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Planning, Strategy, and Competitive Advantage. Chapter 06. Planning and Strategy. Planning : Identifying and selecting 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.
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Planning and Strategy Planning: Identifying and selecting 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. Strategy: A cluster of decisions about what goals to pursue, what goals to pursue, what actions to take, and how to use resources to achieve goals Mission statement: Broad declaration of an organization’s purpose that identifies the organization’s products and customers and distinguishes the organization from its competitors
Planning Planning is athree-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 importance of the organization’s products to its employees and customers and distinguishes the organization from its competitors. • The second step is formulating strategy • The third step is implementing strategy.
The Nature of the Planning Process To perform the planning task, managers should: • Establish and discover where an organization is at the present time • Determine where it should be in the future, its desired future state • Decide how to move it forward to reach that future state
Why Planning is Important Planning is necessary to give the organization a sense of direction and purpose Planning is a useful way of getting managers to participate in decision making about the appropriate goals and strategies for an organization A plan helps coordinate managers of the different functions and divisions of an organization to ensure that they all pull in the same direction and work to achieve its desired future state A plan can be used as a device for controlling managers within an organization
Why Planning is Important Henri Fayol said that effective plans should have four qualities: 1. Unity means that at any 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 and use all available information. 4. The planning process should have enough flexibility so that the plans can be altered and changed if the situation changes.
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, the CEO, other top managers, and their support staff determine the organization’s mission and goals, overall corporate strategy and organizational structure. • At the business level, the managers of each division create a business-level plan detailing long-term divisional goals that will allow the division to meet corporate goals and the division’s business-level strategy and structure. • A functional-level plan states the goals that the managers of each function( Accounting, R&D, Operations, Finance, Marketing) will pursue to help the division attain its business-level goals.
Time Horizons of Plans Time horizon: Intended duration of a plan • Long-term plans are usually 5 years or more • Intermediate-term plans are 1 to 5 years • Short-term plans are less than 1 year Corporate- or business-level plan that extends over several years is typically treated as a rolling plan • Rolling plan is updated and amended every year to take account of changing conditions in the external environment
Types of Plans Standing plans • Used in situations when programmed decision making is appropriate • When the same situations occur repeatedly, managers develop policies, rules, and standard operating procedures (SOPs)
Types of Plans Single-use plans • Developed to handle nonprogrammed decision making in unusual or one-of-a-kind situations • Programs: Integrated sets of plans for achieving certain goals • Projects: Specific action plans created to complete various aspects of a program
Corporate-Level Planning Vision • An inspirational statement of an organization’s purpose Mission • Overall goal that unifies efforts toward its vision, stretches and challenges, and possesses a finish line and time frame. Flows from vision. Strategic Plans • Clarify how the company will serve customers and position itself against competitors
Determining the Organization’s Mission and Goals 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
Determining the Organization’s Goals Once the business is defined(mission statement), managers must then establish a set of primary goals to which the organization is committed. Establishing major goals • Provides the organization with a sense of direction • Stretches the organization to higher levels of performance • Goals must be challenging but realistic Strategic leadership: Ability of the CEO and top managers to convey a compelling vision of what they want the organization to achieve to their subordinates
Specific S.M.A.R.T. • Measurable • Attainable • Realistic • Timely Setting Goals 2.1
Starbucks: “In fiscal 2006, we plan to open approximately 1,800 net new stores globally.” Walgreen: “Second is to hire a significant number of people with disabilities in our South Carolina distribution center, scheduled to open in 2007, and achieve 20% productivity gains there.” UPS: “65% of drivers will have access to the new technology (implemented in 2004) by the end of 2005.” and “In 2005, we will increase operating profit in each of our 3 key businesses: domestic, int’l, supply chain.” Wrigley: “In 2005, the company will decrease the long-term rate of return assumption for the assets of its U.S. (pension) plans from 8.75 % to 8.5%.” Halliburton: “We estimate that 74% of the backlog existing on 12/31 will be eliminated the following fiscal year.” Martha Stewart Living Omnimedia: “In 2004 we will discontinue the Catalog for Living and its online product options, and sell remaining inventory in early fiscal 2005.” Examples of S.M.A.R.T. Goals?
Formulating Strategy Development of a set of corporate, business, and functional strategies that allow an organization to accomplish its mission and achieve its goals SWOT analysis • Planning exercise in which managers identify: • Organizational strengths and weaknesses • Environmental opportunities and threats Based on a SWOT analysis, managers at each level of the organization identify strategies that will best position the organization to achieve its mission and goals.
Levels of Planning • Corporate-level strategy indicates in which industries and national markets an organization intends to compete and why. • Business-level strategy states the methods a division or business intends to use to compete against its rivals in an industry. • Functional-level strategy is a plan of action to improve the ability of each of an organization’s functions to perform its task-specific activities in ways that add value to an organization’s goods and services.
Corporate-Level Strategies Grand Strategies • Growth • Stability • Retrenchment Portfolio Strategies • Acquisitions • Related diversification • Unrelated diversification • Concentration on a single business • Vertical integration • BCG Matrix • Global Expansion
GrowthStrategy focuses on increasing profits, revenues, market share, or numberof places to do business RetrenchmentStrategy (Recovery) Stability Strategy focuses on improving the way the company sells the same products or services to the same customers focuses on turning around very poorcompany performance by shrinking the size or scope of the business A broad strategic plan used to help an organization achieve its strategic goals Grand Strategies 3.2
Corporate-Level Strategies Portfolio Strategies(Diversification) • Acquisitions • Related diversification • Unrelated diversification • Concentration on a single business • Vertical integration • BCG Matrix • Global Expansion
Diversification The strategy of expanding operations into a new business or industry in order to produce new goods or services There are two main types of diversification: related and unrelated. • Related Diversification: Itis 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. • a. Synergy is obtained when the value created by two divisions cooperating is greater than the value that would be created if the two divisions operated separately. • b. To pursue related diversification successfully, managers seek new businesses in which existing skills and resources can be used to create synergies. • Unrelated Diversification: Managers pursue unrelated diversification when they establish divisions or buy companies in new industries that are not related to their current businesses or industries. • a. By pursuing unrelated diversification, managers can buy a poorly performing company and use their management skills to turn around its business, thereby increasing its performance. • b. Unrelated diversification allows managers to engage in portfolio strategy, which is the practice of apportioning financial resources among divisions to increase financial returns and spread risks among different businesses.
Formulating Corporate-Level Strategies Concentration on a single industry: Reinvesting a company’s profits to strengthen its competitive position in its current industry • It is an appropriate strategy when managers see the need to reduce the size of their organizations to increase performance. Vertical integration: Expanding a company’s operations either backward into a new industry that produces inputs for its products or forward into an industry that uses, distributes, or sells its products
Corporate-Level Strategies Vertical Integration • Managers pursue vertical integration because it allows them to either add value to their products by making them special or unique or to lower the costs of making and selling them. • Although vertical integration can increase an organization’s performance, it can also reduce an organization’s flexibility to respond to changing environmental conditions. • Vertical integration may sometimes reduce a company’s ability to create value when the environment changes. Therefore, many companies outsource the production of component parts to other companies and exit the components industry–by vertically disintegrating backwards.
Question Marks Stars High Market Growth Dogs Cash Cows Low Small Large Relative Market Share BCG Matrix 3.1
Stars companies with a large share of a fast-growing market QuestionMarks companies with a small share of a fast-growing market Cash Cows companies with a large share of a slow-growing market Dogs companies with a small share of a slow-growing market BCG Matrix 3.1
Company D Company A High Question Marks Stars Company C Company B Market Growth Company E Company G Low Dogs Cash Cows Company F Company H Small Large Relative Market Share BCG Matrix 3.1 Adapted from Exhibit 6.3
Unrelated diversification does not reduce risk. • Present performance is used to predict future performance. • Cash cows fail to aggressively pursue opportunities and defense themselves from threats. • Being labeled a “cash cow” can hurt employee morale. • Companies often overpay to acquire stars. • Acquiring firms often treat stars as “conquered foes.” Problems with Portfolio Strategy
International Expansion Basic question • What extent do organizations need to customize products and marketing for different national conditions? Global strategy: Selling the same standardized product and using the same basic marketing approach in each national market • Ignoring national differences, may leave organizations vulnerable to local competitors
International Expansion Multi-domestic strategy: Customizing products and marketing strategies to specific national conditions • Significant cost savings associated with not having to customize products and marketing approaches • Helps gain local market share • Raises production costs thereby leading to higher prices
Choosing a Way to Expand Internationally Importing and Exporting: A company engaged in exporting makes products at home and sells them abroad. A company engaged in importing sells products at home that are made abroad (products it makes itself or buys from other companies). Licensing and Franchising: a. In licensing, a company allows a foreign organization to take charge of both manufacturing and distributing one or more of its products in the licensee’s country or region of the world in return for a negotiated fee. b. In franchising, a company sells to a foreign organization the rights to use its brand name and operating know-how in return for a lump sum payment and a share of the franchiser’s profits.
Choosing a Way to Expand Internationally Strategic Alliances: In a strategic alliance, managers pool or share their organization’s resources and know-how with those of a foreign company, and the two organizations share the rewards or risks of starting a new venture in a foreign company. • a. A joint venture is a strategic alliance among two or more companies that agree to jointly establish and share the ownership of a new business. • b. Risk is reduced and a capital investment is generally involved. Wholly Owned Foreign Subsidiaries: When managers decide to establish a wholly owned foreign subsidiary, they invest in establishing production operations in a foreign country, independent of any local direct involvement. This method is much more expensive than the others but also offers high potential returns.
The Five Forces Model Michael Porter’s five forces model is another well-known model that helps managers focus on the most important competitive forces, or potential threats, in the external environment. They are: • Level of rivalry among organizations in an industry • Potential for entry into an industry • Power of large suppliers • Power of large customers • Threat of substitute products
Character of the rivalry is a measure of the intensity of competitive behavior between companies in an industry. • Threat of new entrants is a measure of the degree to which barriers to entry make it easy or difficult for new companies to get started in an industry. • Threat of substitute products or services is a measure of the ease with which customers can find substitutes for an industry’s products or services. • Bargaining power of suppliers is a measure of the influence that suppliers of parts, materials, and services to firms in an industry have on the prices of these inputs. • Bargaining power of buyers is a measure of the influence that customers have on the firm’s prices Porter’s Five Industry Forces
Formulating Business-Level Strategies Porter’s Positioning Strategies • The aim of positioning strategies is to minimize the effects of industry competition and build a sustainable competitive advantage • Cost Leadership(Low-cost) strategy: Driving the organization’s total costs down below the total costs of rivals • Differentiation strategy: Distinguishing an organization’s products from the competitors’ products on dimensions such as product design, quality, or after-sales service • Focused strategy: Aims to serve the needs of customers in only one or a few market segments.
Formulating Business-Level Strategies “Stuck in the middle” • Attempting to simultaneously pursue both a low cost strategy and a differentiation strategy • Difficult to achieve low cost with the added costs of differentiation
Formulating Business-Level Strategies Focused low-cost: Serving only one segment of the overall market and trying to be the lowest cost organization serving that segment Focused differentiation: Serving only one segment of the overall market and trying to be the most differentiated organization serving that segment
