P ART TWO
PLANNING: DELIVERING STRATEGIC VALUE
chapter
4
“
Planning and Strategic
Management
Manage your destiny, or someone else will.
”
— Jack Welch, former CEO, General Electric
LEARNING OBJECTIVES
CHAPTER OUTLINE
After studying Chapter 4, you will be
able to:
An Overview of Planning Fundamentals
The Basic Planning Process
LO 1
Summarize the basic steps in any
planning process. p. 126
LO 2
Describe how strategic planning
should be integrated with tactical
and operational planning. p. 130
LO 3
Identify elements of the external
environment and internal resources
of the firm to analyze before
formulating a strategy. p. 137
LO 4
Define core competencies and
explain how they provide the
foundation for business strategy.
p. 140
LO 5
Summarize the types of choices
available for corporate strategy.
p. 145
LO 6
Discuss how companies can achieve
competitive advantage through
business strategy. p. 148
LO 7
Describe the keys to effective
strategy implementation. p. 150
Levels of Planning
Strategic Planning
Tactical and Operational Planning
Aligning Tactical, Operational, and Strategic
Planning
Strategic Planning
Step 1: Establishment of Mission, Vision,
and Goals
Step 2: Analysis of External Opportunities
and Threats
Step 3: Analysis of Internal Strengths
and Weaknesses
Step 4: SWOT Analysis and Strategy
Formulation
Step 5: Strategy Implementation
Step 6: Strategic Control
Management Close-Up
WHAT STRATEGIES CAN OLLI-PEKKA KALLASVUO USE TO KEEP NOKIA RINGING UP PROFITS?
Nokia CEO Olli-Pekka Kallasvuo should have plenty of
when it comes to smart phones in North America, both
reasons to be happy these days. More than a billion reaApple’s iPhone and Research in Motion’s BlackBerry
sons, you might say. Finland-based Nokia is the world’s
models eclipse Nokia. Nokia’s strong overall position
leading cell phone maker, and more than 1 billion peomay more than offset its lesser market share in the
ple use its phones. Nokia leads the market in Europe,
United States and Canada, but in the wireless world no
Asia, the Middle East, and
manufacturer can afford to be
Africa, selling more than its top
off its game.
Wireless communication and the
three competitors combined.
Industry observers regarded
Internet have transformed how the world
In addition, the company reguNokia’s 2006 decision not to
communicates, and new technologies
larly wins praise from Greenproduce folding clamshell handare emerging almost daily. As you read
peace and Fortune magazine for
sets as a strategic error. Then
this chapter, consider how Olli-Pekka
its environmentally responsible
in 2007 Apple made a splash
Kallasvuo needs to bring a different kind
practices.
with the iPhone’s alphabetic
of discipline to the planning at Nokia.
However, Nokia doesn’t
touch screen—a feature not
have bragging rights in North
available in Nokia phones.
America. Although it posted worldwide sales of $74
When Google announced advancements in software
billion in a recent year, Nokia has yet to capture the
that would bring Internet capability to cell phones,
hearts and wallets of U.S. and Canadian consumers.
Nokia reacted coolly at first. How would the resulting
Nokia’s high-end models with satellite mapping features
buzz about convergence—the marriage of cell phone
do well in Europe and Asia, and in developing countries
mobility and Internet capability—influence the way
its low-end phones have been wildly successful. But
Nokia plans for the future?1
{
}
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Planning: Delivering Strategic Value
To imagine cell phone giant Nokia—or any organization—dealing with the significant
challenges it faces without developing a plan beforehand is almost impossible. Planning is a formal expression of managerial intent. It describes what managers decide to
do and how they will do it. It provides the framework, focus, and direction required
for a meaningful effort. Without planning, any improvements in an organization’s
innovation, speed, quality, service, and cost will be accidental, if they occur at all. This
chapter examines the most important concepts and processes involved in planning and
strategic management. By learning these concepts and reviewing the steps outlined,
you will be on your way to understanding the current approaches to the strategic management of today’s organizations.
An Overview of Planning Fundamentals
The importance of formal planning in organizations has grown dramatically. Until
the mid-1900s, most planning was unstructured and fragmented, and formal planning was restricted to a few large corporations. Although management pioneers such
as Alfred Sloan of General Motors instituted formal planning processes, planning
became a widespread management function only during the last few decades. Initially,
larger organizations adopted formal planning, but today even small firms operated by
aggressive, opportunistic entrepreneurs engage in formal planning.2
Planning is the conscious, systematic process of making decisions about goals and
activities that an individual, group, work unit, or organization will pursue in the future.
Planning is not an informal or haphazard response to a crisis; it is a purposeful effort
that is directed and controlled by managers and often draws on the knowledge and
experience of employees throughout the organization. Planning provides individuals
and work units with a clear map to follow in their future activities; at the same time
this map may be flexible enough to allow for individual circumstances and changing
conditions.
LO 1
The Basic Planning Process
Because planning is a decision process—you’re deciding what to do and how to go about
doing it—the important steps followed during formal planning are similar to the basic
decision-making steps we discussed in Chapter 3. Figure 4.1 summarizes the similarities
between decision making and planning—including the fact that both move not just in
one direction but in a cycle. The outcomes of decisions and plans are evaluated, and if
necessary, they are revised.
We now describe the basic planning process in more detail. Later in this chapter,
we will discuss how managerial decisions and plans fit into the larger purposes of the
organization—its ultimate strategy, mission, vision, and goals.
situational analysis
A process planners use,
within time and resource
constraints, to gather,
interpret, and summarize
all information relevant to
the planning issue under
consideration.
Step 1: Situational Analysis As the contingency approach advocates, planning
begins with a situational analysis. Within their time and resource constraints, planners
should gather, interpret, and summarize all information relevant to the planning issue
in question. A thorough situational analysis studies past events, examines current conditions, and attempts to forecast future trends. It focuses on the internal forces at work
in the organization or work unit and, consistent with the open-systems approach (see
Chapter 2), examines influences from the external environment. The outcome of this
step is the identification and diagnosis of planning assumptions, issues, and problems.
A thorough situational analysis will provide information about the planning decisions you need to make. For example, if you are a manager in a magazine company
considering the launch of a sports publication for the teen market, your analysis will
include such factors as the number of teens who subscribe to magazines, the appeal
of the teen market to advertisers, your firm’s ability to serve this market effectively,
Planning and Strategic Management
Chapter 4
General
decision-making stages
Specific
formal planning steps
Identifying and
diagnosing the problem
Situational
analysis
Generating alternative
solutions
Alternative
goals and plans
Evaluating
alternatives
Goal and
plan evaluation
Making
the choice
Goal and
plan selection
Implementing
Implementation
Evaluation
Monitor and
control
127
FIGURE 4.1
current economic conditions, the level of teen interest in sports, and any sports magazines already serving this market and their current sales. Such a detailed analysis will
help you decide whether to proceed with the next step in your magazine launch.
Decision-Making Stages
(Chapter 3) and Formal
Planning Steps (Chapter 4)
Step 2: Alternative Goals and Plans Based on the situational analysis, the
planning process should generate alternative goals that may be pursued in the future
and the alternative plans that may be used to achieve those goals. This step in the process should stress creativity and encourage managers and employees to think in broad
terms about their jobs. Once a range of alternatives has been developed, the merits of
these different plans and goals will be evaluated. Continuing with our magazine publishing example, the alternatives you might want to consider could include whether
the magazine should be targeted at young men, young women, or both groups, and
whether it should be sold mainly online, through subscriptions, or on newsstands.
Goals are the targets or ends the manager wants to reach. To be effective, goals
should have certain qualities, which are easy to remember with the acronym SMART:
Specific—When goals are precise, describing particular behaviors and outcomes,
employees can more easily determine whether they are working toward the
goals.
Measurable—As much as possible, the goal should quantify the desired results, so
that there is no doubt whether it has been achieved.
Attainable (but challenging)—Employees need to recognize that they can attain
the goals they are responsible for, or else they are likely to become discouraged.
However, they also should feel challenged to work hard and be creative.
Relevant—Each goal should contribute to the organization’s overall mission
(discussed later in this chapter), while being consistent with its values, including
goal
A target or end that
management desires to
reach.
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Planning: Delivering Strategic Value
ethical standards (see Chapter 5). Goals are most likely to be relevant to the
organization’s overall objectives if they are consistent within and among work
groups.
Time-bound—Effective goals specify a target date for completion. Besides knowing
what to do, employees should know when they need to deliver results.
General Electric’s goal of being first or at least second in all its markets is a wellknown example of a goal that is specific, measurable, and challenging. SMART goals
such as these not only point individual employees in the direction they should be
going but also tend to be accepted by the managers and employees who are charged
with achieving them. Thus, they both direct employees and motivate them (for more
on the importance of motivation, see Chapter 13).
plans
Plans are the actions or means the manager intends to use to achieve goals. At a
minimum,
planning should outline alternative actions that may lead to the attainment
The actions or means
of
each
goal,
the resources required to reach the goal through those means, and the
managers intend to use to
obstacles
that
may
develop. IBM has goals to increase its profits, and the fastest-growing
achieve organizational goals.
area of growth is in software. To meet profit goals, the software unit acquires existing
software companies that have high-potential products but lack the means to promote
The bottom line them aggressively enough. IBM’s software group, under the leadership of Steve Mills,
Service plans how its giant sales force will sell the new products. Those plans include training
Contingency plans that the salespeople in what the new software does and how it can help IBM’s clients. To
keep service levels high improve the effectiveness of the sales force, the software group planned a selling sys3
during a crisis can seal a tem for categorizing and keeping track of each salesperson’s leads.
In
this
chapter
we
will
talk
about
various
types
of
plans.
Some
plans,
called contincompany’s reputation for
caring about customers. But gency plans, might be referred to as “what if ” plans. They include sets of actions to be
this commitment requires taken when a company’s initial plans have not worked well or if events in the external
highly dedicated and creative environment require a sudden change. Disasters of recent years, including the 2001
employees, and access to the terrorist attacks and Hurricanes Katrina and Rita, have reminded many businesses
necessary resources can how important contingency planning can be.
be expensive. Managers must
Most major corporations now have contingency plans in place to respond to a major
decide how crucial service is
disaster—to make sure vital data are backed up and can be recovered in an emergency,
to their strategy—and how
willing customers will be to for instance, or that employees know what to do when a crisis occurs. But contingency
forgive them for service lapses plans are important for more-common situations as well. For example, many busiunder pressure. nesses are affected by snowstorms, increases in gasoline prices, computer breakdowns,
or changes in consumer tastes. JetBlue initially achieved success as an airline that would
“bring humanity back to air travel” by caring about its customers and employees. But
the airline was humiliated by its inability to cope with a February snowstorm during
which at least one plane notoriously sat on a runway for 10 hours;
Are small companies prepared?4
the company took days to recover,
canceling a thousand flights.5
Step 3: Goal and Plan Evaluation Next, managers will
Companies who report
having a disasterpreparedness plan
58%
No disasterpreparedness
plan
42%
evaluate the advantages, disadvantages, and potential effects of
each alternative goal and plan.
They must prioritize those goals
and even eliminate some of them.
Also, managers will consider
carefully the implications of alternative plans for meeting highpriority goals. In particular, they
will pay a great deal of attention
to the cost of any initiative and
Planning and Strategic Management
Chapter 4
129
the investment return that is likely to result. In our magazine publishing example, your
evaluation might determine that newsstand sales alone wouldn’t be profitable enough
to justify the launch. Perhaps you could improve profits with an online edition supplemented by Podcasts. To decide, you would estimate the costs and expected returns of
such alternatives, trying to following the decision steps advised in Chapter 3.
Step 4: Goal and Plan Selection Once managers have assessed the various goals
and plans, they will select the one that is most appropriate and feasible. The evaluation process will identify the priorities and trade-offs among the goals and plans. For
example, if your plan is to launch a number of new publications, and you’re trying to
choose among them, you might
weigh the different up-front
“Most discussions of decision making assume that only senior executives make
investment each requires, the size
decisions or that only senior executives’ decisions matter. This is a dangerous
of each market, which one fits
mistake.”
best with your existing product
Peter Drucker
line or company image, and so
on. Experienced judgment always
plays an important role in this process. However, as you will discover later in the
chapter, relying on judgment alone may not be the best way to proceed.
Typically, a formal planning process leads to a written set of goals and
plans that are appropriate and feasible
for a particular set of circumstances.
In some organizations, the alternative
generation, evaluation, and selection
steps generate planning scenarios, as
discussed in Chapter 2. A different contingency plan is attached to each scenario. The manager pursues the goals
and implements the plans associated
with the most likely scenario. However, the manager will also be prepared
to switch to another set of plans if the
situation changes and another scenario
becomes relevant. This approach helps
the firm anticipate and manage crises and allows greater flexibility and
responsiveness.
The Hard Rock Café carries its
strategy—to be identified with
rock ‘n’ roll—through to its hotel
signs.
If a company hasn’t already considered relevant scenarios, managers have to be prepared
to restart the planning process when an unexpected change brings disappointing results.
This flexible approach to planning can help a company survive and even thrive in a turbulent environment. For example, when the economy recently took a downturn, major clients stopped calling on Cor Business, a management coaching firm, for help in developing
their managers. Jeffrey Hull and the other partners of Cor Business realized their firm’s
survival required a new plan for bringing in business.
The partners brainstormed ideas for a new business plan. Looking over the prior year’s
results, they noticed that most of Cor Business’s growth that year had come from small
businesses, even though the partners had been directing most of their energy toward
large companies like MasterCard and AT&T. As a matter of fact, as the economy had
slowed, more and more nervous small-business owners had been looking for help from
their firm.
scenario
A narrative that describes
a particular set of future
conditions.
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Planning: Delivering Strategic Value
Hull and the other partners drew up a new plan in which they would focus on serving
small clients, helping them do what Cor Business’s managers were doing—move beyond
their fear of change to find new opportunities in challenging times. Hull counseled the
owner of a real estate investment company to set aside his fears about the real estate
downturn, reevaluate his data on the prospects for converting a warehouse into a restaurant, and go ahead with plans for what was in fact a well-researched, practical idea.6
The bottom line
COST
Tying plans to a firm’s
financials is a key element of
success.
Step 5: Implementation Once managers have selected the goals and plans, they
must implement the plans designed to achieve the goals. Even the best plans are useless
if they are not implemented properly. Managers and employees must understand the
plan, have the resources to implement it, and be motivated to do so. Including employees in the previous steps of the planning process paves the way for the implementation
phase. As we mentioned earlier, employees usually are better informed, more committed, and more highly motivated when a goal or plan is one that they helped develop.
Finally, successful implementation requires a plan to be linked to other systems
in the organization, particularly the budget and reward systems. If the manager does
not have a budget with financial resources to execute the plan, the plan is probably
doomed. Similarly, goal achievement must be linked to the organization’s reward system. Many organizations use incentive programs to encourage employees to achieve
goals and to implement plans properly. Commissions, salaries, promotions, bonuses,
and other rewards are based on successful performance.
At Wells Fargo, Chairman of the board Dick Kovacevich saw that the bank—one of
the nation’s largest—could stay competitive by excelling at “cross-selling,” the practice
of encouraging the bank’s existing customers to use more of its financial services. Bank
customers typically go to different institutions for different services, but Wells Fargo
beat the odds by getting employees at all levels to focus on customer needs, rather than
product lines. Tellers and branch managers receive training aimed at this goal, and pay
systems reward employees for cross-selling. As a result, Wells Fargo customers use
an average of 5.2 of the bank’s products, roughly double the average for the industry.
Selling to existing customers is much more profitable than winning new ones, so this
strategy might seem obvious. Perhaps it is, but Wells Fargo board member Robert
Joss says, “It’s simple in concept but very hard in execution,” adding that this successful implementation reflects Kovacevich’s “great capacity to motivate people.”7
Step 6: Monitor and Control Although it is sometimes ignored, the sixth step
in the formal planning process—monitoring and controlling—is essential. Without
it, you would never know whether your plan is succeeding. As we mentioned earlier,
planning works in a cycle; it is an ongoing, repetitive process. Managers must continually monitor the actual performance of their work units against the unit’s goals and
plans. They will also need to develop control systems to measure that performance
and allow them to take corrective action when the plans are implemented improperly
or when the situation changes. In our magazine publishing example, newsstand and
subscription sales reports are essential for letting you know how well your new magazine launch is going. If subscription sales aren’t doing as well as expected, you may
need to revise your marketing plan. We will discuss the important issue of control
systems in greater detail later in this chapter and in Chapter 16.
Levels of Planning
LO 2
In Chapter 1 you learned about the three major types of managers: top-level (strategic managers), middle-level (tactical managers), and frontline (operational managers).
Because planning is an important management function, managers at all three levels
Planning and Strategic Management
use it. However, the scope and activities of the planning process at each level of the
organization often differ.
Strategic Planning
Strategic planning involves making decisions about the organization’s long-term
goals and strategies. Strategic plans have a strong external orientation and cover
major portions of the organization. Senior executives
are responsible for the development and execution of the
strategic plan, although they usually do not formulate or
implement the entire plan personally.
Strategic goals are major targets or end results that
relate to the long-term survival, value, and growth of the
organization. Strategic managers—top-level managers—
usually establish goals that reflect both effectiveness (providing appropriate outputs) and efficiency (a high ratio of
outputs to inputs). Typical strategic goals include growth,
increasing market share, improving profitability, boosting
return on investment, fostering both quantity and quality
of outputs, increasing productivity, improving customer
service, and contributing to society.
Organizations usually have a number of mutually reinforcing strategic goals. For example, a computer manufacturer may have as its strategic goals the launch of a
specified number of new products in a particular time
frame, of higher quality, with a targeted increase in market share. Each of these goals supports and contributes to
the others.
A strategy is a pattern of actions and resource allocations designed to achieve the goals of the organization. An
effective strategy provides a basis for answering five broad
questions about how the organization will meet its objectives: (1) Where will we be active? (2) How will we get
there (e.g., by increasing sales or acquiring another company)? (3) How will we win in the marketplace (e.g., by keeping prices low or offering the best service)? (4) How fast will we move and in what sequence will we make
changes? (5) How will we obtain financial returns (low costs or premium prices)?8 In
setting a strategy, managers try to match the organization’s skills and resources to
the opportunities found in the external environment. Every organization has certain
strengths and weaknesses, so the actions, or strategies, the organization implements
should help build on strengths in areas that satisfy the wants and needs of consumers
and other key factors in the organization’s external environment. Also, some organizations may implement strategies that change or influence the external environment,
as discussed in Chapter 2.
Tactical and Operational Planning
Once the organization’s strategic goals and plans are identified, they serve as the foundation for planning done by middle-level and frontline managers. As you can see in
Figure 4.2, goals and plans become more specific and involve shorter periods of time
as they move from the strategic level to the tactical level and then to the operational
level. A strategic plan will typically have a time horizon of from three to seven years—
but sometimes even decades, as with the successful plan to land a probe on Titan, Saturn’s moon. Tactical plans may have a time horizon of a year or two, and operational
plans may cover a period of months.
Chapter 4
131
strategic planning
A set of procedures for
making decisions about the
organization’s long-term
goals and strategies.
The Chicago Sun-Times and the
Chicago Tribune are the only
two major daily newspapers
that remain in Chicago, a city
of 3 million. Both papers are in
serious trouble from declining
circulation and poor advertising
revenues. What kind of new
strategy do you think would help
to ensure the survival of these two
organizations?
strategic goals
Major targets or end results
relating to the organization’s
long-term survival, value, and
growth.
strategy
A pattern of actions and
resource allocations designed
to achieve the organization’s
goals.
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Part Two
Planning: Delivering Strategic Value
Strategic
Tactical
FIGURE 4.2
Hierarchy of Goals and
Plans
tactical planning
A set of procedures for
translating broad strategic
goals and plans into specific
goals and plans that are
relevant to a distinct portion
of the organization, such
as a functional area like
marketing.
operational planning
The process of identifying
the specific procedures and
processes required at lower
levels of the organization.
Operational
Managerial
Level
Level of
Detail
Time
Horizon
Top
Low
Long
(3–7 years)
Middle
Medium
Medium
(1–2 years)
Frontline
High
Short
(
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