Strategic Planning/Management
Structuring for success
organizational structure & growth
A Company Develops a More Complex Structure as its Size Increases
Chandler concluded that a change in strategy for growth used by the company resulted in an adaptations in the organizations structure.
Functional organization:
single or dominant product market, if one product produces 70 - 90% to total sales
growth is reflected by an increase in volume of sales. or through vertical integration.
departmentalized by functional areas (specialization).
decision making is usually centralized
authority from the top down.
Multi-Divisional:
diversification in related businesses
departments are separated by product, region, market.
allows for quicker reaction to market
all resources needed to product and sell product under divisional control
decentralize authority and responsibility.
divisions deal with short range planning and corporate office with long run planning
Holding Company:
diversify in unrelated business
organized along product, market lines, cost centers, SBU's
authority and responsibility even more decentralized
the Corporate office is small, its function is capital allocation
division both long and short run strategic planning
Matrix:
mixing of functional and organizational into team management
relaxing unity of command principle
Network:
linking suppliers, manufacturers, distribution through a network managed from a central office.
Quotes
Joan Woodward - Different technologies impose different kinds of demands on individuals and organizations and these demands have to be met through appropriate structures.
Alfred D. Chandler - growth strategy results in adaptation of organizational structures
Lawrence & Lorsch - Key to organizational design was to structure the department to match challenges posed by external environment
Burns & Stocker - External environment was related to internal management.
Environment
Internal Environment
--employees
--culture
--management
External
Task (Specific)
--labor market
--customers
--competition
--suppliers
General
--legal/political
--sociocultural
--economic
--international
--technological
Internal Organization - the environment within the organization's boundaries.
External Organizational Environment: institutions or forces that are outside the organization and potentially can affect the organization's performance.
General - External everything outside the organization that affect it indirectly
Legal/Political
Ways government influences businesses and other organizations, includes the general political stability of the country:
Legal/Political
Law's; Regulations; Regulatory Agencies
Court
Taxes/ Spending - Fiscal Policy and State and local considerations
Government loans/subsidies
Government competition
Interest Rate - Monetary policy
Pressure Groups
Mergers / Acquisitions
Pressure Groups
An interest group that works to influence companies to behave in socially responsible ways.
Ralph Nader - Center for Responsive Law
Business reaction:
pro-active,
--with lobbying activities to gain economic advantage.
--direct political action through grass roots activities, and PAC's (political action committees
Sociocultural
represents the demographic characteristics, norms, customs, and values of the population within which the organization operates.
Sociocultural Factors
Demographic trends
Gender roles
Leisure time
Educational levels
Economic
represents the overall economic health of the country or region in which the organization functions.
Business cycles - the up and down movement of the economy's ability to generate wealth.
depression, recession, recovery, and prosperity.
Some businesses are more sensitive to business cycles than others.
watch economic indicators: leading, lagging, coincidental.
Recession Sensitive - sales parallel economic conditions
Reverse recession sensitive firms: most profitable when economic conditions are deteriorating
Recession resistant: sales which are not directly related to economic conditions
Technology
All the tools and ideas available for expanding the natural, physical and mental reach of human kind.
includes scientific and technological developments.
Application of knowledge to help solve problems.
Technology
of all factors this is the one changing the most rapidly. The automated work place.
technology always increases output (productivity) - provide a competitive edge.
International
events originating in foreign countries as well as opportunities for American companies in other countries.
Results in increasing competition and consumer markets.
Borderless world, but the global environment is an uneven playing ground which often offers new rules to the game.
Task - directly influence the achievement of an organizations goals i.e. affect organizations operation and performance.
Stakeholders that can positively or negatively influence an organizations effectiveness.
Each organizations specific environment is different (unique) and changes with situations.
Suppliers
Customers (clients)
Competitors
Labor Market
Suppliers
People and organizations who provide the raw materials the organization uses to produce its output.
provide :
--materials
--equipment
--financial inputs
labor
includes sub-contractors
suppliers should be seen as a partner in the process
mutual benefit
Firms are using fewer suppliers
Customers
People who acquire goods or services from the organization.
business exist to meet needs of the customer, business must react to changing needs, taste of customer.
Competitors
Other organizations in the same industry or type of business that provide goods or services to the same set of customers
competition takes place on three levels
a) industry vs industry
b) company vs company
c) product vs product
Complementary goods
type product such as complementary goods must worry not only with their competition, but the demand and supply of the complementary good. Products that go together.
Substitutes
Substitutes are goods which can be used in place of each other
Labor Market:
Individuals available to be hired for a job. Affected by:
Unions
Labor Associations
availability of a pool of properly trained workers
Labor Market Impacts organizations by:
require continuous investment in education and training to be competitive in a global market
shift in markets, automation and plant locations create pools of labor surpluses and shortages in certain areas
Managers dealing with the environment do so in conditions of uncertainty.
Environmental uncertainty is defined as the degree of change and complexity in the organizations environment.
Two Dimensions of Environmental uncertainty
Change
--dynamic (unstable) - environment changes frequently
--stable - environment with a minimal amount of change
Complexity
--number of factors in an organizations environment; and the extent of the knowledge the organization has about these factors
--the amount of knowledge about the environmental factors that the organization needs to know
Environmental Uncertainty
Assessing Environmental Uncertainty
Examples of Uncertainty
High uncertainty: external factors change rapidly, and high number of factors changing. Ex. Electronics, aerospace.
Low uncertainty: external factors relatively stable, and few in number. Ex. Corner grocery store, soft drink bottlers
Two Strategies for Coping with High Uncertainty
1. Adapt the organization to the changes in the environment
2. Influence the environment to make it more compatible with organizational needs.
Technology knowledge, tools, techniques, activities used to transform the organizations inputs into outputs can also affect the organizations structure. Joan Woodward was the first to link the technology as a determinant of structure.
Joan Woodward
Unit Production (job shop):
custom products
small batches or units
labor intensive
Mass Production
assembly line
large batch production
standardized production runs
machine intensive
Process production
continuous process such as with oil or chemical refiners
sophisticated and complex form of production technology
the entire work flow is mechanized
process runs continuously
human operators are not part of actual production
Technical complexity: the degree to which machinery is involved in the production to the exclusion of people.
Mission, Goals, Plans
Mission
Goals
Strategic
Tactical
Operational
Plans
Strategic
Tactical
Operational
Mission - statement of company vision, values, philosophy, fundamental purpose; broad statement
Goals - refinement of mission statement into attainable objectives that will help to reach the mission.
Plan - blue print, detailed course of action telling who, what, where and when
Mission -
a statement of a business's fundamental unique purpose, its reason to exist, what it wants to be and whom it wants to serve, its long term vision. The organizations values and aspirations. It identifies the scope of the business's operations.
Three Primary Aspects of the Organization that Mission Statements should include
Its primary products or services
Its distinctive competitive advantages(s)
Its overall strategy ensuring long-term success
A typical Mission Statement includes:
target market
principal product
product quality
geographic demand
core technologies
concern for growth,
company philosophy
company self-concept
desired public image
attitude toward employees
Goals:
A goal is a desired future state, an refinement of the mission statement.
Specific results needed to reach mission.
Specific desired performance.
Each goal has a set of very specific objectives of how the company will reach its goals.
Objective are targets to be reached, they must be stated in measurable terms.
Type of Goals
Strategic: Broad general purpose statements of where the organization wants to be in the future, relate to the organization as a whole.
Tactical: Statements of how major divisions or departments will assist the organization in obtaining it's goals and mission.
Operational: specific, measurable actions needed by each department, work group etc to help the organization reach its goals.
Means- Ends Chain of Goals
| Top management |
|
Goal: |
| Corporate President |
|
To increase corporate sales by
$250 million by the end of
the year |
| |
|
|
| Middle Management |
|
Goal: |
| Laundry products manager |
|
To increase market share of
Soapy Suds by 5 percent
by July 1 |
| |
|
|
| Lower Management |
|
Goal: |
| Area sales manager |
|
To increase unit sales of Soapy Suds
in Boston area by 100,000 units by
April 1 |
Criteria for effective goals
Specific - relate to a particular and easily defined performance area, specific as to what is to be measured.
Measurable - usually expressed in quantitative terms
Time-linked - to be achieved in a specific time period, deadline for achieving targeted performance
Realistic, but challenging - provide a challenge but attainable
Planning is the process of establishing organizational goals and selecting a future course of action. It is a blueprint for how a goal is going to be achieved. Plans incorporate both ideas and means to reach the goal.
A process of coping with uncertainty by formulating future courses of action.
A Plan is a set of actions necessary to :
achieve the objectives, goals, mission of the company
a blue print of action
identify the needed resources
the task to be accomplished
the actions to be taken
the time table
Two parts to planning:
Purpose: what you intend to accomplish (what is to be done)
Expression: who, how, where and when you intend to accomplish what you want to accomplish
There are Eight reasons to plan:
1. Provide direction and sense of purpose
2. Helps to cope with change
3. Sets standards used for control
4. Minimizes waste and redundancy
5. Helps an organization to succeed
6. Source of motivation and commitment
7. Legitimacy to external audiences
8. Reduce uncertainty and clarifies what employees should accomplish
Strategic - (top) (directional)
Broad, general issues which have an impact on where the organization want to be in the future
are applied to and impact over all objectives
deal with concerns such as resource allocation, priorities, long term needs of the company.
require a major commitment of the organizations resources.
Time span for strategic plans is usually five years in the future.
Thus they are often complex and deal with high degree of uncertainty and risk.
Tactical (middle) -
define specific results for major divisions and departments
focus on how to operationalize strategic plans into actions to reach goals
specify resources
specify time frame.
time span is usually one to five years.
supervisory, emphasizing implementation and carrying out actions
Operational - (lower)
define specific results expected from departments, work groups, and individuals
focus on specific details of how the overall objectives of the organization are to be achieved in each functional area.
an implementation plan; clearly defines what needs to be done, how often, in what quantity, by when and by whom.
specific and challenging,
are of limited (narrow) scope, usually deal with short term issues
thus the time frame is usually a few weeks to one year.
Shewhart Cycle (PDCA)
TQM
Plan a test or change in a specific process
Do the test or carry out the change
Check the results
Act to improve the process based on what you learn
Peter Drucker discussed eight Key areas he felt management must plan for if the company was to be successful.
Peter Drucker's Eight Areas of Focus
1. Market standing relative to competitors
2. Innovation of new methods or products
3. Productivity or efficiency
4. Resources, both physical and financial
5. Profitability
6. Managerial performance and development
7. Worker performance and attitude
8. Public responsibility to customers and society.
Drucker's Key areas for planning:
1. Market Shares - goals related to competition, compare share with market potential. (i.e... standing in market, new markets to enter, delete which products)
2. Innovation - keep ahead in market, (both in product/service), technology -both innovation and improvement.
3. productivity - increase goods and services with fewer inputs and decreasing costs. Concept of contributed value: the difference between gross revenue received by a company from sale of product and amount paid out to purchase of raw materials and service of outside suppliers.
4. Physical and financial resources - goals regard use of resources: equipment, building, capital, inventory funding.
5. Profitability - not merely in terms of money but equipment & people. Watch the hidden cost associated with old equipment, not book value but productivity effect.
6. Managing performance and development - skills and training
7. Employee performance and attitude (employee satisfaction): includes concepts of job rotation, job sharing, cross training. Drucker also talked much about unionization.
8. Social responsibility
"In what direction should I take my company?
That is the question of strategic planning: the overall corporate planning.
Strategic Planning Answers?
1. Where do we want to go: (Objectives)
2. What is our current situation (SWOT)
3. How do we get there from here - action plan
4. What changes and trends are occurring in the competitive market.
Strategic planning commits extensive resources to long term projects.
Develops a strategy: a plan of action that prescribes resource allocation and other activities for dealing with the environment and helping the organization attain its goals
Corporate-Level Strategy
("What business are we in?")
If an organization is engaged in more than one type of business or product lines it must identify and determine the roles of each of these businesses or product lines.
How is the corporation going to manage its "Portfolio of businesses"
Acquisition of new businesses
Additions or divestment of business units, plants, or product lines
Joint ventures with other companies in new areas
Manager portfolio of businesses
Business-Level Strategy
("How do we compete?")
If the organization has only one business then the corporate and SBU are the same.
The Business unit must determine how to compete for each single business, group of related businesses, or each product line.
Each business unit or product line has its own mission, and its own competitors and strategy.
Business-Level Strategy
("How do we compete?")
Advertising
Direction and extent of R&D
Product changes
New product development
Equipment and facilities
Expansion or contraction of product lines
Each business unit has its own mission, competitors, and strategy
SBU's are based on:
Each SBU serves
--a clearly defined product or market segment
Each SBU develops
--strategy tailored to its capabilities and competitive needs
Total business "Portfolio":
--is managed to serve the organization as a whole.
Function-Level Strategy
("How do we support business-level strategy?")
Action plans adopted by major departments to support the business-level strategy to achieve the organization's strategic goals
Production
Distribution
Finance
Purpose of Strategy
SYNERGY: when organizational parts interact to produce a joint effect that is greater than the sum of its parts acting alone.
Steps in Strategic Planning:
1. Identify mission; goals; strategies
2. Analyze the environment
3. identify the opportunities and threats
4. analyze the organizational resources
5. identify strengths and weaknesses
6. formulate strategies
7. implement strategies
8. evaluate results
SWOT Analysis
(steps 2 - 5)
SWOT analysis:
Purpose is to identify a strategic niche which the company can take advantage of.
A distinctive competency a special strength that gives an organization a competitive advantage
A strategic niche that the organization can exploit.
Situation Analysis: SWOT
Strengths (Internal)
Weaknesses (Internal)
Opportunities (External)
Threats (External)
Step 3: Identify Threats and Opportunities
Threats: negative external factors; characteristics in the external environment which may prevent the organization from reaching its objectives.
Opportunities: positive external factors which can be exploited; Characteristics with the potential to help reach objectives
Keep in mind the environment will to an extent define the options available to management.
Managers need to keep in mind such things as:
what the competition is doing
pending legislation which would affect the organization.
Step 4: Analyze the organization's resources
Step 5: Identify Strengths and Weaknesses
Strengths - Internal activities in which the firms excels; resources which are available in the organization
Weaknesses: Internal activities that does poorly in, or resources required but lacking in the current organization and inhibits or restricts its performance
Core Competency or Distinctive Competence
Business activities than an organization does particularly well in comparison to competitors. Skills or resources that are unique.
Superior research and development
Mastery of a technology
Superior customer service
SWOT Analysis
Models have been classified with regard to Corporate level strategic planning and SBU level strategic planning. We will begin with the Corporate level.
Portfolio Analysis - early 1970's Boston Consulting Group Matrix (BCG Matrix)
This is a 2 by 2 matrix which measures market growth rate and market share.
It is a tool
which guides resource allocation decisions
based on market share and growth
in an effort to increase return on investment and increase profits
The Boston Consulting Group (BCG) matrix evaluates SBUs along two dimensions:
Business growth rate: how rapidly the entire industry is growing
Market share : if a SBU has a larger or smaller market share than competitors
The Matrix provides four categories to judge SBUs
Market share - relative market share - high would indicate leader in the industry (as compared with competitors)
Business growth rate - how is the fast is market increasing, usually stated in terms of adjusted sales (for inflation). High market growth is usually measured in as annual rate of at least 10%.
Analysis will look at cash flow generated, share of the market and growth rate.
Stars
Dominant competitive position in a growing industry.
Recommended strategy: growth; add resources and build the business further based upon market projections.
Problem Children (Question Markets)
poor competitive position in a growing industry.
Recommended strategy: growth or retrenchment; apply resources to accomplish positive turnaround or pull back if outlook poor.
Cash Cows
Dominant position in low-growth industry
Recommended strategy - stability or modest growth; maintain benefits of strong cash flow while keeping resource investment minimum
Dogs (Cash Trap)
Poor competitive position in low-growth industry.
Recommended strategy - retrenchment; divest, sell, liquidate the business to eliminate resource drain.
BCG Matrix assumes that increases in production result in decreases in cost. Thus the business with the largest market share should have the lowest cost.
BCG lost favor in the 1990's; however, it is a good way to visualize the size and competitive position of the firms various businesses.
Grand Strategy
General plan of action to achieve long-term objectives
1. Growth
--concentration
--diversification
2. Stability
3. Retrenchment
--harvesting
--turnaround
--divestiture
--liquidation
4. Globalization
Growth Strategies
Can be promoted:
internally by investing in expansion (increase level of operations)
externally by acquiring additional business divisions (mergers and acquisitions)
Growth by Concentration: Internal direct expansion, concentrate on expertise and play on market reputation
Diversification: new goods or services, new fields, allows organization to reduce risks
Mergers - two or more firms, usually similar in size combine into one firm.
Acquisition when one company acquires another company
Merger's & Acquisitions
1881-1911 merger's to stop competition (horizontal mergers
1920's vertical mergers
1960-70's conglomerate mergers to diversify risk, today seeing many of these dismantled
1980's merger to make a quick profit - leverage buyouts, sell off pieces of company
1990's mergers made for strategic purposes, enhance position of company in market
Combinations:
Horizontal - combine like businesses
Vertical - combine businesses at different stages in the distribution process; either backward or forward.
Unrelated - combine businesses entirely unrelated.
Stability : (pause)
Steady slow improvements
Keep the status quo
NO significant change
Grow in a controlled fashion
Retrenchment Strategy:
Reduce the size or diversity to move back to the core competencies. Downsizing; either by:
harvesting
turnaround - restructure; stream line
divestiture - units sold off
liquidation - sell off assets
Retrenchment
Reasons companies are following this policy:
global competition
deregulation
increases in technology
Global Strategy
Globalization: product design and advertising strategies are standardized around the world
Multidomestic: adapt product and promotion for each country
Transnational: combine global coordination with flexibility to meet specific needs in various countries
BCG and Grand Strategies are Corporate level strategic models. The following are SBU level strategies:
Miles and Snow's Adaptive Strategies
Porter's Competitive Strategies
Raymond Miles and Charles Snow - Adaptive strategies:
four strategic types
success could be achieved with the first three if there is a good fit between strategy and the SBU's environment, internal structure, and managerial process.
the fourth called the Reactor often results in failure.
Miles & Snow
Adaptive Strategies
Defender:
Seeks stability with limited number of products in a well defined industry.
Prospector:
seek new opportunities
experiment with innovations
Risk Takers
Analyzer :
imitators, copy success of prospectors
the ability to respond to prospectors initiatives and maintain operating efficiency in current markets.
Reactors:
react to survive
Porters Business level strategies are a result of five competitive factors:
Five factors which determine
the level of competition in turn the industries profitability because they directly influence the prices and individual firm must charge the firms cost structure, and capital investment requirements.
Porter's Five Competitive Forces:
Potential new entrants - what types of barriers of entry into the market exist?
Threat of substitutes - how likely are customers to switch products?
Bargaining powers of buyers - empowered consumer.
Bargaining power of suppliers - availability of substitute inputs
Rivalry among competitors - "Advertising slugfest"
Porter's Competitive Strategies
Differentiation
Cost Leadership
Focus
low cost
differentiation
Porter's Competitive Advantage Strategies
Cost Leadership - operating efficiencies, low cost
Differentiation - unique (perceived differentiation of product. Create a positive image.
Focus - specific segment of market which the firm fell they can serve more effectively and efficiently combined with one of the above.
Stuck in the middle - firms unable to gain a competitive advantage
Product Life Cycle
Seven Traps of Strategic Planning
failing to recognize changing conditions in the competitive environment
basing strategies on a flawed set of assumptions
failing to create or sustain a long run competitive advantage
diversifying for all the wrong reasons
failing to coordinate processes and key functions across functional areas
setting arbitrary and inflexible goals and controls that do not consider culture and rewards
failing to provide leadership to implement strategic change