The Manager as a Planner and Strategist pdf

Chapter 8 Learning Objectives After studying this chapter, you should be able to: • Describe the three steps of the planning process. • Explain the relationship between planning and strategy. • Explain the role of planning in predicting the future and in mobilizing organizational resources to meet future contingencies. • Outline the main steps in SWOT analysis. • Differentiate among corporate-, business-, and functional-level strategies. • Describe the vital role played by strategy implementation in determining managers’ ability to achieve an organization’s mission and goals. The Manager as a Planner and Strategist What is the best way to compete in an industry? In 1971, Federal Express (FedEx) turned the package delivery world upside down when it began to offer overnight package delivery by air. Its founder, Fred Smith, had seen the opportunity for next-day delivery because both the U.S. Postal Service and United Par- cel Service (UPS) were, at that time, taking several days to deliver packages. Smith was convinced there was pent up demand for such a unique new service, overnight deliv- ery, and he was also convinced that cus- tomers would be willing to pay a high pre- mium price to get it, at least $15 a package at that time. 1 Smith was right, customers were willing to pay high prices for fast reliable delivery; when he discovered and tapped into an unmet customer need, he redefined the package delivery industry. Several companies imitated FedEx’s new strategy and introduced their own air over- night service. None, however, could match FedEx’s efficiency and its state-of-the-art information systems which allowed continu- ous tracking of all packages while in transit. Several of its competitors went out of busi- ness. A few, like Airborne Express, managed to survive by focusing or specializing on serving the needs of one particular group of customers—corporate customers—and by offering lower prices than FedEx. Its strategy earned FedEx huge returns through the 1980s, even though the costs of operating its A Manager’s Challenge UPS Battles FedEx The “bricks and mortar” store and “virtual” storefront of bookseller Barnes and Noble. As of 2001, Barnes and Noble had still not yet made a profit from its on-line activities and the company as a whole was experiencing losses. As the battle between FedEx and UPS suggests, there is more than one way to compete in an industry. To find a viable way to enter and compete in an industry, managers must study the way other organiza- tions behave and identify their strategies. By studying the strategies of FedEx, UPS was able to devise a strategy that allowed it to enter the overnight package industry and take on FedEx. So far, it has had considerable success and appears to have achieved a competitive advantage over FedEx. In an uncertain competitive environment, managers must engage in thor- ough planning to find a strategy that will allow them to compete effectively. This chapter explores the manager’s role both as planner and as strategist. We dis- cuss the different elements involved in the planning process, including its three major steps: (1) determining an organization’s mission and major goals, (2) choosing strategies to realize the mission and goals, and (3) selecting the appro- priate way of organizing resources to implement the strategies. We also discuss scenario planning and SWOT analysis, important techniques that managers use to analyze their current situation. By the end of this chapter, you will understand the role managers play in the planning and strategy-making process to create high-performance organizations. 252 Chapter Eight vast air delivery system were, and still are, very high. Previously only a road delivery package service, in 1988 UPS initiated an overnight air delivery service of its own. 2 UPS managers realized that the future of package delivery lay both on the road and in the air because differ- ent customer groups, with different needs were emerging. It began to aggressively imi- tate FedEx’s operating and information sys- tems, especially its tracking systems. Slowly and surely UPS increased the number of overnight packages that it was delivering but it was still way behind FedEx. Even its well- developed, highly efficient road delivery sys- tem that could reach every customer in the United States—its major strength—was not really helping it to catch up. Then, in 1999, UPS announced two major innovations: First, it introduced a new tracking and shipping information system which matched, and even exceeded, the sophistica- tion of that used by FedEx because it could work with any IT system used by corporate customers. By contrast, customers had to install and use FedEx’s proprietary IT, causing more work and cost for them. Second, UPS integrated its overnight air service into this nationwide delivery service and now has a seamless interface between these two differ- ent aspects of its business. This has given it a competitive advantage over FedEx because UPS can more efficiently deliver short-range and mid-distance packages, those around 500 miles, than FedEx, as well as match FedEx’s long-range operations. Moreover, UPS can also offer customers lower prices because it has lower costs than FedEx. In 2000 FedEx delivered 3 million overnight packages and had a 39 percent market share compared to UPS’s 2.2 million packages; but while UPS’s overnight business was growing at 8 percent FedEx’s was growing at 3.6 per- cent. 3 Some analysts believe that the effi- ciency and flexibility of UPS’s delivery sys- tems will make it the market leader in even overnight delivery (it already is in surface package delivery) and that it is the company poised to become the global leader this cen- tury. Not only has FedEx been shaken by these new developments, small delivery com- panies like Airborne Express have come under increased pressure and it appears that major changes in the industry are ahead. Overview Planning, as we noted in Chapter 1, is a process that man- agers use to identify and select appropriate goals and courses of action for an organization. 4 The organizational plan that results from the planning process details the goals of the organization and specifies how managers intend to attain those goals. The cluster of decisions and actions that managers take to help an organization attain its goals is its strategy. Thus, planning is both a goal-making and a strategy-making process. In most organizations, planning is a three-step activity (see Figure 8.1). The first step is determining the organization’s mission and goals. A mission state- ment is a broad declaration of an organization’s overriding purpose; this state- ment is intended to identify an organization’s products and customers as well as to distinguish the organization in some way from its competitors. The second step is formulating strategy. Managers analyze the organization’s current situa- tion and then conceive and develop the strategies necessary to attain the organi- zation’s mission and goals. The third step is implementing strategy. Managers decide how to allocate the resources and responsibilities required to implement those strategies between people and groups within the organization. 5 In subse- quent sections of this chapter we look in detail at the specifics of each of these steps. But first, we examine the general nature and purpose of planning, one of the four managerial functions identified by Henri Fayol. Levels of Planning In large organizations planning usually takes place at three levels of manage- ment: corporate, business or division, and department or functional. Figure 8.2 shows the link between the three steps in the planning process and these three levels. To understand this model, consider how General Electric (GE), a large organization that competes in many different businesses, operates. 6 GE has three main levels of management: corporate level, business level, and functional level (see Figure 8.3). At the corporate level are CEO and Chairman Jeffrey Immelt, three other top managers, and their corporate support staff. Below the corporate level is the business level. At the business level are the different divisions of the The Manager as a Planner and Strategist 253 An Overview of the Planning Process Figure 8.1 Three Steps in Planning DETERMINING THE ORGANIZATION’S MISSION AND GOALS Define the business Establish major goals FORMULATING STRATEGY Analyze current situation and develop strategies IMPLEMENTING STRATEGY Allocate resources and responsibilities to achieve strategies planning Identifying and selecting appropriate goals and courses of action; one of the four principal functions of management. strategy A cluster of decisions about what goals to pursue, what actions to take, and how to use resources to achieve goals. mission statement A broad declaration of an organization’s purpose that identifies the organization’s products and customers and distinguishes the organization from its competitors. company. A division is a business unit that competes in a distinct industry; GE has over 150 divisions, including GE Aircraft Engines, GE Financial Services, GE Lighting, GE Motors, GE Plastics, and NBC. Each division has its own set of divisional managers. In turn, each division has its own set of functions or departments—manufacturing, marketing, human resource management, R&D, and so on. Thus, GE Aircraft has its own marketing function, as do GE Lighting, GE Motors, and NBC. At GE, as at other large organizations, planning takes place at each level. The corporate-level plan contains top management’s decisions pertaining to the organization’s mission and goals, overall (corporate-level) strategy, and struc- ture (see Figure 8.2). Corporate-level strategy indicates in which industries and national markets an organization intends to compete. One of the goals stated in GE’s corporate-level plan is that GE should be first or second in mar- ket share in every industry in which it competes. A division that cannot attain this goal may be sold to another company. GE Medical Systems was sold to Thompson of France for this reason. Another GE goal is the acquisition of other companies to help build market share. Over the last decade, GE has acquired several financial services companies and has transformed the GE Financial Ser- vices Division into one of the largest financial service operations in the world. The corporate-level plan provides the framework within which divisional managers create their business-level plans. At the business level, the managers of each division create a business-level plan that details (1) long-term goals that will allow the division to meet corporate goals and (2) the division’s busi- 254 Chapter Eight Figure 8.2 Levels and Types of Planning CORPORATE-LEVEL PLAN BUSINESS-LEVEL PLAN FUNCTIONAL-LEVEL PLAN STRATEGY FORMULATION GOAL SETTING STRATEGY IMPLEMENTATION Corporate- level strategy Corporate mission and goals Design of business unit structure control Business- level strategy Divisional goals Design of corporate structure control Functional- level strategy Functional goals Design of functional structure control division A business unit that has its own set of managers and functions or departments and competes in a distinct industry. divisional managers Managers who control the various divisions of an organization. corporate-level plan Top management’s decisions pertaining to the organization’s mission, overall strategy, and structure. corporate-level strategy A plan that indicates in which industries and national markets an organization intends to compete. ness-level strategy and structure. Business-level strategy states the methods a division or business intends to use to compete against its rivals in an industry. Managers at GE Lighting (currently number two in the global lighting industry behind the Dutch company Philips NV) develop strategies designed to help the division take over the number-one spot and better contribute to GE’s corporate goals. The lighting division’s competitive strategy might emphasize, for exam- ple, trying to reduce costs in all departments in order to lower prices and gain market share from Philips. GE is currently planning to expand its European lighting operations, which as we discussed in Chapter 6, is based in Hungary. 7 A function is a unit or department in which people have the same skills or use the same resources to perform their jobs. Examples include manufacturing, accounting, and sales. The business-level plan provides the framework within which functional managers devise their plans. A functional-level plan states the goals that functional managers propose to pursue to help the division attain its business-level goals, which, in turn, allow the organization to achieve its cor- porate goals. Functional-level strategy sets forth the actions that managers intend to take at the level of departments such as manufacturing, marketing, and R&D to allow the organization to attain its goals. Thus, for example, consistent with GE Lighting’s strategy of driving down costs, the manufacturing function might adopt the goal “To reduce production costs by 20 percent over three years,” and its functional strategy to achieve this goal might include (1) investing in state-of-the-art European production facilities, and (2) developing an elec- tronic global business-to-business network to reduce the cost of inputs and inventory-holding costs. An important issue in planning is ensuring consistency in planning across the three different levels. Functional goals and strategies should be consistent with divisional goals and strategies, which in turn should be consistent with corporate goals and strategies, and vice versa. Once complete, each function’s The Manager as a Planner and Strategist 255 Figure 8.3 Levels of Planning at General Electric BUSINESS OR DIVISION LEVEL CORPORATE LEVEL FUNCTIONAL LEVEL CEO GE Financial Services GE Aircraft GE Lighting GE Motors GE Plastics NBC Corporate Office R&DMarketing Manufacturing Accounting business-level plan Divisional managers’ decisions pertaining to divisions’ long-term goals, overall strategy, and structure. business-level strategy A plan that indicates how a division intends to compete against its rivals in an industry. function A unit or department in which people have the same skills or use the same resources to perform their jobs. functional managers Managers who supervise the various functions, such as manufacturing, accounting, and sales, within a division. functional-level plan Functional managers’ decisions pertaining to the goals that they propose to pursue to help the division attain its business-level goals. functional-level strategy A plan that indicates how a function intends to achieve its goals. plan is normally linked to its division’s business-level plan, which, in turn, is linked to the corporate plan. Although few organizations are as large and com- plex as GE, most plan as GE does and have written plans to guide managerial decision making. Who Plans? In general, corporate-level planning is the primary responsibility of top man- agers. 8 At General Electric, the corporate-level goal that GE be first or second in every industry in which it competes was first articulated by former CEO, Jack Welch who stepped down in September 2001. Now, Welch’s hand-selected suc- cessor, Jeffrey Immelt, and his top-management team decide which industries GE should compete in. Corporate-level managers are responsible for approving business- and functional-level plans to ensure that they are consistent with the corporate plan. Corporate planning decisions are not made in a vacuum. Other managers do have input to corporate-level planning. At General Electric and many other companies, divisional and functional managers are encouraged to submit pro- posals for new business ventures to the CEO and top managers, who evaluate the proposals and decide whether to fund them. 9 Thus, even though corporate- level planning is the responsibility of top managers, lower-level managers can and usually are given the opportunity to become involved in the process. This approach is common not only at the corporate level but also at the busi- ness and functional levels. At the business level, planning is the responsibility of divisional managers, who also review functional plans. Functional managers also typically participate in business-level planning. Similarly, although the functional managers bear primary responsibility for functional-level planning, they can and do involve their subordinates in this process. Thus, although ulti- mate responsibility for planning may lie with certain select managers within an organization, all managers and many nonmanagerial employees typically par- ticipate in the planning process. Time Horizons of Plans Plans differ in their time horizon, or intended duration. Managers usually dis- tinguish among long-term plans with a horizon of five years or more, intermedi- ate-term plans with a horizon between one and five years, and short-term plans with a horizon of one year or less. 10 Typically, corporate- and business-level goals and strategies require long- and intermediate-term plans, and functional- level goals and strategies require intermediate- and short-term plans. Although most organizations operate with planning horizons of five years or more, it would be inaccurate to infer from this that they undertake major plan- ning exercises only once every five years and then “lock in” a specific set of goals and strategies for that time period. Most organizations have an annual planning cycle, which is usually linked to their annual financial budget (although a major planning effort may be undertaken only every few years). Although a corporate- or business-level plan may extend over five years or more, it is typically treated as a rolling plan, a plan that is updated and amended every year to take account of changing conditions in the external environment. Thus, the time horizon for an organization’s 2002 corporate-level plan might be 2007; for the 2003 plan it might be 2008; and so on. The use of rolling plans is essential because of the high rate of change in the environment and the diffi- 256 Chapter Eight time horizon The intended duration of a plan. culty of predicting competitive conditions five years in the future. Rolling plans allow managers to make midcourse corrections if environmental changes war- rant, or to change the thrust of the plan altogether if it no longer seems appro- priate. The use of rolling plans allows managers to plan flexibly, without losing sight of the need to plan for the long term. As discussed earlier, UPS is a master at using rolling plans to improve its long-run efficiency. It constantly updates its plans as its systems experts develop improved IT systems that provide it with new opportunities to improve its operating effectiveness as discussed in the “Information Technology Byte.” Rolling Plans and Global Supply Chain Management As discussed in the opening case, UPS is gaining on FedEx because its man- agers are committed to constantly upgrading and developing the potential of its IT systems as new technology becomes ever more powerful and useful. Using this new technology, UPS has also gained ground on FedEx in provid- ing another important service that is becoming increasingly important given the growth of B2B networks—global supply chain management. Both UPS and FedEx offer companies such as Compaq, Ford, and Dell a complete global pickup, warehousing, transportation, tracking, and delivery service of their products to customers. Also, they can manage the delivery of inputs these companies require to make their products so that they do not have to carry large stocks of inventory which is expensive. Thus, UPS and FedEx are now in the business of using IT to manage the flow of a company’s inputs and the distribution of its outputs—global supply chain management. FedEx had the early lead in this business, it had opened such a service in Japan and in the United States, building warehouses near major customers to facilitate the flow of Japanese products to the United States. However in the 1990s, UPS managers realized the huge growth potential of the supply chain management business because of soaring international trade and the growth of foreign specialist suppliers that could supply low-cost inputs. They initi- ated a series of rolling plans and set targets to develop an IT system that would continuously improve customer service and increase UPS’s efficiency. By contrast, FedEx managers did not capitalize on their early lead in the business. Although they used to have the best tracking and IT systems, they apparently did not set in place a program to update and improve them, believing their competitive advantage was too strong. This was a mistake. By 2000, the constant improvements in its IT systems had given UPS the lead; large corporate customers were increasingly choosing UPS to manage their supply chains. In 2000, Ford, for example, saved $250 million by allowing UPS to manage the shipping, tracking, and distribution of its new cars to dealers throughout the United States. Some analysts believe that UPS cur- rently has the best supply-chain services in place. Currently, both companies are competing to redefine and control the global shipping business, something largely made possible by the growth of new IT systems and the Internet. Indeed, the emergence of the dot-coms, and companies like Amazon.com, which ship hundreds of millions of pack- ages a year was a major factor in shaping the competitive strategies of these two companies. Interestingly, because of its lower prices in 2001, UPS was the shipper of choice for Amazon.com. The Manager as a Planner and Strategist 257 Information Technology Byte Standing Plans and Single-Use Plans Another distinction often made between plans is whether they are standing plans or single-use plans. Managers create standing and single-use plans to help achieve an organization’s specific goals. Standing plans are used in situations in which programmed decision making is appropriate. When the same situations occur repeatedly, managers develop policies, rules, and standard operating pro- cedures (SOP) to control the way employees perform their tasks. A policy is a general guide to action; a rule is a formal, written guide to action; and a standing operating procedure is a written instruction describing the exact series of actions that should be followed in a specific situation. For example, an organization may have a standing plan about ethical behavior by employees. This plan includes a policy that all employees are expected to behave ethically in their dealings with suppliers and customers; a rule that requires any employee who receives from a supplier or customer a gift larger than $10 to report the gift; and an SOP that obliges the recipient of the gift to make the disclosure in writing within 30 days. In contrast, single-use plans are developed to handle nonprogrammed decision making in unusual or one-of-a-kind situations. Examples of single-use plans include programs, which are integrated sets of plans for achieving certain goals, and projects, which are specific action plans created to complete various aspects of a program. One of NASA’s major programs was to reach the moon, and one project in this program was to develop a lunar module capable of landing on the moon and returning to the earth. Why Planning Is Important Essentially, planning is ascertaining where an organization is at the present time and deciding where it should be in the future and how to move it forward. When managers plan, they must consider the future and forecast what may hap- pen in order to take actions in the present and mobilize organizational resources to deal with future opportunities and threats. As we have discussed in previous chapters, however, the external environment is uncertain and complex, and managers typically must deal with incomplete information and bounded ratio- nality. This is one reason why planning is so complex and difficult. Almost all managers engage in planning, and all should participate because they must try to predict future opportunities and threats. The absence of a plan often results in hesitations, false steps, and mistaken changes of direction that can hurt an organization or even lead to disaster. Planning is important for four main reasons: 1. Planning is a useful way of getting managers to participate in decision mak- ing about the appropriate goals and strategies for an organization. Effective planning gives all managers the opportunity to participate in decision making. At Intel, for example, top managers, as part of their annual planning process, regularly request input from lower-level managers to determine what the orga- nization’s goals and strategies should be. 2. Planning is necessary to give the organization a sense of direction and pur- pose. 11 A plan states what goals an organization is trying to achieve and what strategies it intends to use to achieve them. Without the sense of direction and purpose that a formal plan provides, managers may interpret their own tasks and roles in ways that best suit themselves. The result will be an organization 258 Chapter Eight that is pursuing multiple and often conflicting goals and a set of managers who do not cooperate and work well together. By stating which organizational goals and strategies are important, a plan keeps managers on track so that they use the resources under their control effectively. 3. A plan helps coordinate managers of the different functions and divisions of an organization to ensure that they all pull in the same direction. Without a good plan, it is possible that the members of the manufacturing function will produce more products than the members of the sales function can sell, result- ing in a mass of unsold inventory. Implausible as this might seem, it happened to the high-flying Internet router supplier, Cisco Systems in 2000 when manu- facturing, which had been able to sell all the routers that it produced, had over $2 billion of unsold inventory because of the combination of an economic recession and customers’ demands for new kinds of optical routers that Cisco did not have in stock. 4. A plan can be used as a device for controlling managers within an organi- zation. A good plan specifies not only which goals and strategies the organiza- tion is committed to but also who is responsible for putting the strategies into action to attain the goals. When managers know that they will be held account- able for attaining a goal, they are motivated to do their best to make sure the goal is achieved. Henri Fayol, the originator of the model of management we discussed in Chapter 1, said that effective plans should have four qualities: unity, continuity, accuracy, and flexibility. 12 Unity means that at any one time only one central, guiding plan is put into operation to achieve an organizational goal; more than one plan to achieve a goal would cause confusion and disorder. Continuity means that planning is an ongoing process in which managers build and refine previous plans and continually modify plans at all levels—corporate, business, and functional—so that they fit together into one broad framework. Accuracy means that managers need to make every attempt to collect and utilize all avail- able information at their disposal in the planning process. Of course, managers must recognize the fact that uncertainty exists and that information is almost always incomplete (for reasons we discussed in Chapter 7). Despite the need for continuity and accuracy, however, Fayol emphasized that the planning process should be flexible enough so that plans can be altered and changed if the situa- tion changes; managers must not be bound to a static plan. Scenario Planning One way in which managers can try to create plans that have the four qualities that Fayol described is by utilizing scenario planning, one of the most widely used planning techniques. Scenario planning (also known as contingency plan- ning) is the generation of multiple forecasts of future conditions followed by an analysis of how to respond effectively to each of those conditions. As noted previously, planning is about trying to forecast and predict the future in order to be able to anticipate future opportunities and threats. The future, however, is inherently unpredictable. How can managers best deal with this unpredictability? This question preoccupied managers at Royal Dutch Shell, the third largest global oil company in the 1980s. In 1984, oil was $30 a barrel, and most analysts and managers, including Shell’s, believed that it would hit $50 per barrel by 1990. Nevertheless, Shell conducted a scenario- planning exercise for its managers. Shell’s managers were asked to use scenario The Manager as a Planner and Strategist 259 scenario planning The generation of multiple forecasts of future conditions followed by an analysis of how to respond effectively to each of those conditions; also called contingency planning. [...]... capabilities to pursue a focused differentiation and cost-leadership strategy While many clothing companies, such as the United States’s The Gap, Sweden’s Hennes & Mauritz, and England’s Jaeger and Laura Ashley, have attempted to supply fashionable clothes at lower prices, none has succeeded as well as Spanish clothes maker, Zara, whose sales have soared in recent The Manager as a Planner and Strategist. .. Matsushita Instead, Amstrad’s product was encased in teak rather than metal and featured a control panel tailor-made to appeal to British consumers’ preferences To remain competitive in this market, Matsushita had to place more emphasis on local customization of its Panasonic and JVC brands The advantages and disadvantages of a multidomestic strategy are the opposite of those of a global strategy The. .. how their actions fit into the overall corporate plan Give managers at all levels the opportunity to participate in the planning process to best analyze an organization’s present situation and the future scenarios that may affect it The Manager as a Planner and Strategist Determining the Organization’s Mission and Goals 261 Determining the organization’s mission and goals is the first step of the planning... because they emphasize that a goal must be attained within a reasonable period; they inject a sense of urgency into goal attainment and act as a motivator Formulating Strategy Strategy formulation involves managers analyzing an organization’s current situation and then developing strategies to accomplish its mission and achieve its goals.26 Strategy formulation begins with managers analyzing the factors... buckets, and U.S grown The Manager as a Planner and Strategist 271 rice and wheat are all products that be sold using the same marketing across many countries by simply changing the language Thus, companies can save a significant amount of money The major disadvantage of pursuing a global strategy is that, by ignoring national differences, managers may leave themselves vulnerable to local competitors that... Channel, Dior, and Armani can charge thousands of dollars for the fashionable collections of suits and dresses that they introduce twice yearly in the fall and in the spring Only the very rich can afford such differentiated and expensive clothing and this has opened up a gap in the fashion market for companies that can supply fashionable clothes at lower prices Essentially, these companies have the. .. chain; value is added at each stage Typically, the primary operations of an organization take place in one of these stages For a company based in the assembly stage, backward integration would involve establishing a new division in intermediate manufacturing or raw-material production, and forward integration would involve establishing a new division to distribute its 273 The Manager as a Planner and. .. Discussion and Action 1 Describe the three steps of planning Explain how they are related 4 What is the role of divisional and functional managers in the formulation of strategy? 2 How can scenario planning help managers predict the future? 5 3 Ask a manager about the kinds of planning exercises he or she regularly uses What are the purposes of these exercises, and what are their advantages or disadvantages?... think strategically.16 Tips For New Managers Planning 1 2 3 4 Think ahead by using exercises like scenario planning on a regular basis See plans as a guide to action Don’t become straitjacketed by plans that may no longer be appropriate in a changing environment Make sure that the plans created at each of the three organizational levels are compatible with one another and that managers at all levels... in marketing and in research and development) and weaknesses (such as rising manufacturing costs and outdated technology) The task facing managers is to identify the strengths and weaknesses that characterize the present state of their organization The second step in SWOT analysis begins when managers embark on a fullscale SWOT planning exercise to identify potential opportunities and threats in the . goals. 26 Strat- egy formulation begins with managers analyzing the fac- tors within an organization and outside, in the task and general environments, The Manager as a Planner and Strategist 263 Figure. goals and a set of managers who do not cooperate and work well together. By stating which organizational goals and strategies are important, a plan keeps managers on track so that they use the resources. that plans can be altered and changed if the situa- tion changes; managers must not be bound to a static plan. Scenario Planning One way in which managers can try to create plans that have the