BEN SANTOS

In May 2015, Ben Santos, 27 years old was discussing with his former professor a set of
materials he would present in a one-day planning workshop to be held by his company in Tagaytay the
following week. The workshop would deal with the institution of a corporate planning system designed
by Santos and endorsed by the company president to the division of managers for compliance. Santos
wanted to know the best way to present and defend his proposed corporate planning system during the
workshop.

Company Background

H. Braun, Philippines (HBP) was a wholly-owned subsidiary of a West German multinational

corporation which manufactured a line of medical and chemical products in Europe, Asia, and Latin
America. The Philippine subsidiary was organized into five operating divisions, each distributing a
selected line of products to institutional and retail outlets. The organization chart of HPB is attached.

HBP had always been headed by a West German national. The current company president had
no previous experience in the Philippines but was transferred from a Latin American assignment to
assume the position in the Philippines in January 2015. Historically, the five operating divisions of HBP
has also been headed by West German nationals who reported to their counterpart product heads at
company headquarters in West Germany, as well as to the president of the Philippine operation. At the
time Santos joined the company, the same procedure was being followed. Among the priorities in the
announced agenda of the new head’s presidency was the institution of a corporate planning system for
HBP.

Ben Santos

Santos was an accountancy graduate from a leading university in Manila. After two years of
work, he went back to school and obtained his MBA degree in 2010. Prior to joining HBP, Santos
performed financial analysis and staff planning work with three financial institutions in the Philippines.

In February 2015, Santos applied and was interviewed for the position of the assistant to the
president of HBP. During the interview, he learned that the president needed someone who would
assist in the design and institution of a formal corporate planning system in HBP. Santos was hired
shortly after these interviews.

Following his appointment, Santos had several discussions with the president concerning the
need for a better planning system for the company. “How can we manage this company effectively if we
do not have clearly stated strategies to guide us?” the president had asked Santos in one of these
meetings. Santos believed that it was the president’s exposure to a corporate planning system during his
Latin American assignment which influenced this thinking concerning planning for the Philippine
operation. Subsequently, the president formed a Strategic Planning Committee to coordinate the effort
to design a corporate planning system for HBP. The president was the chairman of the committee, with
Santos, who was head of the Indent Division, as well as the head of Finance and Accounting department
as members. As the head of the Indent Division and therefore the most senior of the division heads in
HBP, Santos was assigned the primary task of preparing the proposals for the corporate planning system
of the company.

The Planning System at HBP

As a first step in undertaking his assignment, Santos familiarized himself with the planning
system currently used in the company. Essentially, the system consisted of the preparation of two-year
revenue and cost budgets for each of the divisions based on planning guidelines emanating from West
Germany. These guidelines were typically few and usually consisted of prescribed budget formats and a
target return on “bound capital” which the Philippine subsidiary had to try to achieve. For some number
of years up to 2014, Santos learned that the target return represented head quarter’s assessment of the
“opportunity cost of capital.” Occasionally, the planning guidelines included sales growth objectives for
specific products - usually new products - sold by certain divisions.

Divisional reports on actual performance were sent to the counterpart product divisions in
headquarters in West Germany every quarter. These reports served as the basis for updating the second
year’s budget forecast.

Bonuses for the managers and employees of HBP were paid when the Philippine subsidiary
made profits. It was Ben Santos’ impression, however, that although divisional profit targets were taken
seriously by the division managers, no heavy sanctions attended the failure to meet these targets.

Proposing a Corporate Planning System

Santos went back to his personal files on the corporate planning systems of the companies
where he had previously worked. He also read a number of the latest American books on corporate
planning. Finally, he compiled a set of macroeconomic indices and forecasts which he believed would be
useful planning material for the company. From these, he compiled the set of materials (shown as
Exhibits) to comprise the proposed new planning system for HBP. When Santos presented these
materials to the president for comment, the latter convened the Strategic Planning Committee where
the proposal was discussed and approved with only minor modifications. Following this, the president
issued a memorandum to the division managers (see Exhibit ) announcing the adoption of the proposed
system.

Initial Reactions from the Division Managers

Santos spent the next few weeks interacting with the division managers concerning the
proposed planning system. The reactions from the managers irritated him. “The division managers of
the Pharmaceuticals and the Medical divisions gave childish reasons for criticizing my proposal. They
implied that I copied the system straight out of a book, which, of course, is not true,” Santos related. He
continued, “The manager of the Chemical Products said he could not see the need for a new system. He
explained that in his division, he uses estimated planned production of the textile mills, adds a factor for
new mills and derives the bulk of his sales forecast in this manner. He told me, ‘I have been doing this
for the last four years and so far, I have been able to hit the forecast even allowing for the 10 percent
growth rate targets for certain products coming from West Germany. My method works. So what more
do you want?’”

When Santos reported these negative reactions to the president, the latter suggested that they
conduct a one-day workshop to discuss the proposal. The president asked Santos to prepare well for the
workshop and added that he was anxious to have a corporate planning system installed by the second
half of 2016.

Study Questions:

1. Why are the division managers resisting Ben Santos’ proposed planning system?

2. How should Santos respond to this opposition?

3. Should he modify his proposed planning system? If so, how?

Partial Organizational Chart

H. Braun, Philippines
 President’s Memo

Date : April 29, 2015

To : ALL DIVISION MANAGERS

From : President

RE : Corporate Planning for H. Braun, Philippines, 2016-2021

Consonant with management’s objective of defining appropriate strategies for HBP as discussed during
the Division Manager’s Meeting, I am pleased to inform you that the Strategic Planning Committee has
already come up with general guidelines for the formulation of the respective divisional strategies for
the next 5 years. It will serve as standard planning formats but is flexible taking into consideration the
nature of operations peculiar to your divisions.

Enclosed please find a summary of General Guidelines for Corporate Strategy Formulation for your
ready reference.

As the preliminary step towards the implementation of an effective strategic planning system for HBP,
the consensus arrived at by the committee members is that the strategy formulation process should
start at the divisional level, and the consolidation thereof would represent HBP’s overall corporate
strategies.

Enclosed herewith are the following standard planning formats and general assessment of the political
and economic situation in the country for the period.

1) General Economic Indicators of the Philippine economy for the planning period.

2) Notes on the Political Situational Analysis.

3) Divisional Environmental Assessment. This will cover the major parameters in the micro-
environment of each division with the objective of identifying potential opportunities and/or
threats in the external environment.

In view of the foregoing, we shall be able to come up with a critical analysis of our environment which is
the most important prerequisite to strategy formulation. I would appreciate, therefore, if you could
prepare and submit to Strategic Planning Committee the following on or before May 30, 1916:

1) Definition of nature and scope of business pertaining to your respective divisions.

2) Indication of strengths and limitation of your respective divisions.

 3) Divisional environmental assessment making use of the attached format allowing flexibility in
terms of identification of other elements/parameters.

After submitting the above information, we will proceed to the second phase of the Strategic Planning
Process as follows:

1) Setting of Goals and Objectives. This involves a definition of what is the company’s desired future
based on the company’s present positions, opportunities in the environment, the company’s
resources, and on the expectations of Central Headquarters in West Germany.

2) Adoption of General Corporate Strategies. This will be formulated at the divisional level, taking
into consideration opportunities in the environment and at the same time, maximize the company’s
utilization of resources to attain goals and objectives. The process of corporate strategy formulation
involves preparation of alternative approaches considering environmental opportunities, threats,
strengths and limitations, and management values. (Attitude towards tasks, achievement,
corporate climate and social issue).

3) Financial Plan (Budget). The financial plan is the translation of goals, objectives and strategies
into quantifiable terms, or principally the profit and loss statement.

If you need additional information, please let us know.

Your full cooperation in this regard will be highly appreciated.

General Guidelines for

Corporate Strategy Formulation

April 2015

I. OBJECTIVES OF STRATEGIC PLANNING

Strategic Planning is the design of a desired future for a business enterprise and the identification
of effective ways to achieve it. It is called strategic because it gives major importance to the
company’s external environment as a factor to consider in the process of corporate strategy
formulation.

More specifically, the objectives of strategic planning are:

 1. to allow the awareness of both internal and external environmental development and
how they affect the company’s future growth;

2. to establish the company’s overall direction and the specific targets that contribute tot
the achievement of the overall objectives;

3. to set priorities and maintain proper plan implementation; and

4. to monitor and control all activities to ensure achievement of set targets and conformity
with the planned direction of the enterprise.

II. ELEMENTS OF STRATEGIC PLANNING

A. Definition of the Nature and Scope of Business

A definition of the business sets in broad terms the direction of the company. This involves
answering the basic question, “What is our business? This covers three aspects:

What has the business been?

What is unique about the business?

What should the business be?

The scope of business may be defined to include the product the company offers and intends to
develop (this should be stated in terms of function instead of description) the market it serves or
wishes to penetrate, and the technology it utilizes or desires to employ.

B. Identification of Corporate Strengths and Limitations

This involves a general review and evaluation of the entire company’s strengths and limitations in
terms of:

1. The company’s present abilities relating to its business, and

2. The company’s abilities in the future

Evaluation should focus on such key areas as:

1. Product. What are the company’s abilities to conceive, design, modify the product.

2. Production. What are the company’s plant and equipment capabilities; the technical
processes and methods employed; degree of technology, etc.

3. Market. Covers market share, distribution, sales force and total marketing resource.

4. Finance. Covers cash position, inventory levels, financial stability.

5. Human resource. Includes personnel skills and abilities, organization, human relations,
turnovers.
 6. Management. Includes management style, values the organizational structure.

The objectives of such a review are to identify the company’s resources needed to attain an
expected future development and to compare resources with that of the existing or future
competitors.

III. ENVIRONMENTAL ASSESSMENT

This involves an analysis of the external environment and the identification of different factors
influencing the company’s operation. Logically, the factors that should be considered as the main
influence in the past operation should be identified. These areas should be monitored as to how
they will affect the future as well as other potential factors which would present opportunities or
threats. A level of confidence for each envisioned factor should be determined - the probability
that this will occur and the degree of its impact on operations.

Environmental assessment should include analyses of such areas as:

1. Market - present and envisioned markets

2. Competition

3. Customer - types, classification, needs and expectations.

4. Technology - developments in products, processes, machinery

5. Industry - trends and prospects

6. Economic trends and general business indicators

7. Monetary and credit situation

8. Government - laws and restrictions

9. Social considerations

IV. BUSINESS SCREEN

The identification of corporate strengths and limitations and the assessment of the environment
can be translated into a matrix called the business screen. This matrix relates a business or a
product’s industry attractiveness with the company’s strengths. Its position in the matrix
determines the relative expectation for such product or line of business, an important basis for
strategy formulation. Each specific product or line of business should undergo this analysis and its
position in the business screen established.
The business screen and its three categories are shown as follows:

Industry Attractiveness
Business
HIGH MEDIUM LOW
Strengths

High

Medium

Low

- Invest/Grow - Selectivity/Earnings - Harvest/Divest

A. Portfolio Categories

The invest/grow category indicates products or line of business with great potential in which the
firm is prepared to invest capital for long-term growth. The objective would be to achieve a strong
market positon for long-term profitability

The selectivity/earnings category are products/lines for their short-term earnings. A product may
remain in this category, may move up or decline.

In the harvest/divest category, the products are viewed as relatively weak and the industry as
having only marginal interest. The products are managed for immediate cash operations.

B. Evaluation Factors

The positioning of a portfolio should be based on the consensus of the company’s executives.
Product Manages and top management may have varying perceptions of where the product is
positioned. Once a product has been firmly established in the matrix, its treatment becomes almost
automatic as dictated by its position. The significance of the categories in terms of strategies are
discussed in Section VI.

As mentioned, the evaluation involved two sets of factors - the industry attractiveness (the external
environment in which the product must compete) and business strength (the product by itself and
the company’s capability to handle the product).

Industry attractiveness is determined by the following factors:

1. Industry Size - present and potential size to warrant the employment of Management and
other resources.

2. Market Growth - indicates stage of industry; mature or low growth; infant industry or
high growth.
 3. Pricing - competitiveness; control impositions.

4. Market Diversity - number of segments; types of products; size per segment.

5. Competitive Structure - relative strength of others in the same field.

6. Industry Profitability - expected returns to be generated, considering size,

competitiveness, etc.

7. Technical Role - obsolescence of product, complexity of technical support required.

8. Social, Environment, Legal and Human Aspects - government legislations, environmental

effect, moral expectations.

On the other hand, business strength is determined by:

1. Size - the volume the company can offer per segment.

2. Growth - volume and sales increases.

3. Share - market share per segment.

4. Position/Image - innovator, leader, etc.

5. Profitability - gross profit rate, fixed cost structure

6. Technology Position - innovator, R & D activities, competent back-up

7. Strengths/Limitations - strengths/limitation of the company in relation to the product

To classify the high, medium, and low categories, a scale can be drawn for each determinant factor
to achieve an objective identification of product position. Prioritizing the factor will also determine
the weight of each factor in the scale.

Example:

The following weight may be assigned to determine product position in the industry
attractiveness grid:

Weight

Industry Size 15

Market Growth 15

Pricing 10

Market Diversity 10

Competitive Structure 13

Industry Profitability 15
 Technical Role 8

Social, Environment, Human 7

Legal 7

TOTAL 100

Products/lines of business with scores of 85-100 are in the high industry-attractiveness category,
65-85 are in medium, and below are in low category.

A similar scale can be made for the business-strength factor.

V. SETTING OF GOALS AND OBJECTIVES

This involves a definition of the company’s desired future based on the company’s environment
and the company’s resources (business screen), and on the expectations of the various
stakeholders. The goals and objectives will set the direction and pace of growth of the company.

Goals and objectives can be categorized as follows:

A. Long-term Objectives

Long-term objectives may be express in such terms as:

1. Attainment of certain industry status

2. Continuing growth sales

3. Increase in market share

4. Balanced satisfaction of the various “stakeholders” in the firm: managers, workers,

stockholders, customers, suppliers, and creditors.

5. Growth in earnings to provide resources for reinvestment

6. Increasing the scope of market and service through new product lines and market
penetration.

7. Contributions to social and economic development.

B. Short-term Goals

These may be expressed as specific percentages or values of the following:

1. Market Share

2. Plant Capacity Utilization

3. Return on Investment
 4. Return on Stockholder’s Equity

5. Growth in Sales

6. Growth in Net Income

7. Earnings Per Share

Short-term goals should be quantified.

VI. ADOPTION OF GENERAL CORPORATE STRATEGY

General corporate strategies are formulated to take full advantage of opportunities in the
environment, and, at the same time, maximize the company’s utilization of resources to attain
goals and objectives. The process of corporate strategy formulation involves preparation of
alternative approaches considering:

A. Environmental Opportunities and Threats

B. The Company’s Strengths and Limitations

C. Management Values (attitudes towards risks, achievement, corporate climate, and social
issues)

The first two factors - environmental and corporate strengths and limitations - have been broadly
considered in the business screen through the matching of industry (environment) and business
strength (corporate strength and limitations). This determines the prospects for the product of line
of business, and hence, the general expectations and course of action to be taken. On the borad
level, this is called the GENERAL CORPORATE STRATEGY.

As discussed in the business screen, the position of the product dictated the corporate strategy to
be adopted. Invest/grow category can adopt any of the following general growth strategies:

1. Market Penetration - offering the same products to the same markets.

2. Market Development - offering the same products to new markets.

3. Product Development - offering new products to the same markets.

4. Diversification - offering new products to new markets.

Selectivity/earnings category can adopt a period of consolidation/rationalization of existing

products and markets. Harvest/divest category can adopt a divestment strategy.

Generally, the general strategies adopted for the three categories, broken down into the various
elements of strategy, are as follows:
Elements of Strategy Invest/Grow Selectivity/Earnings Harvest/Divest
1. Capital Investment Maximum feasible Selective/high yield Minimum
segments
2. Risk Accept/Contain Light Avoid
3. Market Share Build/Diversify Target growth protect Forego share
Markets position
4. Pricing Lead/Determine Price Stabilize for maximum Maintain price even at
Elasticity contribution the expense of
volume
5. Products Lead/Diversify Differentiate Preserve
- specification
- applications
- performance
6. Costs Determine reasonable Aggressive reduction Cut variable costs,
level not necessarily of variable cost, consolidate
thrift economize on fixed
costs
7. Marketing Build Cut creativity/keep Reduce marketing
Creativity/Coverage coverage activities