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  • 1. PART 2: PLANNING CHAPTER 3 - FOUNDATIONS OF PLANNING LEARNING OUTCOMES (PPT 3-2, 3-3) After reading this chapter students should be able to: 1. Define planning. 2. Explain the potential benefits of planning. 3. Identify potential drawbacks to planning. 4. Distinguish between strategic and tactical plans. 5. Recognize when directional plans are preferred over specific plans. 6. Define management by objectives and identify its common elements. 7. Outline the steps in the strategic management process. 8. Describe the four grand strategies. 9. Explain SWOT analysis. 10. Describe how entrepreneurs identify a competitive advantage. Opening Vignette SUMMARY While traditional business used to operate on the adage that if a business could compete if it executed two of the three criteria well ---price, quality, or service---the airline industry has shown that businesses today must execute all three well if they want to remain competitive. Customers are demanding more, and new, smaller airlines such as JetBlue, Southwest, and Air Tran are managing to provide all three (price, quality, and service). And, they’re gaining market share quickly---much to the dismay of the traditional big airlines such as United, US Airways, Delta, American, Northwest, or Continental. In fact, during the past decade, most of the large commercial carriers such as those above have been plagued with high costs, poor performance, aging aircraft, and a disgruntled customer base. Today, most of the major airlines in the United States are fighting for survival. Many have reorganized, restructured, and even filed for bankruptcy. The terrorist attacks of September 11, 2001 simply compounded the problem, as it caused a dramatic downturn in commercial air traffic. Previously, new airlines focusing on low-cost fares---like People Express in the 1970s---have come quickly into the market and have disappeared with almost the same blinding speed. For their effort, they historically never gained more than 5 percent of the commercial air traffic market. But today’s smaller airlines understand that the flying public is demanding more for less. These airlines are raising the bar with higher quality and improved customer services. For instance, JetBlue passengers fly on newer, roomier aircraft. And, in just over a decade, these high quality, customer-service driven, low cost airlines like JetBlue have increased their market share from 5 to 30 percent of the market---and they are the only airlines that are profitable.
  • 2. Part 2 - Planning Several of the major airlines now understand the need to offer price, service and quality to survive. For example, United is offering low-cost, full service fares on its Ted Airline (Ted being the last 3 letters in United). Delta has introduced Song as its low-cost spin-off. The airline industry has changed. Those airlines that anticipate, or even get in front of, the change are the ones who will survive. Teaching notes 1. Discuss with students the following questions. • Why was JetBlue able to compete successfully with United, or American, or any of the other large commercial airlines? What, if anything, set JetBlue apart? Did this happen by accident? • What plans did JetBlue implement to be able to achieve their market share increase from 5 to 30 percent and their profitability? • How realistic is it that the large airlines will change? Do you think they will go out of business? Why or why not? 184 percent of the Trek goal with no quality complaints? • I. PLANNING DEFINED A. Introduction (PPT 3-4) 1. It encompasses defining the organization’s objectives or goals, establishing an overall strategy, and developing a comprehensive hierarchy of plans to integrate and coordinate. a) It is concerned with ends (what is to be done) and with means (how it is to be done). 2. Planning can be further defined in terms of whether it is informal or formal. a) In informal planning, very little, if anything, is written down. b) In formal planning, specific objectives are written down and made available to organization members. 87
  • 3. Chapter 3 - Foundations of Planning Teaching Notes _______________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ II. PLANNING IN UNCERTAIN ENVIRONMENTS A. Introduction 3. Technological, social, political, economic, and legal changes are ever-present. 4. Contemporary managers must plan effectively to ensure an organization’s survival. B. Why Should Managers Formally Plan? 5. Managers should engage in planning for at least four reasons. a) Planning provides direction. b) It reduces the impact of change. c) Planning minimizes waste and redundancy. d) It sets the standards to facilitate control. (See Exhibit 3-1).( PPT 3-5) 6. Planning establishes coordinated effort. a) Understanding where the organization is going and what must be contributed to reach the objectives, helps members to coordinate their activities and fosters teamwork. 7. A lack of planning can cause various organizational members or their units to work against one another. 8. Planning reduces uncertainty. 9. It clarifies the consequences of actions. 10. It is precisely what is needed when managing in a chaotic environment. 11. Planning also reduces overlapping and wasteful activities. 12. Finally, planning establishes objectives or standards that facilitate control. Teaching Notes _______________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ 88
  • 4. Part 2 - Planning C. What Are Some Criticisms of Formal Planning? (PPT 3-6) 13. Formal planning by managers makes intuitive sense. a) An organization needs direction. 14. Planning may create rigidity. a) Formal planning efforts lock an organization into specific goals and specific timetables. b) The assumption may be that the environment won’t change during the time period the objectives cover. 1) If that assumption is faulty, managers who follow a plan may have trouble. 2) Forcing a course of action when the environment is fluid can be a recipe for disaster. 3. Plans can’t be developed for a dynamic environment. 3 4 a) Most organizations today face dynamic change in their environments. 5 1) That means a random and unpredictable business environment. 6 2) Managing chaos and turning disasters into opportunities requires flexibility. 7 4. Formal plans can’t replace intuition and creativity. 1 a) Visions have a tendency to become formalized as they evolve. 2 3 b) Formal planning efforts typically follow a methodology that reduces the vision to a 4 programmed routine. 5 1) The rapid rise of Apple Computer in the late 1970s and throughout the 1980s was attributed, in part, to the creativity and anti-corporate attitudes of one of its cofounders, Steven Jobs. 2) Ultimately Jobs was ousted and with his departure came increased organizational formality—the very thing he despised because it hampered creativity. 5. Planning focuses managers’ attention on today’s competition, not on tomorrow’s survival. a) Formal planning tends to focus on how to best capitalize on existing business opportunities within the industry. 6 b) It often does not allow for managers to consider creating or reinventing the industry. 7 c) Some companies have found much of their success to be the result of forging into uncharted waters, designing and developing new industries as they go. 6. Formal planning reinforces success, which may lead to failure. 89
  • 5. Chapter 3 - Foundations of Planning a) Success may, in fact, breed failure in an uncertain environment. b) It is hard to change or discard successful plans. c) Successful plans may provide a false sense of security. D. The Bottom Line: Does Planning Improve Organizational Performance? 15. Contrary to the critics, the evidence generally supports having formal plans. 16. However, organizations that formally plan do not always outperform those that don’t. 17. Conclusions from studies of the relationship between planning and performance. (PPT 3-7) a) There are generally higher profits, higher return on assets with a formal planning process. b) The quality of the process and appropriate implementation of the plans probably contribute more to high performance than does the extent of planning. c) Finally, in those organizations in which formal planning did not lead to higher performance, the environment was typically the culprit. 1) Government regulations and similar environmental constraints leave managers with fewer viable alternatives. 4. Self-Assessment # 25 “How Good Am I at Personal Planning?” Teaching Notes _______________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ III. TYPES OF PLANS A. Exhibit 3-2 illustrates the relationship of types of plans. (PPT 3-8) 18. Breadth—strategic versus tactical. 19. Time frame—long term versus short. 20. Specificity—directional versus specific. 21. Frequency of use—single use versus standing. 90
  • 6. Part 2 - Planning B. How Do Strategic and Tactical Planning Differ? (PPT 3-9, 3-10, 3-11) 22. Strategic plans apply to the entire organization, establish the organization’s overall objectives, and seek to position the organization in terms of its environment. a) These plans drive the organization’s efforts to achieve its goals. b) They serve as a basis for forming the tactical plans. 23. Tactical plans (operational plans) specify the details of how to achieve the overall objectives. 24. Strategic and tactical plans differ in three primary ways. a) Time frame. 1) Tactical plans tend to cover shorter periods of time. 2) Strategic plans tend to cover five years or more. b) Scope 1) They also cover a broader area and deal less with specifics. c) Whether they include a known set of organizational objectives. 1) Strategic plans include the formulation of objectives. 2) Tactical plans assume the existence of objectives. 3) Tactical plans describe how those objectives will be attained. Teaching Notes _______________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ C. In What Time Frame Do Plans Exist? (PPT 3-9) 25. Short term covers less than one year. 26. Any time frame beyond five years is classified as long term. 27. The difference between short- and long-term plans is important given the length of future commitments and the degree of variability organizations face. a) Plans should extend far enough to see through those commitments that are made today. b) The greater the uncertainty, the more plans should be of the short-term variety. c) Shorter-term plans allow for more flexibility. 91
  • 7. Chapter 3 - Foundations of Planning D. What Is the Difference Between Specific and Directional Plans? (PPT 3-13) 28. It appears intuitively correct that specific plans are always preferable to directional, or loosely guided, plans. a) Specific plans have clearly defined objectives. 29. Specific plans are not without drawbacks. a) They require clarity and a predictability that often does not exist. 30. When uncertainty is high, and management must maintain flexibility in order to respond to unexpected changes, directional plans may be preferable. a) See Exhibit 3-3. (PPT 3-12) 31. Directional plans, on the other hand, identify general guidelines. a) They provide focus but do not lock managers into specific objectives or specific courses of action. 1) A specific plan might aim to cut costs by 10 percent and increase revenues by 8 percent in the next six months. 2) A directional plan might aim at improving corporate profits between 6 and 12 percent during the next six months. E. How Do Single-Use and Standing Plans Differ? (PPT 3-14) 32. A single-use plan is used to meet the need of a particular or unique situation. a) Example, when Sears purchased Lands’ End, top managers used single-use plans to guide the acquisition, and “fold in” the activities from Lands’ End operations. 33. Standing plans are ongoing, providing guidance for repeatedly performed actions. a) Example, the standing “registration” plan at your college or university. The dates have changed, but the process works in the same way semester after semester. Teaching Notes _______________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ IV. MANAGEMENT BY OBJECTIVES A. Locke and Goal-Setting Theory 92
  • 8. Part 2 - Planning 34. The value of setting objectives in organizations—known as goal-setting theory. 35. Proposed 35 years ago by Edwin A. Locke. a) Claimed that setting specific employee goals increase performance. b) Suggested that difficult goals, when accepted by the employee, resulted in even higher performance than easy goals do. c) Suggested that employee performance feedback led to higher performance than when feedback was lacking. d) Research in following years have supported Locke’s claims. B. What Is MBO? (PPT 3-15) 36. Management by objectives is not new. The concept goes back almost fifty years. 37. Its appeal is its emphasis on converting overall objectives into specific objectives. 38. MBO makes objectives operational by cascading them down through the organization. a) See Exhibit 3-4. (PPT 3-16) b) MBO works from the bottom up as well as from the top down. c) The result is a hierarchy that links objectives at one level to those at the next level. d) For the individual employee, MBO provides specific personal performance objectives. C. What Are the Common Elements in an MBO Program? (PPT 3-17) 39. There are four ingredients common to MBO programs. a) The objectives in MBO should be concise statements of expected accomplishments. b) The manager and employee jointly choose the goals and how they will be achieved. c) Each objective has a concise time period in which it is to be completed (e.g., three months, six months, or a year). d) MBO seeks to give continuous feedback on progress toward goals both through ongoing feedback to individuals and periodic formal appraisal meetings. Teaching Notes _______________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ 93
  • 9. Chapter 3 - Foundations of Planning _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ D. Does MBO Work? 40. Assessing the effectiveness of MBO is a complex task. 41. When a person’s ability and acceptance of goals are held constant, more difficult goals lead to higher performance. a) Specific hard goals produce a higher level of output than no goals or generalized goals. b) Feedback also favorably affects performance. c) MBO implies that goals must be perceived as feasible. 42. There is little relationship between the method of setting goals and resulting performance. a) When goal difficulty is held constant, assigned goals frequently do as well as participatively determined goals. b) It is not possible to argue for the superiority of participation. c) One major benefit of participation, it appears to induce individuals to establish more difficult goals. 43. Studies of actual MBO programs confirm that MBO effectively increases employee performance and organizational productivity. a) Top management commitment to MBO is critical for it to reach its potential. E. How Do You Set Employee Objectives? (PPT 3-18) 44. Employees should have a clear understanding of what they’re attempting to accomplish. 45. Every manager can better facilitate this process by following these guidelines. a) Identify an employee’s key job tasks. b) Establish specific and challenging goals for each key task. c) Allow the employee to actively participate. d) Prioritize goals. e) Build in feedback mechanisms to assess goal progress. f) Link rewards to goal attainment. F. Is There a Downside to Objectives? 94
  • 10. Part 2 - Planning 46. Not everyone supports the value of setting objectives. 47. One of the most vocal critics was the late W. Edwards Deming. a) Deming felt that employees tend to focus on the goals by which they will be judged, so they may direct their efforts toward quantity of output (what’s being measured) and away from quality. b) Deming believed that employees tend to view objectives as ceilings rather than as floors. 48. Specific goals also encourage individual achievement rather than promote a team focus. 49. Specific goals may limit employees’ potential and discourage efforts for continuous improvement. 50. How can the criticisms of objectives be overcome? a) Ensure that employees have multiple goals, all of which have a quality component. b) Treat MBO as an ongoing activity. 1) Regularly review goals with employees and make changes when warranted. c) Reward employees for setting difficult goals, even if they aren’t fully achieved. Teaching Notes _______________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ V. THE IMPORTANCE OF AN ORGANIZATIONAL STRATEGY A. Before the Early 1970s 51. Managers generally assumed that better times lay ahead. 52. Plans for the future were merely extensions of where the organization had been in the past. B. The 1970s and 1980s 53. However, the energy crisis, deregulation, accelerating technological change, and increasing global competition, as well as other environmental shocks undermined this approach. 54. These changes forced the development of a systematic means of analyzing the environment, assessing their organization’s strengths and weaknesses, and identifying opportunities where the organization could have a competitive advantage. 95
  • 11. Chapter 3 - Foundations of Planning a) Thinking strategically—General Electric’s approach following the September 11, 2001 attack in the United States. b) The GE Global Insurance Holdings company had been quite profitable until significant claims from the September 11th attack and subsequent skyrocketing insurance premiums. c) They posted a $47 million loss in 2001 and are looking to sell off this part of their business. C. Today 55. Those companies that plan strategically appear to have better financial measurements than those organizations that don’t. 56. Strategic planning has moved beyond the private sector to include government agencies, hospitals, and educational institutions. VI. A STRATEGIC FRAMEWORK: CHOOSING A NICHE A. The Strategic Management Process (PPT 3-19) 57. See Exhibit 3-5. (PPT 3-20) 58. A nine-step process that involves strategic planning, implementation, and evaluation. 59. Strategic planning encompasses the first seven steps. B. How Does the Strategic Management Process Operate? 60. First, identify the organization’s current mission, objectives, and strategies (Step 1). a) Every organization has a mission statement that defines its purpose and answers the question, “What business or businesses are we in?” b) Determining the nature of one’s business is as important for not-for-profits as it is for business firms. c) Once its mission has been identified, the organization can begin to look outside the company to ensure that its strategy aligns well with the environment. 1) Panasonic is a major producer of home entertainment systems. 2) Beginning in the mid-1980s, technological breakthroughs in miniaturization and the trend toward smaller homes dramatically increased the demand for powerful, but very compact, sound systems. 3) The success of Panasonic’s home audio strategy depends on understanding the technological and social changes that are taking place. 96
  • 12. Part 2 - Planning 61. Analyze the environment (Step 2). (PPT 3-21) a) Organizations need an accurate grasp of the environment and important trends that might affect the organization’s operations. 97
  • 13. Chapter 3 - Foundations of Planning Teaching Notes _______________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ 62. What Is Environmental Scanning? (PPT 3-21) a) Example—the Credit Union National Association (CUNA) recognized that organizational employees were turning to credit unions for more of their financial needs. 1) Used environmental scanning to determine membership trends, service opportunities, and strategic implications of technology to establish one-step banking environments. b) Environmental scanning—screening large amounts of information to detect emerging trends and create a set of scenarios. c) There is some evidence to indicate that companies that scan the environment achieve higher profits and revenue growth than companies that don’t. d) The importance of environmental scanning was first recognized (outside of national security agencies such as the Central Intelligence Agency or National Security Agency) by firms in the life insurance industry in the late 1970s. 1) Life insurance companies found the demand for their product was declining. 2) What the insurance companies had failed to recognize was a fundamental change in family structure in the United States. 63. How is competitive intelligence useful? (PPT 3-21) a) It seeks basic information about competitors: Who are they? What are they doing? How will what they are doing affect us? 1) Accurate information about the competition can allow them to anticipate competitors’ actions rather than merely react to them. b) Most of the competitor-related information an organization needs to make crucial strategic decisions is available and accessible to the public. 1) Competitive intelligence isn’t organizational espionage. 2) Advertisements, promotional materials, press releases, reports filed with government agencies, annual reports, want ads, newspaper reports, information on the Internet, industry studies, etc. 3) Managers can literally tap into a wealth of competitive information by purchasing access to databases or obtained free through information contained on websites. c) In a global business environment, these processes are more complex. 98
  • 14. Part 2 - Planning 1) Many of the previously mentioned information sources may be too limited. 2) Management may need to subscribe to news services that review newspapers and magazines from around the globe and provide summaries to client companies. 99
  • 15. Chapter 3 - Foundations of Planning Teaching Notes _______________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ C. What Are the Primary Steps in the Strategic Management Process? 64. Evaluate what it has learned in terms of opportunities (strategic) that the organization can exploit and threats that the organization faces (Step 3). a) Opportunities are positive external environmental factors. b) Threats are negative ones. c) The same environment can present opportunities to one organization and pose threats to another. 1) Telecommuting technologies have enabled organizations that sell computer modems, fax machines, etc. to prosper. 2) Organizations such as the U.S. Post Office and even DHL have been adversely affected by this environmental change. 65. Step 4 involves evaluating the organization’s internal resources. a) This involves asking specific questions and analyzing the available information. 1) What skills and abilities do the organization’s employees have? 2) What is the organization’s cash flow? 3) Has it been successful at developing new and innovative products? 4) How do customers perceive the image of the organization and the quality of its products or services? b) Every organization is constrained in some way by available resources and skills. c) The analysis should lead to a clear assessment of the organization’s internal resources, such as capital, worker skills, patents, and the like. d) It should also indicate organizational departmental abilities, such as training and development, marketing, accounting, human resources, research and development, and management information systems. 66. Strengths (strategic) are internal resources or things that the organization does well (Step 5). 100
  • 16. Part 2 - Planning a) Core competencies are any of those strengths that represent unique skills or resources that can determine the organization’s competitive edge. b) When an organization lacks certain resources or identifies activities the firm does not do well, these are called weaknesses. c) Strong and weak cultures have different effects on strategy and the content of a culture has a major effect on the content of the strategy. 1) In a strong culture, almost all employees will have a clear understanding of what the organization is about. 2) In a strong culture, it should be easy for management to convey to new employees the organization’s core competency. 3) The negative side of a strong culture, of course, is that it is difficult to change. 4) A strong culture may act as a significant barrier to acceptance of a change in the organization’s strategies. Teaching Notes _______________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ D. What Is SWOT Analysis? (PPT 3-23) 67. A merging of the externalities (Steps 2 and 3) with the internalities (Steps 4 and 5) results in an assessment of the organization’s opportunities. a) See Exhibit 3-6. (PPT 3-22) 68. This merging is called SWOT analysis because it brings together the organization’s Strengths, Weaknesses, Opportunities, and Threats in order to identify a strategic niche that can be exploited. 69. Having completed the SWOT analysis, the organization reassesses its mission and objectives. a) Exhibit 3-5, Step 6. b) If changes are needed in the organization’s overall direction, this is where they are likely to originate. c) If no changes are necessary, management is ready to begin the actual formulation of strategies. E. How Do You Formulate Strategies? 70. Strategies need to be set for all levels in the organization (Step 7). a) Develop and evaluate alternative strategies. 101
  • 17. Chapter 3 - Foundations of Planning b) Select a set that is compatible at each level and will allow the organization to best capitalize on its resources and the opportunities available in the environment. 71. Four primary strategies or grand strategies are available: growth, stability, retrenchment, and combination. (PPT 3-24) 72. The growth strategy (PPT 3-25) a) Bigger is better. b) An organization attempts to increase the level of the organization’s operations. c) Growth through more sales revenues, more employees, or more market share. 1) Through direct expansion, new product development, quality improvement or by diversifying—merging with or acquiring other firms. (a) Growth through direct expansion involves increasing company size, revenues, operations, or work force. (b) Subway—opening stores in new locations or by franchising to entrepreneurs (c) This effort is internally focused and does not involve other firms. (d) Growth from creating businesses within the organization. (e) Wal-Mart expanded its operations to include food distribution in super- centers. 2) Merging with other companies or acquiring similar firms. (PPT 3-25) (a) A merger occurs when two companies—usually of similar size—combine their resources to form a new company. (b) Example, Lockheed and Martin-Marietta Corporation merged to form Lockheed-Martin. (c) An acquisition, which is similar to a merger, usually happens when a larger company “buys” a smaller one--for a set amount of money or stocks, or both—and incorporates the acquired company’s operations into its own. 73. The stability strategy a) Best known for what it is not. b) It is characterized by an absence of significant changes. c) It is most appropriate when several conditions exist: a stable and unchanging environment, satisfactory organizational performance, an absence of valuable strengths and critical weaknesses, and only insignificant opportunities and threats. 102
  • 18. Part 2 - Planning d) There are organizations that are successfully employing a stability strategy. 1) Kellogg’s uses the stability strategy very well. 74. The retrenchment strategy a) Because of technological advancements, global competition, other environmental changes, and mergers and acquisitions, growth and stability strategies may no longer be viable for some companies. b) This strategy is characteristic of an organization that is reducing its size or selling off less profitable product lines. 1) Example, Sears, AT&T, General Motors, the U.S. Army, and Apple Computer. 75. The combination strategy a) The simultaneous pursuit of two or more strategies described above. b) One part of the organization may be pursuing a growth strategy while another is retrenching. 1) Example, Procter & Gamble sold off its Jif and Crisco brands in 2002; simultaneously it concentrated on its growth strategy of consumer brands market. 76. Determining a competitive strategy a) The selection of a grand strategy sets the stage for the entire organization. b) Each unit within the organization has to translate this strategy into a set of strategies that will give the organization a competitive advantage. c) To fulfill the grand strategy, managers will seek to position their units so that they can gain a relative advantage over the company’s rivals. d) This positioning requires a careful evaluation of the competitive forces. Teaching Notes _______________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ 77. Michael Porter of Harvard’s Graduate School of Business. a) His competitive strategies framework has generic competitive strategies. b) No firm can successfully perform at an above-average profitability level by trying to be all things to all people. 103
  • 19. Chapter 3 - Foundations of Planning c) Management must select a competitive strategy that will give it a distinct advantage by capitalizing on the strengths of the organization and the industry it is in. d) These three strategies are: cost-leadership, differentiation, and focus. (PPT 2-26) 78. The low-cost producer in its industry is following a cost-leadership strategy. a) Success requires that the organization be the cost leader; the product or service being offered must be perceived as comparable to rivals, or at least acceptable to buyers. b) A firm typically gains a cost advantage by efficiency of operations, economies of scale, technological innovation, low-cost labor, or preferential access to raw materials. 1) Examples, Wal-Mart, Texas Instrument, E & J Gallo Winery, and Southwest Airlines. 79. A differentiation strategy is followed when a firm seeks to be unique in its industry in ways that are widely valued by buyers. a) It might emphasize high quality, extraordinary service, innovative design, technological capability, or an unusually positive brand image. b) The key is that the attribute chosen must be different from those offered by rivals and significant enough to justify a price premium that exceeds the cost of differentiating. 1) Examples, Intel (technology), Maytag (reliability), Mary Kay Cosmetics (distribution), and L.L. Bean (service). 80. The first two strategies sought a competitive advantage in a broad range of industry segments. 81. The focus strategy aims at a cost advantage (cost focus) or differentiation advantage (differentiation focus) in a narrow segment. a) Select a segment or group of segments in an industry (such as product variety, type of end buyer, distribution channel, or geographical location of buyers) and tailor the strategy to serve them to the exclusion of others. b) The goal is to exploit a narrow segment of a market. c) Feasibility depends on the size of a segment and whether it can support the additional cost of focusing. 1) Example, Stouffer’s used a cost focus strategy in its Lean Cuisine line to reach calorie-conscious consumers seeking both high quality products and convenience. 82. Strategy choice depends on the organization’s strengths and its competitors’ weaknesses. a) The organization should put its strength where the competition isn’t. 104
  • 20. Part 2 - Planning b) Success depends on selecting the strategy that fits the complete picture of the organization and its industry. 83. What if an organization cannot use one of these three strategies to develop a competitive advantage? a) Porter uses the term “stuck in the middle” to describe that situation. b) Organizations that are stuck in the middle find it difficult to achieve long-term success. 84. Sustaining a competitive advantage (PPT 2-27) a) Long-term success requires that the advantage be sustainable. b) It must withstand both the actions of competitors and evolutionary changes within the industry. c) Managers need to create barriers that make imitation by competitors difficult. 1) The use of patents, copyrights, or trademarks may assist in this effort. d) When there are strong efficiencies from economies of scale, reducing price to gain volume is a useful tactic. e) “Tie up” suppliers with exclusive contracts. f) Encourage and lobby for government policies that impose import tariffs designed to limit foreign competition. g) The one thing that management cannot do is become complacent. Teaching Notes _______________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ F. What Happens After Strategies Are Formulated? 85. The next-to-last step in the strategic management process is implementation (Step 8). a) A strategic plan cannot succeed if it is not implemented properly. b) Top management leadership is a necessary ingredient in a successful strategy along with a motivated group of middle and lower-level managers to carry out senior management’s specific plans. 86. Finally, results must be evaluated (Step 9). a) How effective have the strategies been? 105
  • 21. Chapter 3 - Foundations of Planning b) What adjustments, if any, are necessary? Teaching Notes _______________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ VII.QUALITY AS A STRATEGIC WEAPON A. Introduction 87. To the degree that an organization can satisfy a customer’s need for quality, it can differentiate itself from the competition and attract and hold a loyal customer base. 88. Constant improvement in the quality and reliability of an organization’s products or services can result in a competitive advantage others cannot steal. a) Product innovations are not sustainable because they can be quickly copied by rivals. 89. Incremental improvement is something that becomes an integrated part of an organization’s operations and can develop into a considerable cumulative advantage. B. How Can Benchmarking Help Promote Quality? (PPT 2-28) 90. Benchmarking involves the search for the best practices that lead to superior performance. 91. Management can improve quality by analyzing and then copying the methods of the leaders. a) It is a very specific form of environmental scanning. 92. In 1979, Xerox undertook the first benchmarking effort in the United States. a) Until then, the Japanese had been aggressively copying the successes of others. b) Xerox’s head of manufacturing took a team to Japan to make a detailed study of its competition’s costs and processes at its own joint venture, Fuji-Xerox. 1) Its Japanese rivals were light-years ahead of Xerox in efficiency. 2) Benchmarking those efficiencies marked the beginning of Xerox’s recovery. 93. Illustrating benchmarking’s use in practice, Ford Motor Company. a) Ford used benchmarking in early 2000 in developing its highly promising Range Rover line. 106
  • 22. Part 2 - Planning Teaching Notes _______________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ 107
  • 23. Chapter 3 - Foundations of Planning C. What Is the ISO 9000 Series? (PPT 2-28) 94. The 1980s saw an increasing push among global corporations to improve their quality. 95. 1987 saw the formation of the ISO 9000 series, designed by the International Organization for Standardization, based in Geneva, Switzerland. a) The ISO standards reflect a process whereby independent auditors attest that a company’s factory, laboratory, or office has met quality management requirements. 96. These standards assure customers that a company: a) uses specific steps to test the products it sells. b) continuously trains its employees to ensure they have up-to-date skills, knowledge, and abilities. c) maintains satisfactory records of its operations. d) corrects problems when they occur. 97. Examples of the multinational and transnational companies that have met these standards include Texas Petrochemical, British Airways, Shanghai Foxboro Company, Ltd., Braas Company, Betz Laboratories, Hong Kong Mass Transit Railway Corporation, BP Chemicals International Ltd., Cincinnati Milacron’s Electronic Systems Division, Borg Warner Automotive, Standard Aero Alliance, Taiwan Synthetic Rubber Corporation, and Weyerhaeuser. 98. A company that obtains an ISO certification can boast that it has met stringent international quality standards and is one of a select group of companies worldwide. 99. Certification also permits entry into some markets not otherwise accessible. a) 93 nations have adopted the ISO standards. b) More than 408,000 companies worldwide have ISO certification. c) Uncertified organizations may be unable to successfully compete against certified companies. d) In 1997, ISO 14000 went into effect. 1) Companies achieving this certification will have demonstrated that they are environmentally responsible. 100.Most organizations that want certification spend nearly one year and incur several hundreds of thousands of dollars in costs to achieve that goal. 108
  • 24. Part 2 - Planning a) Obtaining such certification is quickly becoming a necessity to export goods to any organization in the nations that support the ISO 9000 series standards. b) Example, Fris Office Outfitters in Holland, Michigan was told by their biggest customer they would have to be ISO 9000 certified or Fris Office Outfitters would no longer be a supplier. Teaching Notes _______________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ D. How Can Attaining Six Sigma Signify Quality? (PPT 3-29) 101.Six sigma is a philosophy and measurement process developed in the 1980s at Motorola. a) The premise is to design, measure, analyze, and control the input side of a production process to achieve the goal of no more than 3.4 defects per million parts or procedures. b) Six sigma attempts to design in quality as the product is being made. (1) See Exhibit 3-7. (PPT 3-30) c) It is a process that uses statistical models, coupled with specific quality tools, high levels of rigor, and know-how when improving processes. 102.Effectiveness of six sigma at ensuring quality. a) It is designed to decrease defects to fewer than 3.4 per million items produced. b) 99.9 percent effectiveness would mean: 1) 12 babies would be given to the wrong parents each day; 2) 22,000 checks would be deducted from incorrect checking accounts each hour; 3) two planes a day would fail to land safely at Chicago O’Hare International Airport. c) Just 15 years ago, three sigma was a fairly standard objective by most Americans but that results in more than 66,000 defects per million. 103.Six sigma applications can also be useful on the service side of the business—especially in identifying cost savings. a) Example, GE is spending more than $125 million to find more than $2.5 billion in cost- cuttings savings. 1) Cost cuttings savings will come from reduced personnel, reduced inventories, and increased procurement and sales activities. 109
  • 25. Chapter 3 - Foundations of Planning b) GE is sharing its six sigma expertise with customers—Wal-Mart and Dell Computer—in an effort to eliminate more than $1 billion in inefficiencies in the two organizations. Teaching Notes _______________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ VIII.REVISITING ENTREPRENEURSHIP: HOW DOES THE ENTREPRENEUR IDENTIFY A COMPETITIVE ADVANTAGE? A. Introduction 104.The first thing that entrepreneurs must do is to identify opportunities and possible competitive advantages. 105.Then they’re ready to start the venture by researching its feasibility and planning for its launch. B. Identifying Environmental Opportunities and Competitive Advantage 106.In 1994 Jeff Bezos saw that Internet usage was increasing by 2,300 percent a month. 107.He quit his successful career as a stock market researcher and hedge fund manager on Wall Street to pursue his vision for online retailing, now the Amazon.com Web site. 108.Opportunities are positive trends in external environmental factors and provide unique and distinct possibilities for innovating and creating value. Teaching Notes _______________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ 109. Peter Drucker identified seven potential sources of opportunity that entrepreneurs might look for in the external context. (PPT 3-31) a) The unexpected—unanticipated situations and events can provide opportunities. 1) The well-publicized 2000 U.S. presidential vote count and recounts led savvy entrepreneurs to fashion jewelry, t-shirts, and other products using the chad image. 2) Publicity surrounding the accidental skiing deaths of two well-known individuals (Sonny Bono and Michael Kennedy) proved to be a bonanza for ski helmet manufacturers. b) The incongruous—when inconsistencies and incompatibilities exist in the way something appears, there are opportunities to capture. 110
  • 26. Part 2 - Planning 1) Entrepreneurs who are willing to “think outside the box” may find pockets of potential profitability. 2) Sigi Rabinowicz, CEO of Tefron, an Israeli firm, has spent over a decade adapting a circular hosiery knitting machine to make women’s underwear that is nearly seamless. 3) Fred Smith, founder of FedEx, challenged the accepted doctrine that overnight delivery was impossible and built a multi-billion dollar corporation. c) The process need—happens when technology doesn’t immediately come up with the “big discovery” to fundamentally change the very nature of some product or service. 1) Opportunities abound in tiny steps. 2) Example, medical products industry—while researchers haven’t yet discovered a cure for cancer, there have been many successful entrepreneurial biotechnology ventures created as knowledge about a possible cure continues to grow. d) Industry and market structures—changes in technology can change the structure of an industry and market, making existing firms obsolete if they’re not attuned to the changes or are unwilling to change. 1) Changes in social values and consumer tastes can shift structures of industries and markets. 2) Example, Internet experience caused existing industries and markets to be changed by upstart entrepreneurial ventures. 3) eBay has prospered as an online middleman for buyers and sellers. 4) Computer giant Sun Microsystem sells up to 150 items per day on eBay, including its servers that sell for around $15,000. 5) Disney uses eBay to auction off authentic props from its movies. e) Demographics—characteristics of the world population are changing. 1) These changes influence industries and markets by altering the types and quantity of products and services desired. 2) Example, Thay Thida is one of three individuals in Khmer Internet Development Services who saw the opportunities in bringing the Internet to Phnom Penh, Cambodia. 3) She and her co-founders profited from their entrepreneurial venture. f) Changes in perception—perception is one’s reality. 1) When changes in perception take place, facts do not vary, but their meaning does. 111
  • 27. Chapter 3 - Foundations of Planning 2) Think about your perception of healthy foods—our perceptions of whether or not certain groups are good for us has changed. (a) John Mackey started Whole Foods Market in Texas, as a place for customers to purchase food and other items free of pesticides, preservatives, sweeteners, and animal cruelty. (b) Mackey’s entrepreneurial venture now consists of about 130 stores in more than 23 states, Washington, DC, and Canada. g) New knowledge—a significant source of entrepreneurial opportunity. 1) French scientists are using new knowledge about textiles to develop a wide array of innovative products that keep wearers healthy and smelling good. (a) Neyret, the Parisian lingerie maker, innovated lingerie products woven with tiny perfume micro-capsules that stay in the fabric through about 10 laundry cycles. (b) Francital, developed a fabric that is treated with chemicals to absorb perspiration and odors. Teaching Notes _______________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ Review, Comprehension, Application Chapter Summary 1. Planning is the process of determining objectives and assessing the way those objectives can best be achieved. 2. Planning gives direction, reduces the impact of change, minimizes waste and redundancy, and sets the standards to facilitate controlling. 3. Planning is not without its critics. Some of the more noted criticisms of planning are: It may create rigidity; plans cannot be developed for a dynamic environment; formal plans cannot replace intuition and creativity; planning focuses managers’ attention on today’s competition, not on tomorrow’s survival; and because formal planning reinforces success, it may lead to failure. 4. Strategic plans cover an extensive time period (usually five or more years), encompass broad issues, and include the formulation of objectives. Tactical plans cover shorter periods of time, focus on specifics, and assume that objectives are already known. 5. Directional plans are preferred over specific plans when managers face uncertainty in their environments and desire to maintain flexibility in order to respond to any unexpected changes. 6. Management by objectives (MBO) is a system in which specific performance objectives are jointly 112
  • 28. Part 2 - Planning determined by employees and their bosses; progress toward objectives is periodically reviewed, and rewards are allocated on the basis of the progress. The four ingredients common to MBO programs are goal specificity, participative decision making, explicit time periods, and performance feedback. 7. The strategic management process is made up of nine steps: (1) identify the organization’s current mission, objectives, and strategies, (2) analyze the environment, (3) identify opportunities and threats in the environment, (4) analyze the organization’s resources, (5) identify the organization’s strengths and weaknesses, (6) reassess the organization’s mission and objectives on the basis of its strengths, weaknesses, opportunities, and threats, (7) formulate strategies, (8) implement strategies, and (9) evaluate results. 8. The four grand strategies are (1) growth (increasing the level of the organization’s operations), (2) stability (making no significant change in the organization), (3) retrenchment (reducing the size or variety of operations), and (4) combination (using two or more grand strategies simultaneously). 9. SWOT analysis refers to analyzing the organization’s internal strengths and weaknesses as well as external opportunities and threats in order to identify a niche that the organization can exploit. 10. Opportunities are positive trends in external environmental factors. These trends provide unique and distinct possibilities for innovating and creating value. Entrepreneurs need to be able to pinpoint these pockets of opportunities that a changing context provides. Seven potential sources of opportunity that entrepreneurs might look for in the external context include: (1) the unexpected, (2) the incongruous, (3) the process need, (4) industry and market structures, (5) demographics, (6) changes in perception, and (7) new knowledge. Companion Website We invite you to visit the Robbins/DeCenzo Companion Website at www.prenhall.com/robbins for the chapter quiz and student PowerPoints. OneKey Online Courses We invite you to visit www.prenhall.com/onekey for the part-ending ethics scenarios, diversity exercises, and learning modules.  Enhancing your Skill in Ethical Decision Making New to this edition is an online interactive feature designed to give students experience in making management decisions about hypothetical yet realistic ethical issues. Introductory paragraphs at the ends of Parts 1, 2, 3, 4, and 5 provide background about the company (Boeing) and set up the situation for each set of exercises. After they have studied the chapters in each part, have students log onto www.prenhall.com/onekey and work through the two multiple choice questions and two short-essay questions. You may want to hold classroom debates, assign students to conduct role-plays, or have students work in teams to explore the decision alternatives involved in some of these ethical challenges. 113
  • 29. Chapter 3 - Foundations of Planning  Diversity Perspectives: Communication and Interpersonal Skills, by Carol Harvey and June Allard 1. What perceptions of the bureau could the states have that would lead them to resist cooperating in the environmental scan (i.e., providing information)? Education is the province of each state and states could perceive the scan process as federal control and interference. States tend to be leery of any effort to control 2. What perceptions of the bureau could the states have that would lead them to resist in accepting federal funding for educating teachers of the disabled? Funding is always welcome, but federal funding usually comes with strings attached. For example, some of the strings could be increased work such as preparing application and reporting forms, and some may be requirements and rules (e.g., specification of types of educational experiences for teachers and students, competency exams, etc.) Assignments 1. Help the bureau plan by conducting a SWOT analysis of this situation. The SWOT analysis is conducted by considering the four categories below. Among the entries in the categories that students might suggest are: Strengths • Money is available to create a forecasting system • Money is available to make improvements in education Weaknesses Lack of knowledge of: • Numbers and locations of disabled children • Numbers and locations of teachers of disabled children • Trends in disabilities incidence • Specialized facilities • Forecasting techniques Opportunities • Increase and/or educate enough teachers of the disabled • Get states to use forecasting to improve their teacher training Threats • Reduction in budgets • Failure of states to provide information for environmental scan 2. Help the bureau plan by specifying what information an environmental scan could provide. An environmental scan would center on surveying state boards of education for current and previous numbers of children with each disability and also for data on current and previous numbers of teachers of these children. It would seek out information on existing specialized facilities and on current educational techniques and teacher training. The bureau must also search out some expertise on forecasting techniques. Reading for Comprehension 1. Contrast formal with informal planning. Answer – In informal planning, very little, if anything, is written down. In formal planning, there are written plans at various levels, people are assigned responsibilities, there is a great deal of detail, etc. Formal planning involves specific goals to be achieved within specific timetables. 114
  • 30. Part 2 - Planning 2. Under what circumstances are short-term plans preferred? Under what circumstances are specific plans preferred? Answer – Short term covers less than one year. Plans should extend far enough to see through those commitments that are made today. The greater the uncertainty, the more plans should be of the short- term variety. Shorter-term plans allow for better accommodation of changes by providing more flexibility. It appears intuitively correct that specific plans are always preferable to directional, or loosely guided, plans. Specific plans have clearly defined objectives. When certainty is high, and management can operate on some unchanging assumptions. 3. Compare an organization’s mission with its objectives. Answer – Every organization has a mission that defines its purpose and answers the question, “What business or businesses are we in?” In essence the mission is a directional plan. The mission applies to the entire organization, establishes the organization’s overall objectives, and seeks to position the organization in terms of its environment. Objectives are tactical or specific “plans” that are quantified for achieving specific goals. They can apply to individuals, work units, or the organization. The mission cannot be accomplished without the accomplishment of objectives. Objectives need a mission for them to be clear and coordinated. 4. Describe the nine-step strategic management process. Answer – See Exhibit 3-5. A nine-step process that involves strategic planning, implementation, and evaluation. Strategic planning encompasses the first seven steps. 5. What is a SWOT analysis? Answer – A merging of the externalities (Steps 2 and 3) with the internalities (Steps 4 and 5) results in an assessment of the organization’s opportunities. See Exhibit 3-6. This merging is frequently called SWOT analysis because it brings together the organization's Strengths, Weaknesses, Opportunities, and Threats in order to identify a strategic niche that the organization can exploit. Having completed the SWOT analysis, the organization reassesses its mission and objectives. 6. How can quality provide a competitive advantage? Give an example. Answer – Students’ responses may vary but they most likely will indicate that quality is one of the specific tactics of a differentiation strategy where an organization seeks to be unique in its industry in ways that are widely valued by buyers. The key is that the attribute chosen must be different from those offered by rivals and significant enough to justify a price premium that exceeds the cost of differentiating. To the degree that an organization can satisfy a customer’s need for quality, it can differentiate itself from the competition and attract and hold a loyal customer base. Constant improvement in the quality and reliability of an organization’s products or services can result in a competitive advantage others cannot steal. Product innovations are not sustainable because they can be quickly copied by rivals. Incremental improvement is something that becomes an integrated part of an organization’s operations and can develop into a considerable cumulative advantage. 7. What differentiates entrepreneurs from traditional managers in terms of developing strategy? Explain your answer. Answer – Entrepreneurs are trying to identify opportunities and possible competitive advantages. They may be more willing to take risks, to try something that hasn’t been done before. Entrepreneurs are likely to have an internal vision or strategy that may not be written down or even completely shared verbally with the other employees. Traditional managers are more likely to have a formal 115
  • 31. Chapter 3 - Foundations of Planning strategy, in writing, and be more inflexible about changing that strategy even when the environment and customer needs may change. Linking Concepts to Practice 1. Organizations that fail to plan are planning to fail. Do you agree or disagree with the statement? Explain your position. Answer – Students may agree or disagree. If they agree, they may argue that the discipline of planning provides a framework for thinking through decisions and the future. Whether students like or criticize planning, it does provide direction, measurements of progress, and a framework for judging the success or failure of a venture. 2. Under what circumstances do you believe MBO/goal setting would be most useful? Discuss. Answer – MBO is of value for converting overall objectives into specific objectives for organizational units and individual members. MBO makes objectives operational by cascading them down through the organization. See Exhibit 3-4. Because lower-unit managers jointly participate in setting their own goals, MBO works from the bottom up as well as from the top down. The result is a hierarchy that links objectives at one level to those at the next level. For the individual employee, MBO provides specific personal performance objectives. The circumstances where employee commitment is important, where concrete goals help a company direct its efforts, when there is a need coordination and communication in a company, etc. 3. Using Michael Porter’s generic strategies, describe the strategy used by each of the following companies to develop a competitive advantage in its industry: Wal-Mart, Home Depot, Nieman Marcus, Southwest Airlines. Provide specific examples. Answer – Students’ responses should consider the following facts. No firm can successfully perform at an above-average profitability level by trying to be all things to all people. The cost-leadership strategy requires that the organization be the cost leader, the product or service being offered must be perceived as comparable to rivals, or at least acceptable to buyers. A differentiation strategy seeks to be unique in its industry in ways that are widely valued by buyers is following. It might emphasize high quality, extraordinary service, innovative design, technological capability, or an unusually positive brand image. The key is that the attribute chosen must be different from those offered by rivals and significant enough to justify a price premium that exceeds the cost of differentiating. The focus strategy aims at a cost advantage (cost focus) or differentiation advantage (differentiation focus) in a narrow segment. Select a segment or group of segments in an industry (such as product variety, type of end buyer, distribution channel, or geographical location of buyers) and tailor the strategy to serve them to the exclusion of others. Feasible depends on the size of a segment and whether it can support the additional cost of focusing. 4. “The primary means of sustaining a competitive advantage is to adjust faster to the environment than your competitors do.” Do you agree or disagree with the statement? Explain your position. Answer – Key to this answer is the following facts. Long-term success requires that the advantage be sustainable. It must withstand both the actions of competitors and the evolutionary changes. Managers need to create barriers that make imitation by competitors difficult or reduce the competitive opportunities. 116
  • 32. Part 2 - Planning 5. “Benchmarking, six sigma, ISO 9000 series all have the effect of assisting a company develop a competitive advantage.” Do you agree? Why or why not. Cite specific examples. Answer – Students’ answers will vary. Most may argue that it is true, because almost any competitive advantage, other than one determined by regulation or patent, can be overcome in time. Only those companies that are continually innovating will maintain their advantage. Management Workshop Team Skill-Building Exercise Your College’s Mission Purpose: To show students what is involved in determining and implementing an organizational mission. Time: 30 minutes of out-of-class research, 30 minutes of discussion in class. 117
  • 33. Chapter 3 - Foundations of Planning Instructions: 1. Brainstorm with the class as a whole as to where they could find evidences of, statements of, the college/university mission statement. 2. Break students into groups of three. 3. Have them find and bring to the next class artifacts, statements, etc., other evidence of the mission statement. 4. In class, have them discuss the following questions and prepare to report their discussion to the class.  What is your college’s mission? What resources does your college have that support its mission?  How would you describe your college’s environment in terms of technology and of government regulations?  What do you believe are the strengths and weaknesses of your college?  Which grand strategy is your college following? Which of Porter’s generic strategies is evident at your college?  What do you believe to be your college’s competitive advantage? What do you think your college should do to sustain its competitive advantage? 5. Call on four groups and have them report their answer to the first question. Discuss in class the differences of opinion and perception. Come to an agreement as to the school’s mission statement or lack thereof. 6. Do the same with each of the above questions. 7. Close with a discussion of why this is an important issue for them.  Mission statements direct the allocation of resources.  The perceived strength of the school’s academic programs affects recruiters’ perceptions of them.  Etc. Understanding Yourself Before you can develop other people, you must understand your present strengths. To assist in this learning process, we encourage you to complete the following self-assessments from the Prentice Hall Self-Assessment Library 3.0:  What Time of the Day Am I Most Productive? (#24)  How Good Am I at Personal Planning? (#25) (also available in this chapter, pp. 91) After you complete these assessments, we suggest that you print out the results and store them as part of your “portfolio of learning.” Developing Your Business Plan Skill Purpose: For students to experience the effort required to write a business plan. Time: As long or short as you desire. This can be a multiple day or one class exercise. About the Skill One of the first steps in starting a business is to prepare a business plan. Not only does the business plan 118
  • 34. Part 2 - Planning aid you in thinking about what you’re going to do and how you’re going to do it; it provides a sound basis from which you can obtain funding and resources for your organization. In fact, a well-prepared business plan can be submitted to a financial institution in its entirety as the basis for why you should get a loan to start your business. Steps in Practicing the Skill Instructions: 1. Review the following steps of writing the business plan:  Describe your company’s background and purpose.  Identify your short- and long-term objectives.  Provide a thorough market analysis.  Describe your development and production emphasis.  Describe how you’ll market your product or service.  Establish your financial statements.  Provide an overview of the organization and its management.  Describe the legal form of the business.  Identify the critical risks and contingencies facing the organization.  Put the business plan together. 2. If a multiple day exercise, have students gather research for each element.  Allow students to dream up their own startup business.  If a class exercise, choose one type of business and brainstorm what they already know for each category. 3. Close either type of exercise with student discussion of the effort involved and what they discovered they did not know about the prospective business. Practicing the Skill You have come up with a great idea for a business and need to create a business plan to present to a bank. Choose one of the following products or services and draft the part of your plan that describes how you 119
  • 35. Chapter 3 - Foundations of Planning will price and market it (see Step 5). 1. Haircuts at home (you make house calls) 2. Olympic snow boarding computer game 3. Online apartment rental listing 4. Ergonomic dental chair 5. Voice-activated house alarm 6. Customized running shoes Now choose a different product or service from the list and identify critical risks and contingencies (see Step 9). Developing Your Diagnostic and Analytical Skills For more than the past decade, the McDonald’s corporation was the leader in pioneering what they thought customers wanted---larger and larger portions. While their menu had remained relatively stable, McDonald’s management was always looking for ways to improve sales, and fend off strong competition from the likes of Wendy’s and Burger King. The one thing that McDonald’s did to boost sales was the addition of the Super-sized Meal. Nearly one in ten customers took advantage of the company’s offer to “super-size” their meal (add an extra large soda and an extra large French-fry order) for just 39 cents. But since this expanded offering hit stores, McDonald’s has come under fire. Public pressure was mounting, to the point that individuals sued McDonald’s for causing their physical ailments brought about from obesity. Criticism reached its height in early 2004, when the effects of eating McDonald’s food was the subject of an award-winning documentary. At the end of the month long experiment of eating only McDonald’s food, the producer had gained 24 pounds and his health had deteriorated. In March 2004, McDonald’s announced they would eliminate all super-sized offerings. Additionally, McDonald’s now offers salads and is attempting to promote itself as being more health conscious. McDonald’s action was largely driven by the reality that its sales had plummeted, as had its stock price. Their announcement of the elimination of the super-sized option and the addition of healthier substitutes is being viewed as a move that is entirely responsive to the changing market environment--- something that Burger King and Wendy’s are watching very closely. Questions: 1. Explain how the environment has affected McDonald’s plans to discontinue offering super-sized meals. Answer – The environment has been flooded with healthy products and a great deal of research on the things individuals can do to improve their health. Moreover, obesity rates are increasing in this country. McDonald’s was clearly operating against the prevailing trends in society that were urging individuals to eat more healthily, and therefore the environment strongly influenced them to discontinue offering super-sized meals. 2. Describe how McDonald’s can use the decision to stop selling super-sized meals as a competitive advantage. 120
  • 36. Part 2 - Planning Answer – McDonald’s can use the decision to stop selling super-sized meals as a competitive advantage by seeing it as a differentiation quality---they can position themselves as the only fast food company who really cares about individuals’ health----so much so that they changed their menu to encourage more healthy eating habits. 3. How would you classify this action by McDonald’s---a growth strategy, a stability strategy, or a retrenchment strategy? Defend your choice. 4. Answer – Students will probably have differing opinions on this. This action by McDonald’s could be viewed as combination of a retrenchment strategy (it’s retrenching from a market of super-size; although, they are not closing locations or actually shrinking) and a growth strategy (it’s trying to grow its market by attracting health oriented people; although, it’s not acquiring other companies or locations). Some may argue that it’s a stability strategy---that McDonald’s is trying to keep their existing market share and is simply shuffling things around product-wise in order to maintain stability. 5. Do you believe McDonald’s was socially responsive in their actions to discontinue super-sizing? Why or why not? Answer – Students may answer that yes, they were acting in the best interest of their customers by trying not to contribute to the obesity problem the US is facing. Other students, however, may say that McDonald’s simply had profits in mind, and was forced to discontinue super-sizing in the interest of making money. Enhancing Your Communication Skills 1. Develop a 2-3-page response (or 3-5 minute presentation) to the following statement: “Formal planning reduces flexibility and hinders success.” Present both sides of the argument and include supporting data. Conclude your remarks by defending and supporting one of the two arguments you’ve presented. 2. Describe how your class syllabus is used as a student objective tool. Refer to the “setting employee objectives” section in the text. In your discussion, provide specific references regarding how the guidelines we’ve offered apply to your class. 3. We’ve witnessed many corporations advocating quality programs—e.g., six sigma, ISO 9000—as part of their strategic plans. Pick one organization that has a well-publicized quality focus. Describe the strategic implications of their initiative and highlight what benefits the company expects because of this quality emphasis. Team Exercises Based on Chapter Material 1. Have the class count off to three (one, two, three; keep repeating). Tell them that if they were a “one,” they have to think (individually) of and write down an example of a company who has a competitive advantage based on a cost-leadership (minimization) strategy. If they were a “two” they have to think of (and write down) an example of a company who has a competitive advantage based on a differentiation strategy. If they were a “three” they have to think of (and write down) an example of a company who has a competitive advantage based on a focus strategy. They have 10 minutes to think of their example, and write down several brief bullets to defend their choice of an example. Then, have all the “ones” get together, then break into groups of 4-5. Repeat for the “twos” and “threes”. Have them share their examples, and then each small group should choose the one they think is the best example. (10-15 minutes). Have the groups report their choice back to the class in less than 2 minutes. 121
  • 37. Chapter 3 - Foundations of Planning 2. Select a company that students are very familiar with (e.g., MTV, Apple Computers, TacoBell, Old Navy, Target) and have them break up into pairs. Tell them they have the ½ the class period to conduct competitive intelligence for that company. They can leave the classroom, but they must come back with some information they believe the strategic planning team for that organization will find useful in considering the strategic plans for the next 5 years. When the students return to the class, call on random pairs to see what they have uncovered. Ask for the source of their information, and their approach for determining that would be a good source. Ask for volunteers of any pairs who used a different approach/source. Look for use of Nexis (news papers, industry publications, etc.) and for websites that identify future trends. Also look for students who do direct research such as interviews of other students regarding what they’d like to see or what they know a company is coming out with. (When this happens, it provides a perfect chance to differentiate proactive company moves (based on competitive intelligence) versus reactive; e.g., simply reacting to what is already being done) 3. Have the students break into groups of 4-5 and do a SWOT analysis on a student organization in their university. (30 minutes) Tell them that their final product will be shared with the organization in efforts to help it think more strategically. Select 4 groups at random to share their analysis with the class. 122