Chapter 8

Strategic Planning
8.1 Meaning of Strategic Planning
Strategic planning is the 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 several years.

Relation of Strategic planning to strategy formulation

Strategy formulation is the process of deciding on new strategies, whereas strategic planning is the process of deciding how to implement the strategies. In the strategy formulation process, management arrives at the goals of the organization and creates the main strategies for achieving those goals. The strategic planning process then takes the goals and strategies as given and develops programs that will carry out the strategies and achieve the goals efficiently and effectively.

Benefits and Limitations of Strategic Planning

A framework for Developing the Budget Management Development Tool Mechanism for forcing management to Think Long Term Means of Aligning Managers with Corporate Strategies

Providing better guidance to the entire organization on the crucial point of we are trying to Making managers and organizational members more alert to new opportunities and threatening developments Helping to unify the organization Creating a more proactive management posture Promoting the development of a constantly evolving business model that will produce sustained bottom-line success for the enterprise.

 Providing managers with a rationale for evaluating competitive budget requestsa rationale that argues strongly for steering resources into strategy-supportive, result-producing areas. Strategy formulation activities enhance the firms ability to prevent problems. Managers who encourage subordinates attention to planning are aided in their monitoring and forecasting responsibilities by subordinates who are aware of the needs of strategic planning. Group-based strategic decisions are likely to be drawn from the best available alternatives. The strategic management process results in better decisions because group interaction generates a greater variety of strategies and because forecasts based on the specialized perspectives of group members improve the screening of options. The involvement of employees in strategy formulation improves their understanding of the productivity-reward relationship in every strategic plan and, thus, heightens their motivation. Gaps and overlaps in activities among individuals and groups are reduced as participation in strategy formulation clarifies differences in roles. Resistance to change is reduced. Though the participants in strategy formulation may be no more pleased with their own decisions than they would be with authorization decisions, their greater awareness of the parameters that limit the available options makes them more likely to accept those decisions.

Risk of Strategic Management

Managers must be trained to guard against three types of unintended negative consequences of involvement in strategy formulation. First, the time the managers spend on the strategic management process may have a negative impact on operational responsibilities. Managers must be trained to minimize that impact by scheduling their duties to allow the necessary time for strategic activities. Second, if the formulators of strategy are not intimately involved in its implementation, they may shirk their individual responsibility for the decisions reached. Thus, strategic mangers must be trained to limit their

promises to performance that the decision makers and their subordinates can deliver. Third, strategic managers must be trained to anticipate and respond to the disappointment of participating subordinates over unattained expectations. Subordinates may expect their involvement in even minor phases of total strategy formulation to result in both acceptance of their proposals and an increase in their rewards, or they may expect a solicitation of their input on selected issues to extend to other areas or decision making. Sensitizing managers to these possible negative consequences and preparing them with effective means of minimizing such consequences will greatly enhance the potential of strategic planning.

Why Some Firms Do No Strategic Planning

Poor Reward Structures: When an organization assumes success, it ofte4n fails to reward success. When failure occurs, then the firm may punish. In this situation, it is better for an individual to do nothing (and not draw attention) than to risk trying to achieve something, fail, and be punished. Fire-Fighting: An organization can be so deeply embroiled in crisis management and fire-fighting that it does not have time to plan. Waste of Time: Some firms see planning as a waste of time since no marketable product is produced. Time spend on planning is an investment. Too Expensive: Some organizations are culturally opposed to spending resources. Laziness: People may not want to put forth the effort to formulate a plan. Content with Success: Particularly if a firm is successful, individuals may feel there is no need to plan because things are fine as they stand. But success today does not guarantee success tomorrow. Fear of Failure: By not taking action, there is little risk of failure unless a problem is urgent and pressing. Whenever something worthwhile is attempted, there is some risk of failure. Overconfidence: As individuals amass experience, they may rely less on formalized planning. Rarely, however, is this appropriate. Being overconfident or overestimating experience can bring demise. Forethought is rarely wasted and of often the mark of professionalism. Prior Bad Experience: People may have had a previous bad experience with planning, that is, cases in which plans have been long, cumbersome, impractical or inflexible. Planning, like anything else, can be done badly.

 Self-Interest: When someone has achieved status, privilege, or self-esteem through effectively using an old system, he or she often sees a new plan as a threat. Fear of Unknown: People may be uncertain of their abilities to learn skills, o f their aptitude with new systems, or of their ability to stake on new roles. Honest Difference of Opinion: People may sincerely believe that the plan is wrong. They may view the situation from a different viewpoint, or they may have aspirations for themselves or the organization that are different from the plan. Different people in different jobs have different perceptions of a situation. Suspicion: Employees may not trust management.

Pitfalls of Strategic Planning

Strategic planning is an involved, intricate, and complex process that takes on organization into unchartered territory. In does not provide a ready-to-use prescription for success; instead, it takes the organization through a journey and offers a framework for addressing questions and solving problems. Being aware of potential pitfalls and being prepared to address them is essential to success. Some pitfalls to watch fro and avoid in strategic planning are provided below:
Using strategic planning to gain control over decisions and resources Doing strategic planning only to satisfy accreditation or regulatory requirements Too hastily moving from mission development to strategy formulation Failing to communicate the plan to employees who continue working in the dark Top management making many intuitive decisions that conflict with the formal plan Top managers not actively supporting the strategic-planning process

Failing to use plans as a standard for measuring performance

Delegating planning to a planner rather than involving all managers Failing to involve all key employees in all phases of planning

 Failing to create a collaborative climate supportive of change Viewing planning to be unnecessary or unimportant Becoming so engrossed in current problems that insufficient or no planning is done Being so formal in planning that flexibility and creativity are stifled.

Dimensions of Strategic Decisions

Typically, strategic issues have the following dimensions.

Strategic Issues Require To-Management Decisions Since strategic decisions over arch several areas of a firms operations they require topmanagement involvement. Usually only top management has the perspective needed to understand the broad implications of such decisions and the power to authorize the necessary resource allocations. Strategic Issues Require Large Amounts of the Firms Resources Strategic decision involved substantial allocations of people, physical assets, or moneys that either must be redirected from internal sources or secured from outside the firm. They also commit the firm to actions over an extended period. Strategic Issues Often Affect Firms Long-Term Prosperity Strategic decisions ostensibly commit the firm for a long-term, typically five years; however, the impact of such decisions often lasts much longer. Once a firm has committed itself to a particular strategy, its image and competitive advantages usually, are tied to that strategy. Strategic Issues are Future Oriented Strategic decisions are based on what managers forecast, rather than on what they know. In such decisions, emphasis is placed on the development of projections that will enable the firm to select the most promising strategic options. In the turbulent and competitive free enterprise environment, a firm will succeed only if it takes a proactive (anticipatory) stance toward change. Strategic Issues Usually Have Multifunctional or Multibusiness Consequences Strategic decisions have complex implications for most areas of the firm. Decisions about such matters as customer mix, competitive emphasis, or organizational structure necessarily involve e a number of the firms strategic business units (SBUs), divisions, or program

units. All of these areas will be affected by allocations or reallocations of responsibilities and resources that result from these decisions. Strategic Issues Require Considering the firms External Environment All business firms exist in an open system. They affect and are affected by external conditions that are largely beyond their control. Therefore, to successfully position a firm in competitive situations, its strategic managers must look beyond its operations. They must consider what relevant others (e.g., competitors, customers, suppliers, creditors government, and labor) are likely to do.

8.3 Analyzing Proposed New Programs

Ideas for new programs can originate anywhere in the organization; with the chief executive, with a headquarters planning staff, or in various parts of operating organization. Programs are usually either reactive or proactive. Planner should view the adoption of a new program not as a single all-ornothing decision but rather as a series of decisions, each one a relatively small step in testing and developing the proposed program.

Capital Investment Analysis

Net present of the project The internal rate of return

Reasons for not using present value technique

The calculation of NPV may be unnecessary Uncertainty of estimation Rationale is other than increased profitability No feasible alternative to adoption

Considerations in implementing capital expenditure evaluation systems

Rules Avoiding manipulation Models

Analyzing Ongoing Programs:

Value Chain Analysis: from the strategic planning perspective, the value chain concept highlights three potentially useful areas: Linkage with suppliers Linkage with customers Linkage within the value chain of the firm. Activity-Based Costing: Increased computerization and automation in factories have led to important changes in systems for collecting and using cost information. Activity-based costing (ABC) is a costing model that identifies activities in an organization and assigns the cost of each activity resource to all products and services according to the actual consumption by each: it assigns more indirect costs (overhead) into direct costs. In this way, an organization can precisely estimate the cost of individual products and services so they can identify and eliminate those that are unprofitable and lower the prices of those that are overpriced. In a business organization, the ABC methodology assigns an organization's resource costs through activities to the products and services provided to its customers. It is generally used as a tool for understanding product and customer cost and profitability. As such, ABC has predominantly been used to support strategic decisions such as pricing, outsourcing, identification and measurement of process improvement initiatives.

Methodology

Cost allocation Fixed cost Variable cost Cost driver

Direct labor and materials are relatively easy to trace directly to products, but it is more difficult to directly allocate indirect costs to products. Where products use common resources differently, some sort of weighting is needed in the cost

allocation process. The cost driver is a factor that creates or drives the cost of the activity. For example, the cost of the activity of bank tellers can be ascribed to each product by measuring how long each product's transactions (cost driver) takes at the counter and then by measuring the number of each type of transaction. Other example, for the running machinery activity, the driver is likely to be machine operating hours. That is, machine operating hours drive labour, maintenance, and power cost during the running machinery activity.

Uses:
It helps to identify inefficient products, departments and activities It helps to allocate more resources on profitable products, departments and activities It helps to control the costs at an individual level and on a departmental level It helps to find unnecessary costs It helps fixing the price of a product or service scientifically

Limitations
Even in activity-based costing, some overhead costs are difficult to assign to products and customers, such as the chief executive's salary. These costs are termed 'business sustaining' and are not assigned to products and customers because there is no meaningful method. This lump of unallocated overhead costs must nevertheless be met by contributions from each of the products, but it is not as large as the overhead costs before ABC is employed. Although some may argue that costs untraceable to activities should be "arbitrarily allocated" to products, it is important to realize that the only purpose of ABC is to provide information to management. Therefore, there is no reason to assign any cost in an arbitrary manner.

Strategic Planning
Rational planning by top management

Basic Strategic planning model Defining the Mission and Setting Top-Level Goals
External Analysis of Opportunities and Threats Internal Analysis of Strengths and Weaknesses

Selection of Appropriate Strategies Implementation of Chosen Strategies

The Main Components of the Strategic Planning Process

Implementing and Executing Strategy:

The managerial task of implementing and executing the chosen strategy entails assessing what it will take to develop the needed organizational capabilities and to reach the targeted objectives on schedule. Managing the strategy execution process is primarily a hand-on, close-to-the-scene administrative task that includes the following principle aspects: Building an organization capable of carrying out the strategy successfully Allocating company resources so that the organizational units charged with performing strategy-critical activities and implementing new strategic initiatives have sufficient people and funds to do their work successfully. Establishing strategy-supportive policies and operating procedures Putting a freshly chosen strategy into place Motivating people in ways that induce them to pursue the target objectives energetically and, if need be, modifying their duties and job behavior to better fit the strategy requirements of successful execution Tying the reward structure to the achievement of targeted results Creating a company culture and work environment conducive to successful strategy implementation and execution Installing information, communication, and operating systems that enable company personnel to carry out their strategic roles effectively day in, and day out Instituting best practices and programs for continuous improvement Exerting the internal leadership needed to drive implementation forward and to keep improving on how the strategy is being executed.