The Nature of the Planning Process:
Planning is a process that managers use to identify and select appropriate goals and courses of action for an organization. The cluster of decisions and actions that managers take to help an organization attain its goals is its strategy. Thus, planning is both a goal-making and a strategy-making process. Planning is a three-step activity:
1)Determining the organization’s mission and goals: A mission statement is a broad declaration of an organization’s purpose that identifies the organization’s products and customers and distinguishes the organization from its competitors. 2)Formulating Strategy: Managers analyze the organization’s current situation and then convince and develop the strategies necessary to attain the organization’s mission and goals. 3)Implementing Strategy: Managers decide how to allocate the resources and responsibilities required to implement the strategies between people and groups within the organization.
Levels of Planning:
In large organizations planning takes place at three levels of management: Corporate Level, Business or Division Level, and Department or Functional Level. The Corporate-level plan contains top management’s decisions pertaining to the organization’s mission and goals, overall strategy, and structure. Corporate-level strategy indicates in which industries and national markets an organization intends to compete. The corporate-level plan provides the framework within which divisional managers create their business-level plans. A division is a business unit that has its own set of managers and functions or departments and competes in a distinct industry. Divisional managers are those who control the various divisions of an organization.
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At the business level, the managers of each division create a Business-level plan that details long-term goals that will allow the division to meet corporate goals and the division’s business-level strategy and structure. Business-level strategy states the methods a division or business intends to use to compete against its rivals in an industry. The business-level plan provides the framework within which functional managers devise their plans. A Function is a unit or department in which people have the same skills or use the same resources to perform their jobs. Functional managers are those who supervise the various functions such as manufacturing, accounting, and sales within a division.
A Functional-level plan states the goals that functional managers propose to pursue to help the division attain its business-level goals, which, in turn, allow the organization to achieve its corporate goals. Functional-level strategy sets forth the actions that managers intend to take at the level of departments to allow the organization to attain its goals. An important issue in planning is ensuring consistency in planning across the three different levels. Functional goals and strategies should be consistent with divisional goals and strategies, which in turn should be consistent with corporate goals and strategies, and vice versa. Once complete, each function’s plan is normally linked to its division’s business-level plan, which, in turn, is linked to the corporate plan.
In general, corporate-level planning is the primary responsibility of top managers. Corporate-level managers are responsible for approving business and functional-level plans to ensure that they are consistent with the corporate plan. Corporate planning decisions are not made in a vacuum. Other managers do have input to corporate-level planning. Even though corporate-level planning is the responsibility of top managers, lower-level managers can and usually are given the opportunity to become involved in the process.
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At the business level, planning is the responsibility of divisional managers, who also review functional plans. Functional managers also participate in business-level planning. Similarly, although the functional managers bear primary responsibility for functional-level planning, they can and do involve their subordinates in this process.
Time Horizons of Plans:
Plans differ in their time horizons, or intended durations. Managers usually distinguish among long-term plans, with a horizon of five years or more; intermediate-term plans, with a horizon between one and five years; and short-term plans, with a horizon of one year or less. Typically, corporate- and business-level goals and strategies require long and intermediate-term plans, and functional-level goals and strategies require intermediate and short term plans. Most organizations have an annual planning cycle, which usually linked to the annual financial budget. Although a corporate- or business-level plan may extend over five years or more, it is typically treated as a rolling plan, a plan that is updated and amended every year to take account of changing conditions in the external environment. Rolling plans allow managers to make midcourse corrections if environmental changes warrant or to change the thrust of the plan altogether if it no longer seems appropriate.
Standing Plans and Single-Use Plans:
Managers create standing and single-use plans to help achieve an organization’s specific goals. Standing plans are used in situations in which programmed decision making is appropriate. When the same situations occur repeatedly, managers develop policies (a general guide to action), rules (a formal, written guide to action), and standard operating procedures (SOP a written instruction describing the exact series of actions that should be followed in a specific situation) to control the way employees perform tasks. Single-use plans are developed to handle nonprogrammed decision making in unusual or one-of-a-kind situations. It includes Programs, which are integrated sets of plans for achieving certain goals, and Projects, which are specific action plans created to complete various aspects of a program.
Why Planning is Important?
Planning determines where an organization is at the present time and decides where it should be in the future and how to move it forward. When mangers plan, they must consider the future and forecast what may happen in order to take actions in the present and mobilize organizational resources to deal with future opportunities and threats. However, the external environment is uncertain and complex, and managers typically must deal with incomplete information and bounded rationality. Almost all managers engage in planning. The absence of a plan often results in hesitations, false steps, and mistaken changes of direction that can hurt an organization. Planning is important for four main reasons: 1)Planning is a useful way of getting managers to participate in decision making about the appropriate goals and strategies for an organization.
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2)Planning is necessary to give the organization a sense of direction and purpose. A plan states what goals an organization is trying to achieve and what strategies it intends to use to achieve them. 3)A plan helps coordinate managers of the different functions and divisions of an organization to ensure that they all pull in the same direction. 4)A plan can be used as a device for controlling managers within an organization. A good plan specifies not only which goals and strategies the organization is committed to but also who is responsible for putting the strategies into action to attain the goals.
Henri Fayol said that effective plans should have four qualities: Unity: Means that at any one time only one central, guiding plan is put into operation to achieve an organizational goal. Continuity: Means that planning is an ongoing process in which managers build and refine previous plans and continually modify plans at all levels so that they fit together into one broad framework. Accuracy: Means that managers need to make every attempt to collect and utilize all available information at their disposal in the planning process. Flexibility: Means that plans can be altered and changed if the situation changes.
One way in which managers can try to create plans that have the four qualities described by Fayol is by utilizing scenario planning (Contingency planning), which is the generation of multiple forecasts of future conditions followed by an analysis of how to respond effectively to each of those conditions. Planning is about trying to forecast and predict the future in order to be able to anticipate future opportunities and threats. Because the future is unpredictable, the only reasonable approach to planning is first to generate scenarios of the future based of different assumptions about conditions that might prevail in the future and then to develop different plans that detail what a company should do in the event that one of these scenarios actually occurs.
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The great strength of scenario planning is its ability not only to anticipate the challenges of an uncertain future but also to educate managers to think about the future – to think strategically.
Determining the Organization’s Mission and Goals:
Determining the organization’s mission and goals is the first step of the planning process. Once the mission and goals are agreed upon and formally stated in the corporate plan, they guide the next steps by defining which strategies are appropriate and which are inappropriate.
Defining the Business:
To determine an organization’s mission, managers must first define its business so that they can identify what kind of value they will provide to customers. To define the business, managers must ask three questions: (1) Who are our customers? (2) What customer needs are being satisfied? (3) How are we satisfying customer needs? Answering these questions helps managers to identify not only the customer needs they are satisfying now but the needs they should try to satisfy in the future and who their true competitors are. All of this information helps managers plan and establish appropriate goals.
Establishing Major Goals:
Once the business is defined, managers must establish a set of primary goals to which the organization is committed. Developing these goals gives the organization a sense of direction or purpose. In most organizations, articulating major goals is the job of the CEO, although other managers have input into the process. The best statements of organizational goals are ambitious – that is, they stretch the organization and require the managers improve its performance capabilities. Although goals should be challenging, they should also be realistic. Challenging goals give managers an incentive to look for ways to improve an organization’s operation, but a goal that is unrealistic and impossible to attain may prompt managers to give up. The time period in which a goal is expected to be achieved should be stated. Time constraints are important because they emphasize that a goal must be attained within a reasonable period.
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In strategy formulation managers analyze an organization’s current situation and then develop strategies to accomplish its mission and achieve its goals. Strategy formulation begins with managers’ analyzing the factors within an organization and outside, that affect the organization’s ability to meet its goals now and in the future. SWOT analysis and the five forces model are two techniques managers use to analyze these factors.
SWOT analysis is a planning exercise in which managers identify organizational Strengths, Weaknesses, environmental Opportunities, and Threats. Based on a SWOT analysis, managers at the different levels of the organization select the corporate-, business-, and functional-level strategies to best position the organization to achieve its mission and goals. The first step in SWOT analysis is to identify an organization’s strengths and weaknesses. The task facing managers is to identify the strengths and weaknesses that characterize the present state of their organization.
The second step begins when managers embark on a full-scale SWOT planning exercise to identify potential opportunities and threats in the environment that affect the organization at the present or may affect it in the future. With the SWOT analysis completed, and strengths, weaknesses, opportunities, and threats identified, managers can begin the planning process and determine strategies for achieving the organization’s mission and goals. The resulting strategies should enable the organization to attain its goals by taking advantage of opportunities, countering threats, building strengths, and correcting organizational weaknesses.
The Five Forces Model:
Michel Porter’s five forces model: A well-known model that helps managers isolate particular forces in the external environment that are potential threats. Porter identified these five factors that are major threats because they affect how much profit organizations competing within the same industry can expect to make.
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1)The level of rivalry among organizations in an industry: The more that companies compete against one another for customers, the lower is the level of industry profits. 2)The potential for entry into an industry: The easier it is for companies to enter an industry, the more likely it is for industry prices and therefore industry profits to be low. 3)The power of suppliers: If there are only a few suppliers of an important input, then suppliers can drive up the price of that input, and expensive inputs result in lower profits for the producer.
4)The power of customers: If only a few large customers are available to buy an industry’s output, they can bargain to drive down the price of that output. As a result, producers make lower profits. 5)The threat of substitute products: Often, the output of one industry is a substitute for the output of another industry. Companies that produce a product with a known substitute cannot demand high prices for their products, and this constraint keeps their profits low.
Porter argued that when managers analyze opportunities and threats they should pay particular attention to these five forces because they are the major threats that an organization will encounter. It is the job of managers at corporate, business, and functional levels to formulate strategies to counter these threats so that an organization can respond to its task and general environments, perform at high level, and generate high profits.
Formulating Corporate-Level Strategies:
Corporate-level strategy is a plan of action concerning which industries and countries an organization should invest its resources in to achieve its mission and goals. Managers of most organizations have the goal of growing their companies and actively seek out new opportunities to use the organization’s resources to create more goods and services for customers. In addition, some managers must help their organizations respond to threats due to changing forces in the task or general environment. (Ex. Customers may no longer buy some kinds of goods or services, or other companies enter the market and attract away customers).
Top managers aim to find the best strategies to help the organization respond to these changes and improve performance. The principal corporate-level strategies that managers use to help a company grow, to keep it on top of its industry, and to help it retrench and reorganize to stop its decline are: Concentration on a Single Business, Diversification, International Expansion and Vertical Integration. An organization benefits from pursuing any one of them only when the strategy helps further increase the value of the organization’s goods and services for customers. To increase the value of goods and services, a corporate-level strategy must help an organization differentiate and add value to its products either by making them unique or special or by lowering the costs of value creation.
1)Concentration on a Single Business:
Most organizations begin their growth and development with a corporate-level strategy aimed at concentrating resources in one business or industry in order to develop a strong competitive position within the industry. Sometimes, concentration on a single business becomes an appropriate corporate-level strategy when managers see the need to reduce the size of their organizations to increase performance. Managers may decide to get out of certain industries. Managers may sell off those divisions, lay off workers, and concentrate remaining organizational resources in another market or business to try to improve performance. In contrast, when organizations are performing effectively, they often decide to enter new industries in which they can use their resources to create more value.
Diversification is the strategy of expanding operations into a new business or industry and producing new goods or services. There are two main kinds of diversification: Related and Unrelated.
Related Diversification: Is the strategy of entering a new business or industry to create a competitive advantage in one or more of an organization’s existing divisions or businesses. It can add value to an organization’s products if managers can find ways for its various divisions or business units to share their valuable skills or resources so that synergy is created. Synergy is obtained when the value created by two divisions cooperating is greater than the value that would be created if the two divisions operated separately. In this way, related diversification can be a major source of cost savings. In pursuing related diversification, managers often seek to find new businesses where they can use the existing skills and resources in their departments to create synergies, add value to the new business, and hence improve the competitive position of the company.
Unrelated Diversification: Managers pursue unrelated diversification when they enter new industries or buy companies in new industries that are not related in any way to their current business or industries. Main reasons for pursuing unrelated diversification: •Buy a poorly performing company, transfers to it their management skills, turn around its business, and increase its performance, all of which creates value. •Purchasing businesses in different industries lets managers engage in portfolio strategy, which is apportioning financial resources among divisions to increase financial returns or spread risks among different businesses.
Sometimes, too much diversification can cause mangers to lose control on their organization’s core business. Although unrelated diversification might initially create value for a company, mangers sometimes use portfolio strategy to expand the scope of their organization’s business too much. And so, it becomes difficult for top managers to be knowledgeable about all of the organization’s diverse business. Unable to handle so much information, top managers are overwhelmed and eventually make important resource allocation decisions on the basis of only a superficial analysis of the competitive position of each division. This usually results in value being lost rather than created.
Corporate-level managers must decide on the appropriate way to compete internationally. If managers decide that their organization should sell the same standardized product in each national market in which it competes, and use the same basic marketing approach, they adopt a Global Strategy. Such companies undertake very little, if any, customization to suit the specific needs of customers in different countries. But if managers decide to customize products and marketing strategies to specific national conditions, they adopt a Multidomestic Strategy.
The major advantage of a global strategy is the significant cost savings associated with not having to customize products and marketing approaches to different national conditions. The major disadvantage is that, by ignoring national differences, managers may leave themselves vulnerable to local competitors that do differentiate their products to suit local tastes.
The major advantage of a Multidomestic strategy is that by customizing product offerings and marketing approaches to local conditions, managers may be able to gain market share or charge higher prices for their products. The major disadvantage is that customization raises production costs and puts the Multidomestic company at a price disadvantage because it often has to charge prices higher than the prices charged by competitors pursuing a global strategy.
Choosing a Way to Expand Internationally:
A more competitive global environment has proved to be both an opportunity and a threat for organizations and managers. The opportunity is that organizations that expand globally are able to open new markets, reach more customers, and gain access to new sources of raw materials and to low-cost suppliers of inputs. The threat is that organizations are likely to encounter new competitors in the foreign countries they enter and must respond to new political, economic, and cultural conditions. Before setting up foreign operations, managers need to analyze the forces in the environment of a particular country in order to choose the right method to expand and respond to those forces in the most appropriate way.
There are four basic ways to operate in the global environment:
a)Importing and Exporting: The least complex global operations are exporting and importing. A company engaged in exporting makes products at home and sells them abroad. An organization might sell its own products abroad or allow a local organization in the foreign country to distribute its products. Few risks are associated with exporting because a company does not have to invest in developing manufacturing facilities abroad. A company engaged in importing sells at home products that are made abroad. The internet has made it much easier for companies to inform potential foreign buyers about their products.
b)Licensing And Franchising: In licensing, a company allows a foreign organization to take charge of both manufacturing and distributing one or more of its products in the licensee’s country or world region in return for a negotiable fee (Pursued by manufacturing company).
The advantage is that the licenser does not have to bear the development costs associated with opening up in a foreign country.
The risks associated with this strategy are that the company granting the license has to give its foreign partner access to its technological know-how. In franchising, a company sells to a foreign organization the rights to use its brand name and operating know-how in return for a lump-sum payment and share of the profits. The advantage is that the franchiser does not have to bear the development costs of overseas expansion. The downside is that the organization that grants the franchise may lose control over the way in which the franchise operates and product quality may fall.
c)Strategic Alliances: One way to overcome the loss-of-control problems associated with exporting, licensing, and franchising is to expand globally by means of a strategic alliance. In a strategic alliance, managers pool or share their organization’s resources and know-how with those of a foreign company, and the two organizations share the rewards and risks of starting a new venture in a foreign country. A strategic alliance can take the form of a written contract between two or more companies to exchange resources, or it can result in the creation of a new organization. A joint venture is a strategic alliance among two or more companies that agree to jointly establish and share the ownership of a new business.
d)Wholly Owned Foreign Subsidiaries: Managers invest in establishing production operations in a foreign country independent of any local direct involvement. Operating alone, without any direct involvement from foreign companies, an organization receives all of the rewards and bears all of the risks associated with operating abroad. This method is much more expensive than the others because it requires a higher level of foreign investment. Advantages: Higher potential returns, reduces the level of risk since managers have full control over all aspects, protect their technology and know-how…
When an organization is doing well in its business, managers often see new opportunities to create value by either producing their own inputs or distributing their own outputs. Vertical Integration is the corporate-level strategy through which an organization produces its own inputs (backward vertical integration) or distributes and sells its own outputs (forward vertical integration).
A major reason why managers pursue vertical integration is that it allows them either to add value to their products by making them special or to lower the costs of value creation. Vertical integration can be a problem when forces in the environment counter the strategies of the organization and make it necessary for managers to reorganize or retrench. Vertical integration can reduce an organization’s flexibility to respond to changing environmental conditions.
Formulating Business-Level Strategies:
According to Porter, managers must choose between the two basic ways of increasing the value of an organization’s products: Differentiating the product to add value or lowering the costs of value creation. He also argues that managers must choose between serving the whole market or serving just one segment of the market. Based on those choices, managers choose to pursue one of four business-level strategies: 1)Low-Cost Strategy: With a low-cost strategy, managers try to gain a competitive advantage by focusing the energy of all the organization’s departments or functions on driving the
organization’s costs down below the costs of its rivals. According to Porter, organizations pursuing a low-cost strategy can sell a product for less than their rivals sell it and yet still make a profit because of their lower costs. Thus, these organizations hope to enjoy competitive advantage based on their low prices.
2)Differentiation Strategy: With a differentiation strategy, managers try to gain a competitive advantage by focusing all the energies of the organization’s departments or functions on distinguishing the organization’s products from those of competitors on one or more important dimensions, such as product design, quality, or after-sales service and support. Often, the process of making products unique and different is expensive. Organizations that successfully pursue a differentiation strategy may be able to charge a premium price for their products, a price usually much higher than the price charged by a low-cost organization. The premium price allows them to recoup their higher cost.
3)Focused Low-Cost Strategy: Managers pursuing a focused low-cost strategy serve one or a few segments of the overall market and aim to make their organization the lowest-cost company serving that segment.
4)Focused-Differentiation Strategy: Managers pursuing a focused differentiated strategy serve just one or a few segments of the market and aim to make their organization the most differentiated company serving that segment.
Formulating Functional-Level Strategies:
Functional-level strategy is a plan of action to improve the ability of an organization’s functions to create value. It is concerned with the actions that managers of individual functions can take to add value to an organization’s goods and services and thereby increase the value customers receive. The price that customers are prepared to pay for a product indicates how much they value an organization’s products. The more customers value a product, the more they are willing to pay for it.
There are two ways in which functions can add value to an organization’s products: 1)Functional managers can lower the costs of creating value so that an organization can attract customers by keeping its prices lower than its competitors’ prices. 2)Functional managers can add value to a product by finding ways to differentiate it from the products of other companies. There must be a fit between functional- and business-level strategies if an organization is to achieve its mission and goal of maximizing the amount of value it gives customers. The better the fit between functional- and business-level strategies, the greater will be the organization’s competitive advantage and its ability to attract customers and the revenue they provide.
Each organizational function has an important role to play in the process of lowering costs or adding value to a product. Creating value at the functional level requires the adoption of many state-of-the-art management techniques and practices. All of these techniques can help an organization achieve a competitive advantage by lowering the costs of creating value or by adding value above and beyond that offered by rivals.
Planning and Implementing Strategy:
After identifying appropriate strategies to attain an organization’s mission and goals, managers confront the challenge of putting those strategies into action. Strategy implementation is a five-step process: 1)Allocating responsibility for implementation to the appropriate individuals or groups. 2)Drafting detailed action plans that specify how a strategy is to be implemented. 3)Establishing a timetable for implementation that includes precise, measurable goals linked to the attainment of the action plan. 4)Allocating appropriate resources to the responsible individuals or groups.
5)Holding specific individuals or groups responsible for the attainment of corporate, divisional, and functional goals. The planning process goes beyond the mere identification of strategies; it also includes actions taken to ensure that the organization actually puts its strategies into action. It should be noted that the plan for implementing a strategy might require radical redesign of the structure of the organization, the development of new control systems, and the adoption of a program for changing the culture of the organization.