Chapter Six Planning, Strategy, and Change

Overview of the Chapter

In an uncertain competitive environment, managers must engage in thorough planning to find strategies that will help their organization to compete effectively. This chapter explores the manager’s role both as planner and as strategist. It discusses the three major steps of the planning process, different kinds of plans, strategy formulation, and the challenge of strategy implementation. This chapter also contains a detailed explanation of SWOT analysis and Michael Porter’s business level strategies.

Learning Objectives

  1. Describe the three steps of the planning process.
  2. Explain the relationship between planning, strategy, and change.
  3. Explain the role of planning in predicting the future and in changing the organization so it can meet future challenges.
  4. Outline the main steps in SWOT analysis.
  5. Differentiate among corporate-, business-, and functional-level strategies.
  6. Describe the vital role played by strategy implementation in determining a manager’s ability to change an organization to achieve future goals.

MANAGEMENT IN ACTION: JUST-IN-TIME LOW-COST FASHION

Zara, a Spanish clothing manufacturer, has managed to position itself as the low price/low cost leader in the fashion segment of the clothing market because of the way it uses information technology. It has created an information system that allows the management of its design and manufacturing process in a way that minimizes inventory costs and provides instant feedback concerning market demand, which creates a competitive advantage for the company. Zara can do all of this at with relatively small output levels, which is also a part of its specialized, focused strategy.

While it takes other fashion houses at least six months to design a collection and three additional months to make it available in stores, Zara can complete these two steps in only five weeks. Because of its short manufacturing-to-sales cycle, Zara can offer its clothing collections at relatively low prices and still make profits that are the envy of the fashion industry.

1.  What goals do you think Zara’s top managers set for themselves when their company first entered the fashion industry? What are their future goals?

In their earlier years, Zara’s goals probably included achieving profitability and becoming an industry leader. Future goals include opening stores in all major cities around the world and building their brand name recognition.

2.  Which of Porter’s strategies did Zara use to reach their current level of success?

Zara employs a low cost strategy. It has developed a competitive advantage by developing a means of producing its quality products at costs below its rivals. Technology was a major contributor to the successful implementation of this strategy.

Lecture Outline

I. THE PLANNING PROCESS

The Planning Process

Planning is a process that managers use to identify and select appropriate goals and courses of action for an organization.

·  The organizational plan that results from the planning process details how managers intend to attain those goals.

·  The decisions and actions that managers take to help an organization attain its goals is its strategy.

Planning is a three-step activity.

·  The first step is 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.

·  The second step is formulating strategy.

·  The third step is implementing strategy.

Levels of Planning

In large organizations, planning usually takes place at three levels of management: corporate, business or division, and department or functional.

·  At the corporate level are the CEO, other top managers, and their support staff.

·  At the business level are the different divisions of the company, usually led by a divisional manager. A division is a business unit that competes in a distinct industry.

·  Each division has its own set of functions or departments, such as manufacturing, marketing, R&D, human resources, etc.

The corporate-level plan contains top management’s decisions pertaining to the organization’s mission and goals, overall strategy, and structure. It provides the framework within which divisional managers create their business-level plans. Corporate-level strategy indicates in which industries and national markets an organization intends to compete.

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.

A function is a unit or department in which people have the same skills or use the same resources to perform their jobs. The business-level plan provides the framework within which functional managers devise their plans. A functional-level plan states the goals that functional managers pursue to help the division attain its business-level goals. Functional-level strategy sets forth the actions that managers intend to take at the level of departments.

Who Plans?

Corporate-level planning is the primary responsibility of top managers. Corporate-level managers are responsible for approving business- and functional-level plans to ensure they are consistent with the corporate plan.

At the business level, planning is the responsibility of divisional managers, who also review functional level plans. Functional managers typically participate in business-level planning also.

Similarly, although functional managers bear primary responsibility for functional-level planning, they often involve their subordinates in the process.

Time Horizons of Plans

Plans differ in their time horizon, or intended duration.

·  Long-term plans have a horizon of five years or more. Intermediate-term plans have a horizon between one and five years. Corporate- and business-level goals and strategies require long- and intermediate-term plans.

·  Short-term plans have a horizon of one year or less. Functional-level goals and strategies require intermediate- and short-term plans.

·  Although a corporate- or business-level plan may extend over five years, it is typically treated as a rolling plan, a plan that is updated every year. Rolling plans allow managers to make midcourse corrections and to plan flexibly.

·  Most organizations have an annual planning cycle, linked to their annual financial budget.

Information Technology Byte: Rolling Plans and Global Supply Chain Management

Fed Ex and UPS are now using IT to manage the flow of inputs and distribution of outputs for its customers—global supply chain management. Years ago, Fed Ex was the dominant competitor in the package delivery business but lost its lead by not updating the software that supported its superior tracking system. During the 1990’s, UPS managers realized the tremendous growth potential in the global supply chain management business and responded by developing rolling plans and target that allowed them to continuously improve their levels of customer service and efficiency. Now, both companies are competing to redefine and control the global shipping business, something largely made possible by the growth of new IT systems and the Internet.

Standing Plans and Single-Use Plans

Standing plans are used in situations in which programmed decision-making is appropriate. Standing plans include:

·  Policies, which are a general guide to action.

·  Rules, which are formal, written guides to action.

·  Standing operating procedures, which are written instructions describing the exact series of actions that should be followed.

Single-use plans are developed to handle nonprogrammed decision-making. Single use plans include:

·  Programs, which are integrated sets of plans for achieving certain goals.

·  Projects, which are specific action plans created to complete various aspects of a program.

Why Planning Is Important

Essentially, planning is the activity of ascertaining where an organization is at the present time and deciding where it should be in the future. Managers must consider the future and forecast what may happen in order to deal with future opportunities and threats Because the external environment is uncertain and complex and typically must deal with incomplete information and bounded rationality, planning is often complex and difficult.

Planning is important for four main reasons:

  1. It is a useful way of getting managers to participate in decision making about the appropriate goals and strategies for an organization.
  2. It is necessary to give the organization a sense of direction and purpose.
  3. It helps coordinate managers of the different functions and divisions to ensure that they all are pulling the same direction.
  4. A plan can be used as a device for controlling managers within an organization.

Henri Fayol, the originator of the model of management discussed in Chapter 1, said that effective plans should have four qualities: unity, continuity, accuracy, and flexibility.

  1. Unity means that at any one time only one central plan is put into operation.
  2. Continuity means that planning is an ongoing process.
  3. Accuracy means that managers should attempt to collect all available information.
  4. The planning process should have enough flexibility so that plans can be altered and changed if the situation changes.

II. DETERMINING THE ORGANIZATION’S MISSION AND GOALS

Defining the Business

To determine an organization’s mission, managers must first define its business by asking three questions:

·  Who are our customers?

·  What customer needs are being satisfied?

·  How are we satisfying customer needs?

Answering these questions help managers to determine 1) the customer needs that they are presently satisfying, 2) customer needs they should attempt to satisfy in the future, and 3) who their true competitors are.

Management Insight: Mattel Rediscovers Itself

Faced with the growth of electronic toys and computer games in the 1990s, Mattel decided that it needed to redefine itself. Mattel feared that it would lose its customers to the new computer game companies, and therefore decided to become a major player in this new arena by acquiring The Learning Company. Mattel also signed a contract to introduce toys, many of which would be electronic, linked to new movies from companies like Pixar, Dreamworks, and Disney. Buying The Learning Company, however, turned out not to be a bad idea because it did not possess the skills required to develop new toys quickly. Mattel now hires outside specialists to develop new electronic toys and computer games in an effort to respond to the fast-changing needs of they toy market.

Establishing Major Goals

Once the business is defined, managers must then establish a set of primary goals to which the organization is committed. In most organizations, the CEO articulates major goals. These goals give the company a sense of direction and commitment. Goals typically possess the following characteristics:

·  They are ambitious and stretch the organization and require managers to improve its performance capabilities.

·  They are challenging but realistic—a goal that is impossible to attain may prompt managers to give up.

·  The time period in which a goal is expected to be achieved should be stated. This injects a sense of urgency and acts as a motivator.

III. FORMULATING STRATEGY

Strategy formulation involves managers in analyzing an organization’s current situation and then developing strategies to accomplish its mission and achieve its goals.

SWOT analysis is a planning exercise in which managers identify organizational strengths, weaknesses, opportunities, and threats. Based upon a SWOT analysis, managers at each level of the organization identify strategies that will best position the company to achieve its mission and goals.

·  The first step in SWOT analysis is to identify an organization’s strengths and weaknesses that characterize the present state of the organization.

·  The next step requires managers to identify potential opportunities and threats in the environment that affect the organization at the present or may affect it in the future.

·  When SWOT analysis is completed, managers can begin developing strategies. These strategies should allow the organization to attain its goals by taking advantage of opportunities, countering threats, building strengths, and correcting organizational weaknesses.

Management Insight: A Transformation at Campbell’s Soup

Campbell’s Soup is one of the oldest and best known companies in the world. However, as consumers sought healthier food choices, the condensed soup market declined by 20%, leading to a decline in market share and profits for and Campbell’s. To turn the company around, Douglas Conant, the company’s new CEO, initiated a thorough SWOT analysis. This analysis identified three growth opportunities: health and sports drinks, salsas, and chocolate products. Conant then assessed the internal capabilities of the company and found a number of weaknesses. The culture was very conservative, machinery was outdated, employee levels were too high, and there was a lack of willingness to take risks. Based on this analysis, Conant and his management implemented several new strategies designed to turn around and revitalize the company.

IV. FORMULATING CORPORATE-LEVEL STRATEGIES

Corporate-level strategy is a plan of action that determines the industries and countries an organization should invest its resources in to achieve its mission and goals. Most managers have the goal to grow their companies by seeking out new opportunities to use organizational resources to satisfy customer needs. Also, some managers must help their organizations respond to threats due to changing forces in the task or general environment.

The principle corporate-level strategies that managers use are:

·  Concentration on a single business.

·  Diversification.

·  International expansion.

·  Vertical integration.

An organization benefits from pursuing any of these only when the strategy helps increase the value of the organization’s goods for customers

Concentration on a Single Business

A corporate-level strategy aimed at concentrating resources in one business or industry by most organizations as they are beginning to grow and develop. Also, concentration on a single business can be an appropriate strategy when managers see the need to reduce the size of their organization, in order to improve performance.

Diversification

Diversification is the strategy of expanding operations into a new business or industry and producing new goods or services. Companies that have successfully employed this strategy include PepsiCo, Philip Morris, and GE. There are two main types of diversification: related and unrelated.

Related Diversification

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.