Strategic Planning
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Strategic Planning
8.1. Relation to Strategy FormulationThe distinction is that strategy formulation is the process of deciding on new strategies,
whereas strategic planning is the process of deciding how to implement the strategies.
In the strategy formulation process, management arrives at the goals of the organization and creates the main strategies for achieving those goals
Relation to Strategy FormulationIn practice, there is a considerable amount of overlap (difference)between strategy formulation and strategic planning
Strategic planning is systematic; there is an annual strategic planning process, with prescribed procedures and timetables.
Strategy formulation is unsystematic
8.1.3 Benefits of Strategic PlanningA formal strategic planning process can give to the organization
(1) a framework for developing the annual budget,
(2) a management development tool,
(3) a mechanism to force managers to think long term, and
(4) a means of aligning (cooparate) managers with the long-term strategies of the company.
Framework for Developing the BudgetAn operating budget calls for resource commitments over the coming year;
it is essential
that management make such resource commitments
with a clear idea of where the organization is heading over the next several years.
A strategic plan provides that broader framework
Management Development ToolFormal strategic planning is an excellent management education and trainingtool
that provides managers with a process for thinking about strategies and their implementation.
It is not an overstatement to say that in formal strategic planning,
the process itself is a lot more important than the output of the process,
which is the plan document
A Company without a Strategic Planning Process
A Company with a Strategic Planning Process
Mechanism for Forcing Management to Think Long TermManagers tend to worry more about tactical issues and managing the present,
day-to-day affairs of the business than about creating the future.
Formal strategic planning forces managers to make time for thinking through important long-term issues.
Means of Aligning Managers with Corporate StrategiesThe debates, discussions, and negotiations
that take place during the planning process clarify corporate strategies,
unify and align managers with such strategies, and
reveal (analyze) the implications of corporate strategies for individualmanagers.
Limitations of Strategic planning1. First, there is always a danger that planning can end up becoming a “form-
filling,” bureaucratic exercise
2. A second danger is that an organization may create a large strategic plan-ning department and delegate the preparation of the strategic plan to thatstaff department,
3. Finally, strategic planning is time consuming and expensive.
The most significant expense is the time devoted to it by senior management and managers at other levels in the organization.
In summaryA formal strategic planning process is not needed in small, relatively stableorganizations, and
it is not worthwhile in organizations
that cannot make reliable estimates about the future or in organizationswhose senior management prefers not to manage in this fashion.
8.1.4. Program Structure and ContentIn most industrial organizations,◦ programs are
◦ products or product families,
◦ plus research and development,
◦ general and administrative activities,
◦ planned acquisitions, or other
◦ important activities that do not fit into existing product lines.
Program – Strategic planningThe typical strategic plan covers a period of five future years.
Five years is a long enough period to estimate the consequences of program decisions made currently.
The consequences of a decision to develop and market a new product or to acquire a major new capital asset
may not be fully felt within a shorter period
Program – Strategic planningThe dollar amounts for each program show the approximate magnitude of its revenues, expenses, and capital expenditures.
Because of the relatively long time horizon, only rough estimates are feasible.
Such estimates are satisfactory as a basis for indicating the organization’sgeneral direction
8.1.5 Organizational RelationshipsThe strategic planning process involves senior management and the managersof business units or other principal responsibility centers, ◦ assisted by their staffs.
A primary purpose is to improve the communication between corporate and business unit executives
by providing a sequence of scheduled activities through which they can arrive at a mutually agreeable set of objectives and plans.
Managers of individual departments usually do not participate in the strategic planning process.
Organizational RelationshipsIn some organizations, the controller organization prepares the strategic plan;
in others, there is a separate planning staff.
Strategic planning requires analytical skills and a broad outlook that may notexist in the controller organization; the controller organization may be skilledprimarily in the detailed analytical techniques
that are required in fine-tuning the annual budget and analyzing variances◦ between actual and budgeted amounts.
8.2. Analyzing Proposed New ProgramsIdeas for new programs can originate anywhere in the organization:◦ with the chief executive, with a headquarters planning staff, or
◦ in various parts of the operating organization.
The R&D organization is expected to generate ideas for novel (new) products or processes, the marketing organization for marketing innovations, and
the production engineering organization for better equipment and manufacturing methods.
8.2.1. Capital Investment AnalysisMost proposals require significant new capital.
Techniques for analyzing capital investment proposals attempt to find either
(a) the net present value (NPV) of the project,
that is, the excess of the present value of the estimated cash inflowsover the amount of investment required, or
(b) the internal rate of return (IRR) implicit in the relationship between inflowsand outflows.
An important point is that these techniques are used in only about half the situations in which, conceptually, they are applicable.
Organization for AnalysisA team may evaluate extremely large and important proposals, and the process may require a year or more.
Even for small proposals, considerable discussion usually occurs
◦ between the sponsor of the proposal and the headquarters staff.
A dozen functional and line executives may sign off on an important proposal before it is submitted to the CEO.
The CEO may return the proposals for further analysis several times before making the final decision
◦ to go ahead with or reject the project.
The decision to proceed may require a succession of development and testing hurdlesbe crossed before full implementation
8.3. Analyzing Ongoing Programs In addition to developing new programs,
many companies have systematic ways of analyzing ongoing programs.
Several analytical techniques can aid in this process.
This folowing section describes ◦ value chain analysis and
◦ activity-based costing
8.3.1. Value Chain AnalysisEach firm must be understood in this context of its place in some overall chain of value-creating activities.
From the strategic planning perspective, the value chain concept highlightsthree potentially useful areas:
Linkages with suppliers.
Linkages with customers.
Process linkages within the value chain of the firm
8.3.2. Activity-Based Costing (ABC)Increased computerization and automation in factories have led to important changesin systems for collecting and using cost information.
Sixty years ago, most companies allocated overhead costs to products by means of a plantwide overhead rate
◦ based on direct labor hours or dollars.
Today, an increasing number of companies collect costs for material-related costs
◦ e.g., transportation, storage
separately from other manufacturing costs; and
they collect manufacturing costs for individual departments, individual machines, or individual “cells,”
◦ which consist of groups of machines that perform a series of related operations on a product.
ABCIn these cost centers,
direct labor costs may be combined with other costs
that is,
the labor and factory overhead cost of converting raw materials and parts into finished products.
ABCThe newer systems also use multiple allocation bases.
the word activity is often used instead of cost center, and cost driver used
instead of basis of allocation;
and the cost system is called an activity-based cost system (ABC).
The basis of allocation, or cost driver, for each of the cost centers reflects the cause of cost incurrence—◦ that is, the element that explains why the amount of cost incurred in the cost
center, or activity
8.4. Strategic Planning ProcessThe strategic planning process starts in the spring and is completed in the fall,
◦ just prior to the preparation of the annual budget.
The process involves the following steps:
Reviewing and updating the strategic plan from last year.
Deciding on assumptions and guidelines.
First iteration of the new strategic plan.
Analysis
Second iteration of the new strategic plan.
Final review and approval
8.4.1.Reviewing and Updating the Strategic PlanDuring the course of a year, decisions are made that change the strategic plan;
management makes decisions whenever there is a need to do so
Conceptually, the implications of each decision for the next five years should be incorporated in the strategic plan as soon as the decision is made.
Otherwise, the formal plan no longer represents the path that the company plans to follow
The first step in the annual strategic planning process, therefore, is to reviewand update the strategic plan ◦ that was agreed to last year.
8.4.2. Deciding on Assumptions and GuidelinesThe updated strategic plan incorporates such broad assumptions as the growth in Gross Domestic Product,
cyclical movements, labor rates, prices of important raw materials,
interest rates, selling prices, market conditions such as the actions of competitors, and
the impact of government legislation in each of the countries in which the company operates.
These assumptions are reexamined and,
if necessary, are changed to incorporate the latest information
The updated strategic planThe updated strategic plan contains the implications on
revenues, expenses, and
cash flows of the existing operating facilities and
changes in these facilities from opening new plants,
expanding existing plants, closing plants, and relocating facilities.
It shows the amount of new capital likely to be available from retained earningsand new financing.
8.4.3. First Iteration of the Strategic PlanUsing the assumptions, objectives, and guidelines,
the business units and other operating units prepare
their “first cut” of the strategic plan,
Business unit staffs do much of the analytical work,
but business unit managers make the final judgments
The completed strategic planThe completed strategic plan consists of
◦ income statements;
◦ inventory, accounts receivable, and other key balance sheet items;
◦ number of employees;
◦ quantitative information about sales and production;
◦ expenditures for plant and other capital acquisitions;
◦ any other unusual cash flows; and
◦ a narrative explanation and justification.
8.4.4. AnalysisWhen headquarters receives the business unit plans, they aggregate them into an overall corporate strategic plan.
Planning staff and
the marketing, production, and other functional executives at headquarters
analyze this plan in depth.
The headquarters people examine the business unit plans for consistency also.
◦ If one business unit manufactures for another unit, are the planned ship-ments from the manufacturing unit equal to the planned sales of the sales unit?
8.4.5. Second Iteration of the Strategic PlanAnalysis of the first submission may require a revision
For example,
the aggregation of all plans may indicate that the cash drain from increasinginventories and capital expenditures is more than the company can safely tolerate;
if so, there may be a requirement for postponing expenditures throughout the organization.
These decisions lead to a revision of the plan.
8.4.6. Final Review and ApprovalA meeting of senior corporate officials usually discusses the revised plan at length.
The plan also may be presented at a meeting of the board of directors.
The chief executive officer gives final approval.
The approval should come prior to the beginning of the budget preparationprocess,
because the strategic plan is an important input to that process
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