APPENDIX B
APPENDIX B
Managing in Our Natural
Environment
BUSINESS AND THE ENVIRONMENT:
CONFLICTING VIEWS
Some people believe everyone wins when business tackles environmental issues.1 Others disagree.
The Win-Win Mentality Business used to look at environmental issues as a no-win situation: You either help the environment and hurt your business, or help your business only at
a cost to the environment. Fortunately, things have changed.
“When Americans first demanded a cleanup of the environment
during the early 1970s, corporations threw a tantrum. Their
response ran the psychological gamut from denial to hostility,
defiance, obstinacy, and fear. But today, when it comes to green
issues, many U.S. companies have turned from rebellious underachievers to active problem solvers.”2 Table B.1 gives just a few
examples of things U.S. corporations are doing to help solve
environmental problems.
The Earth Summit in Rio in 1992 helped increase awareness of environmental issues. This led to the Kyoto Protocol, an
international effort to control global warming that included an
unsuccessful meeting in the Hague in November 2000.3 “There
has been an evolution of most groups—whether industry, governments, or nongovernmental organizations—toward a recognition that everyone plays a part in reaching a solution.”4
Being “green” is potentially a catalyst for innovation, new
market opportunities, and wealth creation. Advocates believe
that this is truly a win-win situation; actions can be taken that
benefit both business and the environment. For example, Procter
& Gamble in a span of five years reduced disposable wastes by
over 50 percent while increasing sales by 25 percent.5 Win-win
companies will come out ahead of those companies that have
an us-versus-them, we-can’t-afford-to-protect-the-environment
mentality.
Is the easy part over?6 Companies have found a lot of easyto-harvest, “low-hanging fruit”—that is, overly costly practices
that were made environmentally friendlier and that saved money
at the same time. Many big companies have made these easy
changes, and reaped benefits from them. Many small companies
still have such low-hanging fruit to harvest,7 and plenty remains
to be done.
The Dissenting View The critics of environmentalism in
business are vocal. Some economists maintain that not a single
empirical analysis supports the “free lunch view” that spending
money on environmental problems provides full payback to the
firm.8 Skepticism should continue, they say; the belief that everyone will come out a winner is naive.
What really upsets many businesspeople is the financial cost
of complying with environmental regulations.9 Consider a few
examples:
• GM spent $1.3 billion to comply with California requirements
that 10 percent of the cars sold there be emission-free.
European automakers spent $7 billion to install pollutioncontrol equipment in all new cars during a five-year period.
• At Bayer, 20 percent of manufacturing costs were for the
environment. This is approximately the same amount spent
for labor.
• The Clean Air Act alone was expected to cost U.S. petroleum refiners $37 billion, more than the book value of the
entire industry.
• California’s tough laws are a major reason why manufacturers moved to Arkansas or Nevada.
In industries like chemicals and petroleum, environmental regulations were once considered a threat to their very survival.10
Balance A more balanced view is that business must weigh
the environmental benefits of an action against value destruction. The advice here is: Don’t obstruct progress, but pick your
environmental initiatives carefully. Compliance and remediation
efforts will protect, but not increase, shareholder value.11 And
it is shareholder value, rather than compliance, emissions, or
costs, that should be the focus of objective cost-benefit analyses.
Such an approach is environmentally sound but also hard-headed
in a business sense, and is the one approach that is truly sustainable over the long term.
Johan Piet maintains, “Only win-win companies will survive,
but that does not mean that all win-win ideas will be successful.”12
In other words, rigorous analysis is essential. Thus, some companies maintain continuous improvement in environmental performance, but fund only projects that meet financial objectives.
Most people understand that business has the resources and
the competence to bring about constructive change, and that
this creates great opportunity—if well managed—for both business and the environment.
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TABLE B.1
TABLE B.2
What Companies Are Doing to Enhance the Environment
Some U.S Environmental Laws
Toyota established an “ecotechnologies” division both
for regulatory compliance and to shape corporate
direction, including the development of hybrid
electric-combustion automobiles.
Interface Corporation’s new Shanghai carpet factory
circulates liquid through a standard pumping loop like
those used in most industries. But simply by using
fatter pipes and short, straight pipes instead of long
and crooked pipes, it cut the power requirements by
92 percent.
Xerox used “zero-waste-to-landfill” engineering to
develop a new remanufacturable copier. AT&T cut
paper costs by 15 percent by setting defaults on
copiers and printers to double-sided mode.
Electrolux uses more environmentally friendly waterbased and powder paints instead of solvent-based
paints, and introduced the first refrigerators and
freezers free of chlorofluorocarbons.
Many chemical and pharmaceutical companies,
including Novo Nordisk and Empresas La Moderna,
are exploring “green chemistry” and seeking biological
substitutes for synthetic materials.
Anheuser-Busch saved 21 million pounds of metal a
year by reducing its beer-can rims by 1/8 of an inch
(without reducing its contents).
Nissan enlisted a group of ecologists, energy experts,
and science writers to brainstorm about how an
environmentally responsible car company might
behave. Among the ideas: to produce automobiles
that snap together into electrically powered trains for
long trips and then detach for the dispersion to final
destinations.
SOURCES: P. M. Senge and G. Carstedt, “Innovating Our Way to the Next
Industrial Revolution,” Sloan Management Review, Winter 2001, pp. 24–38;
M. P. Polonsky and P. J. Rosenberger III, “Reevaluating Green Marketing:
A Strategic Approach,” Business Horizons, September–October, 2001, pp. 21–30;
C. Garfield, Second to None: How Our Smartest Companies Put People First (Burr
Ridge, IL; Business One-Irwin, 1992); H. Bradbury and J. A. Clair, “Promoting
Sustainable Organizations with Sweden’s Natural Step,” Academy of Management
Executive, November 1999, pp. 63–74; A. Loving, L. Hunter Lovins, and
P. Hawken, “A Road Map for Natural Capitalism,” Harvard Business Review,
May–June 1999, pp. 145–58; P. Hawken, A. Lovings, and L. Hunter Lovins, Natural
Capitalism (Boston: Little Brown, 1999); and S. L. Hart and M. B. Milstein, “Global
Sustainability and the Creative Destruction of Industries,” Sloan Management
Review, Fall 1999, pp. 23–32.
WHY MANAGE WITH THE ENVIRONMENT IN MIND?
Business is turning its full attention to environmental issues for
many reasons, including legal compliance, cost effectiveness,
competitive advantage, public opinion, and long-term thinking.
Legal Compliance Table B.2 shows just some of the most
important U.S. environmental laws. Government regulations
and liability for damages provide strong economic incentives to
comply with environmental guidelines. Most industries already
have made environmental protection regulation and liability an
Superfund [Comprehensive Environmental Response,
Compensation, and Liability Act (CERCLA)]:
Establishes potential liability for any person or
organization responsible for creating an environmental
health hazard. Individuals may be prosecuted, fined,
or taxed to fund cleanup.
Clean Water Act [Federal Water Pollution Control
Act]: Regulates all discharges into surface waters,
and affects the construction and performance of
sewer systems. The Safe Drinking Water Act similarly
protects groundwaters.
Clean Air Act: Regulates the emission into the air of
any substance that affects air quality, including nitrous
oxides, sulfur dioxide, and carbon dioxide.
Community Response and Right-to-Know Act:
Mandates that all facilities producing, transporting,
storing, using, or releasing hazardous substances
provide full information to local and state authorities
and maintain emergency-action plans.
Federal Hazardous Substances Act: Regulates
hazards to health and safety associated with
consumer products. The Consumer Product Safety
Commission has the right to recall hazardous
products.
Hazardous Materials Transportation Act: Regulates
the packaging, marketing, and labeling of shipments
of flammable, toxic, and radioactive materials.
Resource Conservation and Recovery Act: Extends
to small-quantity generators the laws regulating
generation, treatment, and disposal of solid and
hazardous wastes.
Surface Mining Control and Reclamation Act:
Establishes environmental standards for all
surface-mining operations.
Toxic Substances Control Act: Addresses the
manufacture, processing, distribution, use, and
disposal of dangerous chemical substances and
mixtures.
SOURCE: Dennis C. Kinlaw, Competitive and Green: Sustainable Performance in the
Environmental Age (Amsterdam: Pfeiffer & Co., 1993). Reprinted by permission of
the author.
integral part of their business planning.13 The U.S. Justice Department has handed out tough prison sentences to executives
whose companies violate hazardous-waste requirements.
Some businesspeople consider the regulations to be too rigid,
inflexible, and unfair. In response to this concern, regulatory
reform may become more creative. The Aspen Institute Series
on the Environment in the Twenty-First Century is trying to
increase the cost-effectiveness of compliance measures through
more flexibility in meeting standards and relying on marketbased incentives. Such mechanisms, including tradable permits,
pollution charges, and deposit refund systems, provide positive
financial incentives for good environmental performance.14
Ethics and Corporate Responsibility
Cost Effectiveness Environmentally conscious strategies can
be cost-effective.15 In the short run, company after company
is realizing cost savings from repackaging, recycling, and other
approaches. Union Carbide faced costs of $30 a ton for disposal of solid wastes and $2,000 a ton for disposal of hazardous
wastes. By recycling, reclaiming, or selling its waste, it avoided
$8.5 million in costs and generated $3.5 million in income during
a six-month period. Dow Chemical launched a 10-year program
to improve its environmental, health, and safety performance
worldwide. Dow projected savings of $1.8 billion over the
10-year period.16
Environmentally conscious strategies offer long-run cost
advantages as well. Companies that are functioning barely within
legal limits today may incur big costs—being forced to pay damages or upgrade technologies and practices—when laws change
down the road.
A few of the other cost savings include fines, cleanups, and
litigation; lower raw materials costs; reduced energy use; less
expensive waste handling and disposal; lower insurance rates;
and possibly higher interest rates.
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191
and low key, but much pressure is exerted by environmental
organizations, aroused citizen groups, societies and associations,
international codes of conduct, and environmentally conscious
investors.20
Another important reason for paying attention to environmental impact is TRI, the Toxic Release Inventory.21 Starting in
1986, the EPA required all the plants of approximately 10,000
U.S. manufacturers to report annual releases of 317 toxic chemicals into the air, ground, and water. The substances include freon,
PCBs, asbestos, and lead compounds. Hundreds of others have
been added to the list. The releases are not necessarily illegal,
but they provide the public with an annual environmental benchmark. TRI provides a powerful incentive to reduce emissions.
Finally, it is useful to remember that companies recover very
slowly in public opinion from the impact of an environmental
disaster. Adverse public opinion may affect sales as well as the
firm’s ability to attract and retain talented people. You can see
why companies like P&G consider concern for the environment
a consumer need, making it a basic and critical business issue.
Long-Term Thinking Long-term thinking about resources
Competitive Advantage Corporations gain a competitive
advantage by channeling their environmental concerns into entrepreneurial opportunities and by producing higher-quality products that meet consumer demand. Business opportunities abound
in pollution protection equipment and processes, waste cleanup,
low-water-use plumbing, new lightbulb technology, and marketing of environmentally safe products like biodegradable plastics.
With new pools of venture capital, government funding, and specialized investment funds available, environmental technology has
become a major sector of the venture-capital industry.17
In addition, companies that fail to innovate in this area will be
at a competitive disadvantage. Environmental protection is not
only a universal need; it is also a major export industry. U.S.
trade suffered as other countries—notably Germany—took
the lead in patenting and exporting anti–air pollution and other
environmental technologies. If the United States does not produce innovative, competitive new technologies, it will forsake a
growth industry and see most of its domestic spending for environmental protection go to imports.18
In short, competitive advantage can be gained by maintaining
market share with old customers, and by creating new products
for new market opportunities. And if you are an environmental
leader, you may set the standards for future regulations—regulations that you are prepared to meet, while your competitors
are not.
Public Opinion The majority of the U.S. population believes
business must clean up; few people think it is doing its job well.
Gallup surveys show that more than 80 percent of U.S. consumers consider environmentalism in making purchases. An
international survey of 22 countries found that majorities in
20 countries gave priority to environmental protection even at
the risk of slowing economic growth. Consumers seem to have
reached the point of routinely expecting companies to come up
with environmentally friendly alternatives to current products
and practices.19
Companies also receive pressure from local communities and
from their own employees. Sometimes the pressure is informal
helps business leaders understand the nature of their responsibilities with regard to environmental concerns. For example, you
read about sustainable growth in the chapter.22 Economic arguments and the tragedy of the commons also highlight the need
for long-term thinking.
Economic arguments In Chapter 3, we discussed long-term
versus short-term decision making. We stated that it is common
for managers to succumb to short-term pressure for profits and
to avoid spending now when the potential payoff is years down
the road. In addition, some economists maintain that it is the
responsibility of management to maximize returns for shareholders, implying the preeminence of the short-term profit goal.
But other economists argue that such a strategy caters to
immediate profit maximization for stock speculators and neglects
serious investors who are with the company for the long haul.
Attention to environmental issues enhances the organization’s
long-term viability because the goal is the long-term creation of
wealth for the patient, serious investors in the company23—not
to mention the future state of our planet and the new generations who will inhabit it.
The tragedy of the commons In a classic article in Science,
Garrett Hardin described a situation that applies to all business
decisions and social concerns regarding scarce resources like
clean water, air, and land.24 Throughout human history, a commons was a tract of land shared by communities of people on
which they grazed their animals. A commons has limited carrying capacity, or the ability to sustain a population, because
it is a finite resource. For individual herders, short-term interest lies in adding as many animals to the commons as they can.
But problems develop as more herders add more animals to
graze the commons. This leads to tragedy: As each herder acts
in his short-term interest, the long-run impact is the destruction
of the commons. The solution is to make choices according to
long-run rather than short-run consequences.
In many ways, we are witnessing this tragedy of the commons. Carrying capacities are shrinking as precious resources,
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water chief among them, become scarcer. Inevitably, conflict
arises—and solutions are urgently needed.
The Environmental Movement The 1990s were labeled the
“earth decade” when a “new environmentalism” with new features emerged.25 For example, proponents of the new environmentalism asked companies to reduce their wastes, use
resources prudently, market safe products, and take responsibility for past damages. These requests were formalized in the
CERES principles (see Table B.3).
The new environmentalism combined many diverse viewpoints, but initially it did not blend easily with traditional business
values. Some of the key aspects of this philosophy are noted in
the following discussion of the history of the movement.26
Conservation and Environmentalism A strand of environmental philosophy that is not at odds with business management
is conservation. The conservation movement is anthropocentric (human centered), technologically optimistic, and concerned
chiefly with the efficient use of resources. The movement seeks
to avoid waste, promote the rational and efficient use of natural
resources, and maximize long-term yields, especially of renewable resources.
The environmental movement, in contrast, historically
has posed dilemmas for business management. Following the
lead of early thinkers like George Perkins Marsh (1801–1882),
it has shown that the unintended negative effects of human economic activities on the environment often are greater than the
benefits. For example, there are links between forest cutting and
soil erosion and between the draining of marshes and lakes and
the decline of animal life.
Other early environmentalists, such as John Muir (1838–1914)
and Aldo Leopold (1886–1948), argued that humans are not
above nature but a part of it. Nature is not for humans to subdue
but is sacred and should be preserved not simply for economic
use but for its own sake—and for what people can learn from it.
TABLE B.3
The CERES Principles
Science and the Environment Rachel Carson’s 1962 bestScie
Protection of the biosphere: Minimize the release of
pollutants that may cause environmental damage.
Sustainable use of natural resources: Conserve
nonrenewable resources through efficient use and
careful planning.
Reduction and disposal of waste: Minimize the
creation of waste, especially hazardous waste, and
dispose of such materials in a safe, responsible
manner.
Wise use of energy: Make every effort to use
environmentally safe and sustainable energy sources
to meet operating requirements.
Risk reduction: Diminish environmental, health, and
safety risks to employees.
Marketing of safe products and services: Sell
products that minimize adverse environmental impact
and are safe for consumers.
Damage compensation: Accept responsibility for any
harm the company causes the environment; conduct
bioremediation; and compensate affected parties.
Disclosure of environmental incidents: Public
dissemination of accidents relating to operations that
harm the environment or pose health or safety risks.
Environmental directors: Appoint at least one board
member who is qualified to represent environmental
interests; create a position of vice president for
environmental affairs.
Assessment and annual audit: Produce and
publicize each year a self-evaluation of progress
toward implementing the principles and meeting
all applicable laws and regulations worldwide.
Environmental audits will also be produced annually
and distributed to the public.
SOURCES: Chemical Week, September 20, 1989, copyright permission granted by
Chemical Week magazine. CERES Coalition Handbook.
selling book, The Silent Spring, helped ignite the modern environsell
mental
men movement by alerting the public to the dangers of unrestricted
pesticide use.27 Carson brought together the findings
stri
ecology, and epidemiology in a form accessible
of toxicology,
t
to the
t public. Blending scientific, moral, and political arguments,
she connected environmental politics and values with scientific
knowledge.
kno
Barry Commoner’s Science and Survival (1963) continued in
this vein. Commoner expanded the scope of ecology to include
everything in the physical, chemical, biological, social, politieve
cal, economic, and philosophical worlds.28 He argued that all
of these
elements fit together, and have to be understood as
t
a whole.
According to Commoner, the symptoms of environw
mental
men problems are in the biological world, but their source
lies in economic and political organizations.
Economics and the Environment Economists promote
Eco
growth
for many reasons: to restore the balance of payments,
gro
to make nations more competitive, to create jobs, to reduce
the deficit, to provide for the elderly and the sick, and to reduce
poverty.
Environmentalists criticize economics for its notions of
pov
efficiency
and its emphasis on economic growth.29 For example,
effic
environmentalists
argue that economists do not adequately conenv
sider
side the unintended side effects of efficiency. Environmentalists
hold that economists need to supplement estimates of the economic
nom costs and benefits of growth with estimates of other factors that historically were not measured in economic terms.30
Economists and public policy analysts argue that the benefits
of eeliminating risk to the environment and to people must be balanced against the costs. Reducing risk involves determining how
anc
effective the proposed methods of reduction are likely to be
effe
and how much they will cost. There are many ways to consider
cost factors. Analysts can perform cost-effectiveness analyses,
cos
which they attempt to figure out how to achieve a given goal
in w
with limited resources, or they can conduct more formal riskbenefit and cost-benefit analyses, in which they quantify both the
ben
bbenefits and the costs of risk reduction.31
Ethics and Corporate Responsibility
Qualitative Judgments in Cost-Benefit Analysis Formal,
quantitative approaches to balancing costs and benefits do not
eliminate the need for qualitative judgments. For example, how
does one assess the value of a magnificent vista obscured by
air pollution? What is the loss to society if a particular genetic
strain of grass or animal species becomes extinct? How does
one assess the lost opportunity costs of spending vast amounts
of money on air pollution that could have been spent on productivity enhancement and global competitiveness?
Fairness cannot be ignored when doing cost-benefit analysis.32
For example, the costs of air pollution reduction may have to be
borne disproportionately by the poor in the form of higher gasoline and automobile prices. Intergenerational fairness also plays a
role.33 Future generations have no representatives in the current
market and political processes. To what extent should the current generation hold back on its own consumption for the sake
of posterity? This question is particularly poignant because few
people in the world today are well off. To ask the poor to reduce
their life’s chances for the sake of a generation yet to come is
asking for a great sacrifice.
International Perspectives Environmental problems present
a different face in various countries and regions of the world.
The United States and Great Britain lag behind Germany and
Japan in mandated emissions standards.34 In Europe, the Dutch,
the Germans, and the Danes are among the most environmen-
The environmental movement is a worldwide phenomenon. The
“Greens,” pictured here demonstrating in LePuy, France, are an
important growing European political party.
Chapter 5
193
tally conscious. Italy, Ireland, Spain, Portugal, and Greece are in
the early stages of developing environmental policies. Poland,
Hungary, the Czech Republic, and former East Germany are the
most polluted of the world’s industrialized nations.35
U.S. companies need to realize that there is a large growth
market in western Europe for environmentally “friendly” products. U.S. managers also need to be fully aware of the environmental movement in western Europe. Environmentalists in
Europe have been successful in halting many projects.36 China
has been paying a high ecological price for its rapid economic
growth. But the government has begun recognizing the problem
and is creating some antipollution laws.37
Industries that pollute or make polluting products will have
to adjust to the new reality, and companies selling products
in certain parts of the world must take into account a growing consumer consciousness about environmental protection.
Manufacturers may even be legally required to take products
and packaging back from customers after use, to recycle or dispose of. In order to meet these requirements in Germany, and
be prepared for similar demands in other countries, HewlettPackard redesigned its office-machine packaging worldwide.
WHAT MANAGERS CAN DO
To be truly “green”—that is, a cutting-edge company with respect
to environmental concerns—legal compliance is not enough. Progressive companies stay abreast and ahead of the laws by going
beyond marginal compliance and anticipating future requirements
and needs.38 But companies can go further still by experimenting continually with innovations that protect the environment.
McDonald’s, for example, conducted tests and pilot projects in
composting food scraps and in offering refillable coffee mugs and
starch-based (biodegradable) cutlery.39
Systems Thinking The first thing managers can do to better
understand environmental issues in their companies is to engage
in systems thinking. Environmental considerations relate to the
organization’s inputs, processes, and outputs.40 Inputs include
raw materials and energy. Environmental pressures are causing
prices of some raw materials, such as metals, to rise. This greatly
increases the costs of production. Higher energy costs are causing firms to switch to more fuel-efficient sources.
Firms are considering new processes or methods of production that will reduce water pollution, air pollution, noise and
vibration, and waste. They are incorporating technologies that
sample and monitor (control) these by-products of business
processes. Some chemical plants have a computerized system
that flashes warnings when a maximum allowable pollution level
is soon to be reached. Many companies keep only minimal stocks
of hazardous materials, making serious accidents less likely.
Outputs have environmental impact, whether the products
themselves or the waste or by-products of processes. To reduce
the impact of its outputs, Herman Miller recycles or reuses nearly
all waste from the manufacturing process. It sells fabric scraps to
the auto industry, leather trim to luggage makers, and vinyl to
stereo and auto manufacturers. It buys back its old furniture,
refurbishes it, and resells it. Its corporatewide goal is to send
zero waste to landfills. Environmental manager Paul Murray says,
“There is never an acceptable level of waste at Miller. There are
always new things we can learn.”41
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Strategic Integration Systems thinking reveals that environmental issues permeate the firm, and therefore should be addressed
in a comprehensive, integrative fashion. Perhaps the first step is
to create the proper mindset. Does your firm see environmental concerns merely in terms of a business versus environment
trade-off, or does it see in it a potential source of competitive
advantage and an important part of a strategy for long-term survival and effectiveness? The latter attitude, of course, is more
likely to set the stage for the following strategic actions.
These ideas help to strategically integrate environmental considerations into the firm’s ongoing activities:42
1. Develop a mission statement and strong values supporting
environmental advocacy. Table B.4 shows Procter & Gamble’s
environmental quality policy.
2. Establish a framework for managing environmental initiatives.
Some industries have created voluntary codes of
environmental practice, for example, the chemical industry’s
Responsible Care Initiative. Not all standard practices are
adopted by all companies, however.43 At J&J, Environmental
Regulatory Affairs uses external audit teams to conduct
TABLE B.4
Procter & Gamble’s Environmental Quality Policy
Procter & Gamble is committed to providing
products of superior quality and value that best fill
the needs of the world’s consumers. As part of this,
Procter & Gamble continually strives to improve the
environmental quality of its products, packaging,
and operations around the world. To carry out this
commitment, it is Procter & Gamble’s policy to:
Ensure our products, packaging, and operations
are safe for our employees, consumers, and the
environment.
Reduce or prevent the environmental impact
of our products and packaging in their design,
manufacture, distribution, use, and disposal
whenever possible.
Meet or exceed the requirements of all environmental
laws and regulations.
Continually assess our environmental technology
and programs, and monitor programs toward
environmental goals.
Provide our consumers, customers, employees,
communities, public interest groups, and others
with relevant and appropriate factual information
about the environmental quality of P&G products,
packaging, and operations.
Ensure every employee understands and is
responsible and accountable for incorporating
environmental quality considerations in daily
business activities.
Have operating policies, programs, and resources in
place to implement our environmental quality policy.
SOURCE: K. Dechant and B. Altman, “Environmental Leadership: From
Compliance to Competitive Advantage,” The Academy of Management Executive,
August 1994, p. 10. Reprinted by permission.
environmental audits.44 The Community Environmental
Responsibility Program includes strategy and planning, and
the development of products and processes with neutral
environmental impact.
3. Engage in “green” process and product design. The German
furniture maker Wilkhahn uses an integrated strategic
approach that minimizes the use of virgin resources and uses
recycled materials in an environmentally designed plant.45
4. Establish environmentally focused stakeholder relationships.
Many firms work closely with the EPA and receive technical
assistance to help convert to more energy-efficient facilities.
And to defray costs as well as develop new ideas, small
companies like WHYCO Chromium Company establish
environmental management partnerships with firms like IBM
and GM.46
5. Provide internal and external education. Engage employees
in environmental actions. Dow’s WRAP program has
cut millions of pounds of hazardous and solid waste and
emissions, and achieved annual cost savings of over
$10 million, all through employee suggestions.47 At the
same time, inform the public of your firm’s environmental
initiatives. For example, ecolabeling can urge consumers to
recycle and communicate the environmental friendliness of
your product. And BPAmoco redesigned its logo (BP’s logo
has always been green) as a sun-based emblem, reflecting its
strategic vision of a hydrogen/solar-based energy future.48
Implementation How can companies implement “greening”
Im
strategies? One tactic you read about in the chapter is life-cycle
str
analysis.49 That and other approaches begin with a commitment
ana
by top management. Specific actions could include commissioning an environmental audit in which an outside company checks
for environmental hazards, drafting (or reviewing) the organization’s
environmental policy, communicating the policy and
zat
making
it highly visible throughout the organization, having envima
ronmental
professionals within the company report directly to
ron
the president or CEO, allocating sufficient resources to support
the environmental effort, and building bridges between the organization
and other companies, governments, environmentalists,
niz
and local communities.
Ultimately, it is essential to make employees accountable for
any of their actions that have environmental impact.50 Texaco,
Du Pont, and other companies evaluate managers on their ideas
for minimizing pollution and for new, environment-friendly products.
uct Kodak ties some managers’ compensation to the prevention
tio of chemical spills; the company attributes to this policy a
dramatic
reduction in accidents.51
dra
Companies can employ all areas of the organization to meet
the challenges posed by pollution and environmental challenges.
A vvariety of companies have responded creatively to these challenges52 and may serve as models for other organizations. The
len
following sections describe specific actions companies can take
fol
to address environmental issues.
Strategy Actions companies can take in the area of strategy
Str
include
the following:
inc
1. Cut back on environmentally unsafe businesses. Du Pont, the
leading producer of CFCs, voluntarily pulled out of this
$750 million business.53
Ethics and Corporate Responsibility
2. Carry out R&D on environmentally safe activities. GM is
spending millions to develop hydrogen-powered cars that
don’t emit carbon dioxide. GE is doing research on earthfriendly hydrogen and lower-emission locomotives and jet
engines.54
3. Develop and expand environmental cleanup services. Building on
the expertise gained in cleaning up its own plants, Du Pont
formed a safety and environmental resources division to help
industrial customers clean up their toxic wastes.55 Global
Research Technologies LLC is trying to use solvents to grab
carbon dioxide out of the air to isolate it for disposal.56
4. Compensate for environmentally risky projects. AES has a longstanding policy of planting trees to offset its power plants’
carbon emission.57
5. Make your company accountable to others. Royal Dutch
Shell and Bristol-Myers Squibb are trendsetters in green
reporting.58 Danish health care and enzymes company
Novo Nordisk purposely asked for feedback from
environmentalists, regulators, and other interested bodies
from around Europe. Its reputation has been enhanced, its
people have learned a lot, and new market opportunities
have been identified.59
6. Make every new product environmentally better than the last.
Intel is developing ultra-energy-efficient chips.60 IBM aims
to use recyclable materials, reduce hazardous materials,
reduce emissions, and use natural energy and resources in
packaging.61
7. Invest in green businesses. American Electric Power Co. is
investing in renewable energy in Chile, as well as retrofitting
Bulgarian schools for greater efficiency.62
Chapter 5
195
2. Comply early. Because compliance costs only increase over
time, the first companies to act will have lower costs.
This will enable them to increase their market share and
profits and win competitive advantage. 3M’s goal was to
meet government requirements to replace or improve
underground storage tanks five years ahead of the legally
mandated year.
3. Take advantage of innovative compliance programs. The EU
started a carbon-cutting and trading system in 2005.66
Instead of source-by-source reduction, the EPA’s bubble
policy allows factories to reduce pollution at different
sources by different amounts, provided the overall result
is equivalent. Therefore, 3M installed equipment on only
certain production lines at its tape-manufacturing facility
in Pennsylvania, thereby lowering its compliance costs.67
Today, there is greater use of economic instruments like
tradable pollution permits, charges, and taxes to encourage
improvements.68 Joint implementation involves companies
in industrialized nations working with businesses in
developing countries to help them reduce greenhouse gas
emissions. The company lending a hand then receives credit
toward fulfilling its environmental obligations at home.
The developing country receives investment, technology,
and jobs; the company giving a lending hand receives
environmental credits; and the world gets cleaner air.69
4. Don’t deal with fly-by-night subcontractors for waste disposal.
They are more likely to cut corners, break laws, and do
a poor job. Moreover, the result for you could be bad
publicity and legal problems.70
Operations The actions companies can take in the area of
Public affairs In the area of public affairs, companies can take
a variety of actions:
1. Attempt to gain environmental legitimacy and credibility. The
cosponsors of Earth Day included Apple Computer,
Hewlett-Packard, and the Chemical Manufacturers
Association. McDonald’s has tried to become a corporate
environmental “educator.” Ethel M. Chocolates, in public
tours of its Las Vegas factory, showcases effective handling
of its industrial wastes.63
2. Try to avoid losses caused by insensitivity to environmental
issues. As a result of Exxon’s apparent lack of concern after
the Valdez oil spill, 41 percent of Americans polled said
they would consider boycotting the company.64 MacMillan
Bloedel lost a big chunk of sales almost overnight when it
was targeted publicly as a clear-cutter and chlorine user.65
3. Collaborate with environmentalists. Executives at Pacific Gas
& Electric seek discussions and joint projects with any
willing environmental group, and ARCO has prominent
environmentalists on its board of directors.
The legal area Actions companies can take in the legal area
include the following:
1. Try to avoid confrontation with state or federal pollution control
agencies. W. R. Grace faced expensive and time-consuming
lawsuits as a result of its toxic dumps. Browning-Ferris,
Waste Management Inc., and Louisiana-Pacific were charged
with pollution control violations, damaging their reputations.
operations include the following:
1. Promote new manufacturing technologies. Louisville Gas and
Electric took the lead in installing smokestack scrubbers,
Consolidated Natural Gas pioneered the use of cleanburning technologies, and Nucor developed state-of-the-art
steel mills.
2. Practice reverse logistics. Firms move packaging and other
used goods from the consumer back up the distribution
channel to the firm. Make them not just costs, but a source
of revenue— inputs to production. Fuji Australia believes
that remanufacturing has generated returns in the tens of
millions of dollars.71
3. Encourage technological advances that reduce pollution from
products and manufacturing processes. Cinergy and AEP are
working on technologies that capture carbon as coal is
burned and pump it deep into the ground to be stored
for thousands of years.72 3M’s “Pollution Prevention Pays”
program is based on the premise that it is too costly for
companies to employ add-on technology; instead, they
should attempt to eliminate pollution at the source.73
Pollution prevention, more than pollution control, is related
to both better environmental performance and better
manufacturing performance, including cost and speed.74
4. Develop new product formulations. The Chicago Transit
Authority and Union Pacific Corporation are replacing
traditional wood railroad ties with plastic ties. Other
companies are experimenting with making recycled crossties of old tires, grocery bags, milk jugs, and Styrofoam
196
5.
6.
7.
8.
Part Two
Planning: Delivering Strategic Value
cups.75 Weyerhaeuser, recognizing the
decreasing supply of timber and growing
demand, is working to produce highquality wood on fewer, continuously
regenerated acres.76 Electrolux has
developed a sun-powered lawn mower
and a chainsaw that runs on vegetable
oil.77 Many companies are developing
green pesticides.
Eliminate manufacturing wastes. 3M
replaced volatile solvents with waterbased ones, thereby eliminating the
need for costly air pollution control
equipment. BPAmoco implemented a
similar program.
Find alternative uses for wastes. When
DuPont halted ocean dumping of acid
iron salts, it discovered that the salts
could be sold to water treatment plants
at a profit. A Queensland sugarcane
facility powers production via sugarcane
waste.78
Insist that your suppliers have strong environmental performance.
Chiquita Banana had a spotty environmental record, but
now its plantations are certified by the Rainforest Alliance,
and Wal-Mart has named Chiquita its most environmentally
conscious supplier.79 Scott Paper discovered that many of
its environmental problems were “imported” through the
supply chain. Initially focusing on pulp suppliers, the company
sent questionnaires asking for figures on air, water, and land
releases, energy consumption, and energy sources. Scott
was astonished at the variance. For example, carbon dioxide
emissions varied by a factor of 17 among different suppliers.
Scott dropped the worst performers and announced that
the best performers would in the future receive preference
in its purchasing decisions.80
Assemble products with the environment in mind. Make them
easy to snap apart, sort, and recycle, and avoid glues and
screws.
Marketing Companies can also take action in the marketing
area:
1. Cast products in an environment-friendly light. Most Americans
believe a company’s environmental reputation influences
what they buy.81 Wal-Mart has made efforts to provide
customers with recycled or recyclable products. A
Chinese entrepreneur is making underwear out of soybean
by-products.82 Spiegel plans to offer soybean-fiber halter-top
dresses in pink and mocha.83 Other eco-friendly fibers are
made from hemp and bamboo, which require little pesticide.
2. Avoid attacks by environmentalists for unsubstantiated or
inappropriate claims. When Hefty marketed “biodegradable”
garbage bags, that claim was technically true, but it turned
out that landfill conditions didn’t allow decomposition to
occur.84 The extensive public backlash affected not only
Hefty bags but also other Hefty products. Hefty didn’t
lie, but it did exaggerate. Its tactics overshadowed wellintentioned greening actions.
Companies like Toyota use advertising to convey to consumers their
efforts to become more environmentally friendly.
3. Differentiate your product via environmental services. ICI takes
back and disposes of customers’ waste as a customer service.
Disposal is costly, but the service differentiates the firm’s
products. Teach customers how to use and dispose of
products; for instance, farmers inadvertently abuse pesticides.
Make education a part of a firm’s after-sales service.
4. Take advantage of the Net. The EcoMall (www.ecomall.com/
biz/) promotes a number of environmentally oriented firms
in 68 product categories. Firms using the Net target green
consumers globally, effectively, and efficiently.85
Accounting Actions companies can take in the accounting area
include the following:
1. Collect useful data. The best current reporters of environmental information include Dow Europe, Danish Steel
Works, BSO/Origin, 3M, and Monsanto. BSO/Origin has
begun to explore a system for corporate environmental
accounting.86
2. Make polluters pay. CIBA-GEIGY has a “polluter pays
principle” throughout the firm, so managers have the
incentive to combat pollution at the sources they can
influence.87
3. Demonstrate that antipollution programs pay off. 3M’s Pollution
Prevention Pays program is based on the premise that only
if the program pays will there be the motivation to carry
it out. Every company needs to be cost-effective in its
pollution reduction efforts.
4. Use an advanced waste accounting system. Do this in addition
to standard management accounting, which can hinder
investment in new technologies. Waste accounting makes
sure all costs are identified and better decisions can be made.
5. Adopt full-cost accounting. This approach, called for by Frank
Popoff, Dow’s chairman, ensures that the price of a product
reflects its full environmental cost.88
Ethics and Corporate Responsibility
6. Show the overall impact of the pollution reduction program.
Companies have an obligation to account for the costs and
benefits of their pollution reduction programs. 3M claims half
a billion dollars in savings from pollution prevention efforts.89
Finance In the area of finance, companies can do the following:
1. Gain the respect of the socially responsible investment community.
Many investment funds in the United States and Europe take
environmental criteria into account. A study by ICF Kaiser
concluded that environmental improvements could lead to
significant reduction in the perceived risk of a firm, with
a possible 5 percent increase in the stock price.90 Socially
responsible rating services and investment funds try to help
people invest with a “clean conscience.”91
2. Recognize true liability. Investment houses often employ
environmental analysts who search for companies’
true environmental liability in evaluating their potential
performance. Bankers look at environmental risks and
environmental market opportunities when evaluating a
company’s credit rating.92 The Securities and Exchange
Commission in New York requires some companies to
report certain environmental costs. The Swiss Bank Corp.
has specialized Environmental Performance Rating Units
to include environmental criteria in order to improve the
quality of financial analysis.93
3. Fund and then assist green companies. Ann Winblad of
Hummer Winblad Venture Partners was one of the first
venture capitalists to coach green entrepreneurs to increase
their business skills and chances of success.94
4. Recognize financial opportunities. Worldwide, one of these
great opportunities is water. Water must be purified and
delivered reliably to everyone worldwide. Billions of people
lack sanitary sewage facilities and have poor access to
drinking water. Infrastructures in big cities, including those
in the United States, are seriously deteriorating. Supplying
clean water to people and companies is a $400 billion-a-year
industry—one-third larger than the global pharmaceutical
industry. Companies are aggressively pursuing this market.
They are betting that water in the 21st century will be like
oil in the 20th century. A Bear Stearns analyst called water
the best sector for the next century.95
KEY TERMS
carrying capacity The ability of a finite resource to sustain a
population. p. 191
conservation An environmental philosophy that seeks to
avoid waste, promote the rational and efficient use of natural
resources, and maximize long-term yields, especially of renewable resources. p. 192
Chapter 5
197
environmental movement An environmental philosophy
postulating that the unintended negative effects of human economic activities on the environment are often greater than the
benefits, and that nature should be preserved. p. 192
tragedy of the commons The environmental destruction
that results as individuals and businesses consume finite resources (the “commons”) to serve their short-term interests without
regard for the long-term consequences. p. 191
DISCUSSION QUESTIONS
1. To what extent can and should we rely on government to
solve environmental problems? What are some of government’s limitations? Take a stand on the role and usefulness
of government regulations on business activities.
2. To what extent should managers today be responsible for
cleaning up mistakes from years past that have hurt the
environment?
3. How would you characterize the environmental movement in
western Europe? How does it differ from the U.S. movement?
What difference will this make to a multinational company
that wants to produce and market goods in many countries?
4. What business opportunities can you see in meeting environmental challenges? Be specific.
5. You are appointed environmental manager of XYZ Company. Describe some actions you will take to address environmental challenges. Discuss obstacles you are likely to
encounter in the company and how you will manage them.
6. Interview a businessperson about environmental regulations and report your findings to the class. How would you
characterize his or her attitude? How constructive is his or
her attitude?
7. Interview a businessperson about actions he or she has taken
that have helped the environment. Report your findings to
the class and discuss.
8. Identify and discuss some examples of the tragedy of the
commons. How can the tragedies be avoided?
9. Discuss the status of recycling efforts in your community
or school, your perspectives on it as a consumer, and what
business opportunities could be available.
10. What companies currently come to mind as having the best
and worst reputations with respect to the environment?
Why do they have these reputations?
11. Choose one product and discuss its environmental impact
through its entire life cycle.
12. What are you, your college or university, and your community doing about the environment? What would you recommend doing?
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
{
}
126
Part Two
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.
128
Part Two
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.
130
Part Two
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.
132
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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