Chapter 5 Foundations of Planning Robbins et al., Fundamentals of Management, 4th Canadian Edition ©2005 Pearson Education Canada, Inc. FOM 5.1 1

Learning Outcomes Define planning Explain the potential benefits of planning Identify the potential drawbacks of planning Distinguish between strategic and tactical plans (continued) 2

Learning Outcomes (continued) State 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 (continued) 3

Learning Outcomes (continued) Describe the four grand strategies Explain SWOT analysis Compare how entrepreneurs and bureaucratic managers approach strategy 3

Planning Defining the organization’s goals, establishing an overall strategy, and developing a hierarchy of plans to achieve goals Before we further probe the basics of planning, it is important to remind ourselves what planning is. As mentioned in Chapter 1, “planning” if the managerial activity that defines the organization’s objectives or goals, establishes an overall strategy for achieving those goals, and develops a comprehensive set of plans to integrate and coordinate activities. It is concerned with what is to be done as well as how it is to be done. Robbins et al., Fundamentals of Management, 4th Canadian Edition ©2005 Pearson Education Canada, Inc. FOM 5.5 4

Reasons for Planning Sets Standards to Facilitate Control Provides Direction Reasons for Planning Planning can be either formal or informal, depending on the time frame and amount of documentation. Because of the dynamic and unpredictable business environment, it is important that managers plan and plan well. There are four reasons for planning. First, planning coordinates effort by giving direction to managers and non-managers. Second, planning reduces uncertainty by forcing managers to look ahead, anticipate change, and develop appropriate responses. Third, planning reduces redundancy.By coordinating efforts, wasteful and inefficient activities can be prevented. Fourth, planning establishes standards or objectives that facilitate control over the process of achieving goals. Minimizes Waste and Redundancy Reduces the Impact of Change 5

Can’t Replace Intuition Criticisms of Formal Planning May Create Rigidity Can’t Be Done in a Dynamic Environment Can’t Replace Intuition and Creativity Focus on Today’s Competition Formal planning has been popular in business since the 1960s, but there have been criticisms of the process. • 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. Reinforces Success 6

Does Planning Improve Performance? Financial results Environmental concerns Quality and implementation The evidence is mostly positive and suggests several conclusions. 1. Formal planning in an organization is frequently associated with positive financial results. 2. In those organizations in which formal planning did not lead to higher performance, the environment was typically the culprit. 3. The quality of the planning process and the implementation of the plans affect performance more than does the extent of the plans. 7

How Do Strategic and Tactical Plans Differ? The most popular ways to describe plans are by their breadth (strategic versus tactical), time frame (long term versus short term), specificity (directional versus specific), and frequency of use (single use versus standing). These classifications are not mutually exclusive. Top-level managers typically develop strategic plans that apply to the entire organization. These plans drive the organization’s efforts to achieve its goals. Lower-level managers focus on tactical plans (sometimes called operational plans) that specify how the overall objectives will be achieved. These plans differ in time frame and scope: operational plans are limited in scope and are measured daily, weekly, or monthly; strategic plans are broader, less specific and encompass five or more years. Time Frame Scope Objectives 8

The Time Frame of Planning Short-Term Plans Long-Term Plans Plans differ based on the time frame that the plan covers. Short-term plans typically cover less than one year whereas long-term plans are five years or more. The length of an organization’s plans tend to fit with future commitments and how much uncertainty it faces. If current plans affect future commitments, the longer the time frame for which managers must plan. Likewise, the greater the uncertainty, the more plans should be of the short-term variety. This is so because shorter-term plans allow for better flexibility to meet changing demands. 9

Specific Plans Directional Plans Clear Low Objectives Flexibility Specific plans may appear to be preferable over directional plans as they have clearly defined objectives and leave no room for misinterpretation. However, specific plans may require clarity and predictability that often does not exist. When uncertainty is high and flexibility is needed, directional plans are preferable. Directional plans provide general guidelines, and therefore do not lock managers into specific objectives or courses of action. An example is using a map to get from Point A to Point B as is shown in Exhibit5-2 in your text. The directional plan merely states that you want to go from Point A to Point B and you are provided the flexibility to get there in a manner that you feel best fits the desired outcome. However, if you were to follow a specific plan, you would go from Point A to Point B along the exact streets as indicated. This would be fine unless there was a problem on one of the streets that prevented you from getting to Point B. General High 10

Single-Use vs. Standing Plans Unique Situations Ongoing Operations Some plans are meant to be used only once while 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. An example of a single-use plan would be the students planning a special event during orientation week. Likewise, if you are graduating this year, your institution probably uses a standing plan to execute the graduation ceremonies. 11

What Is Management by Objectives? Organizational Objectives Divisional Objectives Departmental Objectives Management by objectives (MBO)is a system of allowing employees to work with their supervisors in setting performance objectives in an effort to achieve organizational outcomes. It 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. As the figure above shows, the organization’s overall objectives are translated into specific objectives for each succeeding level (divisional, departmental, or individual) in the organization. But because lower-unit managers jointly participate in setting their own goals, MBO works from the “bottom-up” as well as from the “top down.” The result is a hierarchy of objectives that links objectives at one level to those at the next level. And for the individual worker, MBO provides specific personal performance objectives. So each person has an identified specific contribution to make to his or her unit’s performance. If all individuals achieve their goals, then their unit’s goals will be attained and the overall objectives of the organization will become a reality. Individual Objectives 12

Common Elements of MBO Goal specificity Participative decision making Set time period Performance feedback There are four ingredients common to MBO programs: participation in decision making, specific goals, an explicit time period, and performance feedback. MBO objectives should be concise statements of expected accomplishments or outcomes. It is not enough merely to state the desire to cut costs, improve service, or boost quality. Such desires have to be converted into tangible objectives that can be measured and evaluated. An example of a specific goal is to increase product sales by 10%. The objectives of MBO are not unilaterally set by the boss and then assigned to subordinates. A key aspect of MBO is the manager and employees working together to identify and agree on the goals and how the goals will be achieved. Each objective has a specific time period in which it is to be completed. So managers have not only specific objectives but also stipulated time periods in which to accomplish them. Linking this with our first example, the organization may want to increase product sales during the next 6 months by 10%. The final component in an MBO program is continuous feedback on progress toward goals so that individuals can monitor and correct their own actions. Continuous feedback, supplemented by more formal periodic management evaluations, takes place at all levels of the organization. 13

Does MBO Work? More Difficult Specific Goals Goals Lead Lead to To Higher Performance Specific Goals Lead to Better Results Does MBO Work? Support from Top Management Is Critical Participation Is Key Research indicates that MBO is most effective if goals are difficult enough to require an employee to “stretch.” While MBO promotes participative goal setting, when goal difficulty is held constant, assigned goals often work just as well. But, participative goal setting does induce individuals to set more difficult goals. Studies of actual MBO programs confirm that MBO effectively increases employee performance and organizational productivity. A review of 70 programs, for example, found organizational productivity gains in 68 of them. The same review indicated that top management commitment is critical for MBO to reach its potential. When top management was committed to MBO, the average productivity gain was 56 percent. 14

Employees Setting Objectives Identify key job tasks Set specific and challenging goals Encourage active participation Prioritize goals Build in feedback Link rewards to goal attainment Employees need to have a clear understanding of what is expected of them. Managers can help employees set work goals by using the following guidelines: • Identify an employee’s key job tasks. The best source for this can be information from the person’s job description. • Establish specific and challenging goals for each key task. Realistic performance levels, specific targets, and clear deadlines should be set. • Encourage the employee to actively participate. When employees participate in goal setting, they are more likely to accept the goals. But the participation must be genuine and not just going through the motions. • 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 employees know whether their level of effort is sufficient to attain the goal. And the feedback needs to be on a regular and recurring basis. • Link rewards to goal attainment. Linking rewards to the achievements will help each employee to answer the question “What’s in it for me?” 15

Problems with MBO Efforts directed primarily toward output Encourage individual rather than team efforts Goals may discourage efforts for continuous improvement Recall the discussion on TQM from Chapter 2. The architect of TQM, Edward Deming, felt that MBO created more difficulties rather than solutions. He believed that using MBO created an environment where employees paid more attention to quantity of output than quality. Also, he criticized MBO because of the goals set with individual employees, rather than teams. And lastly, he felt that once employees achieved the goals, that the employees would tend to relax. These criticisms can be overcome by setting goals for quality improvements, by creating team goals, and by ensuring that new goals are established once previously-established ones are achieved. 16

The Strategic Management Process Identify Current Mission, Objectives & Strategy The Strategic Management Process Reassess Mission Strategies Evaluate Results 1 Analyze Resources Note Weaknesses and Strengths Environment Threats and Opportunities 2 3 4 5 6 7 & 8 9 The strategic management process is a 9-step process involves strategic planning, implementation and evaluation. This process is typically undertaken by the senior management in the organization. Determining the nature of one’s business is as important for not-for-profit organizations as it is for business firms. Hospitals, government agencies, and educational institutions must also identify their missions. What is the mission of your institution? 17 8

Starting the Process Strategies Mission Objectives The first step in the strategic management process is to identify (or review) the organization’s mission, objectives and strategies. The mission is the organization’s purpose--it determines what business or businesses that it is in. By defining the mission it forces the management to carefully identify the products or services. Whether the organization is profit or not-for-profit, it is critical to clarify why the organization exists. Once there is clarity on the business purpose, then the company can develop objectives and strategies to achieve the business outcomes. 18 10

Analyzing the Environment Environmental Scanning Analyzing the Environment Competitive Intelligence In step two, managers analyze the environment to anticipate and interpret changes in which the organization operates. Large amounts of information are reviewed to detect emerging trends. Information might be gathered on the actions of competitors, pending government legislation, preferences of customers, and supply of labour. One of the newer areas of environmental scanning is “competitive intelligence.” This activity gets accurate and basic information about competitors so that managers can 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, Information on the Internet, and competitor’s products supply 95% of the data required for this technique to work. Some of the more widely-used data bases in Canada come from StatsCan. 19

SWOT Analysis Strengths Opportunities Threats Weaknesses Once the manager has done the scanning of the external environment, the next key steps in the strategic management process is the SWOT analysis. This is where a detailed analysis is done of the external factors and internal resources. In looking at the external factors, you will assess the threats (negative) and opportunities (positive) that face the organization. It is important to remember that what one organization sees as a threat may in fact be an opportunity for another company. The next step in the process is to look at the internal resources to determine the strengths and weaknesses of those resources. From this, the organization will be able to identify its core competency--the strengths that will provide the company with a competitive edge. Weaknesses 20

Identifying Opportunities Organization’s Resources Opportunities in the Environment Organization’s Opportunities The purpose of doing a SWOT analysis is to align the company’s strengths with the opportunities to find a particular niche in which to be successful. It is the area shown above where the organization will want to focus its energies--where there is an overlap between resources and external factors. It will be at this step that the organization reevaluates its missions and objectives, and makes the necessary changes. 21

Grand Strategies Growth Stability Retrenchment Combination Once the organization has identified its opportunities and re-confirmed or re-aligned its mission, management must set strategies for all organizational levels. However, what is focused on at this stage are organizational-wide strategies. There are 2 key theories about strategies. One theory is called The Grand Strategies and it has four individual strategies available to the firm: growth, stability, retrenchment, and combination. The Growth Strategy. Organizations can grow through direct expansion, merger, and acquisition. A direct expansion strategy involves increasing a company’s size, revenues, operation, or workforce. A merger occurs when two companies combine resources to form a new company. An acquisition occurs when a larger company “buys” a smaller one and absorbs its operations. The Stability Strategy. There is no significant change in a stability strategy. The organization continues to serve the same market and customers with little change occurring in the external environment. While it may seem that not many companies pursue this strategy, there are some. The Retrenchment Strategy. Characteristic of an organization that is downsizing--either reducing its workforce or selling product lines. This strategy is used in an environment of decline and began to surface about 20 years ago. The Combination Strategy. This strategy is the simultaneous pursuit of two or more strategies. For example, one part of the organization could be in a retrenchment while another part is growing.

Determining A Business-Level Strategy Cost Leadership Differentiation The other theory of strategy formulation was developed by Michael Porter at Harvard Business School. He basically stated that organizations needed to only develop a competitive strategy and that there were only 3 possibilities. The organization could be a cost leader--producing the product or service at the lowest cost. Or the organization could distinguish itself in same way--a small niche market that buyers highly value. And the distinction could be on service surrounding the actual product. Lastly, Porter stated that a company could have a focused strategy--one either focused on cost or distinction but in a very narrow market segment. For example, an auto parts supplier for a certain make of car. Focus 23

After Strategies Are Formulated Implementation Evaluating results No matter how good the plans are, the organization cannot succeed unless that plan is implemented. Therefore, the last steps in the strategic management process are to implement the plan and then to evaluate the results. Did the plan achieve what it set out to do.

Quality As A Strategic Weapon Benchmarking Quality As A Strategic Weapon ISO 9000 and ISO 14000 Total Quality Management is a focus on quality and continuous improvement? This can be a strategic weapon for an organization that imbeds a TQM philosophy throughout its operations. There are 3 key tools that can be used in a TQM environment. Benchmarking is identifying “best practices” among other businesses that have led to superior performance. Those practices are then adapted to fit your organization. ISO--the International Organization for Standardization--has created the an ISO 9000 certification. The certificate attests that the company has met rigorous world-wide standards for quality and consistency. ISO 14000 deals with environmental standards. 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. Six Sigma 25

Entrepreneurship Process by which individuals pursue opportunities, fulfilling need and wants through innovation, without regard to the resources they currently control Important themes Pursuit of opportunities Innovation Growth There is no shortage of definitions of entrepreneurship. For example, some people apply the term to the creation of any new business. Others focus on intentions, claiming that entrepreneurs seek to create wealth, which is different from starting businesses merely as a means of income. Most people use the following adjectives to describe entrepreneurs: bold, innovative, initiative taking, venturesome, and risk taking. But there are 3 important themes: 1) the pursuit of opportunities; 2) innovation; and 3) growth. Entrepreneurs are pursuing opportunities to grow a business by changing, revolutionizing, transforming, or introducing new products or services.

Entrepreneurial Process Exploring the entrepreneurial context Identifying opportunities and possible competitive advantages Starting the venture Managing the venture Yes, there is an entrepreneurial process. It has four key steps that entrepreneurs must address as they start and manager their venture. Exploring the entrepreneurial context. The context includes the realities of the new economy, society’s laws and regulations that compose the legal environment, and the changing world of work. Identifying opportunities and possible competitive advantages. It is through exploring the entrepreneurial context that the entrepreneurs identify opportunities and possible competitive advantages. Starting the venture. Once entrepreneurs have explored the context and identified the opportunities, they must look at actually starting the venture. This includes researching the feasibility of the venture, planning, organizing, and launching the venture. Managing the venture. The entrepreneurs does this by managing processes, people and growth.

Comparison: Entrepreneurs and Traditional Managers Acceptance Avoidance View toward mistakes Moderate Low Risk tendency Direct involvement Delegation Activity 5-10 year growth of business Short-term goals Time orientation Independence Corporate rewards Primary motivation Entrepreneur Traditional Manager As we conclude our discussions on strategic planning, it is important to review the difference between entrepreneurs and traditional managers. While strategic questions may focus on the same concerns, entrepreneurs and traditional managers approach strategy differently. The entrepreneur is driven by perceived opportunity rather than available resources. Once an opportunity is spotted, an entrepreneur will want to capitalize on it. Besides being confident about succeeding, the entrepreneur is not afraid to risk financial security, career opportunities, family relations, or psychic well-being to get the venture started. After obtaining the resources, the entrepreneur will put together the components required to implement the overall strategy. 26

Project Management Contemporary planning tool Is a process of quality control to ensure a project’s activities are done on time, within budget, and according to specification Project is a one-time-only set of activities that has a definite beginning and ending point in time Today’s managers face the challenges of planning in an environment that[‘s both dynamic and complex. One technique in making planning both effective and efficient is project management--a process of quality control to ensure a project’s activities are done on time, within budget, and according to specifications.

Project Management Process (Exhibit 5-8) Identify activities and resources Define objectives Establish sequences Determine project completion date Compare with objectives Estimate time for activities More and more organizations are using project management because the approach fits well with the need for flexibility and rapid response to perceived market opportunities. When organizations undertake projects that are unique, have specific deadlines, contain complex interrelated tasks requiring specialized skills, and are temporary in nature, these projects often do not fit nicely and neatly into the standardized planning procedures. Therefore, project management enables effective and efficient accomplishment of project goals. Determine additional resource requirements