded official statements of the organization

(intended for public consumption) that may be

irrelevant to its real goals (what actually goes on in

the organization).

Types of Goals…

Stated Goals of Large Global Companies

Execute strategic roadmap—“Plan to Win.”

Grow the business profitably.

Identify and develop diverse talent.

Promote balanced, active lifestyles.

(McDonald’s Corporation)

Continue to win market share globally.

Focus on higher-value products.

Reduce production costs.

Lower purchasing costs.

Integrate diversity.

Gain ISO 14001 certification for all factories.

(L’Oreal)

Roll out newly-designed environmentally friendly

cup in 2006.

Open approximately 1,800 new stores globally in

2006.

Attain net revenue growth of approximately 20

percent in 2006.

Attain annual EPS growth of between 20 percent to

25 percent for the next 3 to 5 years.

(Starbucks)

Expand selection of competitively priced

products.

Manage inventory carefully.

Continue to improve store format every few years.

Operate 2,000 stores by the end of the decade.

Continue gaining market share.

(Target)

To be a global transformation partner.

(Infosys)

Bring Inspiration and Innovation to every

Athlete.

(Nike)

Steps in Planning

• Strategy

The cluster of decisions and actions that managers

take to help an organization reach its goals.

• Mission

A broad declaration of an organization’s purpose that

identifies the organization’s products and customers

and distinguishes the organization from its

competitors.

Types of Goals and Plans

• Strategic Goals – official goals, broad statements

about the organization

Define the action steps the company intends to attain

The blueprint that defines activities

• Tactical Goals – help execute major strategic plans

Specific part of the company’s strategy

Plans of the divisions and departments

• Operational Goals – results expected from

departments, work groups, and individuals

Lower levels of the organization

Specific action steps

Example of General Motors

• Strategic Goals

Increasing U.S. Market Share to 20 percent

• Tactical Goals

Enhance reputation of GM’s most important brand

Chevrolet

• Operational Goals

Chevrolet’s marketing dept. - increasing customer

visits to showroom by 10 percent by year end

Transportation dept - improving on-time delivery of

cars and trucks to dealers by 20 percent

Chevy moved from 9th to 4th position by 2010

Types of Plans

Establishing Goals and Developing

Plans

A Well-Designed Goal

Written in terms of outcomes rather than actions

Measurable and quantifiable

Clear time frame

Optimally challenging

Written down

Clearly communicated

Establishing Goals and Developing

Plans…

• Traditional Goal Setting

Broad goals are set at the top of the organization.

Goals are then broken into subgoals for each

organizational level.

Assumes that top management knows best because

they can see the “big picture.”

Goals are intended to direct, guide, and constrain

from above.

Goals lose clarity and focus as lower-level managers

attempt to interpret and define the goals for their

areas of responsibility.

The Downside of Traditional Goal Setting

Establishing Goals and Developing

Plans…

• Maintaining the Hierarchy of Goals

Means–Ends Chain

The integrated network of goals that results from

establishing a clearly-defined hierarchy of

organizational goals.

Achievement of lower-level goals is the means by which

to reach higher-level goals (ends).

Hierarchal

Organizational Goals

for a Regional Fast-

Food Chain

Establishing Goals and Developing

Plans…

• Management by Objectives (MBO)

Peter Drucker, The Practice of Management, 1954

Specific performance objectives

jointly determined by subordinates and their

supervisors,

progress toward objectives is periodically reviewed,

rewards are allocated on the basis of that progress.

Links individual and unit performance objectives at all

levels with overall organizational objectives

Motivates rather than controls

Steps in a Typical MBO Program

Specific objectives

collaboratively set

with employees

Objectives allocated to

divisional and

departmental units

Action plansimplemented

Give Rewards for

Achieved ObjectivesJointly Set Objectives

Overall objectives

and strategies of

organization

Develop Action Plans

to Achieve Objectives

Managers and

employees work on

action plans together

Review Objectives and

Provide Feedback

MBO Benefits and Problems

Developing Plans

• Contingency Factors in A Manager’s Planning

Manager’s level in the organization

Strategic plans at higher levels

Operational plans at lower levels

Degree of environmental uncertainty

Stable environment: specific plans

Dynamic environment: specific but flexible plans

Length of future commitments

Commitment Concept: current plans affecting future

commitments must be sufficiently long-term to meet

those commitments.

Contemporary Issues in Planning

• Criticisms of Planning

Planning may create rigidity.

Plans cannot be developed for dynamic

environments.

Formal plans cannot replace intuition and creativity.

Planning focuses managers’ attention on today’s

competition not tomorrow’s survival.

Formal planning reinforces today’s success, which

may lead to tomorrow’s failure.

Contemporary Issues in Planning

(cont’d)

• Effective Planning in Dynamic Environments

Develop plans that are specific but flexible.

Understand that planning is an ongoing process.

Change plans when conditions warrant.

Persistence in planning eventually pay off.

Flatten the organizational hierarchy to foster the

development of planning skills at all organizational

levels.

II. STRATEGIC PLANNING

Strategy and the Organization:

A Framework

In what businesses

or areas will we

compete?

Who will we serve?

How to distinguish

our firm from

competitors?

Questions in

the

development

of strategy

What is the purpose

of our business?

How will

environmental forces

impact our firm?

What stakeholders

are important?

Organizational Strategy

• Strategic Management

The set of managerial decisions and actions that

determines the long-run performance of an

organization

• Strategic Management Process

A nine-step process that involves strategic planning,

implementation, and evaluation

The Strategic Management Process

Strategic Management Process

• Step 1: Identify the Organization’s Current Mission, Objectives, and Strategies Mission: the firm’s reason for being

The scope of its products and services

Goals: the foundation for further planning

Measurable performance targets

• Step 2 and 3: Conduct an External Analysis

The environmental scanning of specific and general

environments

Screening large amounts of information to detect emerging

trends and create a set of scenarios

Focuses on identifying opportunities and threats

Strategic Management Process (cont’d)

• Step 4 and 5: Conduct an Internal Analysis Assessing organizational resources, capabilities, activities,

and culture:

Strengths (core competencies) create value for the customer and strengthen the competitive position of the firm

Weaknesses (things done poorly or not at all) can place the firm at a competitive disadvantage

• Steps 2, 3, 4 and 5 combined are called a

SWOT analysis.

SWOT analysis

Analysis of an organization’s strengths, weaknesses,

opportunities, and threats in order to identify a strategic

niche that the organization can exploit

SWOT Analysis

• Strengths (strategic)

Internal resources that are

available or things that an

organization does well

Core competency

• Weaknesses

Resources that an organization

lacks or activities that it does

not do well

• Opportunities (strategic)

Positive external environmental

factors

• Threats

Negative external environmental

factors

A tool that allows

managers to take

a snapshot of their

firm’s internal

strengths and

weaknesses as

well as the

opportunities and

threats that are

evident in the

external

environment

Examples of a Company’s Strengths,

Weaknesses, Opportunities, and Threats

Strategic Management Process (cont’d)

• Step 6: Reassess Organization’s Mission and

Objectives

• Step 7: Formulate Strategies

Develop and evaluate strategic alternatives

Select appropriate strategies for all levels in the

organization that provide relative advantage over

competitors

Match organizational strengths to environmental

opportunities

Correct weaknesses and guard against threats

Strategic Management Process (cont’d)

• Step 8: Implement Strategies

Implementation: effectively fitting organizational structure and activities to the environment

The environment dictates the chosen strategy; effective strategy implementation requires an organizational structure matched to its requirements

• Step 9: Evaluate Results

How effective have strategies been?

What adjustments, if any, are necessary?

Levels of Organizational Strategy

Research andDevelopment

Manufacturing MarketingHuman

ResourcesFinance

StrategicBusiness Unit 1

StrategicBusiness Unit 2

Strategic

Business Unit 3

MultibusinessCorporation

FunctionalLevel

BusinessLevel

CorporateLevel

Types of Organizational Strategies

Corporate-level StrategyThe company’s grand strategy for the entire

organization and its strategic business units

Grand Strategy & Portfolio Strategy

• Grand StrategiesGrowth: A strategy in which an organization

attempts to increase the level of its operations

Stability: maintenance of the status quo

Retrenchment: addresses organizational weaknesses that are leading to performance declines

Combination: simultaneous pursuit of two or more of the strategies above

Types of Organizational Strategies

(cont’d)

• Portfolio Strategy

A corporate-level strategy that minimizes risk by

diversifying investments among various

businesses or product lines

Diversification

Acquisition

Unrelated diversification

1. Corporate-Level Strategies

• Growth Strategy

Seeking to increase the organization’s business by expansion into new products and markets

• Types of Growth Strategies

Concentration CRI pumps in Coimbatore

Vertical integration E-Bay owns online payment business, Coca-Cola owns its own

distribution system, Apple’s own Retail Stores

Horizontal Integration L’Oreal acquiring Body Shop, Software services

Diversification – Related (Godrej) or Unrelated (Tata

Group – Manufacturing, IT, Chemicals, Airlines

Corporate-Level Strategies (cont’d)

• Stability Strategy

A strategy that seeks to maintain the status quo

to deal with the uncertainty of a dynamic

environment, when the industry is experiencing

slow- or no-growth conditions, or if the owners

of the firm elect not to grow for personal

reasons

Continue to serve the same clients by offering the same

product or services

Cadbury maintains things as there’s drop in sales

coming from Chocolates

Corporate-Level Strategies (cont’d)

• Renewal Strategy

Retrenchment (Short term) and Turnaround Strategy

Reduces the company’s activities or operations

Retrenchment strategies include:

– Cost reductions

– Layoffs

– Closing underperforming units

– Closing entire product lines or services

• Combination Strategy

Simultaneous pursuit by the organization of two or

more of growth, stability, and retrenchment strategies

How Corporate Strategies are Managed?

- BCG Matrix

A portfolio strategy

that managers use to

categorize their

corporation’s

businesses by growth

rate and relative

market share, helping

them decide how to

invest corporate

funds

2. Business-Level Strategy

• Business-Level Strategy

A strategy that seeks to determine how an

organization should compete in each unit within

the organization to create a competitive

advantage

Competitive advantage An organization’s distinctive competitive edge that is sourced

and sustained in its core competencies

How to create sustainable competitive

advantage?

- Porter's Five Forces framework for industry analysis

Substitutes

Buyers

BargainingPower ofBuyers

Threat ofSubstitutes

Suppliers

BargainingPower ofSuppliers

NewEntrants

Threat ofNew Entrants

Intensity ofRivalry Among

CurrentCompetitors

Source: Based on M. E. Porter,

Competitive Strategy:

Techniques for Analyzing

Industries and Competitors

(New York: Free Press, 1980).

Competitive Strategies

A strategy that aims to provide a product or service

at as low a price as possible to a broad audience

Cost

leadership

Cost savings achieved when the volume of a product

produced by a firm enables it to reduce per unit costs

Economies

of scale

A strategy in which a firm seeks to be unique in its

industry along a dimension or a group of dimensions that

are valued by consumers

Differentiati

on

A strategy in which a company “focuses” its sales efforts

on a specific geographical region, a specific group of

purchasers, or a specific product typeFocus

3. Functional-Level Strategy

• Functional-level strategies support the

business-level strategy

i.e., Marketing, human resources, research and

development, and finance all support the

business-level strategy

Problems occur when employees or customers

don’t understand a company’s strategy

Different functional strategies for different

SBUs

New Directions in Organizational

Strategies…

• E- Business Strategies

• Customer Service Strategies

• Innovation Strategies

The Basic Value Chain

Source: Adapted from Adelaide Wilcox King, Sally W. Fowler, and Carl P. Zeithaml, “Managing Organizational Competencies for Competitive

Advantage: The Middle-Management Edge,” Academy of Management Executive, Vol. 15, No. 2, 2001, pp. 96–97.