Chapter 3

Faculty of Business, Hospitality,
Accounting & Finance
Principles of Management
MGT 1023
If its important to you, you will find a way. If its not, you’ll find an excuse.
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 1-1
Copyright by Ms Syikin@ 1 1
Chapter 3
Planning and Strategic Management

Learning Outcomes
Follow this Learning Outline as you read and study this chapter
• Define planning
• Differentiate between formal and informal planning
• Describe the purposes of planning
• Explain the conclusions from studies of the
relationship between planning and performance

• How Do Managers Plan?
• Define goals and plans
• Discuss how traditional goal setting works
• Describe the management by objectives (MBO) approach
• Describe the characteristics of well-designed goals
• Describe the five steps in setting goals
• Describe each of the different types of plans
• Discuss the two contingency factors that affect planning
• Explain the criticisms of planning and whether or not they are valid

• Organizational Strategy
• Define strategic management
• List the six steps in the strategic management process
• Describe what managers do when they do external and
internal analyses
• Explain the role of resources, capabilities, and core
competencies in the internal analysis

• Types of Organizational Strategies
• Explain the three organizational strategies
• Discuss the various corporate level
strategies
• Discuss the various business level strategies
• Discuss the functional level strategies

• Quality as a Competitive Advantage
• Define quality management
• List the six characteristics of quality
management
• Describe benchmarking, ISO 9000, and
the six sigma process steps

What Is Planning?
• Planning
• Managerial function that involves:
• Defining the organization’s goals
• Establishing an overall strategy for achieving those goals
• Developing a comprehensive set of plans to integrate
and coordinate organizational work
• Types of planning
• Informal: not written down, short-term focus; specific to
an organizational unit
• Formal: written, specific, and long-term focus, involves
shared goals for the organization

Purposes of Planning
• Provides direction
• Reduces uncertainty
• Minimizes waste and redundancy
• Sets the standards for controlling

Planning and Performance
• The Relationship Between Planning and Performance

• Formal planning is associated with:
• Higher profits and returns on assets
• Other positive financial results
• The quality of planning and implementation affects
performance more than the extent of planning
• The external environment can reduce the impact of planning
on performance
• Formal planning must be used for several years before
planning begins to affect performance

How Do Managers Plan?
• Elements of Planning
• Goals (also objectives)
• Desired outcomes for individuals, groups, or entire
organizations
• Provide direction and performance evaluation criteria
• Plans
• Documents that outline how goals are to be accomplished
• Describe how resources are to be allocated and establish
activity schedules

Approaches to Establishing Goals
• Traditional Goal Setting

• Broad goals are set at the top of the
organization
• Goals are then broken into subgoals for
each organizational level
• Goals are intended to direct, guide, and
constrain from above
Approaches to Establishing Goals (cont’d)
• Management By Objectives (MBO)
• Specific performance goals are jointly determined
by employees and managers
• Progress toward accomplishing goals is
periodically reviewed
• Rewards are allocated on the basis of progress
toward the goals
• Key elements of MBO:
• Goal specificity, participative decision making, an explicit
performance/evaluation period, feedback

Steps in a Typical MBO Program
Jointly Set Objectives Develop Action Plans Review Objectives and Give Rewards for
to Achieve Objectives Provide Feedback Achieved Objectives
Overall objectives Managers and

and strategies of employees work on
organization action plans together
Objectives allocated to Action plans

divisional and implemented
departmental units
Specific objectives
collaboratively set
with employees

Does MBO Work?
• Reason for MBO Success

• Top management commitment and involvement
• Potential Problems with MBO Programs
• Not as effective in dynamic environments that
require constant resetting of goals
• Overemphasis on individual accomplishment may
create problems with teamwork
• Allowing the MBO program to become an annual
paperwork shuffle

Characteristics of Well-Designed Goals
• Written in terms of outcomes rather than

actions
• Measurable and quantifiable
• Clear time frame
• Challenging yet attainable
• Written down
• Communicated to all necessary
organizational members

Steps in Goal Setting
• Review the organization’s mission statement
Do goals reflect the mission?
• Evaluate available resources
Are resources sufficient to accomplish the mission?
• Determine goals individually or with others
Are goals specific, measurable, and timely?
• Write down the goals and communicate them
Is everybody on the same page?
• Review results and whether goals are being met
What changes are needed in mission, resources, or goals?

Types of Plans
Types of
Plans
Breadth Time Frame Specificity Frequency of Use
Strategic Long term Directional Single use

• Should we expand
into overseas
markets?
• Should we develop
new products?
• How large would we
like the company to
be in five years?
Operational Short term Specific Standing

• Should we order new
equipment to produce
our number-one
product more
efficiently?
• How many extra
employees should we
hire for the year-end
sales rush?
• How can we improve
quality control on the
production line?

Types of Plans
• BREADTH
• Strategic Plans
• Apply to the entire organization
• Establish the organization’s overall goals
• Seek to position the organization in terms of its
environment
• Cover extended periods of time
• Operational Plans
• Specify the details of how the overall goals are to be
achieved
• Cover short time period

Types of Plans (cont’d)
• TIME FRAME
• Long-Term Plans
• Time frames extending beyond three years
• Short-Term Plans
• Time frames of one year or less
• SPECIFICITY
• Specific Plans
• Clearly defined and leave no room for interpretation
• Directional Plans
• Flexible plans that set out general guidelines, provide
focus, yet allow discretion in implementation

Types of Plans (cont’d)
• FREQUENCY OF USE
• Single-use Plan
• A one-time plan specifically designed to meet the
needs of a unique situation
• Standing Plans
• Ongoing plans that provide guidance for activities
performed repeatedly

Specific Vs. Directional Plans

Developing Plans
Contingency Factors in Planning

• Degree of environmental uncertainty
• Stable environment: specific plans
• Dynamic environment: specific but flexible plans
• Length of future commitments
• Current plans affecting future commitments must be
sufficiently long-term to meet the commitments

Criticisms of Planning
• Planning may create rigidity
• Plans cannot be developed for dynamic
environments
• Formal plans cannot replace intuition and
creativity
• Planning focuses managers’ attention on
today’s competition, not tomorrow’s survival
• Formal planning reinforces today’s success,
which may lead to tomorrow’s failure
Organizational Strategy
• Strategic Management
• The set of managerial decisions and
actions that determines the long-run
performance of an organization

The Strategic Management Process
External Analysis
• opportunities
• threats
Identify the
organization's Formulate Implement Evaluate
current mission, goals, SWOT
Strategies Strategies Results
Analysis
and strategies
Internal Analysis
• strengths
• weaknesses

Strategic Management Process
• Step 1: Identify the Organization’s Current Mission, Objectives,
and Strategies
• Mission: the firm’s reason for being
• The scope of its products and services
• Goals: the foundation for further planning
• Measurable performance targets
• Step 2: Conduct an Internal Analysis
• Assessing organizational resources, capabilities, activities, and
culture:
• Strengths (core competencies) create value for the
customer and strengthen the competitive position of the
firm
• Weaknesses (things done poorly or not at all) can place
the firm at a competitive disadvantage

Components of a Mission Statement
• Customers: Who are the organization’s customers?

• Products or services: What are the organization’s major
products or services?
• Markets: Where does the organization compete
geographically?
• Technology: How technologically current is the
organization?
• Concern for survival growth, and profitability: Is the
organization committed to growth and financial stability?
(continues)

• Philosophy: What are the organization’s basic beliefs,
values, aspirations, and ethical priorities?
• Self-concept: What is the organization’s major competitive
advantage and core competencies?
• Concern for public image: How responsive is the
organization to societal and environmental concerns?
• Concern for employees: Does the organization consider
employees a valuable asset?
Sources: Based on company websites; and F. David, Strategic Management, 8th ed. (Upper Saddle River, NJ: Prentice Hall, 2001), pp. 65-68.

Strategic Management Process (cont’d)
• Step 3: Conduct an External Analysis

• The environmental scanning of specific and
general environments
• Focuses on identifying opportunities and threats
• Steps 2 and 3 combined are called a SWOT analysis.

(Strengths, Weaknesses, Opportunities, and Threats)

Identifying the Organization’s
Opportunities
Organization’s Organization’s Opportunities in

Resources/Capabilities Opportunities the Environment

Strategic Management Process (cont’d)
• Step 4: Formulate Strategies

• Develop and evaluate strategic alternatives
• Select appropriate strategies for all levels in
the organization that provide relative
advantage over competitors
• Match organizational strengths to
environmental opportunities
• Correct weaknesses and guard against threats

• Step 5: Implement Strategies
• Implementation: effectively fitting organizational
structure and activities to the environment
• The environment dictates the chosen strategy;
effective strategy implementation requires an
organizational structure matched to its requirements
• Step 6: Evaluate Results
• How effective have strategies been?
• What adjustments, if any, are necessary?

Types of Organizational Strategies
• Corporate-level Strategy
• The company’s grand strategy for the entire
organization and its strategic business units
• Types of Grand Strategies
• Growth: expansion into new products and markets
• Stability: maintenance of the status quo
• Retrenchment: addresses organizational
weaknesses that are leading to performance
declines
• Combination: simultaneous pursuit of two or more
of the strategies above
Levels of Organizational Strategy
Corporate Multibusiness
Level Corporation
Business Strategic Strategic Strategic

Level Business Unit 1 Business Unit 2 Business Unit 3
Functional Research and Manufacturing Marketing Human Finance

Level Development Resources

Corporate-Level Strategies
• Growth Strategy
• Seeking to increase the organization’s business
by expansion into new products and markets
• Types of Growth Strategies
• Concentration
• Vertical integration
• Horizontal integration
• Diversification
Growth Strategies
• Concentration
• Focusing on a primary line of business and
increasing the number of products offered or
markets served
• Vertical Integration
• Backward vertical integration: attempting to gain
control of inputs (become a self-supplier)
• Forward vertical integration: attempting to gain
control of output through control of the
distribution channel and/or provide customer
service activities (eliminating intermediaries)
Growth Strategies (cont’d)
• Horizontal Integration
• Combining operations with another competitor in the same
industry to increase competitive strengths and lower
competition among industry rivals
• Diversification
• Related Diversification
• Expanding by merging with or acquiring firms in different,
but related industries that are “strategic fits”
• Unrelated Diversification
• Growing by merging with or acquiring firms in unrelated
industries where higher financial returns are possible

Corporate-Level Strategies (cont’d)
• Stability Strategy
• A strategy that seeks to maintain the status quo
to deal with the uncertainty of a dynamic
environment, when the industry is experiencing
slow- or no-growth conditions, or if the owners
of the firm elect not to grow for personal
reasons
• Retrenchment Strategy
• Reduces the company’s activities or
operations
• Retrenchment strategies include:
• Cost reductions
• Layoffs
• Closing underperforming units
• Closing entire product lines or services

• Combination Strategy
• Simultaneous pursuit by the organization of
two or more of growth, stability, and
retrenchment strategies

Business-Level Strategy
• Business-Level Strategy
• A strategy that seeks to determine how an
organization should compete in each unit within
the organization to create a competitive
advantage
• Competitive advantage
• An organization’s distinctive competitive edge that is sourced
and sustained in its core competencies

Forces in an Industry Analysis
New
Entrants
Threat of
New Entrants
Bargaining
Power of
Intensity of Buyers
Rivalry Among
Suppliers Current Buyers
Competitors
Bargaining
Power of
Suppliers
Threat of
Substitutes Source: Based on M. E.
Porter, Competitive Strategy:
Techniques for Analyzing
Substitutes Industries and Competitors
(New York: Free Press,
1980).

Five Competitive Forces
• Threat of New Entrants
• The ease or difficulty with which new competitors
can enter an industry
• Threat of Substitutes
• The extent to which switching costs and brand
loyalty affect the likelihood of customers adopting
substitute products and services
• Bargaining Power of Buyers
• The degree to which buyers have the market
strength to hold sway over and influence
competitors in an industry
Five Competitive Forces (cont’d)
• Bargaining Power of Suppliers

• The relative number of buyers to suppliers
and threats from substitutes and new
entrants affect the buyer-supplier
relationship
• Current Rivalry
• Intensity among rivals increases when
industry growth rates slow, demand falls,
and product prices descend
Pursuing Porter’s
Competitive
Strategies
Source: Reprinted from M.

E. Porter, Competitive
Strategy: Techniques for
Analyzing Industries and
Competitors (New York:
Free Press, 1980),
pp. 40-41.

Competitive Strategies
• Cost Leadership Strategy
• Seeking to attain the lowest total overall costs relative
to other industry competitors
• Differentiation Strategy
• Attempting to create a unique and distinctive product
or service for which customers will pay a premium
• Focus Strategy
• Using a cost or differentiation advantage to exploit a
particular market segment rather than a larger market
• Stuck in the Middle
• Organizations that are unable to develop a cost or
differentiation advantage

Functional-Level Strategy
• Functional-level strategies support the

business-level strategy
• i.e., Marketing, human resources, research and
development, and finance all support the
business-level strategy
• Problems occur when employees or customers
don’t understand a company’s strategy

Quality as a Competitive Advantage
• Quality management
• A philosophy of management driven by
continual improvement and responding to
customer needs and expectations

Characteristics of Quality Management
1. Intense focus on the customer

2. Concern for continual improvement
3. Attention to the work process
4. Improvement in the quality of everything
the organization does
5. Accurate measurement of all critical
variables in the organization’s operations
6. Empowered employees
Benchmarking
• The search for the best practices among

competitors and noncompetitors that lead to their
superior performance
• By analyzing and copying these practices, firms can
improve their performance

ISO 9000 Series
• ISO 9000
• The ISO standard sets uniform guidelines for
processes to ensure that products conform to
customer requirements

Six Sigma
• Six Sigma
• Is a philosophy and measurement process
developed in the 1980’s at Motorola that
establishes a goal of no more than 3.4 defects per
million parts or procedures


Chapter 3

Uploaded by

Copyright:

Available Formats

Chapter 3

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Chapter 3

Uploaded by

Copyright:

Available Formats

Faculty of Business, Hospitality,

Accounting & Finance

Planning and Strategic Management

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 1-2

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 1-3

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 1-4

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 1-5

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 1-6

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 1-7

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 1-8

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 1-9

• The Relationship Between Planning and Performance

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 1-10

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 1-11

• Traditional Goal Setting

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 1-13

Overall objectives Managers and

Objectives allocated to Action plans

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 1-14

• Reason for MBO Success

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 1-15

• Written in terms of outcomes rather than

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 1-16

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 1-17

Breadth Time Frame Specificity Frequency of Use

Strategic Long term Directional Single use

Operational Short term Specific Standing

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 1-18

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 1-19

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 1-20

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 1-21

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 1-22

Contingency Factors in Planning

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 1-23

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 1-25

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 1-26

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 1-27

• Customers: Who are the organization’s customers?

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 1-28

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 1-29

• Step 3: Conduct an External Analysis

• Steps 2 and 3 combined are called a SWOT analysis.

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 1-30

Organization’s Organization’s Opportunities in

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 1-31

• Step 4: Formulate Strategies

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 1-32

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 1-33

Business Strategic Strategic Strategic

Functional Research and Manufacturing Marketing Human Finance

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 1-35

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 1-38

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 1-40

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 1-41

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 1-42

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 1-43

• Bargaining Power of Suppliers

Source: Reprinted from M.

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 1-46