CHAPTER 4

FOUNDATIONS OF PLANNING
STRATEGIC PLANNING
DECISION MAKING

I. FOUNDATIONS OF PLANNING

Definition of Planning
Defining the organizations 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

Types of Goals
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).

Stated Goals of Large Global Companies

To be a global transformation partner.
(Infosys)

Execute strategic roadmapPlan to Win.

Grow the business profitably.
Identify and develop diverse talent.
Promote balanced, active lifestyles.
(McDonalds 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.
(LOreal)

Bring Inspiration and Innovation to every

Athlete.
(Nike)

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)

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)

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 organizations purpose that
identifies the organizations 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 companys 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 GMs most important brand
Chevrolet

Operational Goals
Chevrolets 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
MeansEnds 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 FastFood 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

Jointly Set Objectives

Develop Action Plans

to Achieve Objectives

Overall objectives
and strategies of
organization

Managers and
employees work on
action plans together

Objectives allocated to
divisional and
departmental units

Action plans
implemented

Specific objectives
collaboratively set
with employees

Review Objectives and

Provide Feedback

Give Rewards for

Achieved Objectives

MBO Benefits and Problems

Developing Plans
Contingency Factors in A Managers Planning
Managers 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 todays
competition not tomorrows survival.

Formal planning reinforces todays success, which

may lead to tomorrows failure.

Contemporary Issues in Planning

(contd)
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?

What is the purpose

of our business?

How will
environmental forces
impact our firm?

What stakeholders
are important?

Questions in
the
development
of strategy

Who will we serve?

How to distinguish
our firm from
competitors?

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 Organizations Current Mission,
Objectives, and Strategies
Mission: the firms 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 (contd)

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 organizations 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
firms internal
strengths and
weaknesses as
well as the
opportunities and
threats that are
evident in the
external
environment

Examples of a Companys Strengths,

Weaknesses, Opportunities, and Threats

Strategic Management Process (contd)

Step 6: Reassess Organizations 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 (contd)

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

Corporate
Level

Multibusiness
Corporation

Business
Level
Functional
Level

Strategic
Business Unit 1
Research and
Development

Manufacturing

Strategic
Business Unit 2

Marketing

Strategic
Business Unit 3
Human
Resources

Finance

Types of Organizational Strategies

Corporate-level Strategy
The companys grand strategy for the entire
organization and its strategic business units
Grand Strategy & Portfolio Strategy

Grand Strategies
Growth: 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

(contd)
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 organizations 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, Apples own Retail Stores

Horizontal Integration

LOreal acquiring Body Shop, Software services

Diversification Related (Godrej) or Unrelated (Tata

Group Manufacturing, IT, Chemicals, Airlines

Corporate-Level Strategies (contd)

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 theres drop in sales
coming from Chocolates

Corporate-Level Strategies (contd)

Renewal Strategy
Retrenchment (Short term) and Turnaround Strategy
Reduces the companys 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
corporations
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 organizations 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
New
Entrants
Threat of
New Entrants

Suppliers

Intensity of
Rivalry Among
Current
Competitors

Bargaining
Power of
Buyers
Buyers

Bargaining
Power of
Suppliers

Threat of
Substitutes
Substitutes

Source: Based on M. E. Porter,

Competitive Strategy:
Techniques for Analyzing
Industries and Competitors
(New York: Free Press, 1980).

Competitive Strategies
Cost
leadership

A strategy that aims to provide a product or service

at as low a price as possible to a broad audience

Economies
of scale

Cost savings achieved when the volume of a product

produced by a firm enables it to reduce per unit costs

Differentiati
on

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

Focus

A strategy in which a company focuses its sales efforts

on a specific geographical region, a specific group of
purchasers, or a specific product type

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
dont understand a companys 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. 9697.