Strategic Planning

Nature of Strategic Planning

Strategic Planning is process of deciding on the programs that organisation will undertake and on approximate resources that will be allocated to each program over next several years Relation to Strategic Planning: after management arrives at goals of the organisation in strategy formulation, strategic planning process then takes goals and strategies as given and develops programs to carry out strategies and achieve goals efficiently and effectively

Nature of Strategic Planning

studies made during planning process may indicate desirability of changing goals or strategies, while formulation usually includes a preliminary consideration of programs that will be adopted as a means of achieving these goals strategic planning is systematic, having annual process with prescribed procedures & timetables; while strategy formulation is unsystematic in a formal strategic planning process, an important first step often has to be to write descriptions of organisations goals and strategies

Nature of Strategic Planning

Evolution of Strategic Planning: a few companies started formal strategic planning systems in late 1950s, but early efforts were failures required data was much detailed than was appropriate, staff people rather than line people did most of the work participants spent more time filling in forms than thinking deeply about alternatives currently, many organisations appreciate advantages of making a plan for next 3 to 5 years

Nature of Strategic Planning

Benefits of Strategic Planning: framework for developing annual budget: It facilitates optimal resource allocation decisions in support of key strategic options management development tool: Formal system forces managers to take time to think on important long-term issues means of aligning managers with corporate strategies: Debates, discussions and negotiations during planning process

Nature of Strategic Planning

Limitations of Strategic Planning: planning can end up becoming a form filling bureaucratic exercise, devoid of strategic thinking organisation may create a large strategic planning department and delegate preparation of strategic plan to that staff department it is time consuming and expensive A formal strategic plan should have features like: top management is convinced that strategic planning is important

Nature of Strategic Planning

organisation is relatively large and complex considerable uncertainty about future exists, but organisation has flexibility to adjust to changed circumstances in summary, formal strategic planning process is not needed in small, relatively stable organisations Program structure and content: in most industrial organisations, programs are product families, plus R & D, general and administrative expenses, not in existing products

Nature of Strategic Planning

in service organisations, programs correspond to types of services rendered by the entity typical strategic plan covers a period of five future years rupee amounts for each plan show approximate magnitude of its revenues, expenses and capital expenditures if strategic plan is structured by business units, the Charter, specifying boundaries within which business unit is expected to operate, is also stated

Nature of Strategic Planning

Organisational Relationships: in some organisations, controller organisation prepares strategic plan, as they may be skilled primarily in detailed analytical techniques required in fine-tuning annual budget & analysing variances between actual & budgeted amounts in other organisations, separate planning staff may support in analytical skills and broader outlook that may not exist in controller set up headquarter staff members should facilitate, not intervene in strategic planning process

Nature of Strategic Planning

Top management style: some Chief Executives prefer to make decisions without benefit of a formal planning apparatus In some companies, Chief Executive want some overall plan for business, but by temperament has an aversion to paperwork In other companies, senior management prefers extensive analysis and documentation of plans and formal part of system is relatively elaborate Designers must correctly diagnose style of senior management and fit the system accordingly

Analysing Proposed New Programs

Proposals for programs are essentially either reactive or proactive Ideas for new programs can originate anywhere in the organisation i.e. CEO, planning staff etc. Planners should view adoption of program not as a single all-or-nothing decision but rather as a series of decisions, each one a relatively small step in testing and developing proposed program Planners should have full implementation and its consequent significant investment only if tests indicate about proposals good chance of success

Analysing Proposed New Programs

Capital Investment Analysis: there are atleast four reasons for not using PV in analysing all proposals: proposal is obviously very attractive estimates involved are so uncertain that PV calculations cannot draw reliable conclusions rationale for the approach is something other than increased profitability there is no feasible alternative to adoption either NPV or IRR is found for analysis

Analysing Proposed New Programs

Rules: companies usually publish rules and procedures for approval of capital expenditure proposals of various magnitudes rules also contain certain guidelines for preparing proposals and general criteria for approving proposals Avoiding manipulation: sponsors who know that their project with negative NPV is not likely to be approved may have a gut feeling that project should be selected

Analysing Proposed New Programs

in some cases, sponsors may make optimistic estimates of sales revenues or reduce allowances for contingencies in some of cost elements analyst may place reliance on sponsors having an excellent track record Models: there are specialised techniques like risk analysis, sensitivity analysis, simulation, scenario planning, game theory, option pricing models etc. planning staff should know such methods and use them in situations when required

Analysing Proposed New Programs

Organisation for Analysis: decision to proceed with proposal may require a succession of development and testing hurdles to be crossed before full implementation expert systems use computer software in analysis of proposed programs software for expert systems permits each participant to vote on an explicitly rank, each of criteria used to judge the project computer then tabulates results and uncovers misunderstandings and raises queries to be solved

Analysing Ongoing Programs

Value Chain Analysis: from strategic planning perspective, concept highlights three potentially useful areas: Linkages with suppliers Linkages with customers Process linkages within value chain of the firm
SUPPLIERS SUPPLIERS FIRM SUPPLIERS FIRM CUSTOMERS CUSTOMERS

CUSTOMERS

Analysing Ongoing Programs

Process linkages with Value Chain of the Firm: individual activities within a firm are not independent but rather are interdependent efficiency of design portion of value chain can be improved by reducing number of separate parts and increasing their ease of manufacture efficiency of inward portion i.e. preceding production, can be improved by reducing number of vendors, by Just-in-time deliveries, by having computer system placing automatic orders etc.

Analysing Ongoing Programs

efficiency of production portion can be improved by increased automation, by rearranging machines into cells and by better production control systems efficiency of outward portion (i.e. from factory door to customer) can be improved by having customers place orders electronically, by changing locations of warehouses etc. Such efficiency-oriented initiatives involve trade-offs e.g. direct computer orders may speed up delivery but order filling costs may increase

Analysing Ongoing Programs

Activity-Based Costing: sixty years ago, most companies allocated overhead costs to products by means of plantwide overhead rate based on direct labour hours today, an increasing number of companies collect costs for material-related costs e.g. storage, seperately from other manufacturing costs, collected from individual departments in these cost centers, direct labour costs may be combined with other costs, giving conversion cost

Analysing Ongoing Programs

with conversion costs, new system assigns R & D, general and administrative and marketing costs to products basis of allocation or cost driver, for each of cost centers reflect cause of cost incurrence ABC concept is not particularly subtle or counter intuitive, but in line with common sense advocates of ABC maintain that a meaningful assessment of full cost today must involve assigning overhead in proportion to activities that generate it in long run

Analysing Ongoing Programs

Use of ABC information: it may show that complex products with many separate parts have higher design and production costs than simple products many engineering change orders have higher unit costs than other products information on magnitude of such differences may lead to changes in policies relating to full line v/s focused product line, product pricing, make or buy decisions, adding/deleting products

Strategic Planning Process

This process involves the following steps: Reviewing and updating the strategic plan: first step is to review and update the strategic plan agreed to last year Actual experience for first few months of current year is already reflected in accounting reports and these are extrapolated for current best estimate of the year as a whole Deciding on assumptions and guidelines: updated strategic plan incorporates broad assumptions as growth in GDP, labour rates etc.

Strategic Planning Process

updated strategic plan contains implications on revenues, expenses and cash flows of existing operating facilities and changes in facilities like opening new plants, expanding or closing plants it also shows amount of new capital likely from retained earnings and new financing objectives are stated seperately for each product line and are expressed as sales revenue, as a profit percentage/return on capital employed principal guidelines are assumptions about wage and salary increases, selling prices etc.

Strategic Planning Process

Management meetings: Many companies hold an annual meeting of corporate and business unit managers, often called summit conference, to discuss proposed objectives and guidelines First Iteration of Strategic Plan: Business units and other operating units prepare their first cut of strategic plan, including different operating plans from those included in current plan such as change in marketing tactics; these are supported by reasons

Strategic Planning Process

Completed Strategic Plan consists of income statements; inventory, accounts receivable and other key balance sheet items; quantitative information on sales and production; expenditures for plant & other capital acquisitions; any unusual cash flows; number of employees and a narrative explanation and justification Analysis (of first iteration): when headquarters receive business unit plans, they aggregate them into overall corporate strategic plan

Strategic Planning Process

headquarter people examine business unit plans for consistency also headquarters staff and their counterparts in business units resolve some of these questions by discussion and report others to corporate management, where, they are basis for discussions between corporate and business unit managers in many cases, sum of business unit plans reveals a planning gap from planning numbers, headquarters can develop planned cash requirements for whole organisation

Strategic Planning Process

Planning gap can be closed by: finding opportunities for improvements in plans make acquisitions review the corporate objectives Second Iteration of Strategic Plan: Revision of plans of only certain business units may be required, limited to change in assumptions and guidelines that affect all business units Some companies do not require a formal revision from business units, changes are negotiated and results are taken into the plan at headquarters

Strategic Planning Process

Final Review and Approval: A meeting of senior corporate officials usually discusses the revised plan at length Plan may also be presented at a meeting of the Board of Directors Chief Executive Officer gives final approval Approval has to come prior to beginning of the Budget preparation process because the strategic plan is an important input to that process