FOUNDATION OF PLANNING

After studying this chapter, you will be able to:

Discuss the nature and purposes of planning.

Explain what managers do in the strategic management process.

Compare and contrast approaches to goal setting and planning, and

Discuss contemporary issues in planning.

What is Planning?
Planning establishes the basis for all the other things managers do as they organize, lead, and control.
Planning is deciding on the organizations objectives or goals and getting the job done by establishing an
overall strategy for achieving those goals and developing a comprehensive hierarchy of plans to
integrate and coordinate activities.
Planning can be informal or formal. Smaller businesses often use informal planning where little is
verbalized or written down and the planning is general and lacks continuity.
Formal planning, however, defines specific goals that are to be met in a specific time period. They are
written down and made available to organization members. Then managers develop specific plans that
clearly define what the organization will do to move from where it is to where it wants to be.

Reason for Planning

Managers should plan for at least four reasons, as seen here in Exhibit 5-1.
1.

Planning coordinates effort. It gives direction to both managers and nonmanagerial employees
so each knows what he or she must contribute individually and as a groupto reach the
organizations goals. Planning stimulates intra- and inter-department coordination of activities,
which fosters teamwork and cooperation.

2.

Planning forces managers to look ahead, anticipate change, consider the impact of change, and
develop appropriate responses. It also clarifies the consequences of the actions managers might
take in response to change.

3.

Planning reduces overlapping and wasteful activities. Coordination before the fact is likely to
uncover waste and redundancy.

4.

Finally, planning establishes the goals or standards that facilitate managerial control to
ensure that the plans are carried out and the goals are met.

Criticisms for planning

Although it makes sense for an organization to establish goals and direction, critics have challenged
some of the basic assumptions of planning.
1.

Planning may create rigidity with goals and a timetable that are set under the assumption that
the environment wont change.

2.

Formal plans cannot replace intuition and creativity. Planning should enhance and support
intuition and creativity, not replace it.

3.

Planning focuses managers attention on todays competition, not on tomorrows survival.

Formal planning tends to focus on how best to capitalize on existing business opportunities
instead of ways to reinvent the industry. Instead of focusing on today, managers should plan
with an eye to untapped opportunities.

4.

Formal planning reinforces success, which may lead to failure. Its difficult to shift from the
comfort of what works to the uncertainty of the unknown. However, managers may need to
face that unknown and do things in new ways to be even more successful.

Formal planning and organizational performance

Does it pay to plan? In a nutshell, yes.
First, the data generally support the position that organizations should have formal plans and that these
plans generally translate into higher profits, higher return on assets, and other positive financial results.
Second, the quality of the planning process and appropriate implementation of the plan probably
contribute more to high performance than the extent of planning does.
Finally, in organizations in which formal planning did not lead to higher performance, the constraints of
the environmentsuch as governmental regulations and unforeseen economic challengesreduced the
impact of planning on the organizations performance.
Strategic Management
One important aspect of an organizations formal planning is strategic planning, which managers do as
part of the strategic management process.
In the space of a week, here are a few headline makers:

German engineering giant Siemens AG is rethinking its strategic goal of becoming a major player
in the nuclear power industry.

Best Buy Co. is shrinking its big-box store strategy to better position itself to compete online
against Amazon.com.

Burberry Group PLCs CEO Angela Ahrendts, pictured here, is outfitting company stores in China
with the latest digital technology to woo younger customers.

Now lets take a look at the what, how, and whys of strategic management.
The importance of strategic management
Strategic management is what managers do to develop an organizations strategiesthat is, the plans
for how the organization will do what its in business to do, compete successfully, and attract and satisfy
its customers in order to achieve its goals.
Strategic management is important to avoid weakening ones position due to poor economic conditions
and myriad external and interval variables. Two strategies that helped clothing chain retailer Buckle Inc.
were its location strategy of not placing the majority of its 400-plus stores in states falling on hard times
and a differentiation strategy of offering customer perks, such as custom pants fittings and free
hemming of its jeans.
Reasons why strategic management is so important include:
1.

It can make a difference in how well an organization performs. Research has found a generally
positive relationship between strategic planning and performance.

2.

It prepares managers in organizations of all types and sizes to cope with continually changing
situations and to examine relevant factors in planning future actions.

3.

Each part of an organization needs to work together to achieve the organizations goals;
strategic management helps accomplish this. For example, with more than 2.1 million
employees worldwide working in various departments, functional areas, and stores, Walmart
uses strategic management to help coordinate and focus employees efforts on whats most
important.

Strategic management isnt just for business organizations. Organizations such as government agencies,
hospitals, educational institutions, and social agencies also need strategic management. For example,
the skyrocketing costs of a college education, competition from for-profit companies offering alternative
educational environments, cuts to state budgets, and cutbacks in federal aid for students and research
have led many university administrators to assess their colleges aspirations and identify a market niche
in which they can survive and prosper.

Steps in strategic management process

STEP 1 of the strategic management process is to identify the organizations current mission, goals, and
strategies.
The mission is a statement of the organizations purpose. Defining the mission forces managers to
identify what the organization is in business to do. For instance, the mission of Facebook is a social
utility that connects you with the people around you, and the mission of the National Heart Foundation
of Australia is to reduce suffering and death from heart, stroke, and blood vessel disease in Australia.
The components of a mission statement, seen here in Exhibit 5-3, includes target customers, markets,
and goals and strategies, and each should be assessed to see if managers should change any of them.
Mission
UTP is an institute of higher learning.
We provide opportunities for the pursuit of knowledge and expertise for the advancement of
engineering, science and technology to enhance the nations competitiveness.
Our objective is to produce well-rounded graduates who are creative and innovative with the potential
to become leaders of industry and the nation.
Our aim is to nurture creativity and innovativeness and expand the frontiers of technology and
education for the betterment of society.
- - - Universiti Teknologi PETRONAS
In STEP 2, managers conduct an external analysis so they can:
1.

Know what the competition is doing, how pending legislation might affect the organization, and
how stable the local labor supply is in locations where it operates.

2.

Examine all components of the environmentthat is, economic, demographic, political/legal,

sociocultural, technological, and globalto see the trends and changes.

3.

Pinpoint opportunities that the organization can exploit and threats that it must counteract.

In STEP 3, managers conduct an internal analysis, which provides critical information about an
organizations specific resources and capabilities. An organizations resources are its assetsfinancial,
physical, human, and intangiblethat it uses to develop, manufacture, and deliver products to its
customers.
In comparison to assets, its capabilities are its skills and abilities in doing the work activities needed in
its business. The major value-creating capabilities of the organization are known as its core
competencies. Both resources and core competencies determine the organizations competitive
weapons.
After completing an internal analysis, managers should be able to identify organizational strengths and
weaknesses. Any activities the organization does well or any unique resources that it has are called
strengths. Weaknesses are activities the organization doesnt do well or resources it needs but doesnt
possess.
The combined external and internal analyses are called the SWOT analysis because, together, they are
an analysis of the organizations strengths, weaknesses, opportunities, and threats.
After completing the SWOT analysis, managers are ready to formulate appropriate strategies that:
(1) Exploit an organizations strengths and external opportunities, and
(2) Buffer or protect the organization from external threats.
STEP 4 is formulating strategies. As managers formulate strategies, they should consider the realities of
the external environment and their available resources and capabilities to design strategies that will
help their organization achieve its goals. Managers typically formulate three main types of strategies:
corporate, business, and functional. Well describe each shortly.
STEP 5 involves implementing strategies. Once strategies are formulated, they must be implemented.
No matter how effectively an organization has planned its strategies, performance will suffer if the
strategies arent implemented properly.
STEP 6 is evaluating results. This is the final step in the strategic management process, where managers
ask, How effective have the strategies been at helping the organization reach its goals? What
adjustments are necessary?
For example, when Anne Mulcahy was first named Xeroxs CEO, she assessed the results of previous
strategies and made strategic adjustmentssuch as cutting jobs, selling assets, and reorganizing
managementto regain market share and improve her companys bottom line.

Strategies need to be formulated for the three organizational levels: corporate, business, and functional,
as seen here in Exhibit 5-4.
A corporate strategy is an organizational strategy that specifies what businesses a company is inor
wants to be inand what it wants to do with those businesses.
The corporate strategy is based on the mission and goals of the organization and the roles that each
business unit of the organization will play. For example, PepsiCos mission is: To be the worlds premier
consumer products company focused on convenient foods and beverages. It pursues that mission with a
corporate strategy that puts it in different businesses, including PepsiCo Americas Beverage, PepsiCo
International, Frito-Lay North America, Quaker Foods North America, and Latin America Foods.
The second part of corporate strategy is when top managers decide what to do with those businesses.
The three main types of corporate strategies are growth, stability, and renewal.

Growth strategy is a corporate strategy in which an organization expands the number of markets served
or products offered, either through its current business or through new business. Because of its growth
strategy, an organization may increase revenues, number of employees, or market share.
Organizations grow by using concentration, vertical integration, horizontal integration, or diversification.

An organization that grows by using concentration increases the number of products

offered or markets served in its primary business.

A company can also grow by vertical integration, either backward, forward, or both.

In backward vertical integration, the organization becomes its own supplier.

In forward vertical integration, the organization becomes its own distributor. One
example is Apple, which has hundreds of retail stores around the globe.

In horizontal integration, a company grows by combining with competitors. Horizontal

integration may be regulated so that one company does not monopolize the market.

Finally, an organization can grow through diversification, either related or unrelated.

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Related diversification is when a company combines with other companies in different,

but related, industries.

Unrelated diversification is when a company combines with firms in different and unrelated industries
Other strategies
During times of economic uncertainty, many companies choose a stability strategy in which the
organization continues to do what it is currently doing, such as serving the same clients by offering the
same product or service, maintaining market share, and sustaining the organizations current business
operations.
When an organization is in trouble, however, managers need strategies called renewal strategies, which
address declining performance. There are two main types of renewal strategies:
1.

A retrenchment strategy is a short-run strategy used for minor performance problems.

This strategy helps it stabilize operations, revitalize organizational resources and
capabilities, and prepare to compete once again.

2.

When an organizations problems are more serious, they need to use the turnaround
strategy. While managers cut costs and restructure organizational operations in either
renewal strategy, these measures are more extensive than in a retrenchment strategy.

Competitive advantage
A competitive strategy is a strategy for how an organization will compete in its business. For a small
organization in only one line of business or a large organization with little product or market
diversification, the competitive strategy describes how the organization will compete in its primary
market.
2. For organizations in multiple businesses, each business has its own competitive strategy that
defines its competitive advantage, the products or services it will offer, the customers it wants
to reach, and so on.
3. When an organization engages in several different businesses, those single businesses that are
independent and formulate their own competitive strategies are often called strategic business
units (SBUs).
4. Developing an effective competitive strategy requires an understanding of the organizations
competitive advantage, which is whatever sets it apart from the competition. That distinctive
edge comes from the organizations core competencies. Competitive advantage also can come
from the companys resourcessomething that the organization has that its competitors dont.
5. When choosing a competitive strategy, Michael Porter, a leading researcher in strategy
formulation at Harvards Graduate School of Business, argues that managers have three generic

choicescost leadership, differentiation, and focusto give an organization a distinct

advantage by capitalizing on its strengths and on the industry its in.
6. A cost leadership strategy is when an organization competes by having the lowest costs in its
industry. A low-cost leader is highly efficient and, although it doesnt place a lot of emphasis on
frills, its product must be perceived as comparable in quality to that of its rivals, or at least be
acceptable to buyers.
7. A company that competes by offering unique products that are widely valued by customers is
following a differentiation strategy. Such product differences might come from exceptionally
high quality, extraordinary service, innovative design, technological capability, or an unusually
positive brand imagesuch as Apple (for product design) and Coach (for design and brand
image).
8. Although cost leadership and differentiation strategies are aimed at the broad market, the final
type of competitive strategythe focus strategyinvolves a cost advantage (or cost focus) or
a differentiation advantage (also called differentiation focus) in a narrow segment or niche.
Segments can be based on product variety, customer type, distribution channel, or geographical
location.
9. The feasibility of a focus strategy depends on the size of the segment and whether the
organization can make money serving that segment.
Sustainable competitive advantage
Not every organization is able to effectively exploit its resources and to develop the core competencies
that can provide it with a competitive advantage, but strategic management helps.
The organization must be able to sustain that advantage despite competitors actions or evolutionary
changes in the industry. Market instabilities, new technology, and other changes can challenge
managers attempts to create a long-term, sustainable competitive advantage.
The final type of strategy managers use is the functional strategy, a strategy used in an organizations
various functional departments to support the competitive strategy.
For instance, when Starbucks found itself facing increased competition from the likes of McDonalds and
Dunkin Donuts, it put additional emphasis on its marketing, product research and development, and
customer service strategies.
Benchmarking and strategic weapons
In todays intensely competitive and chaotic marketplace, organizations are looking for whatever
weapons they can use to achieve their goals. Some of these weapons include customer service,
employee skills and loyalty, innovation, and quality.

All of these weapons have been coveredor will be covered in future chaptersexcept for quality,
which we will look at now.
Many organizations employ quality practices to build competitive advantage and attract and hold a loyal
customer base. If implemented properly, quality is a way for an organization to create a sustainable
competitive advantage. If a business is able to continuously improve the quality and reliability of its
products, it may have a competitive advantage that cant be taken away. Incremental improvement is
something that becomes an integrated part of an organizations operations and can develop into a
considerable advantage.
To promote quality, managers in diverse industriessuch as health care, education, and financial
servicesare discovering the benefits of benchmarking, which is the search for the best practices
among competitors and noncompetitors that lead to their superior performance.
Benchmarking helps managers improve quality by analyzing and then copying the methods of leaders in
various fields.
Once managers have the organizations strategies in place, its time to set goals and develop plans to
pursue those strategies.
Goal settings
Planning involves two important aspects: goals, which are objectives, and plans, which are desired
outcomes or targets.
Plans guide managers decisions and form the criteria against which work results are measured. They
usually include resource allocations, budgets, schedules, and other necessary actions to accomplish
multiple goals.
Most companys goals can be classified as either strategic or financial. Financial goals are related to the
financial performance of the organization while strategic goals are related to all other areas of an
organizations performance.
Stated goals are official statements of an organizations goals, which it wants its stakeholders to believe.
But if you want to know an organizations real goalsthose goals an organization actually pursues
observe what organizational members are doing. Actions define priorities.
Setting goals
Goals provide the direction for all management decisions and actions, and form the criterion against
which actual accomplishments are measured.
Everything members of the organization do should be oriented toward achieving goals, which can be set
either through a process of traditional goal setting or by using management by objectives.

In traditional goal setting, goals set by top managers flow down through the organization and become
subgoals for each organizational area, as seen in Exhibit 5-5, and are passed down to each succeeding
organizational level. Then, at some later time, performance is evaluated to determine whether the
assigned goals have been achieved.
A problem with traditional goal setting is that when top managers define the organizations goals in
broad termssuch as achieving sufficient profitsthese ambiguous goals have to be stated more
specifically as they flow down through the organization. Managers at each level define the goals and
apply their own interpretations and biases as they make them more specific.
When the hierarchy of organizational goals is clearly defined, it forms an integrated network of goals, or
a means-ends chain. Higher-level goals (or ends) are linked to lower-level goals, which serve as the
means for their accomplishment.
MBO
Instead of using traditional goal setting, many organizations use management by objectives (MBO), a
process of setting mutually agreed-upon goals and using those goals to evaluate employee performance.
A manager using this approach would sit down with each member of his or her team to set goals and
periodically review whether progress is being made toward achieving those goals.
MBO programs have four elements:
1.

Goal specificity

2.

Participative decision making

3.

An explicit time period, and

4.

Performance feedback.

MBO uses goals to both make sure employees are doing what theyre supposed to be doing and to
motivate them.
Studies show that actual MBO programs can increase employee performance and organizational
productivity, and that goal setting can effectively motivate employees.
No matter which approach is used, goals have to be written and clearly indicate what the desired
outcomes are, as seen here.
Steps in goal settings
Managers should follow six steps when setting goals:

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1.

Review the organizations mission and the employees key job tasks. Goals should reflect the
mission, and managers need to clearly define what they want employees to accomplish as they
do their tasks.

2.

Evaluate available resources. Goals should be challenging but realistic with regards to available
resources.

3.

Determine the goals individually or with input from others. The goals reflect desired outcomes
and should be congruent with the organizational mission and goals in other organizational
areas. These goals should be measurable, specific, and include a time frame for
accomplishment.

4. Make sure goals are well-written and then communicate them to all who need to know.
5. Build in feedback mechanisms to assess goal progress. If goals arent being met, change them as
needed.
6. Link rewards to goal attainment.
Once the goals have been established, written down, and communicated, managers are ready to
develop plans for pursuing them.
Types of plan
Managers need plans to help them clarify and specify how goals will be met. As we see here in Exhibit 57, strategic plans are usually long-term, directional, and single-use, while tactical plans are short-term,
specific, and standing.
Now lets look at each type of plan and what it means:
1.

Breadth involves strategic plans, which are those that apply to an entire organization and
encompass the organizations overall goals, versus tactical plans (also referred to as operational
plans), which specify the details of how the overall goals are to be achieved.

2.

Time frame refers to the number of months or years used to define short-term and long-term
plans.

3.

Specificity refers to whether a plan is specific or more general. Due to current environmental
uncertainty, managers must be flexible in responding to unexpected changes, so theyre more
likely to use directional plans that set general guidelines. Managers who engages in planning
must weigh the flexibility of directional plans against the clarity that specific plans offer.

4.

Frequency of use describes whether plans are ongoing or used only once. Standing plans are
ongoing plans that provide guidance for activities performed repeatedly, whereas single-use
plans are one-time plans specifically designed to meet the needs of a unique situation.

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The process of plan development is influenced by three contingency factors and by the kind of planning
approach followed.
Three contingency factors that affect the choice of plans are:
1.

Organizational level

2.

Degree of environmental uncertainty, and

3.

Length of future commitments.

Organization plans can best be understood by looking at who does the planning.
In the traditional approach, planning is done entirely by top-level managers who often are assisted by a
formal planning department, which is a group of planning specialists whose sole responsibility is to help
write the various organizational plans. Then the plans flow down through other organizational levels and
are tailored to the particular needs of each level. Although this approach makes managerial planning
thorough, systematic, and coordinated, too often the focus is on developing the plan which is later not
implemented.
Another planning approach involves the input of organizational members at the various levels and in the
various work units who participate in developing the plans to meet their specific needs.

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