Planning and Strategic Management
The first basic management function is planning. Part II: Planning contains three chapters addressing the managerial functions of planning and decision making in detail. Chapter 3 introduces planning and describes strategic management. Chapter 4 provides a variety of perspectives and models for further understanding of decision making. The chapter also discusses the use of groups and teams in decision making. Entrepreneurship, which relies heavily on planning, is the subject of Chapter 5.
The purpose of Chapter 3 is to introduce the basic elements of the planning function of management and to build a foundation for the more detailed coverage of the material that follows in the remaining chapters of Part II. This chapter also discusses how organizations manage strategy and strategic planning. It examines the nature of strategic management, including its components and alternatives. It then describes the kinds of analyses needed for firms to formulate their strategies. Next it examines how organizations first formulate and then implement business strategies, followed by a parallel discussion at the corporate strategy level. Tactical and operational plans are then discussed.
After studying this chapter, students should be able to:
1 . Summarize the planning process and describe organizational goals.
2 . Discuss the components of strategy and the types of strategic alternatives.
3 . Describe how to use SWOT analysis in formulating strategy.
4 . Identify and describe various alternative approaches to business-level strategy formulation.
5 . Identify and describe various alternative approaches to corporate-level strategy formulation.
6 . Discuss how tactical plans are developed and implemented.
7 . Describe the basic types of operational plans used by organizations.
The opening incident describes the strategies of the three players in the video game industry—giants Electronic Arts (EA) and Sony and tiny Acclaim. Their strategies are quite different. EA offers games for all platforms and uses brand name products such as Lord of the Rings and Madden NFL. Sony offers games only for its consoles and is more of a low-cost player. Acclaim makes games only for the mobile market.
I . Planning and Organizational Goals
In order to plan effectively, managers must understand the environmental context in which the organization exists. Managers must establish a mission that includes the organization’s purpose, premises, values, and directions. Strategic goals and plans are devised from the mission statements; tactical goals and plans are generated from the strategic goals and plans; and operational goals and plans are devised from the tactical goals and plans.
A . Organizational Goals
1 . The four purposes of goals are to:
a ) provide guidance and a unified direction for people in the organization
b ) promote good planning
c ) motivate employees
d ) provide an effective mechanism for evaluation and control
2 . Organizations have several different kinds of goals.
a ) An organization’s mission is a statement of its fundamental, unique purpose that sets it apart from other firms of the same type. The mission also identifies the scope of the business’s operations in product and market terms.
b ) Strategic goals are goals set by and for the top managers of the organization, who focus on broad, general issues.
c ) Tactical goals are set by and for middle managers, who focus on how to operationalize actions necessary to achieve the strategic goals.
d ) Operational goals are set by and for lower-level managers, who focus on shorter-term issues associated with the tactical goals.
B . Kinds of Organizational Plans
1 . A strategic plan is a general plan that outlines the decisions of resource allocation, priorities, and action steps necessary to reach strategic goals, which are set by the board of directors and top management and have an extended time frame.
2 . Tactical plans are developed to implement parts of a strategic plan. Typically, tactical plans involve upper and middle managers and have a shorter time frame than the strategic plan.
3 . Operational plans focus on carrying out the tactical plans to achieve operational goals. They are developed by middle and lower-level managers and have a short-term focus.
II . The Nature of Strategic Management
A strategy is a comprehensive plan for accomplishing a firm’s goals. Strategic management is the comprehensive and ongoing process aimed at formulating and implementing strategies. Effective strategies align an organization with its environment, leading to the achievement of strategic goals.
A . The Components of Strategy
1 . Distinctive competence, an organizational strength possessed by only a small number of competing firms, is something the organization does exceptionally well.
2 . Scope specifies the range of markets in which a firm will compete.
3 . Resource deployment specifies how a firm will distribute its resources across the areas in which it competes.
B . Types of Strategic Alternatives
1 . Business-level strategy is the set of strategic alternatives from which a firm chooses as it conducts business in a particular industry or a particular market.
2 . Corporate-level strategy is the set of strategic alternatives from which a firm chooses as it manages its operations simultaneously across several industries and several markets.
3 . Strategy formulation is the set of processes involved in creating or determining the strategies of the firm.
4 . Strategy implementation consists of the methods by which strategies are operationalized or executed within the business.
III . Using SWOT Analysis to Formulate Strategy
SWOT is an acronym that stands for Strengths, Weaknesses, Opportunities, and Threats. The best strategies exploit opportunities and strengths, neutralize threats, and avoid or correct weaknesses.
A . Evaluating an Organization’s Strengths
Organizational strengths are skills and capabilities that enable a firm to conceive of and implement its strategies. Distinctive competencies are those strengths possessed by only a small number of competing firms. Firms that exploit their distinctive competencies often obtain a competitive advantage and attain above-normal economic performance.
B . Evaluating an Organization’s Weaknesses
Organizational weaknesses are skills and capabilities that do not enable a firm to choose and implement strategies that support its mission. A firm has a competitive disadvantage when it is not implementing valuable strategies that are being implemented by competing firms.
C . Evaluating an Organization’s Opportunities and Threats
Organizational opportunities are areas that may generate higher performance. Organizational threats are areas that make it difficult for a firm to perform at a high level.
IV . Formulating Business-Level Strategies
There are two important frameworks for identifying the major strategic alternatives when choosing a business-level strategy.
A . Porter’s Generic Strategies
1 . A firm uses a differentiation strategy when it seeks to distinguish itself from competitors through the quality of its products or services.
2 . A firm uses an overall cost leadership strategy to gain a competitive advantage by reducing its costs below the costs of competing firms.
3 . A firm using a focus strategy concentrates on a specific market, product line, or group of buyers.
B . Strategies Based on the Product Life Cycle
The product life cycle is a four-stage model that shows how sales volume changes over the life of a product. Strategies differ for each stage of the life cycle.
1 . In the introduction stage, demand may be high and sometimes outpaces the firm’s ability to supply the product.
2 . During the growth stage, more firms enter the market and sales continue to grow.
3 . As the product enters the mature stage, overall demand growth begins to slow down and the number of new firms producing the product begins to decline.
4 . The decline stage is characterized by decreasing demand for the product or technology, a drop in the number of organizations producing the product, and lower total sales.
V . Formulating Corporate-Level Strategies
Most large businesses are engaged in several businesses, industries, and markets. Each business or set of businesses within such a firm is frequently referred to as a strategic business unit, or SBU. Diversification refers to the number of different businesses that a firm is engaged in and the extent to which these businesses are related to one another.
A . A single-product strategy is used by those firms that produce just one product or service and sell it in a single geographic market.
B . Related diversification occurs when one firm operates multiple businesses that are related to one another.
1 . There are three advantages of related diversification, as compared to other corporation strategies.
a ) It reduces a firm’s dependence on any one of its business activities and thus reduces economic risk.
b ) It reduces the overhead costs associated with managing any one business.
c ) It allows a firm to exploit its strengths and capabilities in more than one business (creates synergies). Synergy exists among a set of businesses when the businesses’ economic value together is greater than their economic value separately.
C . Unrelated diversification is practiced by corporations operating multiple businesses that are not related to one another.
1 . A business that uses this strategy should have stable performance over time and resource allocation advantages. In practice, however, the presumed benefits are never realized, due to the disadvantages.
2 . One disadvantage is that corporate-level managers may not know enough about the unrelated businesses to provide strategic guidance or to allocate capital appropriately.
3 . Because firms that implement unrelated diversification fail to exploit important synergies, they are at a competitive disadvantage compared to firms that use related diversification.
D. Managing Diversification
Portfolio management techniques are methods that diversified firms use to make decisions about what businesses to engage in and how to manage these multiple businesses.
1 The BCG matrix is a portfolio management technique that provides a framework for evaluating the relative performance of businesses in which a diversified organization operates. The matrix uses two factors to evaluate a firm’s set of businesses: market growth rate and market share. The matrix classifies businesses as one of four types.
a ) Dogs are businesses that have a very small share of a market that is not expected to grow.
b ) Cash cows are businesses that have a large share of a market that is not expected to grow substantially.
c ) Question marks are businesses with a small share of a quickly growing market.
d ) Stars are businesses that have the largest share of a rapidly growing market.
2 . The GE Business Screen is a portfolio management technique that is similar to the BCG matrix approach; however, the GE Business Screen considers industry attractiveness and competitive position in classifying businesses. Another difference is the use of a 3 x 3 matrix, which results in nine possible classifications.
VI . Tactical Planning
Tactical plans are an organized sequence of steps designed to execute strategic plans. Tactical plans are more narrowly focused than strategic plans, have mid-range time horizons, and involve middle managers.
A . Developing Tactical Plans
Tactical plans must address a number of tactical goals derived from a broader strategic goal, must deal with specific resource and time issues, and require the use of human resources.
B . Executing Tactical Plans
For proper execution of tactical plans, a manager must evaluate each alternative action’s potential to contribute to goal achievement, allocate information and resources, support vertical and horizontal communication, and conduct ongoing monitoring of results.
VII . Operational Planning
Operational plans are a detailed series of specific actions designed to execute tactical plans. Operational plans are narrowly focused, have short time horizons, and involve lower-level managers.
A . Single-Use Plans
A single-use plan is developed to carry out a course of action that is not likely to be repeated in the future. Two kinds of single-use plans are programs and projects.
1 . A program is a single-use plan for a large set of activities.
2 . A project is similar to a program, but with smaller scope and less complexity.
B . Standing Plans
A standing plan is used for activities that recur regularly over a period of time.
1 . Policies specify the organization’s general response to a designated problem or situation.
2 . Standing operating procedures, or SOPs, outline steps to be followed in particular circumstances.
3 . Rules and regulations describe exactly how specific activities are to be carried out.
C . Contingency Planning and Crisis Management
Contingency planning is the determination of alternative courses of action to be taken if an intended plan of action is unexpectedly disrupted or rendered inappropriate. It usually involves various action points that identify the need to use alternative plans.
Questions for Review
1 . Describe the purposes of organizational goals. Be certain to note how the purpose varies for different kinds of goals.
The purposes of goals are to (1) provide guidance and direction, (2) facilitate planning, (3) serve as a source of motivation and inspiration, and (4) aid in evaluation and control. Businesses that move aimlessly cannot survive in today’s economy. Goal development is essential because it helps guide the planning process. When employees know and understand the direction of the business, they are more motivated to accomplish the goals of the organization. Finally, the goals can be monitored as a control device.
Goals at higher levels are best at fulfilling these purposes in a more general way, while goals at lower levels fulfill these purposes in specific ways.
2 . Identify and describe Porter’s generic strategies.
Porter’s generic strategies are as follows: (1) differentiation: a firm seeks to distinguish itself from competitors through the quality of its products or services; (2) overall cost leadership: a firm attempts to gain a competitive advantage by reducing its costs below the costs of competing firms; and (3) focus: a firm concentrates on a specific market, product line, or group of buyers.
3 . What are the basic differences among a single-product strategy, a related diversification strategy, and an unrelated diversification strategy?
A single-product strategy involves manufacturing just one product or service and selling it in a single geographic market. A related diversification strategy involves operating multiple businesses that are related to one another in some way. An unrelated diversification strategy involves operating multiple businesses that are not related to one another.
4 . What is tactical planning? What is operational planning? What are the similarities and differences among them?
Tactical plans are developed to implement parts of a strategic plan. Operational plans are aimed at achieving operational goals; they are narrowly focused, have short time frames, and involve lower-level managers. Two common forms of operational plans are single-use plans and standing plans. Tactical and operational plans differ in that operational plans are derived from tactical plans and are more specific and focused. The level of manager involved in developing these two plans also differs. Tactical plans are developed by middle and upper-level managers, while operational plans are developed by middle and lower-level managers. Tactical and operational plans are similar in that both are designed to implement the overall strategic plan outlined by the organization.
5 . What is contingency planning? How is it both related and unrelated to crisis management?
Contingency plans are alternative plans developed in advance of need, in response to situations which may or may not arise. Crisis management is the planned and practiced response that an organization intends to make when an emergency situation occurs. While engaging in crisis management, organizations will rely heavily on contingency planning. However, crisis management must also entail a nonspecific yet effective way to respond to events that cannot be anticipated, such as the 9/11 attacks.
Questions for Analysis
6 . Suppose an organization does not have an identifiable distinctive competence. Assuming the organization’s managers can determine how to develop one, how long is it likely to remain unique? Why?
Whether or not a newly acquired distinctive competency continues to remain unique depends on its imitability. If other firms can quickly or easily imitate it (such as lowering price), it will not remain a strength for long. On the other hand, if it cannot be imitated easily (such as a new patent), then it will remain a strength.
7 . Suppose a firm decides to move from a single-product strategy to a strategy based on related diversification. How might managers use SWOT analysis to select attributes of its current business to serve as bases of relatedness among the potential businesses it may acquire or launch?
SWOT analysis focuses on any relevant combination of environmental and organizational characteristics. Thus, technology, distribution networks, brand names, and product or service reputations are just a few of the many attributes that can be used to define relatedness.
8 . For decades now, Procter & Gamble has promoted its Ivory Soap as being “99 percent pure.” The firm also refuses to use deodorants, perfumes, or colors in Ivory and packages the soap in plain paper wrappers with no foil or fancy printing. Is Ivory using a product differentiation strategy, a low-cost strategy, or a focus strategy? Or is it using some combination? Explain your answer.
Ivory Soap is actually using both a differentiation and a cost leadership strategy at the same time. Its purity and image provide it with a unique image in the marketplace. At the same time, its economical approach to packaging, along with its simple production process, enables managers to price the soap very competitively. Any new soap hoping to compete with Ivory would therefore have to deal with both image and price simultaneously, a difficult combination for a new product.
9 . Which kind of plan—tactical or operational—should be developed first? Why? Does the order really matter? Why or why not?
Tactical plans should be developed prior to operational plans. This is because operational plans are a subunit of tactical plans; that is, operational plans are derived from tactical plans. In order for middle and lower-level managers to develop operational plans, they must have some idea of the scope and focus of tactical plans; thus it is important that tactical plans are developed first.
10 . Cite examples of each type of operational plan you have used or encountered at work, in your school work, or in your personal life.
While answers will differ due to the personal experiences, one example of each type of operational plan is provided. Program—Determining which college to attend requires a great deal of information collecting, telephoning, and time. The activities that must occur prior to making that decision vary and can take over a year. Some individuals make campus visits, others telephone or write to the school, while others interview former or current students. These activities may not be used again, once a decision is made. Project—Deciding where to live can be viewed as a project. While the same information-collecting activities, telephoning, and time discussed above are required, the length of the decision time normally will be much shorter. Often, individuals schedule a one-week “house-hunting” trip in order to find a place to live. Policy—Employees of a restaurant are often approached by various organizations requesting support or a donation for a worthy cause. The restaurant manager may have issued a statement (policy) about how this type of solicitation should be handled. When approached, the employee will simply read or explain the policy to the solicitor. SOP—Any person who has been informed of the appropriate evacuation procedures for exiting a building in case of a fire has been involved with a standard operating procedure. Rules and regulations—The specific rules and guidelines that are taught to new employees fall into this category. For example, when working behind a service counter where numbers are not given to customers to determine the order in which they should be helped, a company may require its employees to mentally note the order in which the customers arrived, or to query the group after completing an order for one individual and before moving on to the next.
Trek’s External and Internal Environments
Today in the United States, inflation, cost of materials, and unemployment are fairly low and are not increasing. Emerging economies are growing more rapidly than the U.S. economy. Foreign trade is relatively open, so manufacturers face intense international and local competition, with pressure to keep prices low, and also have the opportunity to utilize low-cost labor and raw materials from around the world. New manufacturing technologies, futuristic materials, and e-commerce are becoming more prevalent and affordable. The political-legal climate is favorable to business in the United States and most developing nations, while regulation is higher in the E.U. The standard of living is stable, the population is aging, and ethnic diversity is increasing.
Today in the bicycle manufacturing industry, manufacturers must invest heavily in research and development (R&D) to effectively compete on a global scale. Domestically, the bicycle manufacturing industry is fragmented, with the largest firm, Trek, controlling just 24 percent of sales. The industry’s customers are primarily local, independent bike retailers, a very fragmented group. The Internet and eBay, in particular, provide alternate channels for new and used bike sales. Bike riders, the ultimate purchasers, are interested in style, comfort, and high-tech features, as well as environmental and health issues. Suppliers of many bike components are small, local manufacturers located in developing countries. However, a few suppliers are more powerful, such as Shimano, an internationally known maker of bicycle components and cycling gear. Regulators are not a significant force for bicycle manufacturers, but Trek and others have numerous joint ventures. In one example, Trek teamed with AMD, Nike, and other companies to produce the high-performance cycle used by Lance Armstrong in the Tour de France and other races.
Trek has excellent R&D capability and effectively utilizes low-cost manufacturers in producing the more affordable products in its broad line of bikes. However, its Wisconsin factory produces its high-end lines and can customize a bike to a customer’s exact specifications. Trek is beginning a push to improve the customer bike-buying experience. The company will limit the number of retailers it uses and require retailers to stock a higher percentage of Trek products. In return, it will provide training and funds to improve in-store marketing and increase customer loyalty.
Chapter Closing Case:
FEMA’s Disastrous Response to Hurricane Katrina
The case describes the role of the Federal Emergency Management Agency (FEMA) in the aftermath of Hurricane Katrina which hit the Gulf Coast on August 29, 2005. FEMA’s mismanagement stemmed from a variety of factors including the inadequate leadership of Michael Brown, FEMA’s underestimation of the extent of the damages, and the poor communication between FEMA personnel and the victims.
1. In your opinion, were the problems experienced by agencies coping with Hurricane Katrina occurring at the strategic, tactical, or operational level? Explain.
FEMA’s problems happened at both the strategic and the tactical levels. At the strategic level, the key problem was the poor leadership of Michael Brown. He underestimated the seriousness of the problem, and his flippant attitude (the emails are particularly telling) led to his resignation on September 12. At the strategic level, FEMA did not have an adequate implementation plan. At the tactical level, FEMA did not have policies in place to treat the handicapped and the elderly and remove them from danger.
2. Should FEMA handle planning for hurricanes and other natural disasters with a single-use plan or a standing plan? What would be the advantages of each approach?
A standing plan would be more beneficial because natural disasters, unfortunately, happen all the time—floods, forest fires, etc. A standing plan allows for modifications based upon actual experience and saves time in implementation.
3. How would worst-case planning have helped emergency responders react more effectively to Hurricane Katrina?
One of the key criticisms of FEMA’s handling of Hurricane Katrina was its underestimation of the severe damages caused to residents of the Gulf Coast. In short, FEMA did not have a worst-case scenario that would have called for quick and drastic action. Having a worst-case plan would have helped FEMA employees to realize the seriousness of the problem and to deal with the emergency more effectively.