1. Foundations of Planning
© 2008 Prentice Hall, Inc. All rights reserved.

2. After reading this chapter, you will be able to:
L E A R N I N G O U T C O M E S
After reading this chapter, you will be able to:
Define planning.
Explain the potential benefits of planning.
Identify potential drawbacks to planning.
Distinguish between strategic and tactical plans.
Recognize when directional plans are preferred over specific plans.
Define management by objectives and identify its common elements.
Outline the steps in the strategic management process.
© 2008 Prentice Hall, Inc. All rights reserved.

3. L E A R N I N G O U T C O M E S (cont’d)
After reading this chapter, you will be able to:
Describe the four grand strategies.
Explain SWOT analysis.
Describe how entrepreneurs identify a competitive advantage.
© 2008 Prentice Hall, Inc. All rights reserved.

4. Planning Defined Defining the organization’s objectives or goals
Establishing an overall strategy for achieving those goals
Developing a comprehensive hierarchy of plans to integrate and coordinate activities
Planning is concerned with ends (what is to be done) as well as with means (how it is to be done).
Planning is defining organizational goals, establishing a strategy for reaching those goals, and developing a comprehensive hierarchy of plans to integrate and coordinate activities. It can be either formal or informal, depending on the time frame and amount of documentation
© 2008 Prentice Hall, Inc. All rights reserved.

5. EXHIBIT 3–1 Reasons for Planning
© 2008 Prentice Hall, Inc. All rights reserved.

6. Criticisms Of Formal Planning
Planning may create rigidity.
Plans can’t be developed for a dynamic environment.
Formal plans can’t replace intuition and creativity.
Planning focuses managers’ attention on today’s competition, not on tomorrow’s survival.
Formal planning reinforces success, which may lead to failure.
Formal planning has been popular in business since the 1960s, but critics have observed the following:
Planning may create rigidity. Assuming that conditions will remain relatively stable, formal plans lock organizational units into specific goals and time frames.
Plans can’t be developed for a dynamic environment. Managing chaos and turning disasters into opportunities requires flexibility, not rigid, formal plans.
Formal plans can’t replace intuition and creativity. Developing strategy depends as much on intuition and creativity as it does on formal analysis. Because most successful strategies are visions, not plans, merely following a systematic framework will not yield incisive thinking.
Planning focuses a manager’s attention on today’s competition, not on tomorrow’s survival. Formal planning stresses capitalizing on existing opportunities, not reinventing or creating an industry.
Formal planning reinforces success, which may lead to failure. Success can breed failure. Since change is motivated by problems, success may not motivate managers to challenge the status quo.
© 2008 Prentice Hall, Inc. All rights reserved.

7. The Bottom Line: Does Planning Improve Organizational Performance?
Formal planning means higher profits, higher return on assets, and other positive financial results.
Planning process quality and implementation contribute more to high performance than does the extent of planning.
When external environment restrictions allowed managers few viable alternatives, planning did not lead to higher performance.
The evidence is mostly positive and suggests several conclusions:
Formal planning in an organization is frequently associated with positive financial results.
In those organizations in which formal planning did not lead to higher performance, the environment was typically the culprit.
The quality of the planning process and the implementation of the plans affect performance more than does the extent of the plans.
© 2008 Prentice Hall, Inc. All rights reserved.

8. EXHIBIT 3–2 Types of Plans
BREADTH TIME FREQUENCY OF USE FRAME SPECIFICITY OF USE
Strategic Long term Directional Single use
Tactical Short term Specific Standing
© 2008 Prentice Hall, Inc. All rights reserved.

9. Planning: Focus and Time
Strategic Plans
Are organization-wide, establish overall objectives, and position an organization in terms of its environment.
Tactical Plans
Specify the details of how an organization’s overall objectives are to be achieved.
Short-term Plans
Cover less than one year.
Long-term Plans
Extend beyond five years.
The short-term covers less than one year, the intermediate-term covers one to five years, and the long-term is five years or more.
The commitment concept is relevant to classifying plans because the more current plans affect future commitments, the longer the time frame for which managers must plan.
The length of the planning horizon increases up the management hierarchy and decisions of top management imply greater commitments of resources than decisions of lower managers.
With respect to the degree of variability, the greater the uncertainty, the more plans should be of the short-term variety. This is so because shorter-term plans allow for better accommodation of change by providing more flexibility.
© 2008 Prentice Hall, Inc. All rights reserved.

10. Strategic Planning Strategic Plans
Apply broadly to the entire organization.
Establish the organization’s overall objectives.
Seek to position the organization in terms of its environment.
Provide direction to drive an organization’s efforts to achieve its goals.
Serve as the basis for the tactical plans.
Cover extended periods of time.
Are less specific in their details.
© 2008 Prentice Hall, Inc. All rights reserved.

11. Tactical Planning Tactical Plans (Operational Plans)
Apply to specific parts of the organization.
Are derived from strategic objectives.
Specify the details of how the overall objectives are to be achieved.
Cover shorter periods of time.
Must be updated continuously to meet current challenges.
© 2008 Prentice Hall, Inc. All rights reserved.

12. EXHIBIT 3–3 Directional Versus Specific Plans
© 2008 Prentice Hall, Inc. All rights reserved.

13. Specific and Directional Plans
Specific Plans
Clearly defined objectives and leave no room for misinterpretation.
“What, when, where, how much, and by whom” (process-focus)
Directional Plans
Are flexible plans that set out general guidelines.
“Go from here to there” (outcome-focus)
It appears intuitively correct that specific plans are always preferable to directional, or loosely guided plans. Specific plans have clearly defined objectives and leave no room for misinterpretation. However, specific plans are not without drawbacks. They require a clarify and predictability that often does not exist.
When uncertainty is high and flexibility is needed, directional plans are preferable. Since directional plans identify general guidelines, they provide focus but do not lock managers into specific objectives or courses of action
© 2008 Prentice Hall, Inc. All rights reserved.

14. Single-Use and Standing Plans
Single-Use Plan
Is used to meet the needs of a particular or unique situation.
Single-day sales advertisement
Standing Plan
Is ongoing and provides guidance for repeatedly performed actions in an organization.
Customer satisfaction policy
Some plans are meant to be used only once; others are used repeatedly. A single-use plan is used to meet the needs for a particular or unique situation. A standing plan is ongoing and guides for actions that are performed repeatedly in an organization.
© 2008 Prentice Hall, Inc. All rights reserved.

15. Management by Objectives
Management by Objectives (MBO)
A system in which specific performance objectives are jointly determined by subordinates and their supervisors, progress toward objectives is periodically reviewed, and rewards are allocated on the basis of that progress.
Links individual and unit performance objectives at all levels with overall organizational objectives.
Focuses operational efforts on organizationally important results.
Motivates rather than controls.
Management by objectives (MBO) emphasizes participation to set goals that are tangible, verifiable, and measurable. MBO’s appeal lies in its emphasis on converting overall organizational objectives into specific objectives for units and members of the organization.
© 2008 Prentice Hall, Inc. All rights reserved.

16. EXHIBIT 3–4 Cascading of Objectives
© 2008 Prentice Hall, Inc. All rights reserved.

17. Management by Objectives (cont’d)
Common Elements in an MBO Program
Goal Specificity
Participative Decision Making
Explicit Performance Period
Performance Feedback
© 2008 Prentice Hall, Inc. All rights reserved.

18. Setting Employee Objectives
Identify an employee’s key job tasks.
Establish specific and challenging goals for each key task.
Allow the employee to actively participate.
Prioritize goals.
Build in feedback mechanisms to assess goal progress.
Link rewards to goal attainment.
Employees should understand what they are trying to accomplish. Managers can help employees set work goals by using the following guidelines:
Identify an employee’s key job tasks. The employee’s job description can be used to define what he or she is supposed to accomplish.
Establish specific and challenging goals for each key task. Performance levels, specific targets, and clear deadlines should be set for all employees.
Allow the employee to actively participate. When employees participate in goal setting, they are more likely to accept the goals.
Prioritize goals. The purpose of prioritizing goals in order of importance is to encourage the employee to take action and expend effort on each goal in proportion to its importance.
Build in feedback mechanisms to assess goal progress. Feedback lets workers know whether their level of effort is sufficient to attain the goal. It should be frequent and recurring.
Link rewards to goal attainment. Linking rewards to the achievements will help each employee to answer the question “What’s in it for me?
© 2008 Prentice Hall, Inc. All rights reserved.

19. Is There a Downside to MBO?
Does MBO Work?
Goal Difficulty
Goal Specificity
Is There a Downside to MBO?
Top Management
Participation
© 2008 Prentice Hall, Inc. All rights reserved.

20. EXHIBIT 3–5 The Strategic Management Process
A nine-step process that involves strategic planning, implementation, and evaluation
© 2008 Prentice Hall, Inc. All rights reserved.

21. Steps in Writing a Business Plan
Describe your company’s background and purpose.
Identify your short- and long-term objectives.
Provide a thorough market analysis.
Describe your development and production emphasis.
Describe how you’ll market your product or service.
© 2008 Prentice Hall, Inc. All rights reserved.

22. The Organization’s Current Identity
Mission Statement
Defines the present purpose of the organization.
Objectives
Are specific measures (milestones) for achievement, progress, and performance.
Strategic Plan
Explains the business founders’ vision and describes the strategy and operations of that business.
First, management must identify the mission, objectives, and strategies of the organization.
A mission statement defines an organization’s purpose and provides guidance to managers and employees. A clear mission statement forces management to identify the scope of its products or services carefully
It answers questions such as the following:
What business are we in?
What are we trying to accomplish?
All organizations have strengths and weaknesses.
© 2008 Prentice Hall, Inc. All rights reserved.

23. Analyze the Environment
Environmental Scanning
Involves screening large amounts of information to detect emerging trends and create a set of scenarios
Competitive Intelligence
Information about competitors that allows managers to anticipate competitors’ actions rather than merely react to them
In step two, managers analyze the environment in which the organization operates: actions of competitors, pending government legislation, preferences of customers, and supply of labor.
Managers use environmental scanning to anticipate and interpret environmental changes. The term refers to screening information to detect trends, monitor the actions of others, and create scenarios. This slide and the next one review four environmental-scanning techniques: competitive intelligence, scenario development, forecasting, and benchmarking.
The seeking of basic information about competitors, competitive intelligence can allow managers to anticipate rather than react to the actions of competitors. Advertisements, promotional materials, press releases, governmental reports, annual reports, want-ads, newspaper articles, databases, trade shows, industry studies, and competitor’s products supply 95% of the data required for this technique to work.
© 2008 Prentice Hall, Inc. All rights reserved.

24. EXHIBIT 3–6 SWOT: Identifying Organizational Opportunities
SWOT analysis
Analysis of an organization’s strengths, weaknesses, opportunities, and threats in order to identify a strategic niche that the organization can exploit
© 2008 Prentice Hall, Inc. All rights reserved.

25. SWOT Analysis Strengths (Strategic) Weaknesses
Internal resources that are available or things that an organization does well.
Core competency: a unique skill or resource that represents a competitive edge.
Weaknesses
Resources that an organization lacks or activities that it does not do well.
Opportunities (Strategic)
Positive external environmental factors.
Threats
Negative external environmental factors.
Management analyzes the internal resources of the organization, such as capital, skills of workers, or patents. These resources are the strengths of the organization. The strengths that represent unique skills or resources are called the organization’s distinctive competence. In contrast, weaknesses are resources that are lacking in the organization.
Based on the results of the SWOT analysis, management must complete step six by assessing the opportunities that are available, reevaluating its missions and objectives, and making necessary changes.
© 2008 Prentice Hall, Inc. All rights reserved.

26. How Do You Formulate Strategies?
Growth
Combination
Stability
Grand Strategies
Retrenchment
© 2008 Prentice Hall, Inc. All rights reserved.

27. Growth Strategies Strategies for Growth Direct Expansion Acquisition
Merger
© 2008 Prentice Hall, Inc. All rights reserved.

28. Competitive Strategies
Strategies for Competitive Advantage
Cost Leadership
Differentiation
Focus
© 2008 Prentice Hall, Inc. All rights reserved.

29. Sustaining a Competitive Advantage
Competitive advantage counts for little if it cannot be sustained over the long-term.
Factors reducing competitive advantage
Evolutionary changes in the industry
Technological changes
Customer preferences
Imitation by competitors
Defending competitive advantage
Patents, copyrights, trademarks, regulations, and tariffs
Competing on price
Long-term contracts with suppliers (and customers)
To sustain a competitive advantage, managers create barriers to competition through patents, copyrights, or trademarks; using economies of scale to reduce price to boost volume; locking up suppliers with exclusive contracts and lobbying for government policies to limit foreign competition.
© 2008 Prentice Hall, Inc. All rights reserved.

30. What Happens After Strategies Are Formulated?
Strategy Formulation
Implementation and Execution
Step eight requires leadership from top management and commitment from middle or lower-level managers. In step nine, management must evaluate the results obtained from the strategic management process.
Evaluation
© 2008 Prentice Hall, Inc. All rights reserved.

31. Quality as a Strategic Weapon
Benchmarking
The search for the best practices among competitors or noncompetitors that lead to their superior performance.
ISO 9000 series
Quality management standards set by the International Organization for Standardization (ISO)
ISO 14000
Companies achieving this certification will have demonstrated that they are environmentally responsible.
TQM focuses on quality and continuous improvement. If integrated into ongoing operations, incremental improvement can accumulate into a competitive advantage that others cannot steal.
Benchmarking is the practice of using a measurable scale to compare key business operations with those of successful organizations. It involves four steps. (1) Form a team to identify the following: benchmarking targets, “best practices” of other organizations, and data collection methods. (2) Collect data from internal operations and external organizations. (3) Analyze data to identify performance gaps and determine their causes. (4) Prepare and implement an action plan to meet or exceed performance standards.
To show that its products meet world standards for quality management, a company must gain ISO 9000 certification. The certificate attests that the company has met rigorous standards for quality and consistency as defined by the International Organization for Standardization in Geneva.
© 2008 Prentice Hall, Inc. All rights reserved.

32. Attaining Six Sigma Quality
A philosophy and measurement process developed in the 1980s at Motorola.
To design, measure, analyze, and control the input side of a production process to achieve the goal of no more than 3.4 defects per million parts or procedures.
A philosophy and measurement process that attempts to design in quality as a product is being made.
The six sigma philosophy was developed in the 1980s at Motorola. Its premise is to “design, measure, analyze, and control the input side of a production process.” Rather than measuring the quality of a product after it is produced, six sigma uses statistical models, specific quality tools, high levels of rigor, and process improvement “know how” to design in quality as the product is being made. Accordingly, six sigma is designed to decrease defects to fewer than four per million items produced.
© 2008 Prentice Hall, Inc. All rights reserved.

33. EXHIBIT 3–7 Six Sigma 12-Process Steps
Select the critical-to-quality characteristics.
Define the required performance standards.
Validate measurement system, methods, and procedures.
Establish the current processes’ capability.
Define upper and lower performance limits.
Identify sources of variation.
Screen potential causes of variation to identify the vital few variables needing control.
Discover variation relationship for the vital variables.
Establish operating tolerances on each of the vital variables.
Validate the measurement system’s ability to produce repeatable data.
Determine the capability of the process to control the vital variables.
Implement statistical process control on the vital variables.
Source: Cited in D. Harold and F. J. Bartos, “Optimize Existing Processes to Achieve Six Sigma Capability,” reprinted from Control Engineering Practice, © 1998, p. 87, with permission from Elsevier Science.
© 2008 Prentice Hall, Inc. All rights reserved.

34. Identifying A Competitive Advantage
The Unexpected
The Incongruous
The Process Need
Industry and Market Structures
Demographics
Changes in Perception
New Knowledge
Environmental Sources of Entrepreneurial Opportunity
© 2008 Prentice Hall, Inc. All rights reserved.