Chapter 5 – Foundations of Planning
CHAPTER
5
FOUNDATIONS
OF PLANNING
LEARNING OUTCOMES
After reading this chapter, students should be able to:
5-1. Discuss the nature and purposes of planning.
5-2. Explain what managers do in the strategic management process.
5-3. Compare and contrast approaches to goal setting and planning.
5-4. Discuss contemporary issues in planning.
Management Myth
MYTH: Planning is a waste of time because no one can predict the future.
TRUTH: No matter how well you plan, there’s always the unexpected. Flexible planning that
includes multiple scenarios can prepare managers for a variety of situations.
SUMMARY
Organizations must develop goals, plans, and strategies for how best to achieve their purpose.
However, sometimes after evaluating the outcomes of those plans and strategies, managers have
to change direction as conditions change.
Teaching Tips:
Students should be encouraged to think about the advantage of long-term planning for
companies.
How do organizations plan in environments where technology is constantly changing?
Have students think of some innovations that were hot one day and then disappeared the
next. Why did these innovations not succeed in the long-term?
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Chapter 5 – Foundations of Planning
I. WHAT IS PLANNING AND WHY DO MANAGERS NEED TO PLAN?
A. Introduction
1. Planning is the primary management function, setting the basis for the other
functions.
2. It encompasses defining the organization’s objectives or goals, establishing an
overall strategy, and developing a comprehensive hierarchy of plans to integrate
and coordinate.
a) It is concerned with ends (what is to be done) and with means (how it is to be
done).
3. Planning can be further defined in terms of whether it is informal or formal.
a) In informal planning very little, if anything, is written down.
b) In formal planning, specific objectives are written down and made available to
organization members.
B. Why Should Managers Formally Plan?
1. Managers should engage in planning for at least four reasons. (See Exhibit 5-1).
a) Planning establishes coordinated effort.
1) Understanding where the organization is going and what must be
contributed to reach the objectives, helps members to coordinate their
activities and fosters teamwork.
2) A lack of planning can cause various organizational members or their units
to work against one another.
b) Planning reduces uncertainty.
1) It clarifies the consequences of actions.
2) It is precisely what is needed when managing in a chaotic environment.
c) Planning also reduces overlapping and wasteful activities.
1) When means and ends are clear, inefficiencies become obvious.
d) Finally, planning establishes objectives or standards that facilitate control.
1) Without planning, there are no goals against which to measure or evaluate
work efforts.
C. What Are Some Criticisms of Formal Planning and How Should Managers
Respond?
1. Criticism: Planning may create rigidity.
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Chapter 5 – Foundations of Planning
a) Formal planning efforts lock an organization into specific goals and specific
timetables.
b) The assumption may be that the environment won’t change during the time
period the objectives cover.
1) Forcing a course of action when the environment is fluid can be a recipe
for disaster.
2. Managers’ Response: Managers need to remain flexible and not be tied to a course
of action simply because it is the plan.
3. Criticism: Formal plans can’t replace intuition and creativity.
a) Visions have a tendency to become formalized as they evolve.
b) Formal planning efforts typically follow a methodology that reduces the vision
to a programmed routine.
4. Managers’ Response: Planning should enhance and support intuition and creativity,
not replace it.
5. Criticism: Planning focuses managers’ attention on today’s competition, not on
tomorrow’s survival.
a) Formal planning tends to focus on how to best capitalize on existing business
opportunities within the industry.
b) It often does not allow for managers to consider creating or reinventing the
industry.
6. Managers’ Response: When managers plan, they should be open to forging into
uncharted waters if there are untapped opportunities.
7. Criticism: Formal planning reinforces success, which may lead to failure.
a) Success may, in fact, breed failure in an uncertain environment.
b) It is hard to change or discard successful plans.
c) Successful plans may provide a false sense of security.
8. Managers’ Response: Managers may need to face that unknown and be open to
doing things in new ways to be even more successful.
D. Does Formal Planning Improve Organizational Performance?
1. Contrary to the critics, the evidence generally supports having formal plans.
2. However, organizations that formally plan do not always outperform those that
don’t.
3. Conclusions from studies of the relationship between planning and performance.
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Chapter 5 – Foundations of Planning
a) There are generally higher profits, higher return on assets, and other positive
financial results with a formal planning process.
b) The quality of the process and appropriate implementation of the plans
probably contribute more towards high performance than does the extent of
planning.
c) Finally, in those organizations in which formal planning did not lead to higher
performance, the environment was typically the culprit.
1) Government regulations and similar environmental constraints leave
managers with fewer viable alternatives.
II. WHAT DO MANAGERS NEED TO KNOW ABOUT STRATEGIC MANAGEMENT?
A. What is Strategic Management?
1Strategic management is what managers do to develop an organization’s
strategies.
2 These plans encompass:
a) How the organization will do what it’s in business to do,
b) How it will compete successfully,
c) And how it will attract and satisfy its customers in order to achieve its goals.
B. Why is Strategic Management Important?
1. Example given of Buckle, Inc. which has not suffered as much as other retailers
from the recent economic downturn.
a) Buckle’s strategy included its placement of stores in states that fared better
during economic downturns.
b) Buckle implemented customer-service investments as a way to differentiate
themselves from other retailers.
2. One reason is that it can make a difference in how well an organization performs.
a) Research has found a generally positive relationship between strategic
planning and performance. Those that have a plan generally have better
financial performance.
3. Another reason is that it helps managers in organizations of all types and sizes
face continually changing situations.
4. Finally, it is important because organizations are complex and diverse and each
part needs to work together to achieve organizational goals.
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Chapter 5 – Foundations of Planning
5. All types of organizations can benefit from strategic plans.
C. What Are The Steps of The Strategic Management Process?
1. The six-step strategic management process involves strategic planning,
implementation, and evaluation.
2. See Exhibit 5-2.
3. Strategic planning encompasses the first four steps.
4. Step 1: Identify the organization’s current mission, objectives, and strategies. See
Exhibit 5-3.
a) Every organization has a mission statement that defines its purpose and answers
the question, “What business or businesses are we in?”
b) Determining the nature of one’s business is as important for not-for-profits as it is
for business firms.
c) Once its mission has been identified, the organization can begin to look outside
the company to ensure that its strategy aligns well with the environment.
5. Step 2: Analyze the external environment.
a) Organizations need an accurate grasp of the environment and important trends
that might affect the organization’s operations.
b) Opportunities are positive external environmental factors.
c) Threats are negative ones.
6. Step 3: Evaluate the organization’s internal resources.
a) This involves asking specific questions and analyzing the available information
about an organization’s resources and capabilities.
b) The analysis should lead to a clear assessment of the organization’s internal
resources – financial, physical, human, and intangible.
c) The capabilities include, how does the organization work?
7. Step 4: Formulate strategies with three main types – corporate, competitive, and
functional.
8. Step 5: Implement strategies. No matter how effectively an organization has planned
its strategies, performance will suffer if the strategies aren’t implemented properly.
9. Step 6: Evaluate the results to determine the effectiveness or whether changes need to
be made.
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Chapter 5 – Foundations of Planning
D. What Strategic Weapons do Managers Have?
1. Six strategic weapons are important in today’s environment: customer service,
employee skills and loyalty, innovation, quality, social media, and big data.
2. Quality as a strategic weapon.
3. To the degree that an organization can satisfy a customer’s need for quality, it can
differentiate itself from the competition and attract and hold a loyal customer base.
a) Incremental improvement is something that becomes an integrated part of an
organization’s operations and can develop into a sustainable competitive
advantage.
4.
Benchmarking can help promote quality because it involves the search for the best practices
among competitors and non-competitors that lead to superior performance.
a) Management can improve quality by analyzing and then copying the methods
of the leaders.
b) In 1979, Xerox undertook the first benchmarking effort in the United States.
c) Until then, the Japanese had been aggressively copying the successes of
others.
d) Xerox’s head of manufacturing took a team to Japan to make a detailed study
of its competition’s costs and processes at its own joint venture, Fuji-Xerox.
1) Its Japanese rivals were light-years ahead of Xerox in efficiency.
2) Benchmarking those efficiencies marked the beginning of Xerox’s
recovery.
5. Social media has become a tool organizations can use as a strategic weapon.
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Technology and the Manager’s Job: Innovative IT and Strategy
A company’s information technology can make a significant contribute to their strategy. Two
examples are given: Caesars Entertainment (formerly Harrah’s) and Prada. Caesars’ research
showed that customers who were satisfied with the service they received at the casino increased
their gaming expenditures by 10 percent, and those who were extremely satisfied increased their
gaming expenditures by 24 percent. On the other hand, Prada’s attempt to integrate wireless
networks resulted in equipment malfunctions and did not result in increase sales.
Discuss This:
How should managers ensure that their IT efforts contribute to helping strategies succeed?
How do your IT applications (smartphone organizers and calendars, apps, text messaging,
etc.) help you be a better planner in your personal life?
Chapter 5 – Foundations of Planning
a) Red Robin example.
b) Successful social media strategies should:
1) Help people inside and outside the organization connect.
2) Reduce costs or increase revenue possibilities or both.
6. Big data can also be used as a strategic weapon. Collecting data about customers,
partners, employees, markets, and other quantifiable areas can be used to respond to
the needs of these same stakeholders.
E. What Strategies Do Managers Use?
1. Strategies need to be set for all levels in the organization. See Exhibit 5-4.
2. Three levels of strategy are available: corporate, competitive, and functional.
a) A corporate strategy is an organizational strategy that specifies what
businesses a company is in or wants to be in and what it wants to do with
those businesses.
b) Three main corporate strategies: growth, stability, renewal.
1) Growth strategy – when an organization expands the number of markets
served or products offered, either through its current business(es) or
through new business(es).
(a) Concentration focus on primary line of business.
(b) Vertical integration: company grows by gaining control of inputs or
outputs or both.
(i) Backward vertical integration.
(ii) Forward vertical integration.
(c) Horizontal integration – grow by combining with competitors.
(d) Diversification – grow by moving into related or unrelated
businesses.
c) Stability strategy is characterized by an absence of significant changes.
d) Renewal strategy – organization is in trouble and needs to address declining
performance.
1) The retrenchment strategy is for minor performance problems.
2) Turnaround strategy is used when companies face serious financial
challenges.
3. A competitive strategy is the second main strategy.
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Chapter 5 – Foundations of Planning
a) Describes how a company will compete in its primary or main market.
b) Units that are independent and formulate their own competitive strategies are
called strategic business units (SBUs).
c) This positioning requires a careful evaluation of the competitive forces.
d) Competitive advantage sets an organization apart, its distinctive edge comes
from the organization’s core competencies and the company’s resources.
4. Choosing a competitive strategy.
a) Porter’s competitive strategies framework: cost-leadership, differentiation,
focus, and stuck in the middle.
b) The low-cost producer in its industry is following a cost-leadership strategy.
1) Success requires that the organization be the cost leader; the product or
service being offered must be perceived as comparable to rivals, or at
least acceptable to buyers.
2) A firm typically gains a cost advantage by efficiency of operations,
economies of scale, technological innovation, low-cost labor, or
preferential access to raw materials.
3) Walmart, Texas Instrument, and Southwest Airlines examples.
c) A differentiation strategy is followed when a firm seeks to be unique in its
industry in ways that are widely valued by buyers.
1) It might emphasize high quality, extraordinary service, innovative
design, technological capability, or an unusually positive brand image.
d) The focus strategy aims at a cost advantage (cost focus) or differentiation
advantage (differentiation focus) in a narrow segment or niche.
1) The goal is to exploit a narrow segment of a market.
5. What if an organization cannot use one of these three strategies to develop a
competitive advantage?
a) Porter uses the term “stuck in the middle” to describe that situation.
b) Organizations that are stuck in the middle find it difficult to achieve long-term
success.
6. The functional strategies for managers are the strategies used by an organization’s
various functional departments to support the competitive strategy.
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Chapter 5 – Foundations of Planning
A Question of Ethics?
Do you shop? Well, you might be saying to yourself, that’s kind of a stupid question….of course I shop.
Well, here’s another question: Do you realize the extent to which retail stores are spying on you as you
shop? Although most of us “accept” the fact that when we shop online, we’re allowing the online
retailer to install its cookies to track our every move and click. Now however, technology is being used
more frequently in the physical retail environment. And it’s more than camera watching. Many retailers
are using cell phone tracking technology, personalized advertising, and super spy cams. Why? To track
your behavior and to get you (and all those other shoppers) to buy more. Results from a recent survey
showed that 80 percent of consumers do not want stores to track their movements via smartphone. And
44 percent said that a tracking program would make them less likely to shop at that store.
Discuss This:
What ethical dilemmas are involved with the strategy of retail consumer tracking?
What factors might influence a business’s decision to use this strategy? (Think in terms of the
various stakeholders who might be affected by this decision.)
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