Chapter 8 Strategic planning 29 terms michaellafarrell

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Strategic plan vs. strategic planning PLAN = formal statement of plans

PLANNING = process of preparing and revising the statement

definition of strategic planning process of:

- deciding on the programs that the organization will undertake
AND
- on the approximate amount of resources that will be allocated to each program over the next servral years

strategy formulation vs. strategic planning FORMULATION = process of deciding on new strategies
o Arrives at goals and creates strategies for achieving those goals
**where STRATEGIC DECISIONS are made

PLANNING = process of deciding how to implement the strategies

o Takes those goals given and develops programs that will carry out the strategies and achieve the goals
efficiently and effectively
**where IMPLEMENTATION ISSUES are resolved

manufacturer example (pg 331) READ THROUGH IT

first step in a formal strategic planning process write descriptions of the organization's goals and strategies

WHY: goals/strategies not stated explicitly enough or communicated clearly to make a framework out of
 PROBLEM: management may not be able to verbalize with specificity necessary for making good program
decisions

systematic vs. unsystematic systematic = STRATEGIC PLANNING

unsystematic = STRATEGIC FORMULATION

benefits of strategic planning 1. Framework for developing the budget

Facilitates the formulation of an effective operating budget
To facilitate optimal resource allocation decisions in support of key strategic options

2. Management development tool

3. Mechanism for forcing management to think long term

4. Means of aligning managers with corporate strategies

limitations of strategic planning 1. Always a danger that planning can end up becoming "form filling" bureaucratic exercise, devoid of strategic
thinking (no new fresh ideas)

2. Organization may create a large strategic planning department and delegate preparation of the strategic
plan to that staff department (staff dt should have a minimal role b/c should be up to line managers who will
actually be executing the plan)

3. Time consuming and expensive

problems when don't have a strategic planning - consider too many strategic issues (info overload)
process - inadequate consideration of strategic alternatives
- neglect of choices altogether

organizational characteristics where formal Top management is convinced that strategic planning is important
strategic plan DESIRABLE Organization is relatively large and complex
Considerable uncertainty about the future exists but organization has flexibility to adjust to changed
circumstances

organizational characteristics where formal In small, relatively stable organizations

strategic plan NOT DESIRABLE In organizations that cannot make reliable estimates about the future
In organizations whose senior management prefers not to manage in this fashion

why strategic plan covers 5 years - long enough period to estimate consequences for program decisions made currently
-consequences from decision of acquisition/development of new product/capital asset not fully felt in shorter
period
 -beyond 5 years = too murky

*sometimes only covers 3 years**

who does strategic planning process involve -senior management

- managers of business units
- managers of principal resp. centers

**NOT managers of individual depts

what numbers must all match up? from the:

-strategic plan
-annual budget
-accounting system

**responsibility given to 1 group (usually controller org. even if there is planning staff)

role of headquarters staff facilitate strategic planning process but DO NOT make decisions

WHY? if bus. unit mgrs. perceive they are overly influential in decisions then mgrs. will be reluctant to have
frank discussion essential to developing plans

top management style o No system will function effectively unless chief executive actually uses it

designers of system must diagnose style of senior management and fit system to that

2 types of proposals for new programs o Proactive: come as initiative to capitalize on an opportunity

o Reactive: come as a reaction to perceived threat

how to view adoption of a new program view as a series of decisions (not an all-or-nothing decision):

-agreement of initial idea

-technical feasibility?
-production issues
-cost characteristics in pilot plan
-test consumer acceptance

***then can make major commitment to full production & marketing

2 ways to analyze capital investment proposals 1. NPV of project (excess of pv)

2. internal rate of return implicit in relationship between inflows and outflows

4 reasons not to use NPV to analyze investment ISSUE 1: proposal may be so obviously attractive that calculation of its NPV is unnecessary
proposals
ISSUE 2: estimates involved in the proposal are so uncertain that making PV calculations is not worth the effort
- sometimes referred to as "GIGO" (garbage in, garbage out)

ISSUE 3: rationale for proposal is something other than increased profitability

ISSUE 4: no feasible alternative to adoption of the new program

considerations when implementing cap RULES

expenditure evaluation system (level of approval, thresholds)

AVOIDING MANIPULATION

MODELS
(risk/sensitivity analysis, simulation, scenario planning)

expert systems uses computer software

timetable for analyzing investments THERE IS NONE!

STARTING: as soon as ppl are available, can start analysis

*decision made as soon as the need is identified*

DEADLINE: keep in mind of the budget since strategic planning must come before budget preparation

techniques for analyzing ongoing programs (1) value chain analysis

(2) ABC costing

value chain analysis **looking at linked set of value-creating activities

(strategic planning perspective)
3 useful areas:
- Linkages with suppliers
- Linkages with customers
- Process linkages within the value chain of the firm

efficiency-oriented initiatives:
-inward portion (before prod)
-production portion
-outward portion (factory to customer)
ABC costing
(strategic planning perspective)
steps of strategic planning process
planning gaps & 3 ways to close them
what is incorporated in strategic plan
cost driver of each cost center = cause of cost incurrence
will show if:
- complex products have higher design and production costs than simpler products
- products w/ low volume have higher unit costs (and vice versa)
1. Reviewing and updating strategic plan from last year
2. Deciding on assumptions and guidelines
3. 1st iteration of the new strategic plan
4. Analysis *where you address planning gaps
5. 2nd iteration of the new strategic plan
6. Final review and approval
= when some of individual plan does not attain corporate objectives
CLOSE:
Find opportunities for improvement * most favored
Make acquisitions
Review the corporate objectives
- implications of decisions made
-assumptions/guidelines about external forces (inflation, internal policies, product pricing)