1. PowerPoint Presentation by Charlie Cook Gordon Walker McGraw-Hill/Irwin Copyright © 2004 McGraw Hill Companies, Inc. All rights reserved. Chapter 12 Strategic Planning and Decision Making

2. 12–2 What Is Strategic Planning? Strategic planning should: Strategic planning should: –Be a line management, not staff, activity. –Require evaluation of the contribution of investments to financial goals—in the context of industry trends and competitor behavior. –Extend top management leadership and power –Neutralize decision-making biases. –Overcome organizational drift. –Identify what the organization needs to do to improve its performance.

3. 12–3 What Is Strategic Planning? (cont’d) Strategic planning should: Strategic planning should: –Be distinct from strategy execution. –Act as a tool for management decision-making. –Communicate the organization’s strategy without jargon and in a conceptually coherent format. –Generate commitment from employees. –Motivate the organization’s systems of financial and operating control. –Be reviewed regularly and in response to unexpected and significant market changes.

4. 12–4 Decision Making Biases Myopia Myopia –Failing to account for long-term effects Sunk costs Sunk costs –Continuing to invest in failing projects in hope of getting back the original investment. Framing in terms of gains or losses Framing in terms of gains or losses –Being risk seeking in terms of losses and risk adverse to gains

5. 12–5 Decision Making Biases Information availability Information availability –Valuing and using information simply because it is favored, most recent, or readily at hand. Information anchoring Information anchoring –Information that appears first in the information flow acts as an anchor that provides a reference point for the rest of the information stream, skewing the decision-making process toward choices in which early information plays a stronger role.

6. 12–6 Planning in a Single Business Strategic planning elements: Strategic planning elements: –Mission statement »Include the vision if desired –Analysis of industry and firm’s market position –Financial goals defined –Strategic initiatives mapped –Programs

7. 12–7 Mission Statement Describes the scope of the business in terms of its product line and markets served. Describes the scope of the business in terms of its product line and markets served. May include a statement of the strategic intent of the business (e.g., market leadership, niche leadership, diversification). May include a statement of the strategic intent of the business (e.g., market leadership, niche leadership, diversification). Should be no longer than several sentences that convey, in clear and unambiguous language, the purpose and direction for the firm. Should be no longer than several sentences that convey, in clear and unambiguous language, the purpose and direction for the firm.

8. 12–8 Industry Analysis Is necessary for an effective strategic plan. Is necessary for an effective strategic plan. Identifies how much firm performance is due to macroeconomic and industry factors. Identifies how much firm performance is due to macroeconomic and industry factors. Provides a baseline for goal setting. Provides a baseline for goal setting. May be improved by scenario planning. May be improved by scenario planning.

9. 12–9 Elements of Competitor Analysis What are the key macroeconomic variables that affect profits in the industry? What are the key macroeconomic variables that affect profits in the industry? What are the current macroeconomic trends? What are the current macroeconomic trends? What are the critical regulatory factors that influence performance in the industry? What are the critical regulatory factors that influence performance in the industry? What are the key industry forces (e.g., powerful buyers, strong substitutes, ease of entry) affecting firm profitability? What are the key industry forces (e.g., powerful buyers, strong substitutes, ease of entry) affecting firm profitability? What are the trends in these forces? What are the trends in these forces? What are the entry and exit rates in the industry? What are the entry and exit rates in the industry? What are the trends in these rates? What are the trends in these rates? Table 12.1a

10. 12–10 Elements of Competitor Analysis (cont’d) Has the industry passed through a shakeout? Has the industry passed through a shakeout? Has the industry experienced significant disruption? If so, how have entrants competed against incumbents? Has the industry experienced significant disruption? If so, how have entrants competed against incumbents? If not, are there identifiable forces or products that could be disruptive to the industry? If not, are there identifiable forces or products that could be disruptive to the industry? What are the key value and cost drivers in the industry? What are the key value and cost drivers in the industry? How is the industry structured into strategic groups based on these value and cost drivers? How is the industry structured into strategic groups based on these value and cost drivers? Table 12.1b

11. 12–11 Elements of Competitor Analysis (cont’d) What is the trend in industry revenue? What is the trend in industry revenue? Which competitors are growing faster in revenue than the industry trend? Why? Which competitors are growing faster in revenue than the industry trend? Why? What are the key competitors the firm faces in its major markets? What are the key competitors the firm faces in its major markets? What are their strategies and performance levels? What are their strategies and performance levels? What is the trend in industry profitability? What is the trend in industry profitability? Which competitors are growing faster in profitability than the industry trend? Why? Which competitors are growing faster in profitability than the industry trend? Why? Table 12.1c

12. 12–12 Elements of Competitor Analysis (cont’d) What new strategic initiatives and programs have key competitors developed, if any? What new strategic initiatives and programs have key competitors developed, if any? How likely is it that these initiatives will improve the market positions of these competitors? How likely is it that these initiatives will improve the market positions of these competitors? How aggressive are these firms in growing their market positions? How aggressively do these firms defend their positions? How aggressive are these firms in growing their market positions? How aggressively do these firms defend their positions? Where is the firm located in this competitive landscape in terms of its value and cost drivers? Where is the firm located in this competitive landscape in terms of its value and cost drivers? How are the resources and capabilities underlying the value and cost drivers protected from imitation? How are the resources and capabilities underlying the value and cost drivers protected from imitation? Table 12.1d

13. 12–13 Financial Goals Established goals focus management attention and push the planning team to articulate which investments are strategically important. Established goals focus management attention and push the planning team to articulate which investments are strategically important. Goals force management to be explicit about its expectations and assumptions. Goals force management to be explicit about its expectations and assumptions. Three key questions in setting goals: Three key questions in setting goals: –What is the planning period? –What are the key financial metrics? –What should the goals be?

14. 12–14 Strategic Initiatives Strategic initiatives are the essence of the strategic plan, acting as an organizing framework for activities throughout the firm. Strategic initiatives are the essence of the strategic plan, acting as an organizing framework for activities throughout the firm. Initiatives are categorized as projects that: Initiatives are categorized as projects that: –Improve the firm’s value/cost drivers. –Raise customer retention rates. –Are investments in growth. –Terminate or turnaround underperforming activities of the firm. –Focus on risk management and compliance.

15. 12–15 ProgramsPrograms Are necessary for plan effectiveness, Are necessary for plan effectiveness, Are the basic units through which the plan is executed. Are the basic units through which the plan is executed. May be ongoing or created to achieve specific strategic initiatives. May be ongoing or created to achieve specific strategic initiatives. Should have: Should have: –An accountable manager and documented schedule. –A means of being valued financially (e.g., NPV, real options models).

16. 12–16 Sample Program Template: Strategic Initiative Table 12.2a

17. 12–17 Sample Program Template: Strategic Initiative Table 12.2b

18. 12–18 Planning in a Multibusiness Firm Allocating financial resources across the business units Allocating financial resources across the business units Managing the portfolio of businesses Managing the portfolio of businesses Organizing and managing relationships among the units Organizing and managing relationships among the units Centralizing activities Centralizing activities Developing top down initiatives Developing top down initiatives Developing corporate infrastructure Developing corporate infrastructure

19. 12–19 Resource Allocation Goal of resource allocation is to invest in and support those businesses within the portfolio whose projects produce the highest economic return for the firm. Goal of resource allocation is to invest in and support those businesses within the portfolio whose projects produce the highest economic return for the firm.

20. 12–20 The Profitability Matrix Figure 12.1 Source: Adapted from Michael Rabin, Uta Werner, and Jim McTaggert, “Beyond Performance Measurement: The Use and Misuse of Economic Profit,” Marakon Associates, August 1, 1994.

21. 12–21 Managing the Portfolio of Businesses The corporate plan The corporate plan –Addresses the challenge of new business development within the portfolio except when the firm is failing or bankrupt. Interbusiness relationships Interbusiness relationships –The plan outlines how transfer policies are aligned with the business units’ value and cost drivers. Centralization of activities Centralization of activities –The plan articulates how shared or centralized activities contribute to business unit performance.

22. 12–22 Managing the Portfolio of Businesses Top-down initiatives Top-down initiatives –The plan provides management with an vehicle to state its intended initiatives, and to develop programs to assess their impact, and to identify where new initiatives are warranted. Corporate infrastructure Corporate infrastructure –The plan offers an overview of how elements of the corporate infrastructure (e.g., legal, IT, HR) contribute to business unit performance or effective compliance.