ISSN 1940-204X
Williams & Jacobs, LLC: A Deposition on Business
Monte Swain, CMA, CPA, CGMA, Ph.D.
Brigham Young University
Steve Smith, CMA, Ph.D.
Brigham Young University
INTRODUCTION
profits this year were essentially flat. This was affecting
everyone’s bonuses as well as the distribution of net income
to the partners.
After handing out the bonus letters the day before, Carly
was expecting some disappointed comments, and she was
correct. The comments capped off a tough week for Carly.
Earlier in the week, she had worked with the firm’s full
partners to review performance, and that process had been
painful. There were grumblings about costs—specifically
about the amounts some practice groups were spending on
travel and training. The discussion revived old arguments
about how costs were being assigned across practice groups.
Further, Arjun Singh, lead partner with the corporate
group, raised a new concern about profit reporting and
performance analysis in the firm. Arjun commented that his
group did a lot of development work to acquire and upsell
Williams & Jacobs,LLC, clients on other law services,
particularly services from the tax, property, and bankruptcy
groups. Arjun’s point was that his corporate group was
building business for other practice groups but receiving
no benefit to its own bottom line. Arjun’s frustration made
sense to Carly—operating profits for corporate were down
significantly from the previous year, and that was affecting
Arjun’s (and everyone else’s) compensation.
In addition to Arjun’s concerns, the complaints about
travel and training cost allocations, and the disappointing
overall profits, Carly’s week received another blow in the
club parking lot as she was putting her golf bags in the
car. Her new law associate in the estate and trust practice,
Malik Young, approached her and said, “Hey, Carly. I need
As Carly Jacobs, senior partner at law firm Williams & Jacobs,
LLC, drove home from the firm’s annual golf tournament
to meet her husband and go to the firm’s family picnic that
evening at Naperville Riverwalk, she was thinking very
carefully about what she had observed that day. The golf
tournament at the Springbrook Golf Course had always
been a big hit with the employees. But, frankly, this year it
seemed to Carly that the level of energy and laughter typical
of this event was low.
Under Carly’s direction, the firm’s office manager had
carefully designed the four-person scramble teams to help
individuals from different law practice groups within the
firm get to know each other better. Carly was therefore
disappointed to see that most of her colleagues were
choosing to sit with members of their own groups during
lunch rather than with their golf teams.
Carly was concerned, but she was not really surprised
as she reflected on the past year at the firm. She and her
retired partner, Isaac Williams, had originally designed
the firm’s business model to create healthy competition
between the professionals that form each practice group at
Williams & Jacobs, LLC. The firm’s annual bonus pool is
substantial, and it is distributed based on operating profits
for each practice group. Carly liked the competition. It
kept everyone motivated to serve clients and grow business
within the practice. It was supposed to help employees be
more conscientious about costs in the firm. In Carly’s view,
however, costs continued to be too high, and overall firm
IM A ED U C ATIO NA L C A S E JOURNAL
Bill Tayler, CMA, Ph.D.
Brigham Young University
1
VOL. 10, N O. 2, ART. 2, JUNE 2017
©2 0 1 7 I MA
to let you know that I’ve received an offer a couple of days
ago from one of the big downtown firms, and I’m seriously
considering it.”
Carly responded, “Wow, Malik. I know we’ve talked
before about calls you’ve been getting from headhunters,
but I had no idea you were considering offers. I really value
your contribution here at the firm, and I thought you were
enjoying the work.”
Malik stammered a bit: “I do enjoy the work we’re doing
together, Carly, and I really appreciate you mentoring me in
the estate and trust practice. This is the kind of law work I
want to continue doing, and so I really hadn’t taken seriously
these headhunter calls.” Malik paused. “It’s just that we
had such a disappointing year in our practice group. And my
bonus check yesterday was a hard pill to swallow. I’ve got big
law school loans I’m paying back, and I can’t afford another
year like this last one. You understand, don’t you, Carly?”
Carly did understand. She thanked Malik for his honesty
and asked him to give her 48 hours before taking the offer
from the other firm. She promised to consider carefully
what she might be able to do to hold on to one of the most
promising new associates in the firm. Malik agreed and
shook her hand, but his smile was a little thin, and Carly’s
concern about the overall profits at Williams & Jacobs, LLC,
weighed on her even more heavily.
returns. Isaac and Carly both learned a lot about taxes, and
the work certainly helped pay the bills that first year. More
important, their relationships with these clients often evolved
into long-term relationships involving ongoing estate and
trust work. Nevertheless, neither Isaac nor Carly was a tax
specialist, and Isaac was determined to stay focused on their
core business. Carly worked very hard those first few years,
and Isaac generously let her work her way into becoming a
partner in their new firm at an early stage of her career.
Within five years, Carly was a full partner in the firm, and
Williams & Jacobs, LLC, had opened its own standalone
office on Naper Boulevard. The firm had grown to include two
more associates and three paralegals. The initial work helping
clients file amended tax returns was evolving into a fullfledged tax practice that complemented the estate and trust
services. The tax practice became a second anchor for the firm
with the arrival of a new partner who specialized in tax.
Isaac and Carly expanded the practice over the next 10
years to include family law services and corporate services for
small to medium-sized businesses. The corporate services
eventually grew to become the largest practice group in
the firm. The firm also expanded by acquiring a small twoattorney specialty practice in property law.
One of the promoted associates also began a practice
focused on bankruptcy, enlisting the help of her recently
retired law school professor to serve in an “Of Counsel” role,
which is a senior attorney who—while not actively involved
in the day-to-day work of the firm—is either available for
consultation related to his or her specialty or manages a
particular practice or client(s) on a part-time basis. Part of the
value provided by Of Counsel attorneys is the “star power”
brought to the firm by associating the name of the individual
with the firm (on stationery, the website, and so on) without
requiring his or her full-time presence or compensation.
Managing Of Counsel attorneys presents particular
challenges (e.g., determining insurance and liability on the
attorney’s decisions, setting and managing expectations for
performance and behavior, and more).
The bankruptcy practice is at an early stage and is still
evolving. In fact, bankruptcy has yet to report an operating
profit (though it is close), which means this practice group
is not yet participating in the bonus pool. The bankruptcy
group is obviously concerned, and other partners are worried
about the drag on overall firm profits.
BUILDING THE WILLIAMS & JACOBS LAW
PRACTICE
Twenty-three years ago, Isaac Williams and Carly Jacobs
debuted their firm as an estate and trust law practice. Isaac
had been a partner with one of the large firms in downtown
Chicago, where Carly was a promising associate, having
graduated three years earlier from Michigan State University
near the top of her class. Isaac recognized Carly early on as a
rising star and offered to become her mentor. As they worked
together, he shared with Carly his dream to establish a small
firm outside the city where he could build on what he had
learned about successfully running a law practice. Carly was
convinced, and soon they both tendered their resignations
and signed a contract for a shared office space on Ferry Road
in the city of Naperville, 40 miles east of Chicago.
Based on Isaac’s reputation and financial resources, they
were able to weather the first “thin” year as they began their
practice in Naperville. Estate and trust work is based on a
strong community network and reputation, which takes time.
Potential estate and trust clients initially came to the firm
seeking tax advice, which often involved filing amended tax
IM A ED U C ATIO NA L C A S E JOURNAL
2
VOL. 10, N O. 2, ART. 2, JUNE 2017
THE FIRM’S COMPENSATION MODEL
income, computed as operating profit less bonus pool. (Note:
10% of net income is reserved by the firm for contingencies.)
Junior partners work through a significant buy-in period as a
process of becoming full partners. Specifically, 50% of each
junior partner’s net income distribution is withheld until
the buy-in is completed. The junior partners’ holdback is
distributed equally to the full partners. Currently, five of the
10 partners are junior partners. (Note: Of the ten partners
who share in the available net income, nine partners are
active in the firm business and one partner is retired.)
Williams & Jacobs, LLC, is rather unique in the extent it
uses Of Counsel attorneys to enlarge its practice profile. This
approach gives the firm flexibility to take on special projects
or handle occasional spikes in client demand. But the model
presents challenges when assigning costs. Of Counsel
attorneys are paid at a rate of 55% of their billing rate. This
works out to a higher annualized salary than even the most
senior partner, but Of Counsel attorneys do not participate
in the bonus pool as employees, nor do they receive a
distribution of firm profits like partners do.
Isaac, who is now Of Counsel to the estate and trust group,
only bills client hours occasionally. Most of his involvement
with the firm is consultative, advising on firm management
issues and occasionally on particularly difficult client issues.
The two Of Counsel attorneys working with the estate and
trust practice are almost entirely focused on billable client
work and require very little overhead support by the firm.
They work out of their home offices and handle their own
client communications. The two Of Counsel attorneys
who are involved in the family practice and the Of Counsel
attorney working with the property practice maintain an office
at the firm (despite working significantly less than full-time)
and require significant staff and paralegal support.
As the firm grows, the separation between the practices is
becoming blurred. This blurring is generally a good result,
as clients access multiple services and some of the firm’s
professionals become skilled in multiple practices. One result,
however, is a greater sharing of resources across practices. In
particular, the estate and trust practice often crosses to provide
combined client services with the tax and family practices.
Estate and tax also occasionally require bankruptcy support.
Similarly, the corporate practice often involves working with
the tax, property, and bankruptcy groups.
When Isaac retired three years ago, Carly became the
senior partner. Isaac continues to serve as an Of Counsel
attorney in the original estate and trust practice. Carly often
seeks Isaac’s advice on business development and employee
management issues. Despite being retired, Isaac remains
committed to the firm, and he continues to participate fully
with all the partners in the firm’s net income. At this point,
he is the only retired partner. The current headcount in the
firm is shown in Table 1.
Early on, as the firm began expanding, Isaac introduced
to Carly the idea that creating some competition between
different practice groups could strengthen everyone’s focus
on serving clients and building business. At the heart of the
firm’s management model is the bonus pool. All full-time
employees (excluding interns) participate in the bonus pool,
including active partners. The bonus pool at Williams &
Jacobs, LCC, is designed to create a sense of ownership for
all employees, not just partners.
The pool is established as 30% of the firm’s total
operating profit. The first 2% of the bonus pool is distributed
to the office staff team. The remaining 28% is distributed
to each practice based on relative operating profit. Each
practice allocates its share of the bonus pool to employees
based on their relative salaries or wages. Allocations to
employees who support multiple practice lines are handled
by determining their proportional work during the year.
Since individual salaries and wages are known only to
the full partners, it is not possible for most employees to
directly compare their bonus computations to those of their
colleagues. Nevertheless, employees generally have a good
sense of how their total compensation relates to others in the
firm. Table 2 provides details of the bonus pool allocation for
the year just ended.
Active partners participate fully in the bonus pool
(retired partners do not). Then all partners, including retired
partners, are distributed an equal share of the available net
IM A ED U C ATIO NA L C A S E JOURNAL
FINANCIAL PERFORMANCE
Table 3 provides an analysis of the client revenue at Williams
& Jacobs, LLC, for the last year. Billing rates are essentially
based on published studies of law practice in the surrounding
areas and are managed to be competitive with other offices.
In terms of client services, associates carry the lion’s share
of the load, which is typical of most offices. Partners
spend substantial time nurturing client relationships and
developing new client business, paralegals provide support
work that is not always billable, and interns are somewhat
protected from being overworked. In addition, associates,
paralegals, and interns participate substantially in training
events, both in and out of the office.
3
VOL. 10, N O. 2, ART. 2, JUNE 2017
CASE QUESTIONS
The last year’s profit and loss report is provided in Table
4. There are significant differences in both client revenue
and costs of service across the practice groups. There is also
a significant difference in how administrative expenses are
being reported for each practice group. But it is difficult
to describe this as a “performance” management issue for
practice groups since administrative costs are allocated
based on an overhead rate computed using total billable
hours. What is clear, however, is that the differences in these
various administrative expenses are sizable when computed
using a rate based on billable hours.
Williams & Jacobs, LLC, rents out some of its office
space to a property title company for $1,600 per month. This
“other income” is also allocated across the practice groups
as an offset to administrative expenses, resulting in a net
overhead rate last year of approximately $68.90 per billable
hour. Clearly, the volume of billable hours does not actually
create many of these costs. Otherwise, it would make no
sense to ever bill clients less than $69 an hour as this would
create a net loss on the client hour.
Carly Jacobs is reasonably confident that even the
average billable rate of $61 per hour for the paralegals is
making money for the firm. What is not clear to Carly is
the actual value (or margin) provided to Williams & Jacobs,
LLC, on each billable hour across the different practice
groups and for each type of professional. The average net
income distribution to partners for this last year was below
expectations. Either the volume of billable hours needs to
increase, or costs need to be reduced somewhere in the office
since client rates are largely set by the market.
You have been retained by Carly to help her analyze the
following issues as she works with the firm partners.
1. Each practice group is responsible for its costs of service,
but the allocation of administrative expenses is not clear.
What factors need to be considered in how costs are
assigned and used in profit analysis and performance
evaluation? What additional information is needed for
this analysis?
2. What should be done about the bankruptcy practice?
Does Carly need to take a different approach in analyzing
performance and profit for this practice group?
3. The overall management strategy at Williams & Jacobs,
LLC, is based on competition for the bonus pool. Based
on Arjun Singh’s frustration about noncompensated
work that benefits other practice groups, is this the best
approach to incentivize the professionals at Williams &
Jacobs, LLC?
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THE DRIVE HOME
Carly was thoughtful as she drove home. She had no regrets
about the decision to leave the big Chicago practice so many
years ago and start her own firm with Isaac. Overall, the firm
has been a success, but profit performance over the last few
years seems to indicate a leveling off, or worse.
As she drove, Carly resolved to gather the partners
as soon as possible to discuss this situation. Before that
meeting, Carly planned to spend some time with her old
mentor to consider the firm’s situation before it becomes a
crisis. By the time she pulled into the driveway, Carly had
specifically laid out in her mind the issues to discuss with
Isaac. She also resolved that outside help is needed.
IM A ED U C ATIO NA L C A S E JOURNAL
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VOL. 10, N O. 2, ART. 2, JUNE 2017
Table 1: Firm Headcount
Estate & Trust
Family
Tax
Corporate
Property
Bankruptcy
Total
1
2
2
1.6
2.4
1
1
1
2
3
3
2
1
1
2
1
1
1
1
1
1
1
9
8
11
3
4
7
42
Partners
Associates
Paralegals
Interns
Of Counsel
Office Staff
Total
2
Notes:
• One tax partner spends about 60% of his time working with the family practice.
• Most paralegals have flexible roles in the firm but largely work within the practice groups as listed above.
• The office staff supports all six practice groups and is composed of the office manager, the company accountant, a billings clerk, two office receptionists,
and two secretaries.
Table 2: Bonus Pool for Last Year
Estate &
Trust
Family
Tax
Corporate
Property
$12,223
$37,950
$82,999
$47,851
$32,054
$0
$15,220
$228,297
$536,640
$395,520
$612,000
$872,640
$364,320
$337,560
$294,000
$3,412,680
Bonus percent of compensation
2.3%
9.6%
13.6%
5.5%
8.8%
0.0%
5.2%
6.7%
Practice group bonus pool %
28%
Staff group bonus pool %
2%
Bonus pool assigned to practice
Practice group compensation
Bankruptcy
Office Staff
Total
Note (see Table 3 for key data):
• Bonus percentage of compensation is computed by dividing the bonus pool by the group compensation. This represents the employees’ bonus in
addition to compensation.
Table 3: Revenue Analysis for Last Year
Average Billable Rates per Hour
Estate & Trust
Family
Tax
Corporate
Property
Bankruptcy
Total
Partners
$320
$320
$340
$360
$300
$290
$329
Associates
175
N/A
180
190
170
160
179
Paralegals
60
50
65
70
60
55
61
Interns
N/A
N/A
80
80
N/A
N/A
80
Of Counsel
360
340
N/A
N/A
330
340
343
Estate & Trust
Family
Tax
Corporate
Property
Bankruptcy
Total
Partners
1,390
2,320
3,588
3,020
1,530
1,380
13,228
Associates
3,900
N/A
1,857
5,850
1,875
1,710
15,192
Paralegals
2,100
2,120
1,090
3,930
1,970
1,052
12,262
Interns
N/A
N/A
1,690
3,170
N/A
N/A
4,860
210
1,650
N/A
N/A
950
813
3,623
7,600
6,090
8,225
15,970
6,325
4,955
49,165
Total Billable Hours
Of Counsel
Total
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VOL. 10, N O. 2, ART. 2, JUNE 2017
Table 4: Profit and Loss Report for Last Year
Estate & Trust
Family
Tax
Corporate
Property
Bankruptcy
Total
Client Revenue
$444,800
$742,400
$1,219,920
$1,087,200
$459,000
$400,200
$4,353,520
Associates
Partners
682,500
N/A
334,260
1,111,500
318,750
273,600
2,720,610
Paralegals
126,000
106,000
70,850
275,100
118,200
57,860
754,010
N/A
N/A
135,200
253,600
N/A
N/A
388,800
75,600
561,000
N/A
N/A
313,500
276,420
1,226,520
$1,328,900
$1,409,400
$1,760,230
$2,727,400
$1,209,450
$1,008,080
$9,443,460
Of Counsel payments (55%)
($41,580)
($308,550)
N/A
N/A
($172,425)
($152,031)
($674,586)
Professional salaries
(436,800)
(296,640)
(563,040)
(727,200)
(276,000)
(291,000)
(2,590,680)
(99,840)
(98,880)
(48,960)
(145,440)
(88,320)
(46,560)
(528,000)
N/A
N/A
(56,100)
(111,100)
N/A
N/A
(167,200)
Payroll tax, benefits, etc.
(106,080)
(80,093)
(133,253)
(183,416)
(71,760)
(68,676)
(643,278)
Travel and entertainment
(14,450)
(24,130)
(67,785)
(164,855)
(27,438)
(21,750)
(320,408)
Court and filing fees
(61,130)
(39,765)
(21,980)
(119,876)
(21,444)
(87,650)
(351,845)
Postage and delivery
(1,295)
(5,111)
(3,663)
(2,786)
(850)
(4,610)
(18,315)
($761,175)
($853,169)
($894,781)
($1,454,673)
($658,237)
($672,277)
($5,294,312)
Total
Overhead
Rate
Interns
Of Counsel
Total Service Revenue
Costs of Service
Paralegal salaries
Intern wages
Total Costs of Service
Administrative Expense
Office staff salaries and wages
Payroll tax, benefits, etc.
Supplies and travel
Marketing
Estate &
Trust
Family
Tax
Corporate
Property
Bankruptcy
($45,447)
($36,417)
($49,184)
($95,498)
($37,823)
($29,630)
($294,000)
(5,908)
(4,734)
(6,394)
(12,415)
(4,917)
(3,852)
($38,220)
($5.98)
(0.78)
(89,565)
(71,769)
(96,930)
(188,203)
(74,539)
(58,394)
(579,400)
(11.78)
(76,094)
(60,976)
(82,352)
(159,898)
(63,328)
(49,611)
(492,260)
(10.01)
(138,428)
(110,924)
(149,812)
(290,880)
(115,205)
(90,251)
(895,500)
(18.21)
Training and licensing
(50,935)
(40,815)
(55,123)
(107,030)
(42,390)
(33,208)
(329,500)
(6.70)
Dues and subscriptions
(9,312)
(7,462)
(10,078)
(19,567)
(7,750)
(6,071)
(60,240)
(1.23)
HR development
(7,602)
(6,092)
(8,228)
(15,975)
(6,327)
(4,957)
(49,180)
(1.00)
(15,289)
(12,251)
(16,546)
(32,127)
(12,724)
(9,968)
(98,905)
(2.01)
Property tax
(3,055)
(2,448)
(3,306)
(6,419)
(2,542)
(1,991)
(19,760)
(0.40)
Building maintenance
(9,756)
(7,818)
(10,559)
(20,501)
(8,120)
(6,361)
(63,115)
(1.28)
Equipment purchase and maintenance
(30,069)
(24,095)
(32,542)
(63,185)
(25,025)
(19,604)
(194,520)
(3.96)
Utilities
(11,006)
(8,819)
(11,911)
(23,128)
(9,160)
(7,176)
(71,200)
(1.45)
Computer and technology
(18,983)
(15,211)
(20,544)
(39,888)
(15,798)
(12,376)
(122,800)
(2.50)
(2,309)
(1,851)
(2,499)
(4,853)
(1,922)
(1,506)
(14,940)
(0.30)
(12,266)
(9,829)
(13,275)
(25,775)
(10,208)
(7,997)
(79,350)
(1.61)
(691)
(554)
(748)
(1,452)
(575)
(451)
(4,470)
(0.09)
($526,715)
($422,065)
($570,030)
($1,106,794)
($438,352)
($343,404)
($3,407,360)
(69.30)
Insurance (malpractice, etc.)
Mortgage interest
Offsite storage
Accounting and payroll
Bank interest and charges
Total Administrative Expenses
Other
Inc. Rate
Other Income - office rent
Operating Profit
2,968
2,378
3,212
6,237
2,470
1,935
19,200
$43,978
$136,545
$298,631
$172,169
$115,332
($5,666)
$760,988
Bonus pool (30%)
$0.39
(228,297)
Avg. per
Partner
Net Income
$532,692
$53,269
Notes:
• Costs of service are traced directly to each practice group.
• Payroll tax, benefits, etc. in the Costs of Service are for professionals, paralegals, and interns. These similar costs in Administrative Expense are for office staff.
• Administrative expenses and other income are allocated based on billable hours in each practice group.
IM A ED U C ATIO NA L C A S E JOURNAL
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VOL. 10, N O. 2, ART. 2, JUNE 2017
ACC421 Management Control and
Decision Making
Strategic Planning
ACC421
ACC421 Management Control and
Decision Making
What is planning?
✓the process that provides guidance and direction regarding what an
organization needs to do throughout its operations
✓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.
✓The planning process not only defines the company’s objectives and
goals, it sets the stage for prioritizing how to develop, communicate
and carry out accomplishing them.
ACC421 Management Control and
Decision Making
Importance of planning
1. forces management to think about where the company is and
where the company wants to be.
2. coordinates company efforts toward the same goals.
3. provides clear performance standards, enabling better monitoring
and control of results.
4. can anticipate and respond quickly to sudden changes in its
environment.
5. Indicator of management’s competence - planning and controlling
the firm’s activities - either create or seize a positive opportunity, or
escape a decline.
ACC421 Management Control and
Decision Making
Planning in Order to Achieve Superior
Performance
- Main goals: achieve superior performance, profitability, shareholder
value
- Gain competitive advantage i.e. when it is more profitable than the
average company in its industry.
- Shareholders want to see profitable growth: high profitability and
also sustainable profit growth.
- Management’s challenge: Attaining and maintaining both short-term
profitability and long-term profit growth
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Strategic Leaders
• Managing the company’s strategy-making process to increase
company performance and maximize shareholder value.
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What is strategy?
• 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 specifies how an organization matches its own capabilities
with the opportunities in the marketplace
• It involves designing, delivering and supporting products; improving
efficiency and effectiveness of operations; and designing the
organization structure, control systems, and culture.
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How does strategy lead to profitability?
• Competitive advantage.
- set the company apart from its competitors and cause it to
consistently outperform them.
- Formulate a business model that is efficient than
competitors,
- Adopt differentiated strategies in key areas.
- Competitive advantage: attributes that enable an organization to outperform its
competitors such as access to natural resources, highly -skilled personnel, a favorable geographic
location, high entry barriers, and so forth.
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Other factors to consider
- Growing or shrinking demand
- Price wars – leading to lower prices due to excess of demand over
supply or raising prices due to an excess of demand over supply.
- Conditions vary from industry to industry.
Profitability and profit growth depends on
(1) its success relative to other firms in its same industry, and
(2) the overall performance of the industry it is in compared with that of
other industries.
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Strategic planning
• Strategic plans are usually for a period of five years or longer. The plan
is updated, or rolled forward, each year.
• The results of this annual planning process are usually used, along
with tactical and operational planning, in developing the budget for
the coming year.
• In this way, the strategic plan is used to determine resource
allocation within the company.
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The Role of Management in Attaining Profitable
Growth
1) Passive role and views its function basically as making reactive decisions
in response to environmental events as they occur.
2) Active role - the planning and control theory - emphasizes the planning
function of management and its ability to control the activities of the
business.
• Most companies’ managements operate somewhere between these two.
But, if non-controllable variables become dominant, a competent
management team can almost always manage and use the situation to
move the company to environments where the variables are controllable
again. When management operates more closely to the planning and
control theory, it has more ability to reduce the randomness of events and
to deal productively with those that do occur
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General principles of planning
• Effective planning → Coordination among the different units and
departments in the company → alignment with the larger goals of
the company.
• Misalignment and lack of coordination → working at cross-purposes
and not move in a positive direction.
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Strategic Plans (Long-term plans)
• 5 years or longer – based on the objectives of the organization
• Strategic planning – responsibility of the top management
• Involvement from employees at all levels of the organization
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•
•
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they are closest to what is going on.
promotes their understanding and ownership of the strategic plan,
motivates them to participate in its implementation,
promotes an understanding on their part that the decision-making process is
fair and inclusive.
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Process of strategic planning
• Examines both the internal and external factors affecting the
company.
• Review the long-term objectives and economic environment of the
firm (both internally and externally)
• Identify any threats, opportunities, or limitations that it faces.
• Review capacity and capital resources – to meet expected demand
• Make long term business plans (e.g. dropping or adding product lines
or specific products, or making long-term capital investments in
increasing capacity or capital resources or decreasing capacity or
capital resources.)
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Intermediate and Short-Term Plans
• Intermediate or tactical plans - one to five years - to implement
specific parts of the strategic plan.
• Upper and middle managers develop tactical plans.
• Short-term or operational plans - one week to one year- developed
from the tactical plans.
• Operational plans
• include budgeted amounts
• drive the day-to-day operations of the company.
• Middle and lower-level managers develop operational plans.
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Short-term or operational plans are the primary
basis of budgets.
• Most budgets are developed for a period of one year or less
• Formulates action steps from the organization’s short-term objectives.
• The budget reflects the company’s operating and financing plans for a
specific period (generally a year or a quarter or a month).
• The one exception to this is the capital expenditures budget. The capital
expenditures budget is generally developed for a long period of time and
the relevant impact is incorporated into the operating and financial
budgets each year.
• The capital expenditures budget needs to be a long-term budget because it
may not be possible to quickly increase the capacity of the company. The
company needs time to plan for capacity increases.
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Other Types of Plans
• Standing-purpose plans or single-purpose plans - for a specific item such as
construction of a fixed asset, the development of a new product, or the
implementation of a new accounting system.
• also incorporated into the operating and financial budgets during the relevant years.
• Marketing and operation plans fall into this category.
• Contingency planning is planning that a company develops to prepare for possible
future events (especially negative events).
• Also known as the “what if?” planning.
• Preparing different plans for different situations is more expensive because it entails
developing multiple plans.
• Enable the company to be better prepared for what may occur - lead to greater savings than
the cost of the planning itself.
• Important for companies that are influenced by outside events in order to react quickly in the
best possible manner.
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Strategic Planning Process
• The formal strategic planning process consists of five steps.
1) Defining the company’s mission, vision, values, and goals.
2) Analyzing the organization’s external competitive environment in order to
identify opportunities and threats.
3) Analyzing the internal operating environment to identify strengths, weaknesses
and limitations 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 and limitations for the purpose of taking advantage of external
opportunities while countering external threats (SWOT analysis)
5) Developing and implementing the chosen strategies.
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1) Defining the Company’s Mission, Vision, Values,
and Goals
• The company’s mission statement provides the context within which its
strategies will be formulated.
• The mission statement includes four components:
(i) Statement of the Company’s Mission or “Reason To Be”
A company’s mission is what the company does, “What is our business?
What will it be? What should it be?”
Should be answered 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?
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(ii) Statement of the Company’s Vision
- What the company would like to achieve or become
- It should be challenging.
- an ambitious future state that will (1) motivate employees at all levels
and (2) drive the strategies that the company’s management will
formulate and implement in order to achieve the vision.
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(iii) Statement of the Company’s Values
- How managers and employees should behave and do business.
- The foundation of its organizational culture - consists of the values,
norms and standards that govern how the company’s employees
work to achieve the company’s mission and goals.
- These standards are in turn associated with the company’s
performance—either good performance or poor performance.
- Thus the company must not only “talk the talk” but it must also “walk
the walk.”
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(iv) Statement of the Company’s Goals
▪ A goal is a precise and measurable future state that the company wants to achieve.
▪ Specifies what needs to be done in order to attain the company’s mission and
vision.
▪ Basis for managers’ performance evaluation
▪ Goals should be
1) They are precise and measurable.
2) The number of goals should be limited so managers can maintain their focus on
them.
3) They should be challenging while at the same time being realistic.
4) Time-line - when they should be achieved in order to create a sense of urgency.
5) Stated in specific terms to prevent “interpretation” of the objectives by
employees.
6) Acceptance of goals
More on goals and objectives
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• Often used interchangeably.
• Exist at all levels of the organization.
• Corporate goal is a measurable future state that the company wants to
achieve - what needs to be done for the company to achieve its mission or
vision.
• Objectives are the series of steps taken to attain the goal.
• Smaller targets at unit or departmental level contribute to attaining the corporate
goal
• Individuals within the organization also have their individual goals and objectives.
• Goals are met through attaining the smaller targets that are the
objectives. The goals and objectives of the corporation are met through
accomplishment of the goals and objectives of the divisions, and the goals
and objectives of the divisions are met through accomplishment of the
goals and objectives of the people in the divisions.
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• Planning helps to achieve its goals and objectives.
• Management ensures the smaller goals and objectives work toward the
ultimate achievement of the corporate-level goals and objectives.
• When the goals of one level of the company fit with the goals of the next
highest level, the company has achieved a means-end relationship. A
means-end relationship results when the achievement of the goals of one
level enables the next highest level to achieve its goals as well.
• Efficiency is the attempt to fulfill the goals and objectives of the company
while using the least amount of inputs.
• Effectiveness → the actual accomplishment of goals.
• Though both efficiency and effectiveness are important, effectiveness is of
ultimate importance. If a company is efficient but does not accomplish
what is needed, then the efforts and resources used are wasted.
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QnA
• Which one of the following management considerations is usually
addressed first in strategic planning?
a) Outsourcing.
b) Overall objectives of the firm.
c) Organization structure.
d) Recent annual budgets.
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2) Analyzing the External Environment
• Opportunities arise when companies can leverage 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.
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
as well as the international environment,
3) And the wider environment, or macroenvironment in which the company
operates.
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Industry analysis
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•
Assessing the company’s industry as a whole,
The company’s competitive position within the industry,
Competitive positions of its major rivals.
Nature of the industry, the stage the industry is in, the dynamics and the
history are all part of this analysis.
For example, the industry the company operates in may be highly
competitive, or it may be less competitive. The amount of competition the
company faces will impact the prices it can charge, the marketing effort
needed, research and development needs, and so forth. Likewise, if the
industry is growing, the company can expect and plan to benefit from that
growth; or, if the industry is in a decline, the company should plan how it
needs to respond.
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National and international environment analysis
• Assessing domestic as well as international political risk and the
impact of globalization on competition within the industry.
International political risks include the obvious risks of government
expropriation (government seizure of private property with some
minimal compensation offered, generally not an adequate amount)
and war (which can affect employee safety and create additional
costs to ensure employees’ safety).
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The macroenvironment analysis
Macroeconomic factors affecting the entire industry or the economy as a whole.
Economic growth leads to more consumer spending and gives companies the
opportunity to expand their operations and increase their profits. Economic
recession leads to a reduction in consumer spending and, in a mature industry, may
cause price wars.
The level of interest rates can affect a company’s sales and net income if the
company is in an industry where demand is affected by interest rates, such as the
housing market or the manufacture of capital goods. Rising interest rates will cause
demand to decrease, while falling interest rates will cause demand to increase.
Changes in currency exchange rates affect the competitiveness of companies in
international trade. A declining local currency creates opportunities for increased
international sales while decreasing foreign competition. An increasing local
currency causes the opposite condition.
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The macroenvironment analysis (cont.)
• Both inflation and deflation cause businesses to be less willing to make
investments in new projects. When inflation increases, it is difficult to plan
on what the real return will be from an investment. Deflation also causes a
lack of stability in the economy, because when prices are deflating,
companies with a high level of debt and the obligation to make regular
fixed payments on the debt can find themselves unable to service that
debt. Those companies will be reluctant to commit to new investment
projects.
• social factors such as environmental issues and government, legal,
international, and technological factors that affect the industry and the
company
• Current or future anticipated tax credits
Porter’s five forces
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1) The risk of entry by potential competitors.
- Barriers to entry, such as costs or regulatory requirements that make it difficult for new
companies to enter an industry, is a major determinant of the risk of entry by potential
competitors.
- 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) The intensity of rivalry among established companies within an industry.
- Compete to gain market share - Competition based on prices, product design, promotional
efforts, selling efforts, and service and support after the sale.
- Intense rivalry - leads to lower prices and higher costs, both of which lower profits - a strong
threat. Low intensity - companies in the industry can raise prices or reduce their spending on
competitive weapons other than price, and industry profits will increase.
- The height of exit barriers can influence the intensity of rivalry among established companies
within an industry. 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 resulting in a large loss.
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Porter’s five forces
3) The 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 that would increase manufacturers’ costs, an industry can
become less profitable. Therefore, powerful buyers are a threat.
4) The 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, it will raise the costs of companies in the
industry. So powerful suppliers are also a threat.
5) The closeness of substitutes to an industry’s 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.
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3) Analyzing the Internal Environment
• To identify strengths, weaknesses and limitations within the
organization.
• Assess company’s resources and capabilities
• Strengths lead to superior performance in the areas of efficiency,
quality, innovation, and responsiveness to customers.
• Weaknesses and limitations lead to inferior performance. As we said
earlier, 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.
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Competitive advantage driven from
1) Distinctive competencies and the superior efficiency, quality,
innovation and customer responsiveness that result from them.
1) A differentiation advantage, meaning it is able to provide the customer
with benefits that exceed those of its competitors, and/or
2) A cost advantage, meaning it is 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.
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.
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Internal environment analysis (cont.)
• Analyzing financial performance
-comparing, or benchmarking, the company’s current financial
performance against that of its competitors as well as against the
company’s own historical performance.
-Benchmarking help management to understand what is going on in
the company and identify its strengths and weaknesses.
-Whether the strategies the company is pursuing are maximizing value
creation, whether the company’s costs’ are in line with those of their
competitors, and whether the company’s resources are being used
effectively.
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Internal environment analysis (cont.)
• Durability of Competitive Advantage
1) Barriers to imitation, or factors that make it difficult for a competitor to imitate the
company’s distinctive competencies, such as patents.
2) The capability of competitors to imitate the company’s competitive advantage, based
upon their prior strategic commitments and their absorptive capacity. Competitors’
prior strategic commitments are commitments to specific ways of doing business.
Once a company makes a strategic commitment, it will be difficult for it to respond to
new competition if it would require changing its commitments. Absorptive capacity
means the company’s ability to make use of new knowledge.
3) The dynamism of the industry environment, or how rapidly the industry is changing.
The dynamism of the industry is a part of the external environment. When an industry
is changing rapidly, a company with competitive advantage may quickly find its market
position overtaken by a competitor with a new innovation.
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Organisational Failure
1) Inertia, or reluctance to change strategies in order to adapt to changing
conditions in the company’s competitive environment.
2) The company’s prior strategic commitments, such as investments, which may
limit its ability to imitate rivals and to be flexible, causing a competitive
disadvantage.
3) The Icarus paradox. The Icarus paradox is based on a Greek myth. Icarus used a
pair of wings that he stuck to his body with wax to escape from an
imprisonment. But he flew so well that he flew too close to the sun. The heat
of the sun melted the wax holding his wings together. He plunged to his death.
This same paradox can be applied to many companies if they become too
dazzled by their own success. They believe that the way to attain future
success is to follow the same strategies that made them successful in the past.
They can become so specialized and inner directed that they lose sight of
reality and of what is needed to maintain their competitive advantage.
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Avoiding failure
• Focus on all four generic building blocks of competitive advantage: superior efficiency,
quality, innovation, and responsiveness to customers. Develop distinctive competencies
in those areas that will result in superior performance. Do not become so focused on one
of them that the others are neglected.
• Practice continuous improvement and continuous learning. Things change so quickly
that the only way to maintain a competitive advantage over time is to continually
improve the four generic building blocks: efficiency, quality, innovation, and
responsiveness to customers. Continuous learning ― seeking ways to improve
operations and creating new competencies.
• Identify and adopt best industrial practice through benchmarking in order to contribute
to superior efficiency, quality, innovation, and responsiveness to customers.
• Overcome barriers to change. Once the barriers to change have been identified, good
leadership and appropriate changes in organizational structure and control systems are
required in order to implement the changes.
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4) Formulating Strategies (SWOT Analysis)
• To optimize the organization’s strengths and correct its weaknesses in order to take
advantage of external opportunities while countering external threats.
• Generate series of strategic alternatives that align the company’s resources and
capabilities to the demands of its environment.
Functional-level strategy, 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, considering what business or businesses the company should be
in so as to maximize its long-run profitability and profit growth.
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5) Developing and Implementing the Chosen
Strategies
• Translating strategies into actions – strategy implementation
• 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 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.
• References: http://panmore.com/google-organizational-structure-characteristics-analysis
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• 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 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. Furthermore, the structure
of an organization affects its culture. In order to change the culture, it may be necessary
to change the structure.
• Reading: http://panmore.com/google-organizational-culture-characteristics-analysis
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Characteristics of Successful Strategic Plans
• Strategic planning is an ongoing process, not just a one-time or once-every-five-years
activity. It should be integrated into the organization as a core business practice that
keeps the company focused on its strategic direction.
• A successful strategic plan is integrated throughout the organization. Strategies should
be balanced across all of the dimensions that will drive growth in the organization. All of
the different areas of the business need to be in alignment and operating together.
• In developing a strategic plan, all former assumptions should be challenged. The
strategy should be based on a clear understanding of the current direction of the
business environment and the company’s markets, not just a reiteration of the previous
plan.
• Strategies should be long-term in nature. However, if an idea or a discovery that could
lead to a new product or a new market is brought forth or if a disruptive change occurs in
the market after the plan has been formalized, the plan should be flexible enough to
enable the company to respond to the change or the new opportunity.
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Characteristics of Successful Strategic Plans (cont.)
• Employees’ input into the strategic planning process, though led by top management.
Ideas for change may come from lower level managers, engineers, or customer service
employees because they are closest to what is going on. It will also promote their
understanding and ownership of the plan, motivates them to participate in its
implementation, and helps them to perceive that the decision-making process is fair and
inclusive.
• Everyone needs to know what the firm is trying to achieve. The strategy should be
communicated clearly and often to everyone in the organization. The strategy should be
viewed as a roadmap to take the firm from vision to reality.
• The organization and its people need to have the tools to properly execute the strategy.
Performance objectives should be developed, and employees at all levels should have
performance incentives linked to the company’s strategy.
• The strategic planning process should be viewed as an opportunity to develop a shared
vision, increase the sense of joint-ownership among the staff, and build a leadership
team that is focused on moving the business in the right direction.
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