After studying this chapter, you will be able to: Discuss the nature and purposes of planning. Explain what managers do in the strategic management process. Compare and contrast approaches to goal setting and planning, and Discuss contemporary issues in planning.
Planning establishes the basis for all the other things managers do as they organize, lead, and control. Planning is deciding on the organization’s objectives or goals and getting the job done by establishing an overall strategy for achieving those goals and developing a comprehensive hierarchy of plans to integrate and coordinate activities. Planning can be informal or formal. Smaller businesses often use informal planning where little is verbalized or written down and the planning is general and lacks continuity. Formal planning, however, defines specific goals that are to be met in a specific time period. They are written down and made available to organization members. Then managers develop specific plans that clearly define what the organization will do to move from where it is to where it wants to be.
Managers should plan for at least four reasons, as seen here in Exhibit 5-1. Planning coordinates effort. It gives direction to both managers and nonmanagerial employees so each knows what he or she must contribute— individually and as a group—to reach the organization’s goals. Planning stimulates intra- and inter-department coordination of activities, which fosters teamwork and cooperation. Planning forces managers to look ahead , anticipate change, consider the impact of change, and develop appropriate responses. It also clarifies the consequences of the actions managers might take in response to change. Planning reduces overlapping and wasteful activities. Coordination before the fact is likely to uncover waste and redundancy. Finally, planning establishes the goals or standards that facilitate managerial control to ensure that the plans are carried out and the goals are met.
Although it makes sense for an organization to establish goals and direction, critics have challenged some of the basic assumptions of planning. Planning may create rigidity with goals and a timetable that are set under the assumption that the environment won’t change. Formal plans cannot replace intuition and creativity. Planning should enhance and support intuition and creativity, not replace it. Planning focuses managers’ attention on today’s competition, not on tomorrow’s survival . Formal planning tends to focus on how best to capitalize on existing business opportunities instead of ways to reinvent the industry. Instead of focusing on today, managers should plan with an eye to untapped opportunities. Formal planning reinforces success, which may lead to failure. It’s difficult to shift from the comfort of what works to the uncertainty of the unknown. However, managers may need to face that unknown and do things in new ways to be even more successful.
One important aspect of an organization’s formal planning is strategic planning, which managers do as part of the strategic management process. In the space of a week, here are a few headline makers: German engineering giant Siemens AG is rethinking its strategic goal of becoming a major player in the nuclear power industry. Best Buy Co. is shrinking its “big-box store” strategy to better position itself to compete online against Amazon.com. Burberry Group PLC’s CEO Angela Ahrendts, pictured here, is outfitting company stores in China with the latest digital technology to woo younger customers. Now let’s take a look at the what, how, and whys of strategic management.
Strategic management is what managers do to develop an organization’s strategies—that is, the plans for how the organization will do what it’s in business to do, compete successfully, and attract and satisfy its customers in order to achieve its goals. Strategic management is important to avoid weakening one’s position due to poor economic conditions and myriad external and interval variables. Two strategies that helped clothing chain retailer Buckle Inc. were its location strategy of not placing the majority of its 400-plus stores in states falling on hard times and a differentiation strategy of offering customer perks, such as custom pants fittings and free hemming of its jeans. Reasons why strategic management is so important include: It can make a difference in how well an organization performs. Research has found a generally positive relationship between strategic planning and performance. It prepares managers in organizations of all types and sizes to cope with continually changing situations and to examine relevant factors in planning future actions. Each part of an organization needs to work together to achieve the organization’s goals; strategic management helps accomplish this. For example, with more than 2.1 million employees worldwide working in various departments, functional areas, and stores, Walmart uses strategic management to help coordinate and focus employees’ efforts on what’s most important. Strategic management isn’t just for business organizations. Organizations such as government agencies, hospitals, educational institutions, and social agencies also need strategic management. For example, the skyrocketing costs of a college education, competition from for-profit companies offering alternative educational environments, cuts to state budgets, and cutbacks in federal aid for students and research have led many university administrators to assess their colleges’ aspirations and identify a market niche in which they can survive and prosper.
The strategic management process (see Exhibit 4-2) is a six-step process that encompasses strategy planning, implementation, and evaluation. Although the first four steps describe the planning that must take place, implementation and evaluation are just as important! Even the best strategies can fail if management doesn’t implement or evaluate them properly.
The strategic management process , seen here in Exhibit 5-2, is a six-step process that encompasses: Strategy planning Implementation, and Evaluation. Even the best strategies fail if management doesn’t implement or evaluate them properly. Now let’s look at each of these six steps independently.
STEP 1 of the strategic management process is to identify the organization’s current mission, goals, and strategies. The mission is a statement of the organization’s purpose. Defining the mission forces managers to identify what the organization is in business to do. For instance, the mission of Facebook is “a social utility that connects you with the people around you,” and the mission of the National Heart Foundation of Australia is to “reduce suffering and death from heart, stroke, and blood vessel disease in Australia.” The components of a mission statement, seen here in Exhibit 5-3, includes target customers, markets, and goals and strategies, and each should be assessed to see if managers should change any of them.
The combined external and internal analyses are called the SWOT analysis because it’s an analysis of the organization’s strengths, weaknesses, opportunities, and threats.
After completing the SWOT analysis, managers are ready to formulate appropriate strategies is, strategies that (1) exploit an organization’s strengths and external opportunities, (2) buffer or protect the organization from external threats, or (3) correct critical weaknesses
STEP 4 is formulating strategies. As managers formulate strategies, they should consider the realities of the external environment and their available resources and capabilities to design strategies that will help their organization achieve its goals. Managers typically formulate three main types of strategies: corporate, business, and functional. We’ll describe each shortly. STEP 5 involves implementing strategies. Once strategies are formulated, they must be implemented. No matter how effectively an organization has planned its strategies, performance will suffer if the strategies aren’t implemented properly. STEP 6 is evaluating results. This is the final step in the strategic management process, where managers ask, “How effective have the strategies been at helping the organization reach its goals? What adjustments are necessary?” For example, when Anne Mulcahy was first named Xerox’s CEO, she assessed the results of previous strategies and made strategic adjustments—such as cutting jobs, selling assets, and reorganizing management—to regain market share and improve her company’s bottom line.
Strategies need to be formulated for the three organizational levels: corporate, business, and functional, as seen here in Exhibit 5-4. A corporate strategy is an organizational strategy that specifies what businesses a company is in—or wants to be in—and what it wants to do with those businesses. The corporate strategy is based on the mission and goals of the organization and the roles that each business unit of the organization will play. For example, PepsiCo’s mission is: To be the world’s premier consumer products company focused on convenient foods and beverages. It pursues that mission with a corporate strategy that puts it in different businesses, including PepsiCo Americas Beverage, PepsiCo International, Frito-Lay North America, Quaker Foods North America, and Latin America Foods. The second part of corporate strategy is when top managers decide what to do with those businesses. The three main types of corporate strategies are growth, stability, and renewal.
Growth strategy is a corporate strategy in which an organization expands the number of markets served or products offered, either through its current business or through new business. Because of its growth strategy, an organization may increase revenues, number of employees, or market share. Organizations grow by using concentration, vertical integration, horizontal integration, or diversification. An organization that grows by using concentration increases the number of products offered or markets served in its primary business. A company can also grow by vertical integration , either backward, forward, or both. In backward vertical integration , the organization becomes its own supplier. In forward vertical integration , the organization becomes its own distributor. One example is Apple, which has hundreds of retail stores around the globe. In horizontal integration , a company grows by combining with competitors. Horizontal integration may be regulated so that one company does not monopolize the market. Finally, an organization can grow through diversification , either related or unrelated. Related diversification is when a company combines with other companies in different, but related, industries. Unrelated diversification is when a company combines with firms in different and unrelated industries.
During times of economic uncertainty, many companies choose a stability strategy in which the organization continues to do what it is currently doing, such as serving the same clients by offering the same product or service, maintaining market share, and sustaining the organization’s current business operations. When an organization is in trouble, however, managers need strategies called renewal strategies, which address declining performance. There are two main types of renewal strategies: A retrenchment strategy is a short-run strategy used for minor performance problems. This strategy helps it stabilize operations, revitalize organizational resources and capabilities, and prepare to compete once again. When an organization’s problems are more serious, they need to use the turnaround strategy . While managers cut costs and restructure organizational operations in either renewal strategy, these measures are more extensive than in a retrenchment strategy.
A competitive strategy is a strategy for how an organization will compete in its business(es). For a small organization in only one line of business or a large organization that has not diversified into different products or markets, its competitive strategy describes how it will compete in its primary or main market. For organizations in multiple businesses, however, each business will have its own competitive strategy that defines its competitive advantage, the products or services it will offer, the customers it wants to reach, and the like
One of the leading researchers in strategy formulation is Michael Porter of Harvard’s Graduate School of Business. He proposed that managers must choose a competitive strategy that will give it a distinct advantage by capitalizing on the strengths of the organization and the industry it is in. His three competitive strategies are cost leadership, differentiation, and focus.
The final type of strategy managers use is the functional strategy , a strategy used in an organization’s various functional departments to support the competitive strategy. For instance, when Starbucks found itself facing increased competition from the likes of McDonald’s and Dunkin’ Donuts, it put additional emphasis on its marketing, product research and development, and customer service strategies.
In today’s intensely competitive and chaotic marketplace, organizations are looking for whatever “weapons” they can use to achieve their goals. Some of these weapons include customer service, employee skills and loyalty, innovation, and quality. All of these “weapons” have been covered—or will be covered in future chapters—except for quality, which we will look at now. Many organizations employ quality practices to build competitive advantage and attract and hold a loyal customer base. If implemented properly, quality is a way for an organization to create a sustainable competitive advantage. If a business is able to continuously improve the quality and reliability of its products, it may have a competitive advantage that can’t be taken away. Incremental improvement is something that becomes an integrated part of an organization’s operations and can develop into a considerable advantage. To promote quality, managers in diverse industries—such as health care, education, and financial services—are discovering the benefits of benchmarking , which is the search for the best practices among competitors and noncompetitors that lead to their superior performance. Benchmarking helps managers improve quality by analyzing and then copying the methods of leaders in various fields. Once managers have the organization’s strategies in place, it’s time to set goals and develop plans to pursue those strategies.
Planning involves two important aspects: goals and plans. Goals (objectives) are desired outcomes or targets. They guide managers’ decisions and form the criteria against which work results are measured. Plans are documents that outline how goals are going to be met. They usually include resource allocations, budgets, schedules, and other necessary actions to accomplish the goals
Planning involves two important aspects: goals, which are objectives, and plans, which are desired outcomes or targets. Plans guide managers’ decisions and form the criteria against which work results are measured. They usually include resource allocations, budgets, schedules, and other necessary actions to accomplish multiple goals. Most company’s goals can be classified as either strategic or financial. Financial goals are related to the financial performance of the organization while strategic goals are related to all other areas of an organization’s performance. Stated goals are official statements of an organization’s goals, which it wants its stakeholders to believe. But if you want to know an organization’s real goals —those goals an organization actually pursues—observe what organizational members are doing. Actions define priorities.
Goals provide the direction for all management decisions and actions, and form the criterion against which actual accomplishments are measured. Everything members of the organization do should be oriented toward achieving goals, which can be set either through a process of traditional goal setting or by using management by objectives. In traditional goal setting , goals set by top managers flow down through the organization and become subgoals for each organizational area, as seen in Exhibit 5-5, and are passed down to each succeeding organizational level. Then, at some later time, performance is evaluated to determine whether the assigned goals have been achieved. A problem with traditional goal setting is that when top managers define the organization’s goals in broad terms—such as achieving “sufficient” profits—these ambiguous goals have to be stated more specifically as they flow down through the organization. Managers at each level define the goals and apply their own interpretations and biases as they make them more specific. When the hierarchy of organizational goals is clearly defined, it forms an integrated network of goals, or a means-ends chain . Higher-level goals (or ends) are linked to lower-level goals, which serve as the means for their accomplishment.
Instead of using traditional goal setting, many organizations use management by objectives (MBO) , a process of setting mutually agreed-upon goals and using those goals to evaluate employee performance. A manager using this approach would sit down with each member of his or her team to set goals and periodically review whether progress is being made toward achieving those goals. MBO programs have four elements: Goal specificity Participative decision making An explicit time period, and Performance feedback. MBO uses goals to both make sure employees are doing what they’re supposed to be doing and to motivate them. Studies show that actual MBO programs can increase employee performance and organizational productivity, and that goal setting can effectively motivate employees. No matter which approach is used, goals have to be written and clearly indicate what the desired outcomes are, as seen here.
Managers should follow six steps when setting goals: Review the organization’s mission and the employees’ key job tasks. Goals should reflect the mission, and managers need to clearly define what they want employees to accomplish as they do their tasks. Evaluate available resources . Goals should be challenging but realistic with regards to available resources. Determine the goals individually or with input from others. The goals reflect desired outcomes and should be congruent with the organizational mission and goals in other organizational areas. These goals should be measurable, specific, and include a time frame for accomplishment.
4. Make sure goals are well-written and then communicate them to all who need to know. 5. Build in feedback mechanisms to assess goal progress. If goals aren’t being met, change them as needed. 6. Link rewards to goal attainment. Once the goals have been established, written down, and communicated, managers are ready to develop plans for pursuing them.
Managers need plans to help them clarify and specify how goals will be met. As we see here in Exhibit 5-7, strategic plans are usually long-term, directional, and single-use, while tactical plans are short-term, specific, and standing. Now let’s look at each type of plan and what it means: Breadth involves strategic plans , which are those that apply to an entire organization and encompass the organization’s overall goals, versus tactical plans (also referred to as operational plans), which specify the details of how the overall goals are to be achieved. Time frame refers to the number of months or years used to define short-term and long-term plans. Specificity refers to whether a plan is specific or more general. Due to current environmental uncertainty, managers must be flexible in responding to unexpected changes, so they’re more likely to use directional plans that set general guidelines. Managers who engages in planning must weigh the flexibility of directional plans against the clarity that specific plans offer. Frequency of use describes whether plans are ongoing or used only once. Standing plans are ongoing plans that provide guidance for activities performed repeatedly, whereas single-use plans are one-time plans specifically designed to meet the needs of a unique situation.
Strategic plans are those that apply to an entire organization and encompass the organization’s overall goals. Tactical plans (sometimes referred to as operational plans) specify the details of how the overall goals are to be achieved
Long-term plans are now defined as plans with a time frame beyond three years. Short-term plans cover one year or less
Intuitively, it would seem that specific plans would be preferable to directional, or loosely guided, plans. Specific plans are plans that are clearly defined and leave no room for interpretation. However, when uncertainty is high and managers must be flexible in order to respond to unexpected changes, they’d likely use directional plans, flexible plans that set general guidelines
Some plans that managers develop are ongoing, while others are used only once. A single-use plan is a one-time plan specifically designed to meet the needs of a unique situation. In contrast, standing plans are ongoing plans that provide guidance for activities performed repeatedly.
The process of plan development is influenced by three contingency factors and by the kind of planning approach followed. Three contingency factors that affect the choice of plans are: Organizational level Degree of environmental uncertainty, and Length of future commitments. Exhibit 5-8, shown here, illustrates the relationship between a manager’s level in the organization and the type of planning that manger does. For the most part, lower-level managers do operational (or tactical) planning while upper-level managers do strategic planning. The second contingency factor is environmental uncertainty . When uncertainty is high, plans should be specific but flexible. Managers must be prepared to change or amend plans as they’re implemented. The third contingency factor relates to the time frame of plans. The commitment concept says that plans should extend far enough to meet commitments made when the plans were developed. But planning for too long or too short a time period is inefficient and ineffective. For example, when organizations increase their computing capabilities, many have found their “power-hungry” computer” generate so much heat that the electric bills have skyrocketed because of the increased need for air conditioning. This illustrates the commitment concept: When organizations expand their computing technology, they’re “committed” to whatever future expenses are generated by that plan.
Organization plans can best be understood by looking at who does the planning. In the traditional approach, planning is done entirely by top-level managers who often are assisted by a formal planning department , which is a group of planning specialists whose sole responsibility is to help write the various organizational plans. Then the plans flow down through other organizational levels and are tailored to the particular needs of each level. Although this approach makes managerial planning thorough, systematic, and coordinated, too often the focus is on developing “the plan” which is later not implemented. Another planning approach involves the input of organizational members at the various levels and in the various work units who participate in developing the plans to meet their specific needs.
Of the many contemporary planning issues that managers face, let’s turn our attention to two: Planning effectively in dynamic environments, and How managers can use environmental scanning, especially competitive intelligence. These days, the external environment is continually changing. In such an uncertain environment, managers should develop plans that are specific but flexible. Managers need to recognize that planning is an ongoing process and that plans serve as a road map—although the destination may change due to dynamic market conditions. The flexibility to change direction is particularly important as plans are implemented. Even when the environment is highly uncertain, it’s important to continue formal planning to improve organizational performance. Persistence and practice in planning contributes to significant performance improvement. In dynamic environments, making a flatter hierarchy means lower organizational levels can set goals and develop plans because organizations have little time for goals and plans to flow down from the top. Managers should teach their employees how to set goals and to plan, and then trust them to do it.
A manager’s analysis of the external environment may be improved by environmental scanning, which involves screening large amounts of information to detect emerging trends. One of the fastest-growing forms of environmental scanning is competitive intelligence, which is accurate information about competitors that allows managers to anticipate competitors’ actions rather than merely react to them
Step 2 & 3: What is a SWOT Analysis?SWOT Analysis – The combined external and internal analyses• Strengths – Any activities the organization does well or any unique resources that it has• Weaknesses – Activities the organization doesn’t do well or resources it needs but doesn’t possess
SWOT Analysis (cont.)• Opportunities – Positive trends in the external environment• Threats – Negative trends in the external environment
Competitive Strategy• Competitive Strategy – An organizational strategy for how an organization will compete in its business(es)• Competitive Advantage – What sets an organization apart; its distinctive edge• Strategic Business units (SBUs) – An organization’s single businesses that are independent and formulate their own competitive strategy
Types of Competitive Strategies• Cost Leadership Strategy – Competing on the basis of having the lowest costs in the industry• Differentiation Strategy – Competing on the basis of having unique products that are widely valued by customers• Focus Strategy – Competing in a narrow segment or niche with either a cost focus or a differentiation focus
TYPES OF PLANS• The most popular ways to describe plans are in terms of their – Breadth (strategic versus tactical) – Time frame (long term versus short term) – Specificity (directional versus specific) – Frequency of use (single use versus standing)
Breadth• Strategic Plans – Plans that apply to the entire organization and encompass the organization’s overall goals• Tactical Plans – Plans that specify the details of how the overall goals are to be achieved
Time Frame• Long-term Plans – Plans with a time frame beyond three years• Short-term Plans – Plans with a time frame of one year or less
Specificity• Specific Plans – Plans that are clearly defined and leave no room for interpretation• Directional Plans – Plans that are flexible and set general guidelines
Frequency of Use• Single-use Plan – A one-time plan specifically designed to meet the needs of a unique situation• Standing Plans – Plans that are ongoing and provide guidance for activities performed repeatedly
4.4 Contemporary Issues in PlanningHow Can Managers Plan Effectively in Dynamic Environments? Managers should develop plans that are specific, but flexible. Managers need to stay alert to environmental changes that may impact implementation and respond. A flatter organizational hierarchy helps to effectively plan in dynamic environments
How Can Managers Use Environmental Scanning?• Environmental scanning—screening large amounts of information to detect emerging trends and create a set of scenarios. Competitive intelligence - It seeks basic information about competitors that gives managers accurate information about competitors