Chapter

7

The Basics of Planning and Strategic Management

McGraw-Hill/Irwin © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives

After studying this chapter, you will be able to:

1. Define planning and distinguish between formal and

functional plans.

2. Contrast strategic planning with operational planning.

3. Explain the differences between objectives, policies,

procedures, and rules.

4. Define the management by objectives (MBO) process.

5. Define strategy and explain the various levels of

strategies.

Learning Objectives (cont’d)

After studying this chapter, you will be able to:

6. Define strategic management and explain the strategic

management process.

7. Define organizational mission and explain how mission

relates to long- and short-range objectives.

8. Discuss the components of a SWOT analysis.

9. Define a strategic business unit (SBU).

10.Discuss what organizational factors need to be evaluated in

implementing a strategic plan.

The Planning Process

• Planning

– The process of deciding what objectives to pursue during a future time

period and what to do to achieve those objectives.

• Why plan?

– Actively affect the future.

– Set objectives and “make it happen.”

– Involve personnel from across the organization.

– Positively effect managerial performance.

– Gain knowledge and experience from the planning process.

The Planning Process (cont’d)

• Formal Plans–Written, documented plans developed through an

identifiable process.–The environment, size and type of business are

factors that usually affect the planning process.

• Functional Plans–Originate from the functional areas of an

organization such as production, marketing, finance, and personnel.

Planning

The Planning Horizon

• Short-range plans– Generally cover up to one year.

• Long-range plans– Typically span at least three to five years.– Some extend as far as 20 years into the future.– Usually carried out at the top management levels.

• Intermediate plans– Cover the term between short-range and long-range

plans.– Usually between three to five years.– Derived from long-range plans; short-range plans derived

from intermediate plans.

NASA Plans in 19591960First launching of a Meteorological Satellite First launching of a Passive Reflector Communications Satellite. First launching of a Scout vehicle. First launching of a Thor-Delta vehicle. First launching of an Altas-Agena-B vehicle (by the Department of Defense). First suborbital flight of an astronaut.

1961First launching of a lunar impact vehicle. First launching of a lunar impact vehicle.

1961-1962Attainment of manned space flight, Project Mercury.

1962First launching to the vicinity of Venus and/or Mars.

NASA plans continued

1963First launching of two stage Saturn vehicle.

1963-1964First launching of unmanned vehicle for controlled landing on the moon. First launching Orbiting Astronomical and Radio Astronomy Observatory.

1964First launching of unmanned lunar circumnavigation and return to earth vehicle. First reconnaissance of Mars and/or Venus by an unmanned vehicle.

1965-1967First launching in a program leading to manned circumlunar flight and to permanent near- earth space station.

Beyond 1970Manned flight to the moon. . . .

Types of Plans

• Strategic planning– Analogous to top-level, long-range planning.– Covers a relatively long period.– Applied at the highest levels of the organization and

affecting many parts of the organization.• Operations or tactical planning

– Short-range planning.– Done primarily by middle- to lower-level managers.– Concentrates on the formulation of functional plans.

• Contingency plans– Address the what-ifs of the manager’s job.– Gets the manager in the habit of being prepared and

knowing what to do if something does go wrong.– Most needed in rapidly changing environments.

Word Association

• Sleeping

• Contest

• Spot

• Shop

• BEAUTY

Word Association

1. cross baby blood ribbon _____________

2. touch palate soap sell _____________

3. tree cup cake forbidden _____________

4. dust movie gaze sapphire _____________

5. alley date snow spot _____________

6. rest post linen fellow _____________

7. opera no box stone _____________

8. storage shoulder comfort cream _____________

9. business suit wrench shine _____________

10. bug rest fellow cover _____________

Word Association

1. cross baby blood ribbon Blue

2. touch palate soap sell Soft

3. tree cup cake forbidden Fruit

4. dust movie gaze sapphire Star

5. alley date snow spot Blind

6. rest post linen fellow Bed

7. opera no box stone Soap

8. storage shoulder comfort cream Cold

9. business suit wrench shine Monkey

10. bug rest fellow cover Bed

Word Association (2)

1. days biscuit collar ear _____________

2. play breast pox wire _____________

3. guy crack up man _____________

4. ball trouser fruit house _____________

5. dress good star prayer _____________

6. stone jacket fever pages _____________

7. bathtub wedding telephone key _____________

8. horse brake left box _____________

9. right pike your stile _____________

10. bulldog cuff toast windows _____________

Word Association (2)

1. days biscuit collar ear Dog

2. play breast pox wire Chicken

3. guy crack up man Wise

4. ball trouser fruit house Fly

5. dress good star prayer Evening

6. stone jacket fever pages Yellow

7. bathtub wedding telephone key Ring

8. horse brake left box Shoe

9. right pike your stile Turn

10. bulldog cuff toast windows French

Setting Objectives• Objectives

– Statements outlining what the organization is trying to achieve.

– Provide direction to an organization and its members.• Long-range objectives

– Go beyond the current fiscal year.– Must support and not conflict with the organizational

mission.• Short-range objectives

– Generally tied to a specific time period of a year or less.– Derived from an in-depth evaluation of long-range

objectives.

Classifying Objectives

• Objectives should be dynamic.

• Four general categories objectives usually fall into:– Profit oriented– Service to customers– Employee needs and well-being– Social responsibility

• Another scheme for classifying objectives:– Primary: Relate directly to profit– Secondary: Apply to specific units of the organization. – Individual: Directly concern the organization’s employees.– Societal: Relate to the local, national, and global communities.

Establishing Objectives

• Areas for establishing objectives in most organizations:– Profitability– Markets– Productivity– Product– Financial resources– Physical facilities– Research and innovation– Organization structure– Human resources– Social responsibility

Management by Objectives

• A philosophy based on converting organizational objectives into personal objectives.– It works best when the objectives of each organizational

unit are derived from the objectives of the next higher unit in the organization.

– People at each level become more aware of organizational objectives.

– Objectives for an individual are jointly set by the person and the superior; there are give-and-take negotiating sessions between them.

– Achieving self-formulated objectives can improve motivation and, thus, job performance.

Other Approaches to Setting Objectives

• Policies– Broad, general guides to action that constrain or direct the attainment

of objectives.– Create an understanding among members of a group that makes the

actions of each member more predictable to other members.• Procedure

– Series of related steps or tasks expressed in chronological order for a specific purpose.

– They define in a step-by-step fashion, methods through which policies are achieved.

• Rules– Require specific and definite actions to be taken or not to be taken in

a given situation.

Strategy

• Strategy–Outlines the basic steps management plans to

take to reach an objective or a set of objectives. –Outlines how management intends to achieve its

objectives.

• Levels of Strategy:–Corporate Strategies–Business Strategies–Functional Strategies

Levels of Strategies

Figure 7.2

Corporate Strategies

• Corporate (grand) strategies–Address which businesses an organization will be

in and how resources will be allocated among these businesses.

–Established at the highest level of the organization’s management involving long-range time horizon.

–Concerned with the overall direction of the company and tied to the mission statements.

Major Types of Corporate Strategies

Figure 7.1

TurnaroundWilliam Bratton

• 1994 NYC Police Commissioner

• Reduced serious crime by 33% in 27 mos.

• Broken Window Theory

• First applied to window washers and subway related crimes.

• Created Compstat, a computer statistics analysis

Business Strategies

• Business strategies (competitive strategies)–Focus on how to compete in a given business.–Generally applies to a single business unit.–Usually situational in nature.

Types of Business Strategies

• Overall cost leadership– Usually attained through a combination of experience and efficiency.– Usually requires that the company develop some unique advantages

over competitors.– Requires attention to production methods, overhead, marginal

customers and overall cost reduction in sales and R&D.

• Differentiation– Making product(s) unique to allow company to charge higher-than-

average prices.– Aimed to build brand loyalty and lower sensitivity to prices by making

it the company’s competitive advantage.

Types of Business Strategies (cont’d)

• Focus–Company directs its attention to a narrow market

segment.–Allows company to serve this narrow market

better than competitors.

Porter's Generic Strategies

Target ScopeAdvantage

Low Cost Product Uniqueness

Broad(Industry

Wide)Cost Leadership

StrategyDifferentiation

Strategy

Narrow(Market

Segment)

FocusStrategy(low cost)

FocusStrategy

(differentiation)

IndustryForce Cost

LeadershipDifferentiation Focus

EntryBarrier

Ability to cut price in retaliation deters potential entrants.

Customer loyalty can discourage potential entrants.

Focusing develops core competencies that can act as an entry barrier.

BuyerPower

Ability to offer lower price to powerful buyers.

Large buyers have less power to negotiate because of few close alternatives.

Large buyers have less power to negotiate because of few alternatives.

SupplierPower

Better insulated from powerful suppliers.

Better able to pass on supplier price increases to customers.

Suppliers have power because of low volumes, but a differentiation-focused firm is better able to pass on supplier price increases.

Threat ofSubstitutes

Can use low price to defend against substitutes.

Customer's become attached to differentiating attributes, reducing threat of substitutes.

Specialized products & core competency protect against substitutes.

RivalryBetter able to

compete on price.

Brand loyalty to keep customers from rivals.

Rivals cannot meet differentiation-focused customer needs.

Functional Strategies

• Functional strategies

–Concerned with the activities of different

functional areas of the business.–Narrower in scope than business strategies.–Primarily concerned with how-to issues.–Usually in effect for a relatively short period, often

one year or less.

Strategic Management

• The application of the basic planning process at the highest levels of the organization.– Formulation, proper implementation, and continuous

evaluation of strategic plans.– Determines the long run directions and performance of an

organization.– The essence is developing strategic plans and keeping

them current.– Guided by top management, successful strategic

management involves many levels of the organization.

Phases of Strategic Management Process

• Formulation phase– Developing the initial strategic plan.

• Implementation phase– Implementation of the strategic plan that has been

formulated.

• Evaluation phase– Continuous evaluation and updation of the strategic plan.

Formulation Phase

• Corporate and business level strategies are chosen based on:– Organization’s strengths and weaknesses – Threats and opportunities the environment presents.

• The first step is obtaining a clear perspective of current position and status of the organization.– Identifying mission– Identifying past and present strategies – Diagnosing organizations past and present performance – Setting objectives for company’s operation.

Objectives of the Company Mission

Source: Adapted from William R. King and David I. Cleland, Strategic Planning and Policy (New York: Van Nostrand Reinhold, 1978), p. 124.

Figure 7.3

Organizational Purpose

Drucker’s approach to defining an organization’s present

business:

• Identify the customers– Where are they?– How do they buy?– How can they be reached?

• What is the customer buying?

• What is the customer looking for in the product?

Strategic Investigation

Peter Drucker recommends four areas to investigate:

• What is the long-term market potential?

• What changes in market structure might occur due to

economic developments, changes in lifestyle or styles, or

competition?

• What possible changes will alter customers’ buying habits?

• What customer needs are not being adequately served by

available products and services?

Mission Statement Components

Source: From John A. Pearce II and F. R. David, “Corporate Mission Statements: The Bottom Line,” Academy of Management Executive, May 1987. Reprinted with permission.

Figure 7.5

Identifying Past and Present Strategies

A strategy or a series of strategies, as reflected by the

organization’s past actions and intentions, can usually be

identified.

• The following questions can be addressed,– Has past strategy been consciously developed?– If not, can past history be analyzed to identify what implicit

strategy has evolved?– If so, has the strategy been recorded in written form?

Thunderbird

Diagnosing Performance and Setting Objectives

• Evaluating an organization’s performance usually involves some type of in-depth financial analysis and diagnosis of past and present performance. The following questions can be addressed,

– How is the organization currently performing?– How has the organization performed over the last several years?– Is the performance trend moving up or down?

• The next step in formulating strategy is to decide the long-, intermediate-, and short-range objectives should be in light of the current mission.

SWOT Analysis

• Technique for evaluating an organization’s internal strengths and weaknesses and its external opportunities and threats.

• An organization’s strengths and weaknesses are usually identified by conducting an internal analysis of the organization.– What things does the organization do well? – What things does the organization do poorly? From a

resource perspective?– What are the organization’s strengths and weaknesses?

SWOT Analysis: Sizing Up a Company’s Strengths, Weaknesses, Opportunities,

and Threats

External Environment

• Consists of everything outside the organization.

• General economic conditions and social, political, and technological trends represent major factors in the broad environment.

• Factors in the competitive environment are close to the organization and come in regular contact with it.

Forecasting of Environmental Trends

• Qualitative techniques are based primarily on opinions and judgments.

• Quantitative techniques are based primarily on the analysis of data and the use of statistical techniques.

• Five forces model of competition – A tool developed by Michael Porter. – Suggests that the competitive environment can be

assessed by analyzing the import of, and interactions among five major forces in the competitive or industry environment.

Five Forces Model of Competition

Source: M. E. Porter, Competitive Strategy (New York: Free Press, 1980).

Figure 7.6

Comparing Strategic Alternatives

• Goal is to identify feasible strategic alternatives and select the best alternative.– Evaluation and final choice of an appropriate strategic

alternative involves the integration of the mission, objectives, internal analysis, and external analysis.

– Once the corporate strategy has been identified, additional sub-strategies must be selected to support it.

• Strategic business unit (SBU)– Distinct business that has its own set of competitors and

can be managed reasonably independently of other businesses within the organization.

– In a small organization, the entire company may be a SBU.

Implementing Strategy• Include determining and implementing the most appropriate

organizational structure, developing short- range objectives, and establishing functional strategies.

• Organizational Factors– An organization’s current structure places restrictions on strategy

implementation.– Strategy must fit with current organizational policies, or conflicting

policies must be modified.– Organizational systems currently in place can affect how the strategy

might best be implemented.

• Functional Strategies– Development of functional strategies generally requires active

participation of many levels of management.

The Strategic Management Process