Chapter Five

Strategic Planning and

Decision Making

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Planning

Planning conscious, systematic process of making decisions

about goals and activities that an individual, group, work unit, or organization will pursue in the future.

a purposeful effort that is directed and controlled by managers and often draws on the knowledge and experience of employees throughout the organization.

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Formal Planning Steps

Step 1 Analysis the SituationStep 2 Develop alternative Goals and PlansStep 3 Evaluate Goals and Plan Step 4 Select Goals and Plan Step 5 ImplementationStep 6 Monitor and Control

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Step 1-Situational Analysis

Analyze the Situation A process planners use, within time and resource

constraints, to gather, interpret, and summarize all information relevant to the planning issue under consideration.

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Step 2-Generate Alternative Goals and Plans

Should stress creativity and encourage managers and employees to think in broad terms about their jobs.

Goal A target or ends that management desires to

reach SMART goals

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SMART Specific-When goals are precise, employees know what

they need to do to accomplish them. Measurable-As much as possible, the goal should quantify

the desired results, so that there is no doubt whither it has been achieved.

Attainable( but challenging)-Employees need to recognize that they can attain their goals, so they won’t become discouraged. However, they also should feel challenged to work hard and be creative.

Relevant-Each goal should contribute to the organization’s overall mission and be consistent with its values, including ethical standards.

Time-bound-Effective goals specify a target date for completion.

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Examples of S.M.A.R.T. Goals?

Starbucks: “In fiscal 2006, we plan to open approximately 1,800 net new stores globally.”

Walgreen: “Second is to hire a significant number of people with disabilities in our South Carolina distribution center, scheduled to open in 2007, and achieve 20% productivity gains there.”

UPS: “65% of drivers will have access to the new technology (implemented in 2004) by the end of 2005.” and “In 2005, we will increase operating profit in each of our 3 key businesses: domestic, int’l, supply chain.”

Wrigley: “In 2005, the company will decrease the long-term rate of return assumption for the assets of its U.S. (pension) plans from 8.75 % to 8.5%.”

Halliburton: “We estimate that 74% of the backlog existing on 12/31 will be eliminated the following fiscal year.”

Martha Stewart Living Omnimedia: “In 2004 we will discontinue the Catalog for Living and its online product options, and sell remaining inventory in early fiscal 2005.”

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Step 2-Generate Alternative Goals and Plans

Plans The actions or means

managers intend to use to achieve organizational goals

Contingency plans sets of actions to be

taken when a company’s initial plans have not worked well or if events in the external environment require a sudden change

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Step 3-Evaluate Goals and Plans

Managers will evaluate the advantages, disadvantages, and potential effects of each alternative goal and plan.

Must prioritize those goals and even eliminate some of them.

Managers must consider carefully the implications of alternative plans for meeting high priority goals.

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Step 4-Select Goals and Plans

Managers will select the option that is most appropriate and feasible

The evaluation process will identify the priorities and trade-offs among the goals and plans

Scenario A narrative that describes a particular set of

future conditions.

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Step 5-Implement the Goals and Plans

Managers and employees must understand the plan, have the resources to implement it, and be motivated to do so

Successful implementation requires a plan to be linked to other systems in the organization, particularly the budget and reward systems

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Step 6-Monitor and Control Performance

Managers must continually monitor the actual performance of their work units against the unit’s goals and plans.

Manager’s also need to develop control systems to measure that performance and allow them to take corrective action when the plans are implemented improperly or when the situation changes

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Hierarchy of Goals and Plans

Exhibit 5.2

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Levels of Planning

Strategic planning A set of procedures

for making decisions about the organization’s long-term goals and strategies

Strategic goals major targets or end

results that relate to the long-term survival, value, and growth of the organization.

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Strategic Planning

Strategy A pattern of actions

and resource allocations designed to achieve the organization’s goals

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Strategic Planning

1. Where will we be active?

2. How will we get there?

3. How will we win in the marketplace?

4. How fast will we move and in what sequence will we make changes?

5. How will we obtain financial returns?

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Tactical and Operational Planning

Tactical planning A set of procedures for translating broad strategic

goals and plans into specific goals and plans that are relevant to a distinct portion of the organization, such as a functional area like marketing.

Specify how a company will use resources, budgets, and people to accomplish goals within its mission. (6 months to 2 years)

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Management by Objectives

Steps to Management by Objectives:

1. Discuss possible goals

2. Select goals that are challenging, attainable and consistent with the company’s overall goals

3. Jointly develop tactical plans that lead to the accomplishment of tactical goals and objectives

4. Meet regularly to review progress

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Tactical and Operational Planning

Operational planning The process of identifying the specific procedures

and processes required at lower levels of the organization.

Day-to-day plans for producing or delivering products and

services over a 30-day to six-month period

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Planning

All levels of planning should be aligned • To be effective, tactical, operational, and strategic goals

must be consistent, mutually supportive, and focused on achieving a common purpose and direction.

• Companies frequently use strategic maps to align strategic and operational goals.

– Strategy maps show the relationship between a firm’s practices and its long-term success. They include:

» financial goals» learning and growth goals» internal goals» customer goals

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Strategic Planning Process

Strategic management A process that involves managers from all parts of

the organization in the formulation and implementation of strategic goals and strategies.

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The Strategic Management Process

Exhibit 5.3

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Step 1-Establish a Mission, Vision, and Goals

Mission An organization’s basic

purpose and scope of operations.

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Mission Statements

Advanced Auto Parts It is the Mission of Advance Auto Parts to provide personal vehicle

owners and enthusiasts with the vehicle related products and knowledge that fulfill their wants and needs at the right price. Our friendly, knowledgeable and professional staff will help inspire, educate and problem-solve for our customers.

Aflac To combine aggressive strategic marketing with quality products and

services at competitive prices to provide the best insurance value for consumers.

Ford We are a global family with a proud heritage passionately committed

to providing personal mobility for people around the world.

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Establish a Mission, Vision, and Goals

Strategic vision the long-term direction and strategic intent of a

company provides a perspective on where the organization

is headed and what it can become

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Vision Statements

Alcoa At Alcoa, our vision is to be the best company in the

world--in the eyes of our customers, shareholders, communities and people. We expect and demand the best we have to offer by always keeping Alcoa's values top of mind.

Anheuser-Busch Be the world's beer company. Through all of our products,

services and relationships, we will add to life's enjoyment.Ford

To become the world's leading Consumer Company for automotive products and services.

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Step 2-Analyze External Opportunities and Threats

Successful strategic management depends on an accurate and thorough evaluation of the environment.

Stakeholders Groups and individuals

who affect and are affected by the achievement of the organization’s mission, goals, and strategies

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Analyze ExternalOpportunities and Threats

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Step 3-Analyze Internal Strengths and Weaknesses

Resources Inputs to a system that can enhance performance Resources fall into two broad categories:

• Tangible assets such as real estate, production facilities, raw materials, etc

• Intangible assets such as company reputation, culture, technical knowledge, patents, as well as accumulated learning and experience.

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Step 3-Analyze Internal Strengths and Weaknesses

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Step 3-Analyze Internal Strengths and Weaknesses

Effective internal analysis provides a clearer understanding of how a company can compete through its resources.

Resources are a source of competitive advantage only under the following circumstances: Create customer value-they increase the benefits

customers derive from a good or service relative to the costs they incur.

Rare-not equally available to all competitors Difficult to imitate -resources are harder to imitate if

they are complex, with many independent variables and no obvious link between behaviors and desired outcomes.

Well organized 5-35

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Step 4-Formulate Strategy

SWOT analysis A comparison of strengths, weaknesses,

opportunities, and threats that helps executives formulate strategy.

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Step 3-Analyze Internal Strengths and Weaknesses

Core capabilities the less visible, internal decision-making routines, problem-solving

processes, and organization cultures that determine how efficiently inputs can be turned into outputs.

Distinctive competence is something that a company can make, do, or perform better than its

competitors. Benchmarking

process of assessing how well one company’s basic functions and skills compare with those of another company or set of companies.

goal of benchmarking is to thoroughly understand the “best practices” of other firms and to undertake actions to achieve both better performance and lower costs

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Formulate Strategy

Corporate strategy The set of businesses, markets, or industries in

which an organization competes and the distribution of resources among those entities• Concentration

– A strategy employed for an organization that operates a single business and competes in a single industry.

• Vertical integration– The acquisition or development of new businesses that

produce parts or components of the organization’s product

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Conduct a SWOT Analysisand Formulate Strategy

• Related diversification – A strategy used to add new businesses that produce related

products or are involved in related markets and activities

• Unrelated diversification – A strategy used to add new businesses that produce unrelated

products or are involved in unrelated markets and activities

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BCG Matrix

Exhibit 5.5

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BCG Matrix

companies with a small share of a slow-growing market

companies with a small share of a slow-growing marketDogsDogsDogsDogs

3.13.1

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BCG Matrix

42Relative Market ShareRelative Market Share

Mar

ket

Gro

wth

Mar

ket

Gro

wth

Small Large

Low

High Question MarksQuestion Marks

Company A

Company B

StarsStarsCompany C

Company D

DogsDogs

Company H

Company G

Cash CowsCash Cows

Company F

Company E

Adapted from Exhibit 6.3

3.13.1

Porter’s Positioning Strategies

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Cost LeadershipCost Leadership

DifferentiationDifferentiation

Focus StrategyFocus Strategy4.24.2

The aim of positioning strategies is to minimize the effects of industry competition and build a sustainable competitive advantage

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Business strategy

Business strategy – defines the major actions by which an organization builds and strengthens its competitive position in the marketplace.

• Low-cost strategy is a strategy an organization uses to build competitive advantage by being efficient and offering a standard, no-frills product.

• Differentiation strategy is a strategy an organization uses to build competitive advantage by being unique in its industry or market segment along one or more dimensions.

• Each functional area of the organization implements functional strategies to support the business strategy.5-44

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Firm-Level Strategies

Market commonality the degree to which two companies have

overlapping products, services, or customers in multiple markets. The more markets in which there is product, service, or customer overlap, the more intense the direct competition between the two companies.

Resource similarity the extent to which a competitor has similar

amounts and kinds of resources, that is, similar assets, capabilities, processes, information, and knowledge used to create and sustain an advantage over competitors. 45

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Strategic Moves of Direct Competition

Attack

A competitive move designed to reduce a rival’s market share or profits.

Response

A competitive countermove, prompted by a rival’s attack, to defend or improve a company’s market share or profit.

5.25.2

Direct Competition

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Resource SimilarityResource Similarity

Low High

High

Low

Mar

ket

Co

mm

on

alit

yM

arke

t C

om

mo

nal

ity

III

III IV

McDonald’sMcDonald’s

McDonald’sMcDonald’s

BurgerKing

Wendy’s

Luby’s Cafeteria Subway

5.15.1

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Step 5-Strategy Implementation

Managers must ensure that new strategies are implemented effectively and efficiently in addition to formulation of the appropriate strategies. Steps in Strategy Implementation

• Define strategic risks• Assess organization capabilities• Develop an implementation agenda• Create an implementation plan

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Strategic Control

Strategic control system A system designed to support managers in

evaluating the organization’s progress regarding its strategy and, when discrepancies exist, taking corrective action.

Strategic control systems typically include budgets• strategic - creates and maintains long-term

effectiveness (a flexible budget)• operational - tightly monitored to achieve efficiency

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Managerial decision making

Lack of structure is the usual state of affairs in managerial decision-making. Programmed decisions are decisions

encountered and made before having objectively correct answers, and solvable by using simple rules policies, or numerical computations.

Non-programmed decisions are new, novel, complex decisions having no proven answers.

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Managerial Decision Making

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Uncertainty and Risk

Certainty exists when decision-makers have accurate and comprehensive information.

Uncertainty means the manager has insufficient information to know the consequences of different actions.

Risk exists when the probability of an action being successful is less than 100 percent.

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Stages of Decision MakingExhibit 5.6

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Formal Decision Making

1. Identifying and diagnosing the problem • The first stage in the decision-making process is to recognize

that a problem exists and must be solved.• Questions to ask and answer in this stage include:

a. Is there a difference between what is actually happening and what should be happening?

b. How can you describe the deviation, as specifically as possible?

c. What is/are the cause(s) of the deviation?d. What specific goals should be met?e. Which of these goals are absolutely critical

to the success of the decisions?5-54

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Generating alternative solutions

The second stage, problem diagnosis is linked to the development of alternative courses of action aimed at solving the problem. Ready-made solutions are ideas that have been

seen or tried before, of follow the advice of others who have faced similar problems.

Custom-made solutions must be designed for specific problems and are the combination of ideas into new, creative solutions.

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Evaluating alternatives

The third stage involves determining the value or adequacy of the alternatives that were generated. Which solution will be the best? Key questions to ask:

• a. Is our information about alternatives complete and current? If not, can we get more and better information?

• b. Does the alternative meet out primary objectives?• c. What problems could we have if we implement the

alternative?– Ready-made solutions are ideas that have been seen or tried

before.– Custom-made solutions are new, creative solutions designed

specifically for the problem. 5-56

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Making the choice

To maximize is to make the best possible decision, the greatest positive consequences and the fewest negative consequences.

To satisfice is to choose the first option that is minimally acceptable or adequate: the choice appears to meet a targeted goal or criterion.

Optimizing means that you achieve the best possible balance among several goals.

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Implementing the decision

The decision-making process does not end once a choice is made.

Decision-makers must understand the choice and why it was made.

They must be committed to its successful implementation.

They must plan implementation carefully.• Determine how things will look when the decision is fully

operational.• Chronologically order the steps necessary to achieve a fully

operational decision.• List the resources and activities required implementing each step.• Estimate the time needed for each step.• Assign responsibility for each step to specific individuals. 5-58

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Implementing the decision

Decision-makers should assume that things will not go smoothly during implementation. Useful question to ask are: What problems could this action cause? What can we do to prevent the problems? What unintended benefits or opportunities could

arise? How can we make sure they happen? How can we be ready to act when the

opportunities come?5-59

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Evaluating the decision

The final stage in the decision-making process is evaluating the decision.

Collect information on how well the decision is working.

Decision evaluation is useful whether the feedback is positive or negative.

If the decision appears inappropriate, it’s back to the drawing board.

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Human nature erects barriers to good decisions

Psychological biases • Illusion of control is a belief that one can influence

events, even when one has no control over what will happen.

• Framing effects refer to how problems or decision alternatives are phrased or presented, and how these subjective influences can override objective facts.

• Discounting the future is a bias weighing short-term costs and benefits more heavily than longer-term costs and benefits.

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Human nature erects barriers to good decisions

Time pressures • Instead of relying on long-range planning and futuristic

forecasts, focus on real-time information.• Involve people more effectively and efficiently.

Social realities • Interpersonal factors decrease decision-making

effectiveness.• Many decisions are the result of intensive social

interactions, bargaining, and politicking

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Groups make many decisions

Groups can help More information is available when several people

are making the decision. There are a greater number of perspectives on the

issues, or different approaches to solving the problem.

An opportunity for intellectual stimulation is achieved.

People are more likely to understand why the decision was made.

Groups lead to a higher level of commitment to the decision.

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Groups can hurt Sometimes one group member dominates the

discussion. Satisficing is more likely with groups. Pressure to avoid disagreement can lead to a

phenomenon called groupthink. Groupthink occurs when people choose not to

disagree or raise objections because they don’t want to break up a positive team spirit.

Goal displacement often occurs in groups.• Goal displacement is a condition that occurs when a

decision-making group loses sight of its original goal and a new, possibly less important goal emerges.

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Groups must be well led Appropriate leadership style.

• The leader of a decision-making body must attempt to minimize process-related problems.

• The leader should avoid dominating the discussion.• Don’t lose sight of the problem.• Make a decision!

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Constructive Use of Disagreement and Conflict

The most constructive type of conflict is cognitive conflict, or differences in perspectives or judgments about issues. Affective conflict is emotional and directed at other

people. A devil’s advocate has the job of criticizing ideas. The dialectic goes a step beyond devil’s advocacy by

requiring a structured debate between two conflicting courses of action.

Enhancement of Creativity Brainstorming-group members generate as many

ideas as they can. 5-66

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Assignment

Get in your groupsDo a SWOT analysis on Texas Tech University

What are its strengths? What are its weaknesses? What are the opportunities? What are the threats?

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Video: Free for All

How does “free” work as a business model?How does Google leverage its ownership of

YouTube?