© Pearson Education Limited 2015 Chapter Foundations of Planning © Pearson Education Limited 2015

© Pearson Education Limited 2015 Learning Outcomes 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. Discuss contemporary issues in planning. 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. Discuss contemporary issues in planning. © Pearson Education Limited 2015

© Pearson Education Limited 2015 5.1 Discuss the nature and purposes of planning. © Pearson Education Limited 2015

© Pearson Education Limited 2015 What is Planning? Planning: The primary management function. 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. © Pearson Education Limited 2015

© Pearson Education Limited 2015 Reasons for Planning Managers should plan for at least four reasons, as seen here in Exhibit 5-1. Planning establishes coordinated 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 reduces uncertainty. It 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. © Pearson Education Limited 2015

Criticisms of Formal Planning May create rigidity. Can’t replace intuition and creativity. Focuses attention on today’s success, not tomorrow’s survival. Reinforces success, which may lead to failure. 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. Managers need to remain flexible and not be tied to a course of action simply because it’s the plan 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. © Pearson Education Limited 2015

Formal Planning and Organizational Performance Does it pay to plan? Higher profits Higher return on assets Improved quality of planning Appropriate implementation Does it pay to plan? In a nutshell, yes. First, the data generally support the position that organizations should have formal plans and that these plans generally translate into higher profits, higher return on assets, and other positive financial results. Second, the quality of the planning process and appropriate implementation of the plan probably contribute more to high performance than the extent of planning does. Finally, in organizations in which formal planning did not lead to higher performance, the constraints of the environment—such as governmental regulations and unforeseen economic challenges—reduced the impact of planning on the organization’s performance. © Pearson Education Limited 2015

© Pearson Education Limited 2015 5.2 Explain what managers do in the strategic management process. © Pearson Education Limited 2015

© Pearson Education Limited 2015 Strategic Management What managers do to develop an organization’s strategies. In the space of a week, here are a few headline makers: Swedish furniture giant IKEA Group says it’s planning to set up 25 stores in India in coming years, a move made possible by a change in Indian government policy that says some retailers can now own 100 percent of their Indian units. Airbus, a unit of European Aeronautics & Space Co. plans to build a $600 million factory in Alabama—its first in the United States. In a fierce battle over tablet computers, Apple announced that it’s building a miniature iPad to rival Amazon’s Kindle Fire, Google’s Nexus 7, and Barnes & Noble’s Nook Color. The race to build book-size tablets is driven by consumer desire for greater portability. Strategic management is very much a part of what managers do. © Pearson Education Limited 2015

The Importance of Strategic Management It has a positive impact on organizational performance. It prepares managers to cope with changing situations. It guides managers to examine relevant factors in planning future action. 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. © Pearson Education Limited 2015

Steps in the Strategic Management Process 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. © Pearson Education Limited 2015

Step 1: Mission, Goals & Strategies 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 Avon is “To be the company that best understands and satisfies the product, service, and self-fulfillment needs of women on a global level.” 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. © Pearson Education Limited 2015

External and Internal Analyses Step 2: External Analysis Competition Components of environment Threats and opportunities Step 3: Internal Analysis Resources Capabilities Core competencies Organizational strengths and weaknesses In STEP 2, managers conduct an external analysis so they can: Know what the competition is doing, how pending legislation might affect the organization, and how stable the local labor supply is in locations where it operates. Examine all components of the environment—that is, economic, demographic, political/legal, sociocultural, technological, and global—to see the trends and changes. Pinpoint opportunities that the organization can exploit and threats that it must counteract. In STEP 3, managers conduct an internal analysis, which provides critical information about an organization’s specific resources and capabilities. An organization’s resources are its assets—financial, physical, human, and intangible—that it uses to develop, manufacture, and deliver products to its customers. In comparison to assets, its capabilities are its skills and abilities in doing the work activities needed in its business. The major value-creating capabilities of the organization are known as its core competencies. Both resources and core competencies determine the organization’s competitive weapons. After completing an internal analysis, managers should be able to identify organizational strengths and weaknesses. Any activities the organization does well or any unique resources that it has are called strengths. Weaknesses are activities the organization doesn’t do well or resources it needs but doesn’t possess. The combined external and internal analyses are called the SWOT analysis because, together, they are an analysis of the organization’s strengths, weaknesses, opportunities, and threats. After completing the SWOT analysis, managers are ready to formulate appropriate strategies that: (1) Exploit an organization’s strengths and external opportunities, and (2) Buffer or protect the organization from external threats. © Pearson Education Limited 2015

Formulating, Implementing, and Evaluating Results Step 4: Formulating Strategies Corporate Business Functional Step 5: Implementing Strategies Step 6: Evaluating Results How effective have strategies been? What adjustments are necessary? 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?” © Pearson Education Limited 2015

Strategies Managers Use 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 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. © Pearson Education Limited 2015

© Pearson Education Limited 2015 Growth Strategy An organization expands the number of markets served or products offered Concentration Vertical integration Horizontal integration Diversification 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. 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. © Pearson Education Limited 2015

Stability and Renewal Strategies Stability strategy: Organization continues to do what it’s doing Renewal strategy: Organization addresses declining organizational performance Retrenchment Turnaround 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. In both renewal strategies, managers can (1) cut costs and (2) restructure organizational operations but actions are more extensive in turnaround strategy © Pearson Education Limited 2015

© Pearson Education Limited 2015 Competitive Strategy A competitive strategy is a strategy for how an organization will compete in its business. A competitive strategy is a strategy for how an organization will compete in its business. For a small organization in only one line of business or a large organization with little product or market diversification, the competitive strategy describes how the organization will compete in its primary market. For organizations in multiple businesses, each business has its own competitive strategy that defines its competitive advantage, the products or services it will offer, the customers it wants to reach, and so on. When an organization engages in several different businesses, those single businesses that are independent and formulate their own competitive strategies are often called strategic business units (SBUs). © Pearson Education Limited 2015

Competitive Advantage What sets an organization apart; its distinctive edge that comes from its core competencies and resources. Developing an effective competitive strategy requires an understanding of the organization’s competitive advantage, which is whatever sets it apart from the competition. That distinctive edge comes from the organization’s core competencies. Competitive advantage also can come from the company’s resources—something that the organization has that its competitors don’t. Cost leadership strategy Differentiation strategy. Focus strategy—involves a cost advantage (or “cost focus”) Stuck in the middle Use strategic management to get a sustainable competitive advantage. © Pearson Education Limited 2015

© Pearson Education Limited 2015 Functional Strategy Those strategies used by an organization’s various functional departments to support the competitive strategy. Those strategies used by an organization’s various functional departments (marketing, operations, finance/accounting, human resources, and so forth) to support the competitive strategy. © Pearson Education Limited 2015

© Pearson Education Limited 2015 Strategic Weapons Customer service Employee skills & loyalty Innovation Quality Social media Big data In today’s intensely competitive and chaotic marketplace, organizations are looking for whatever “weapons” they can use to do what they’re in business to do and to achieve their goals. We think six strategic “weapons” are important in today’s environment: customer service, employee skills and loyalty, innovation, quality, social media, and big data. We’ve covered customer service in previous chapters and will discuss employee-related matters in. Now we’ll look at quality, social media, and big data. 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. © Pearson Education Limited 2015

Strategic Weapons (cont.) 5. Social Media Help people connect Reduce costs and/or increase revenue. 6. Big Data Translate business knowledge into improved decision making and performance. Successful social media strategies should (1) help people—inside and outside the organization—connect; and (2) reduce costs or increase revenue possibilities or both. As managers look at how to strategically use social media, it’s important to have goals and a plan. Big data can be an effective counterpart to the information exchange generated through social media. All the enormous amounts of data collected about customers, partners, employees, markets, and other quantifiables can be used to respond to the needs of these same stakeholders. With big data, managers can measure and know more about their businesses and “translate that knowledge into improved decision making and performance.” Case in point: When Walmart began looking at its enormous database, it noticed that when a hurricane was forecasted, not only did sales of flashlights and batteries increase, but so did sales of Pop-Tarts. Now, when a hurricane is threatening, stores stock Pop-Tarts with other emergency storm supplies at the front entrance. This helps them better serve customers and drive sales. © Pearson Education Limited 2015

© Pearson Education Limited 2015 5.3 Compare and contrast approaches to goal setting and planning. © Pearson Education Limited 2015

Setting Goals and Developing Plans Types of Plans Financial versus strategic Stated versus real 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. © Pearson Education Limited 2015

Traditional Goal Setting 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. © Pearson Education Limited 2015

Management by Objectives Goal specificity Participative decision making Explicit time period Performance feedback 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 the four elements listed on the slide. 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. © Pearson Education Limited 2015

© Pearson Education Limited 2015 Well-Written Goals No matter which approach is used, goals have to be written and clearly indicate what the desired outcomes are, and some goals more clearly indicate what the desired outcomes are. Exhibit 5–6 lists the characteristics. © Pearson Education Limited 2015

© Pearson Education Limited 2015 Steps in Goal-Setting Review the organization’s mission and employees’ key job tasks. Evaluate available resources. Determine the goals individually or with input from others. Make sure goals are well-written and communicate to all who need to know. Build in feedback mechanisms to assess goal progress. Link rewards to goal attainment. 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. Make sure goals are well-written and then communicate them to all who need to know. Build in feedback mechanisms to assess goal progress. If goals aren’t being met, change them as needed. Link rewards to goal attainment. Once the goals have been established, written down, and communicated, managers are ready to develop plans for pursuing them. © Pearson Education Limited 2015

© Pearson Education Limited 2015 Types of Plans 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. © Pearson Education Limited 2015

© Pearson Education Limited 2015 Developing Plans 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. © Pearson Education Limited 2015

Approaches to Planning Top-down traditional approach Development by organizational members 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. © Pearson Education Limited 2015

© Pearson Education Limited 2015 5.4 Discuss contemporary issues in planning. © Pearson Education Limited 2015

© Pearson Education Limited 2015 Contemporary Issues Planning in dynamic environments Environmental scanning Two issues currently affecting planning are: Planning effectively in dynamic environments, and How managers can use environmental scanning, especially competitive intelligence. In today’s changing and 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. Much of the competitor-related information managers need to make crucial strategic decisions is available and accessible to the public. In other words, competitive intelligence isn’t organizational espionage. Advertisements, promotional materials, press releases, reports filed with government agencies, annual reports, want ads, newspaper reports, information on the Internet, and industry studies are readily accessible sources of information. Managers do need to be careful about the way information, especially competitive intelligence, is gathered to prevent any concerns about whether it’s legal or ethical Competitive intelligence becomes illegal corporate spying when it involves the theft of proprietary materials or trade secrets by any means. © Pearson Education Limited 2015

© Pearson Education Limited 2015