Planning
Planning in general refers to the process that provides guidance and direction regarding
what an organization needs to do throughout its operations.
It determines the answers to the “who, what, when, where and how” questions of a business operation.
Planning is the first activity that management must undertake when creating yearly budgets and making other critical decisions that will affect the future.
A company’s plan serves as its guide or compass for the activities and decisions made by individuals throughout the entire organization.
Types of Planning
Plans can be short-term, intermediate-term, or long-term.
There are three main types of management plans: strategic plans, tactical plans and operational plans.
o Strategic plans are developed from the company’s mission statement. They outline priorities and resource allocations.
o Tactical plans are developed from the strategic plan. They are designed to implement specific parts of the strategic plan. Tactical plans are made by upper and middle managers.
o Operational plans are developed from the tactical plans. They focus on implementing the tactical plans to achieve operational goals, and they include budgeted amounts. They are developed by middle and lower-level managers.
Strategic planning defines the corporate mission, addresses the long-term objectives of the organization and covers periods greater than one year.
Strategic Planning
o Strategic plans are developed by top management and they focus on overall objectives and strategies and long-term consequences.
The strategic plan lays out the path that the organization will use for attaining its long-term goals and mission. Strategic planning looks at the strategies as well as the organizational objectives and goals by examining both the external and internal factors that affect the company.
This type of planning is neither detailed nor focused on specific financial targets.
Tactical and Operational Plans
Tactical and operational plans refine the overall objectives from the strategic plan in order to develop the programs, policies and performance expectations required to achieve the company’s long-term strategic goals.
Tactical plans are usually quantitative (numerical) and often revolve around production, expenditures, inventory and other common activities in the company. A tactical plan needs to be clear about who is responsible for the different elements of the plan.
Operational plans drive the day-to-day operations of the company and provide the basis for the master budget. Plans can also be single-purpose, developed for a specific item such as construction of a fixed asset, development of a new product or the implementation of a new accounting system.
Long-Term Success
For most companies, if not all, the ultimate objective is to achieve superior performance in comparison with the performance of their competitors. When superior performance is achieved, company profitability will increase.
Profitability can be measured by means of the return earned on the invested capital. Thus, profitability is the measure of how efficiently and effectively the company’s management has used the capital they have access to in producing goods and/or services that satisfy customer needs.
Profit growth can be measured by the increase in Net After-Tax Profit over a period of time. Profit growth comes from sales made in markets that are growing rapidly; from taking market share from competitors; from increasing the sales made to existing customers; or from expansion into new markets or diversification into new lines of business that are profitable.
Strategies and Their Development
Strategic leaders are responsible for effectively managing the company’s strategy-making process to increase company performance and maximize shareholder value.
A strategy is a set of actions taken by managers of a company to increase the company’s performance. The strategy-making process includes both strategy formulation and strategy implementation.
Strategy formulation is the process of selecting strategies.
Strategy implementation is the process of putting the selected strategies into action. It involves designing, delivering and supporting products; improving efficiency and effectiveness of operations; and designing the organization structure, control systems, and culture.
The Strategic Planning Process
There are five steps in the strategic planning process:
1. Defining the company’s mission and addressing the key corporate goals;
2. Analyzing the organization’s external competitive environment to identify opportunities and threats;
3. Analyzing the internal operating environment to identify the strengths and weaknesses of the organization;
4. Formulating and selecting strategies that, consistent with the organization’s mission and goals, will optimize the organization’s strengths and correct its weaknesses for the purpose of taking advantage of external opportunities while countering external threats (SWOT analysis); and
5. Developing and implementing the chosen strategies.
Creating the Mission Statement
The company’s mission statement provides the context within which its strategies will be formulated. The mission statement includes four components:
1. a statement of the company’s “reason to be”;
2. its vision, or a statement of a desired future state;
3. a statement of the organization’s values; and
4. a statement of its major goals.
This definition should be very broad, because customer demands can shift quickly, and a given need can be served in more than one way.
In writing the mission statement, management should ask itself, “What is our business? What will it be? What should it be?” In answering the questions, they should think in terms of the customer:
What customer groups are being served?
What customer needs are being served?
And by what means (skills, knowledge or distinctive competencies) are customers’ needs being served?
The answers should be customer-centered rather than product-centered.
Analyzing the External Environment
The primary purpose of analyzing the external operating environment is to identify opportunities as well as threats in the company’s operating environment that can affect it in the pursuit of its mission.
Opportunities arise when companies can leverage (definition: to gain advantage through the use of something) external conditions to develop and implement strategies that will make them more profitable.
Threats include conditions in the external environment that pose a danger to profitability.
Environments to Consider
Three environments should be examined, and the three environments are interrelated:
1. The industry in which the company operates,
2. The country or the national environment in which the company operates,
3. And the wider environment, or macroenvironment in which the company operates.
Porter’s Five Forces
Michael Porter, a leading authority on competitive strategy from Harvard Business School, provided a well-known framework, known as the five forces model, that helps managers analyze competitive forces in the environment to identify opportunities and threats.
According to Porter, when one or more of these competitive forces is strong, it limits the company’s ability to raise prices and earn greater profits.
Thus, a strong competitive force depresses profits and so is a threat. A weak competitive force allows the company to raise prices, thereby improving profits, and so is an opportunity.
The Five Forces
Porter’s Five Forces are:
1. The risk of entry by potential competitors.
2. The intensity of rivalry among established companies within an industry.
3. The bargaining power of buyers.
4. The bargaining power of suppliers.
5. The closeness of substitutes to an industry’s products.
1. The Risk of Entry by Potential Competitors
Potential competitors are companies not presently in an industry but which could enter it.
A major factor in the risk of entry is the height of barriers to entry, such as costs or regulatory requirements that make it difficult for new companies to enter an industry.
Economies of scale constitute a high entry barrier as well, since a new competitor would not have the volume to enable it to compete profitably against the established players in the industry.
2. Intensity of Rivalry Within the Industry
Rivalry is the competition among companies in an industry to gain market share from one another. Weapons in the competition include prices, product design, promotional efforts, selling efforts, and service and support after the sale.
If rivalry is intense, it leads to lower prices and higher costs, both of which lower profits.
Thus, intense rivalry is a strong threat.
However, if rivalry is not intense, companies in the industry can raise prices or reduce their spending on competitive weapons other than price, and industry profits will increase.
2. Intensity of Rivalry, continued
The intensity of rivalry can be influenced by things such as the height of exit barriers. Exit barriers are factors that prevent companies from leaving an industry.
If exit barriers are high, companies may find themselves locked into an industry with declining demand, causing excess capacity which leads to price wars.
An example of a high exit barrier is a large investment in assets that are specific to the industry. A company leaving an industry when the industry had overcapacity would not be able to sell its assets or would have to sell them at a very low price, and could have a large loss as a result.
3. Bargaining Power of Buyers
If buyers such as large discount store chains have the ability to bargain down prices or to demand better product quality and service which would increase manufacturers’ costs, an industry can become less profitable.
Therefore, powerful buyers are a threat.
4. Bargaining Power of Suppliers
If suppliers have the ability to raise the prices of inputs such as materials or direct labor (through labor unions, for instance) or to lower quality, this will raise costs of companies in the industry.
So, powerful suppliers are also a threat.
5. Closeness of Substitute Products
The existence of close substitutes for an industry’s product is a threat, because it limits the prices that can be charged for the product.
If there are few or no close substitutes, then companies have the opportunity to raise prices without fear that their customers will switch to a substitute.
Analyzing the Internal Enveronment
The purpose of internal analysis is to identify strengths and weaknesses within the organization. The company’s resources and capabilities need to be assessed.
Strengths lead to superior performance in the areas of efficiency, quality, innovation, and responsiveness to customers.
Weaknesses lead to inferior performance.
A company has competitive advantage when it is more profitable than the average company in its industry. It has a sustained competitive advantage if it is able to continue having above-average profitability over several years.
Creating a Competitive Advantage
In order to have a competitive advantage, a company must have or create two basic things:
1. Distinctive competencies and the superior efficiency, quality, innovation and customer responsiveness that result from them; and
2. The profitability that is derived from the value customers place on its products, the price that it charges for its products, and the costs of creating those products.
Distinctive Competencies
Distinctive competencies are strengths that a company has that enable it to either:
Have a differentiation advantage, i.e., be able to provide the customer with benefits that exceed those of its competitors, and/or
Have a cost advantage, i.e., be able to provide to the customer the same benefits as its competitors do, but at a substantially lower cost.
Distinctive competencies stem from two sources: resources and capabilities.
Distinctive Competencies - Resources
Resources are factors that enable a company to create value for its customers. They can be financial, physical, social/human, technological, or organizational factors. Resources can be tangible or intangible.
Tangible resources are things such as land, buildings, inventory, and cash.
Intangible resources are nonphysical resources like brand names, company reputation, intellectual property such as patents and trademarks, and employees’ knowledge.
As long as a company’s distinctive competency leads to a strong demand for the company’s products, then that distinctive competency has value. The more difficult a resource is to imitate or replace, the more valuable it is.
Distinctive Competencies - Capabilities
Capabilities refer to the company’s ability to coordinate its resources and to put them to productive use. These capabilities are a function of the way in which management makes decisions and manages its internal rules, routines and procedures to achieve its organizational objectives.
A company’s capabilities are thus the result of its organizational structure, processes, and control systems.
They are intangible, because they are a function of the way individuals within the organization interact, cooperate, and make decisions.
Distinctive Competencies - Capabilities
Four factors that derive directly from a company’s distinctive competencies create competitive advantage. These are called “generic” distinctive competences, because any company can pursue them. They are
1. Superior efficiency,
2. Superior quality,
3. Superior innovation, and
4. Superior customer responsiveness.
Creating Competitive Advantage – Profitability
Profitability is derived from the value customers place on its products, the price that it charges for its products, and the costs of creating those products.
The utility that customers receive from a product or service, i.e., the satisfaction they gain from it, determines the value that they place on the product or service. Utility comes from the attributes of the product, such as the way the product performs, the way it is designed, its quality and service after the sale.
If a company can increase the utility, or value, of its products in the eyes of its customers, it will be able to raise its prices to reflect the increased utility, or it can keep prices low to increase its sales.
Creating Value and Consumer Surplus
The company is creating value for customers when it produces and sells its product or performs and sells its service. This value created is the difference between the utility (U) that the customer gets from the product and the company’s costs (C) to produce it.
U − C = Created Value
The difference between the customer’s utility and the price charged is called consumer surplus by economists.
U − P = Consumer Surplus
Durability of Comparative Advantage
The durability of competitive advantage is how long any competitive advantage that a company has will last. This in turn will limit the successful company’s ability to profit from its competitive advantages. The durability of a company’s competitive advantage depends on three factors:
1. Barriers to imitation, or factors that make it difficult for a competitor to imitate the company’s distinctive competencies.
2. The capability of competitors to imitate the company’s competitive advantage, based upon their prior strategic commitments and their absorptive capacity.
3. The dynamism of the industry environment, or how rapidly the industry is changing. This is actually a function of the external environment.
SWOT Analysis
Once the company’s external opportunities and threats and internal strengths and weaknesses have been identified, the next step is to perform SWOT analysis (SWOT stands for Strengths, Weaknesses, Opportunities, Threats).
SWOT analysis consists of generating a series of strategic alternatives that could be pursued given the company’s strengths, weaknesses, opportunities and threats.
The purpose of this is to select the strategies that will do the best to align the company’s resources and capabilities to the demands of its environment.
Levels of Strategies
Management selects a set of strategies that will create and sustain a competitive advantage for the company. They consider a range of strategies. The general classifications of strategies considered are:
Functional-level strategy, which is for the purpose of improving operations inside the company. These operations include areas such as manufacturing, marketing, materials management, product development, and customer service.
Business-level strategy, which includes the position of the business in the marketplace as well as different positioning strategies that could be used. Some examples are (1) cost leadership, (2) differentiation, (3) focusing on a particular marketing niche or segment, or (4) a combination of more than one of these.
Global strategy, or considering how to expand operations outside the home country.
Corporate-level strategy, which considers what business or businesses the company should be in so as to maximize its long-run profitability and profit growth.
Functional Level Strategy
Functional-level strategies are developed to improve the effectiveness of a company’s operations. This improves its ability to achieve superior efficiency, quality, innovation, and customer responsiveness.
A company’s distinctive competencies determine the functional-level strategies that it can pursue.
Business Level Strategies
Business-level strategy relates to the business’s position in the market. Successful selection and pursuit of a business model is what permits a company to compete effectively. Business-level strategies that create competitive advantage contribute to a successful business model.
In developing its business model, a company must define its business first. Defining its business includes three sets of decisions. The decisions managers make about these issues determines the strategies they will formulate and implement in order to put the company’s business model into action.
Decisions For Defining the Business
Those decisions are:
1. Decisions about customers’ needs and what needs are to be satisfied.
2. Decisions about what products should be offered and to which customer groups.
3. Decisions about how customer needs are to be satisfied, using the company’s distinctive competencies.
The Four Generic Competitive Strategies
In order to achieve profitability that is greater than the average in its industry, a company must formulate and implement a business model that will give it a specific competitive position in relation to its competition.
There are four generic competitive strategies that will give a company competitive advantage.
1. Cost leadership,
2. Focused cost leadership – cost leadership in a narrow niche,
3. Differentiation, and
4. Focused differentiation – differentiation in a narrow niche.
Global Strategy
The multinational company has the opportunity to globalize its production. It can perform each value creation activity in the country where the cost and quality of factors of production (land, labor, capital, energy) are best for that activity. This strategy is called location economies.
The world economy is also moving toward globalization of markets. National markets are no longer so separated from one another by trade barriers and barriers of distance, time, and culture.
Strategies for International Operations
Companies usually choose from four basic strategies in their international operations:
1. Global standardization,
2. Localization,
3. Transnational, and
4. International.
Global Standardization
This strategy focuses on the cost reductions from economies of scale and location economies and pursues a low-cost strategy on a global scale.
In order to keep costs low, the company does not customize its product offerings or marketing strategies to local conditions.
Rather, it markets a standardized product worldwide and uses its cost advantage to price the product aggressively in all of its markets.
This strategy works if there are strong competitive pressures for cost reduction and the need to be locally responsive to customers is not great.
Localization
Localization works to increase profitability by offering goods or services that are customized for each different national market.
Localization works when consumer tastes vary among nations and when cost pressures are not too intense.
Customized products have more value in the local markets.
Customization requires smaller production runs and limits the company’s ability to benefit from cost savings of mass-production.
This strategy can work if the added value supports higher pricing and thus enables the company to recoup its higher costs. It also can work if it creates greater local demand, which can allow the company to reduce its costs through economies of scale in its local markets.
Transnational
This strategy can be used when requirements for local responsiveness are high and, at the same time, cost pressures are strong.
It is not easy to combine high local responsiveness with low cost structure, and few if any companies have actually been able to accomplish it.
It is a challenging task to create an organization that is capable of supporting this type of strategy.
International Strategy
This strategy is used by companies that do not have great pressure to produce low-cost goods and do not have great pressure to be locally responsive.
This is the case if the company is selling a product that serves universal needs and if the company does not face significant competition. This is an enviable position to be in.
Companies in this position usually centralize their product development while establishing manufacturing or marketing operations in each major geographic area where they do business.
The risk in international strategy is that eventually, competitors do emerge.
Therefore, managers need to be proactive in reducing their costs in order to be prepared.
Entering a Market
1. After a company decides to enter a market, the next issue the company needs to consider in what will be the best mode for the entry. The company has five main options:
1. Exporting
2. Licensing
3. Franchising
4. Entering into a joint venture with a host country company
5. Setting up a wholly owned subsidiary in the host country
Corporate Level Strategies
Corporate-level strategy involves a long-term perspective.
Managers need to continually consider how changes that are taking place in an industry, in technology, in customer preferences, and the competition will affect the company’s current business model.
Focusing on corporate-level strategies can help managers recognize trends and future opportunities, so that they can position their company to compete successfully in the changing environment.
Corporate-level strategy is used to redefine and reposition the company’s business model as needed to achieve and maintain its position in the changing environment through taking advantage of opportunities and defending against threats.
Developing and Implementing Strategies
Once a set of strategies has been chosen to achieve competitive advantage and increase performance, the strategies must be translated into action. This is strategy implementation. It is taking the actions necessary to execute the strategic plan.
Implementing strategy involves decisions about how to use the organizational structure, corporate culture and control environment to achieve the company’s goals and execute its business model.
This is organizational design.
Organizational Design
Organizational design involves determining how a company should create, combine and use three elements to pursue its business model successfully.
These three elements of organizational design are the company’s
1. Organizational structure,
2. Control systems and
3. Culture.
These are the means the organization uses to motivate and coordinate its members to work toward achieving competitive advantage through its distinctive competencies.
Organizational Structure
Organizational structure specifies who should do what, how they should do it, and how they should work together to increase efficiency, quality, innovation and responsiveness to customers.
Specific employees are assigned to specific value creation tasks and other roles. A company’s organizational structure coordinates and integrates employee efforts at all levels —corporate, business, and functional.
It also coordinates and integrates employee efforts across the company’s functions and business units so that they work together to achieve the strategies specified by the business model.
Control Systems
Control systems provide managers with incentives to motivate their employees to work to increase efficiency, quality, innovation and responsiveness to customers.
They also provide feedback to managers on how well the company and its employees are succeeding in increasing these building blocks of competitive advantage.
With this information, management can take action when needed to strengthen the business model.
Organizational Culture
Organizational culture includes all of the norms, values, beliefs and attitudes that people in an organization share.
It is the company’s way of doing things, and it controls the way its members interact with one another and also with outside stakeholders.
Different norms and values are appropriate in different types of organizations, and managers need to be intentional about cultivating and developing the organizational norms and values that are appropriate in their organizations.
Additionally, the structure of an organization affects its culture. In order to change the culture, it may be necessary to change the structure.
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