Strategic Planning Management Control Systems Chapter 8 August 2014Iwan Pudjanegara SE., MM.1

Natutre of Strategic Planning  A Strategic Plan: a formal statement of specific plans about how to get there.  The Strategic Plan: the documents that describes how the strategic decision is to be implemented.  Strategic Planning = Long-range planning and programming. August 2014Iwan Pudjanegara SE., MM.2

Natutre of Strategic Planning  Strategic Planning: the process of preparing and revising this statement.  Strategic Planning: the process of deciding on the programs that the organization will undertake and on the approximate amount of resources that will be allocated to each programs over the next several years. August 2014Iwan Pudjanegara SE., MM.3

Strategic Planning and Strategy Formulation Strategy Formulation The process of deciding on new strategies. Management creates the main strategies for achieving goals. An activity in which creative and innovative thinking is strongly encouraged. Strategic Planning The process of deciding how to implement the strategies. Take the goals and strategies as given and develops programs that will carry out the strategies and achieve the goals efficiently and effectively. August 2014Iwan Pudjanegara SE., MM.4

Strategic Planning and Strategy Formulation Strategy Formulation Usually includes a preliminary consideration of the programs that will be adopted as a means of achieving the goals. unsystematic Strategic Planning Tend to become institutionalized. May indicate the desirability of changing goals or strategies. Systematic August 2014Iwan Pudjanegara SE., MM.5

Benefits and Limitations of Strategic Planning  Benefits: 1)A framework for developing the annual budget. 2)A management development tool. 3)A mechanism to force managers to think long-term. 4)A means of aligning managers with the long-term strategies of the company. August 2014Iwan Pudjanegara SE., MM.6

Budgeting EXHIBIT 8.1 A Company without a Strategic Planning Process Strategic Option A Strategic Option B Strategic Option C Strategic Option D August 2014Iwan Pudjanegara SE., MM.7

Strategic Planning EXHIBIT 8.2 A Company with a Strategic Planning Process Strategic Option A Strategic Option B Strategic Option C Strategic Option D Strategic Option A Strategic Option C Budgeting August 2014Iwan Pudjanegara SE., MM.8

Benefits and Limitations of Strategic Planning  Limitations: 1)Planning can end up becoming a “formfilling”, bureaucratic exercise, devoid of strategic thinking. 2)The organization may create a large strategic planning department and the delegate the preparation of the strategic plan to that staff department 3)Strategic planning is time consuming and expensive. August 2014Iwan Pudjanegara SE., MM.9

Characteristics of Strategic Plan 1.Top management is convinced that strategic planning is important. 2.The organization is relatively large and complex. 3.Considerable uncertainty about the future exists, but the organization has the flexibility to adjust to changed circumstances. August 2014Iwan Pudjanegara SE., MM.10

Capital Investment Analysis  Most proposals require significant new capital.  Techniques for analyzing capital investment proposals attempt to find either: a)The net present value (NPV) of the project = the excess of the present value (PV) of the estimated cash inflows over the amount of investment required. b)The internal rate of return (IRR) implicit in the relationship between inflows and outflows. August 2014Iwan Pudjanegara SE., MM.11

Capital Investment Analysis  Four reasons for not using PV techniques in analyzing all proposals: 1)The proposal may be so obviously attractive that a calculation of its NPV is unnecessary. 2)The estimates involved in the proposal are so uncertain that making PV calculations is believed to be not worth the effort  one can’t draw a reliable conclusion from unreliable data. August 2014Iwan Pudjanegara SE., MM.12

Capital Investment Analysis 3)The rationale for the proposal is something other than increased profitability. The PV approach assumes that the objective function is to increase profits, but many proposed investments win approval because they improve employee morale, the company’s image, or safety. 4)There is no feasible alternative to adoption. Ex.: environmental laws may require investment in new program. August 2014Iwan Pudjanegara SE., MM.13

Analyzing Ongoing Programs  Value Chain Analysis The Value Chain for any firm: the linked set of value creating activities of which it is a part, from acquiring the basic raw materials for component suppliers to making the ultimate end-use product and delivering it to the final consumers. August 2014Iwan Pudjanegara SE., MM.14

Analyzing Ongoing Programs The Value Chain Concept:  Linkages with suppliers  Linkages with customers  Process linkages within the value chain of the firm. The objective: to move materials from vendors, through production, and to the customer at the lowest cost, in the shortest time, and of acceptable quality. August 2014Iwan Pudjanegara SE., MM.15

Suppliers’ supplier EXHIBIT 8.3 Profit Improvement Opportunities through Linkages with Suppliers SuppliersFirm August 2014Iwan Pudjanegara SE., MM.16

Firm EXHIBIT 8.4 Profit Improvement Opportunities through Linkages with Customers Customers Customers’ Customers August 2014Iwan Pudjanegara SE., MM.17

Analyzing Ongoing Programs  Activity-Based Costing (ABC)  Direct Labor costs may be combined with other costs (conversion cost).  Conversion Cost: the labor and factory overhead cost of converting raw materials and parts into finished products.  ABC System is the new Cost System which is use multiple allocation bases such as cost center and cost driver and assign R&D, General & Administrative, and Marketing Cost to products. August 2014Iwan Pudjanegara SE., MM.18

Analyzing Ongoing Programs  Use of ABC Information  It may show that complex products with many separate parts have higher design and production costs than simpler products.  Products with low volume have higher unit costs than high-volume products.  Products with many setups or many engineering change orders have higher unit costs than other products.  Products with a short life cycle have higher unit costs than other products. August 2014Iwan Pudjanegara SE., MM.19

Strategic Planning Process 1.Reviewing and updating the strategic plan from last year. 2.Deciding on assumptions and guidelines 3.First iteration of the new strategic plan 4.Analysis 5.Second iteration of the new strategic plan 6.Final review and approval. August 2014Iwan Pudjanegara SE., MM.20