1. McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved. 4 - 1

2. McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved. 4 - 2 Chapter 4 Planning and Strategic Management

3. McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved. 4 - 3 Learning Objectives After studying Chapter 4, you will know: how to proceed through the basic steps in any planning process how strategic planning integrates with tactical and operational planning why it is important to analyze both the external environment and internal resources of the firm before formulating a strategy the choices available for corporate strategy how companies can achieve competitive advantage through business strategy

4. McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved. 4 - 4 Learning Objectives (cont.) After studying Chapter 4, you will know: how core competencies provide the foundation for business strategy the keys to effective strategy implementation

5. McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved. 4 - 5 An Overview Of Planning Fundamentals Planning the conscious, systematic process of making decisions about goals and activities to be pursued in the future importance of formal planning has grown dramatically Basic planning process Step one: situational analysis a process planners use, within time and resource constraints, to gather, interpret, and summarize all information relevant to the planning issue under consideration study past and current conditions, and forecast future trends focuses on internal forces and influences from the external environment

6. McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved. 4 - 6 An Overview Of Planning Fundamentals (cont.) Basic planning process (cont.) Step two: alternative goals and plans generate alternative future goals and plans to achieve them goals - targets or ends the manager wants to reach should be specific, challenging, and realistic should be acceptable to those charged with achieving them plans - the actions or means intended to achieve goals identify alternative actions, needed resources, and potential obstacles single use plans - designed to achieve goals that are unlikely to be repeated in the future standing plans - designed to achieve an enduring set of goals contingency plans - actions to be taken when initial plans fail or if events in the external environment require a sudden change

7. McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved. 4 - 7 An Overview Of Planning Fundamentals (cont.) Basic planning process (cont.) Step three: goal and plan evaluation evaluate the advantages, disadvantages, and potential effects of each alternative goal and plan prioritize those goals consider the implications of alternative plans Step four: goal and plan selection identify the priorities and trade-offs among goals and plans leads to a written set of goals and plans that are appropriate and feasible within a predicted set of circumstances scenario - narrative that describes a set of future conditions a contingency plan is attached to each scenario

8. McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved. 4 - 8 An Overview Of Planning Fundamentals (cont.) Basic planning process (cont.) Step five: implementation plans are useless unless they are implemented properly managers must understand the plan, have the necessary resources, and be motivated to implement it implementation likely to be more successful if managers and employees have participated in the previous planning steps the plan should be linked to other systems in the organization Step six: monitor and control must continually monitor the actual performance in relation to the goals and plans develop control systems to take corrective action

9. McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved. 4 - 9 Identifying and diagnosing the problem Generating alternative solutions Evaluating alternatives Making the choice Implementing Evaluation Situational analysis Alternative goals and plans Goal and plan evaluation Goal and plan selection Implementation Monitor and control General decision- making stages Specific formal planning steps Decision-Making Stages And Formal Planning Steps

10. McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved. 4 - 10 Levels Of Planning Strategic planning decisions of senior executives about the organization’s long- term goals and strategies has an external orientation covers major portions of the organization strategic goals - major targets that relate to the long-term survival, value, and growth of the organization strategy - pattern of actions and resource allocations designed to achieve the goals of the organization matches the skills and resources of the organization to the opportunities found in the external environment

11. McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved. 4 - 11 Levels Of Planning (cont.) Tactical planning translates broad strategic goals and plans into specific goals and plans that are relevant to a definite portion of the organization developed for a functional area such as marketing focuses on the major actions that a unit must take to fulfill its part of the strategic plan Operational planning identifies the specific procedures and processes required at lower levels of the organization plans intended for short periods of time and focus on routine tasks

12. McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved. 4 - 12 Levels Of Planning (cont.) Strategic, tactical, and operational plans must be consistent and mutually supportive Starbucks’ balanced scorecard - method for linking strategic and operational planning to use the scorecard for planning, it is necessary to: clarify the vision develop business unit scorecards review business unit scorecards communicate the scorecard to the entire company conduct annual strategy reviews

13. McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved. 4 - 13 Customer Striving to be “3 rd place” Repeat business 30-40% annual expansion Only 5% of all U.S. consumption Brand extension Process Brewing the perfect cup Brewing the perfect cup at home Retail skills and customer service Coffee knowledge Empowerment Financial $1 billion company (market value) $100 million annual profits 800% stock appreciation 2000+ stores People/Learning Commitment/trust (low turnover) Training Beanstock program Opinion surveys Flexible schedules Applying The Balanced Scorecard For Starbucks Vision And Strategy

14. McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved. 4 - 14 Strategic Planning: Yesterday And Today Traditional strategic planning emphasized a top-down approach was the responsibility of senior executives and special planning units, and excluded line managers gap developed between strategic managers and tactical and operational managers Strategic planning today managers from throughout the organization are involved in the strategy formulation process strategic management - integrates strategic planning and management into a single, on-going process

15. McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved. 4 - 15 Strategy implementation Strategic control Establishment of mission, vision, and goals Analysis of external opportunities and threats Analysis of internal strengths and weaknesses SWOT analysis and strategy formulation Strategic Management Process

16. McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved. 4 - 16 Strategic Management Process (cont.) Step 1: Establishment of mission, vision, and goals mission - basic purpose and values of the organization defines the scope of operations states the organization’s reason(s) to exist written in terms of the general clients served by the organization strategic vision - provides a perspective on where the company is headed and what the organization can become clarifies the company’s strategic intent strategic goals - evolve from the mission and vision of the organization need to be communicated to everyone who has contact with the organization

17. McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved. 4 - 17 Strategic Management Process (cont.) Step 2: Analysis of external opportunities and threats successful strategic management depends on an accurate and thorough evaluation of the environment stakeholders - groups and individuals who affect and are affected by the achievement of the organization’s mission, goals, and strategies environmental analysis provides a map of these stakeholders forecasting future trends is critical must develop a clear sense of market opportunities identify potential threats as well difference between an opportunity and a threat may depend on how a company positions itself strategically

18. McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved. 4 - 18 Elements Of Environmental Analysis Social analysis Labor analysis Industry and market analysis Environmental Analysis Competitor analysis Technological analysis Macroeconomic analysis Political and regulatory analysis

19. McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved. 4 - 19 Strategic Management Process (cont.) Step 3: Analysis of internal strengths and weaknesses Resources - inputs to production that can be accumulated over time to enhance the performance of the firm may be tangible or intangible assets provide a competitive advantage if: the resource is instrumental in creating customer value the resource is rare and not equally available from other sources resource is difficult to imitate resource is well organized

20. McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved. 4 - 20 Internal Resource Analysis Marketing audit Operations analysis Financial analysis Internal Resource Analysis Human resources assessment Other internal resource analyses

21. McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved. 4 - 21 Strategic Management Process (cont.) Step 3: Analysis of internal strengths and weaknesses (cont.) Core competence - something a company does especially well relative to its competitors provides a competitive edge usually a set of skills or expertise in some activity

22. McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved. 4 - 22 Resources are rare Resources are organized Resources are inimitable Resources are valuable Resources And Core Competence Core competence

23. McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved. 4 - 23 Strategic Management Process (cont.) Step 3: Analysis of internal strengths and weaknesses (cont.) Benchmarking - process of assessing how well one company’s basic functions and skills compare to those of other companies goals are: to thoroughly understand the “best practices” of other firms to undertake actions to achieve both better performance and lower costs only permits imitating rather than surpassing competitors

24. McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved. 4 - 24 Strategic Management Process (cont.) Step 4: SWOT analysis and strategy formulation SWOT analysis - comparison of strengths, weaknesses, opportunities, and threats helps summarize the major facts and forecasts derived from external and internal analyses used as the basis for identifying primary and secondary strategic issues confronting the organization

25. McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved. 4 - 25 Step 4: Strategy formulation (cont.) Corporate strategy - identifies the set of businesses, markets, or industries in which the organization competes and the distribution of resources among those businesses concentration strategy - focuses on a single business competing in a single industry vertical integration - expands the domain of the organization into supply or distribution channels concentric diversification - moving into businesses that are related to the company’s original core business conglomerate diversification - expands into unrelated businesses Strategic Management Process (cont.)

26. McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved. 4 - 26 Primary Industry Concentric diversification Concentration Supply chain Distribution channels Vertical Integration Vertical Integration Unrelated Industry Conglomerate diversification Summary Of Corporate Strategies

27. McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved. 4 - 27 Strategic Management Process (cont.) Step 4: Strategy formulation (cont.) BCG matrix - used to analyze and communicate corporate strategy each business in the corporation is plotted on the growth rate of its market and the relative strength of its competitive position in that market (market share) question marks - require substantial investment to improve their position otherwise divestiture is recommended stars - require heavy investment, but generate needed revenues cash cows - generate revenues in excess of their investment needs used to fund other businesses dogs - remaining revenues are realized, and then firms are divested

28. McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved. 4 - 28 Question Marks Stars Dogs Relative competitive position StrongWeak The BCG Matrix Market growth High Low Cash Cows

29. McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved. 4 - 29 Strategic Management Process (cont.) Step 4: Strategy formulation (cont.) Trends in corporate strategy wave of mergers and acquisitions either by concentrating in one industry or by portfolio diversification implementing a diversified strategy depends on individual circumstances unrelated diversification may hurt a corporation diversification may help competing in a slow-growth, mature, or threatened industry organizations tend to perform better if they implement a more concentric diversification strategy

30. McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved. 4 - 30 Step 4: Strategy formulation (cont.) Business strategy - defines the major actions used to build and strengthen competitive position within an industry low-cost strategy - attempt to be efficient and offer a standard, no frills product useful for companies that are large and take advantage of economies of scale in production or distribution organization must be the cost leader in its industry must offer a product that is acceptable to customers differentiation strategy - attempt to be unique in its industry or market segment along some dimensions that customers value position based on high product quality, excellent marketing and distribution, or superior service Strategic Management Process (cont.)

31. McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved. 4 - 31 Strategic Management Process (cont.) Step 4: Strategy formulation (cont.) Functional strategy - implemented by each functional area of the organization to support the business strategy ensures that departments operate in a manner that is consistent with business strategies Step 5: Strategy implementation organizations are adopting a comprehensive view of implementation organizations currently are applying a participative strategic management process to implementation

32. McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved. 4 - 32 Steps In Strategy Implementation Define strategic tasks Implementation plan Assess organizational capabilities Develop implementation agenda

33. McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved. 4 - 33 Attacking The Six Barriers To Strategy Implementation The Silent Killers Poor coordination across functions, businesses, or borders Unclear strategy and conflicting priorities Poor vertical communication Top-down or laissez-faire senior management style An ineffective senior management team Inadequate down-the-line leadership skills and development

34. McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill© 2003 The McGraw-Hill Companies, Inc. All rights reserved. 4 - 34 Strategic Management Process (cont.) Step 6: Strategic control designed to support managers in evaluating the organization’s progress with its strategy when discrepancies are identified, corrective action is taken encourages efficient operations that are consistent with the plan typically involves budgets to monitor and control financial expenditures strategic budget - used to create and maintain long-term effectiveness operational budget - tightly monitored to achieve short-term efficiency