1. 7/23/2009 1 IM 1013 Chapter 7: Foundations of planning Planning involves defining organization’s objectives/goals, establishing an overall strategy for achieving those goals and developing a comprehensive hierarchy of plans to integrate and coordinate activities. The term planning in this chapter refers to formal planning Purposes of planning are: Gives direction to the organization Establishes coordinated effort Reduces uncertainty by anticipating change Clarifies the consequences of actions managers might take Reduces overlapping and wasteful activities Establishes objectives or standards that facilitate control

2. 7/23/2009 IM 1013 2 Chapter 7 We cannot assume organizations with formal planning processes always outperform those organizations that don’t have formal planning processes. Generally formal planning is associated with positive financial results (forecast). The quality of planning (high details) process and appropriate implementation probably contribute more to high performance than does the extent of planning. When formal planning did not help to higher performance (meeting objectives) the environment is usually the reason. Plans can be described by: A. Breath – strategic versus operational plans. Strategic plans are plans that are the organization wide, establish overall objectives and position an organization in terms of its environment. Operational plans are plans that specify details on how overall objectives are to be achieved

3. 7/23/2009 IM 1013 3 Chapter 7 B. Time frame – short term vs. long term plans. Short term plans are plans that cover less than one year. Long term plans are plans that extend beyond five years C. Specificity – specific versus long term plans. Specific plans are plans that are clearly defined and leave no room for interpretation. Directional plans are flexible plans that set out general guidelines. D. Frequency of use single use versus standing plans. A single use plan is a one time plan that’s specifically designed to meet the needs of a unique situation and is created in response to non programmed decisions that managers make. Standing plans are ongoing plans that provide guidance for activities repeatedly performed in the organization and that are created in response to programmed decisions that managers make.

4. 7/23/2009 IM 1013 4 Chapter 7 Contingency factors that affect planning are: Level in the organization. Operational planning usually dominates the planning activities of lower level managers. As managers are promoted thru the levels of the organization, their planning becomes more strategic. Degree of environmental uncertainty. The greater the environmental uncertainty the more plans should be directional and emphasis placed on the short term Length of future commitments. The commitment concept says that plans should extend far enough to see thru current commitments. Objectives / goals are defined as desired outcomes for individuals, groups or entire organizations. They are also foundation of planning

5. 7/23/2009 IM 1013 5 Chapter 7 Multiplicity (many) of objectives. Real vs. stated objectives: Organizations have both real objectives; an organization actually pursues as defined by the actions of its members; and stated objectives; official statements of what an organization says and what it wants its various publics to believe. Traditional objective setting is defined as the process of objectives being set at the top and then broken down into sub goals for each level in an organization. The top imposes its standards on everyone below. Management by objectives (MBO) is defined as a system in which specific performance objectives are jointly determined by subordinates and their superiors, where progress toward objectives is periodically reviewed and rewards are allocated on the basis of this progress

6. 7/23/2009 IM 1013 6 Chapter 7 MBO makes objectives operational by devising a process by which they cascade down through the organization. Does MBO work? A review of the body of literature on the relationship between goals and performance shows the following: More difficult goals lead to higher performance if factors such as a person’s ability and acceptance of goals are held constant Specific hard goals produce a higher level of output than do no goals or generalized goals Feedback also affects performance favorably Studies of actual MBO programs confirm that MBO effectively increases employee performance and organizational productivity

7. 7/23/2009 IM 1013 7 Chapter 8: Strategic management The environmental ‘shock’ of the 1970s and 1980s have forced managers into developing a systematic means of analyzing the environment and incorporating these findings into their organization. The use of strategic planning has become more prevalent in for-profit as well as in nonprofit organizations. There are three different and distinct levels of strategy: Corporate level – to determine what business a corporation should be in Business level – to determine how a corporation should compete in each of its businesses. In doing this it might need to create strategic business units which are defined as a single business or collection of businesses that is independent and formulates its own strategy Functional level – to determine how to support the business level strategy; involves various functional departments such as manufacturing, marketing, finance, human resources and IT

8. 7/23/2009 IM 1013 8 Chapter 8 The strategic management process an 8 steps process encompassing strategic planning, implementation and evaluation: Identifying the organization’s current mission, objectives (targets / goals) and strategies. Every organization has a mission that defines the purpose of the organization i.e. what business? Analyzing the external environment; PEST; and internal environment (see chapter 3). A successful strategy aligns well with the environment. Identifying opportunities and threats in the environment. Analyzing resources; 4M – Man (management / technical skills), Method (management system & production processes), Machine (hardware & software technology) & Material (including money). Identifying strengths and weaknesses of organization - resources. Formulating strategies for corporate, business and functional levels to achieve objectives.

9. 7/23/2009 IM 1013 9 Chapter 8 7. Implement strategies; includes effectiveness measurement 8. Evaluate (analysis of) the result to know the effectiveness of strategies and identify what corrections need to be made. CORPORATE LEVEL STRATEGIES There are two approaches to corporate level strategies: Grand strategies – all encompassing strategies A stability strategy – absence of significant change A growth strategy - seeks to increase the level of the organization’s operations; increasing revenues, employees and market share. A retrenchment strategy - seeks to reduce the size of an organization’s operations. A combination strategy - pursues two or more of the above strategies simultaneously.

10. 7/23/2009 IM 1013 10 Chapter 8 B. Corporate portfolio matrix – strategic frameworks The BCG (Boston Consulting Group) matrix is a strategy tool to guide resource allocation decisions based on market share and business unit growth based on income over a period of time. The matrix identifies four business groups. Cash cows – low growth and high market share Stars – high growth and high market share Question marks – high growth and low market share Dogs – low growth and low market share The BCG matrix assumes the existence of a cumulative learning curve which speculates that when a business increases the amount of product manufactured the per unit cost of the product will decrease. It provides a framework for understanding distinct businesses and establishes priorities for making strategic resource allocation decisions

11. 7/23/2009 IM 1013 11 Chapter 8 BUSINESS LEVEL STRATEGIES Two popular framework of business level strategies are the adaptive and competitive: Adaptive strategies were developed by Miles and Snow. They identified four strategic types: Defender - seeks stability by producing only a limited set of products directed at a narrow segment of the total potential market. Prospector – seeks innovation by finding and exploiting new product and market opportunities. Analyzer – seeks to minimize risk by following competitors’ innovations but only after they have proven successful. Reactor – inconsistent and unstable decision patterns

12. 7/23/2009 IM 1013 12 Chapter 8 Competitive strategies developed by Michael Porter suggests that managers can choose one of three generic strategies that will give the organization a competitive advantage over rivals: A cost leadership strategy – to be the lowest cost producer in its industry A differentiation strategy – to be unique in its industry A focus strategy – pursues a cost or differentiation advantage in a small industry segment Porter uses the term stuck in the middle to describe organizations that cannot compete using the above strategies. To be successful in using any of the above strategies the competitive advantage must be sustainable. Industry analysis is an important step in Porter’s framework. There are five competitive forces at work:

13. 7/23/2009 IM 1013 13 Chapter 8 Barriers to entry – how easy for new competitors to enter an industry Threats of substitutes – customer will switch their business to a competitor Bargaining power of buyers – amount of influence that buyers have in an industry Bargaining power of suppliers – power that suppliers will have over firms in the industry Existing rivalry – how intense rivalry will be among firms currently in the industry