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CHAPTER 8

The Manager as a Planner and Strategist

LEARNING OBJECTIVES

• To describe the three steps of the planning process.• To explain the relationship between planning and strategy.• To explain the role of planning in forecasting the future and

in activating organizational resources to meet futureemergencies.

• To outline the main steps in SWOT analysis.• To differentiate among corporate-business-,and functional

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level strategies.• To describe the important role played by strategy

implementation in determining managers’ ability to achievean organization’s mission and goals.

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The Planning Process

Definitions Planning

Process of identifyingidentifying andand selectingselecting appropriate goals and courses of action for an organization. The organizationalorganizational planplan that results from the planning process details the goals and

specifies how managers will attain those goals. Strategy

The clustercluster ofof decisionsdecisions andand actionsactions that managers take to help an organization reach its goals. Mission

A broad declaration of an organization’s purpose that identifies the organization’s products andcustomers and distinguishes the organization from its competitors.

• Planning is a three-step process (Fig.8-1) :• i. Determining the Organization’s Mission and Goals

D fi i th i ti ’ idi d it l

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Defining the organization’s overriding purpose and its goals.• ii. Formulating (creating) strategy

Managers analyze current situation and develop the strategies needed to achieve the mission.• iii.Implementing (executing) strategy

Managers must decide how to allocate resources between groups to ensure the strategy isachieved.

• Therefore, planning is both a goal-making and a strategy-making process.

Fig. 8.1 Three Steps in Planning

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The Nature of the Planning Process

To perform the planning task, managers:1. Establish where an organization is at the present time1. Establish where an organization is at the present time2. Determine its desired future state3. Decide how to move it forward to reach that future state Why planning is important?1. Necessary to give the organization a sense of direction

and purpose2 Useful way of getting managers to participate in decision

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2. Useful way of getting managers to participate in decisionmaking

3. Helps coordinate managers of the different functions anddivisions of an organization

4. Can be used as a device for controlling managers

Why Planning is Important

• Henri Fayol, the originator of Fayol’s principles ofmanagement we discussed in Chapter 2, said that effectiveg p ,plans should have the following four qualities:

• Unity - at any one time only one central, guiding plan isput into operation

• Continuity – planning is an ongoing process in whichmanagers build and refine previous plans and continuallymodify plans at all levelsA d t k tt t t

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• Accuracy – managers need to make every attempt tocollect and utilize all available information at their disposal

• Flexibility – plans can be altered and changed if thesituation changes

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Levels of Planning

• In large organizations planning usuallytakes place at three levels of management:takes place at three levels of management:corporate, business or division, anddepartment or functional. Let’s see howGeneral Electric (GE) operates in Figure 8.2

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A division is a business unit that competes in a distinct (separate) industry.

Fig. 8.2 Levels of Planning at General Electric

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• Corporate-Level Plan Top management’s decisions pertaining to the organization’s

Levels of Planning

Top management s decisions pertaining to the organization smission, overall strategy, and structure.

Provides a framework for all other planning. The corporate level plan provides the framework within which

divisional managers create their business-level plans.• Corporate-Level Strategy A plan that indicates in which industries and national markets an

organization intends to compete

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organization intends to compete.

• Division – business unit that has its own set of managersand departments and competes in a distinct industry(Fi 8 3)

Levels of Planning

(Fig.8-3)• Divisional managers – Managers who control the

various divisions of an organization• Business-Level (or Division-Level) Plan

Divisional managers’ decisions pertaining to divisions long-term goals overallstrategy, and structure. Identifies how the business will meet corporate goals.

The business-level plan provides the framework within which functional managers

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The business-level plan provides the framework within which functional managerspropose to pursue to help the division to attain its business-level goals.

• Business-Level (or Division-Level) Strategy A plan that indicates how a division intends to compete against its rivals in an

industry Shows how the business will compete in market.

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• Functional-Level (or Department-Level) Plan Functional managers’ decisions pertaining to the goals that they

Levels of Planning

Functional managers decisions pertaining to the goals that theypropose to pursue to help the division attain its business-levelgoals.

A function is a unit or department in which people have the sameskills or use the same resources to perform their jobs, i.e.accounting, marketing, etc.

F ti l ( D t t L l) St t

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• Functional (or Department-Level) Strategy A plan that indicates how a function intends to achieve its goals.

In large organizations planning takes place at all levels ofmanagement. The figure shows the link between the threesteps in the planning process and the three levels ofmanagement.

Fig. 8.3 Levels & Types of Planning

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The Planning Process

Time Horizons of Plans• Time Horizon• Time Horizon

The intended duration of a plan. Long-term plans are usually 5 years or more. Intermediate-term plans are 1 to 5 years. Short-term plans are less than 1 year.

Corporate and business-level goals and strategies require long- andintermediate-term plans.

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p Functional plans focus on short-to intermediate-term plans Most organizations have a rolling planning cycle to amend plans

constantly.

The Planning Process

Types of Plans• Standing Plans Use in programmed decision situations (i.e. ethical behavior) Policies are general guides to action. Rules are formal written specific guides to action. Standard operating procedures (SOP) specify an exact series of

actions to follow.• Single-Use Plans Developed for a one-time, nonprogrammed issue.

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p , p g Programs: integrated plans achieving specific goals. (i.e. to build a

tourist village) Project: specific action plans to complete programs. (i.e. to build a

shopping complex within the tourist village)

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Scenario Planning (Contingency Planning)The generation of multiple forecasts of future conditions followed by

The Planning Process

The generation of multiple forecasts of future conditions followed byan analysis of how to effectively respond to those conditions.

Planning seeks predict the future, but the future is unknowable. By generating multiple possible “futures,” a firm can see how its

plans might work in each and prepare for the possibleoutcomes.

Scenario planning is a learning tool to improve strategic planning

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results. It is one of the most widely used planning techniques is scenario

planning, i.e. oil price changes affect production.

Determining the Organization’s Mission & Goals

• To determine an organization’s mission, managers must first definethe business. Answers to these questions help managers definetheir business and determine the organization’s missions and goalstheir business and determine the organization s missions and goals.

• Defining the Business Who are our customers? What customer needs are being satisfied? How are we satisfying customer needs

• Establishing Major Goals

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• Establishing Major Goals Provides the organization with a sense of direction Stretches the organization to higher levels of performance. Goals must be challenging but realistic with a definite period in which they are

to be achieved.

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Fig. 8.4 Four Mission Statements

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Formulating Strategy

• Strategic Formulation Managers work to develop the set of strategies (corporate, divisional, and functional)

that will allow an organization to accomplish its mission and achieve its goalsthat will allow an organization to accomplish its mission and achieve its goals. Managers analyze the current situation to develop strategies for achieving the mission.

• SWOT Analysis (Fig.8-5) A planning exercise in which managers identify organizational strengths and

weaknesses. Strengths (e.g., superior marketing skills) Weaknesses (e.g., outdated production facilities)

and external opportunities and threats. Opportunities (e g entry into new related markets)

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Opportunities (e.g., entry into new related markets). Threats (increased competition)

• Questions for SWOT analysis are also shown on Table 8.1

• The Five Forces model, which we will examine later helps to identifyopportunities and threats in the external environment.

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Based on SWOT analysis, managers at the different levelsof the organization select the appropriate corporate,business, and functional-level strategies to best position theorganization to achieve its mission and goals.

Fig. 8.5 Planning and Strategy Formulation

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The Five Forces Model by Michael Porter, also known as Porter’s Five Forces Model. It is a well-known model

that helps managers isolate particular forces in the external environment that are potential threats because they affect how much profit organizations competing within the same

industry can expect to make.

The Threat ofS b tit t P d tSubstitute Products

The Power of Suppliers

The Level of Rivalry Among Organizationsin an Industry

The Power of

Customers

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The Potential for Entry into an Industry

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The Five Forces explained:

Competitive Forces

Level of Rivalry Increased competition results in lower profits.

Potential for Entry Easy entry leads to lower prices and profits.

Power of Suppliers If there are only a few suppliers of important items, supply costs rise.

Power of Customers If there are only a few large buyers they can

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Power of Customers If there are only a few large buyers, they can bargain down prices.

Substitutes More available substitutes tend to drive down prices and profits.

Formulating Corporate-Level Strategies

The principal corporate-level strategies that managers use to help acompany grow are four:

A. Concentration on a Single BusinessA. Concentration on a Single Business Can become a strong competitor, but can be risky. Organization uses its functional skills to develop new kinds of products or expand its

locations Appropriate when managers see the need to reduce the size of their organizations to

increase performanceB. Vertical Integration (Fig.8-6)

A strategy that allows an organization to create value by producing its own inputsor distributing its own products.

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Backward vertical integration occurs when a firm seeks to reduce its inputcosts by producing its own inputs.

Forward vertical integration occurs when a firm distributes its outputs orproducts to lower distribution costs and ensure the quality service tocustomers.

A fully integrated firm faces the risk of bearing the full costs of an industry-wideslowdown.

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Fig. 8.6 Stages in a Vertical Value Chain

The figure shows the four main stages in a typical raw-materials to consumer value chain. Value is

added at each stage.

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Formulating Corporate-Level Strategies

C. Diversification It is the strategy of expanding operations into a new business or industry andgy p g p y

producing new goods or services, (i.e. PepsiCo Frito Lays, Philip Morris Miller Beer). There are two types:

i. Related diversification into similar market areas to build upon existingcompetencies. (i.e. Kleenex tissues moving into toilet paper) Synergy: two divisions working together perform better than the sum of

their individual performances.ii. Unrelated diversification is entry into industries unrelated to current business.

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Attempts to build a portfolio of unrelated firms to reduce risk of singleindustry; difficulty to manage.

Research evidence suggests that many diversification efforts havereduced value rather than create it.

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Formulating Corporate-Level Strategies

D. International Expansion tries to answer the question: To what extent do we customize products and marketing for different national conditions?

• Opportunities• Opportunities opening new markets, reaching more customers, and gaining access to new sources of

raw materials and to low-cost suppliers• Threats

encountering new competitors, and responding to new political, economic, and culturalconditions

i. Global strategy Selling the same standardized product and using the same basic marketing approach in

all countries. (no customization) Standardization provides for lower production cost

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Standardization provides for lower production cost. Ignores national differences that local competitors can address to their advantage.

ii. Multidomestic Strategy Customizing products and marketing strategies to specific national conditions.

(customization) Helps gain local market share. Raises production costs

Choosing a way to expand internationally

i. Exporting making products at home and selling them abroad

ii. Importing selling at home products that are made abroad

iii. Licensing allowing a foreign organization to take charge of manufacturing and distributing a product in

its country in return for a negotiated feeiv. Franchising

selling to a foreign organization the rights to use a brand name and operating know-how inreturn for a lump-sum payment and a share of the profits

v. Strategic alliance managers pool resources with those of a foreign company

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g p g p y Organizations agree to share risk and reward

vi. Joint venture strategic alliance among companies that agree to jointly establish and share the ownership of

a new businessvii.Wholly Owned Foreign Subsidiary

managers invest in establishing production operations in a foreign country independent of anylocal direct involvement

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• The previous strategies are GrowthSt t i

Formulating Corporate-Level Strategies

Strategies.• There are also Defensive Strategies (such

as Divestiture, Turnaround, Bankruptcy,Liquidation, Harvesting) and StabilityStrategies (such as Growing Slowly, No heavy

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g ( g y yinvestment, Not taking risks).

Formulating Business-Level Strategies

A. Low-Cost Strategy Driving the organization’s total costs down below the total costs of Driving the organization s total costs down below the total costs of

rivals. Manufacturing at lower costs, reducing waste.

Lower costs than competition means that the low cost producer can sell forless and still be profitable.

B. Differentiation Di ti i hi th i ti ’ d t f th f tit

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Distinguishing the organization’s products from those of competitorson one or more important dimensions. Differentiation must be valued by the customer in order for a producer to

charge more for a product.

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5. Formulating Business-Level Strategies

C. “Stuck in the Middle” Attempting to simultaneously pursue both a low cost strategy and a

differentiation strategydifferentiation strategy. Difficult to achieve low cost with the added costs of differentiation. Tend to have lower levels of performance that do those that pursue

a low-cost or differentiation strategy.D. Focus Strategies• Focused Low-Cost Serving only one market segment and being the lowest-cost

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g y g gorganization serving that segment. i.e. Cott, a company makingsoda’s for Wal-Mart but not competing with Pepsi and Coke.

• Focused Differentiation Serving only one market segment as the most differentiated

organization serving that segment. i.e. Toyota

Porter also came up with a theory of how managers can select abusiness-level strategy, a plan to gain a competitive advantage ina market. According to Porter, managers must choose betweentwo basic ways of increasing the value of an organization’sproducts: differentiating the product to add value or lowering the

Table 8.2 Porter’s Business Level Strategies

costs of value creation. Also, they must choose between servingthe whole market or serving just one segment or part of a market.

Number of Market Segments Served

Strategy Many Few

Low-cost

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Focused low-cost

Differentiation

Focused differentiation

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Planning & Implementing Strategy

1. Allocate implementation responsibility to the appropriateindividuals or groups.

2. Draft detailed action plans for implementation.3. Establish a timetable for implementation4. Allocate appropriate resources5. Hold specific groups or individuals responsible for the

attainment of corporate, divisional, and functional goals.

Review Questions

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1. Discuss the importance of planning and provide examples where appropriate to support your answer.

2. What is SWOT analysis? Give examples where appropriate.