Chapter 3 - Foundations of Planning

PART 2: PLANNING

CHAPTER 3 - FOUNDATIONS OF PLANNING

LEARNING OUTCOMES (PPT 3-2, 3-3)

After reading this chapter students should be able to:

1.Define planning.

2.Explain the potential benefits of planning.

3.Identify potential drawbacks to planning.

4.Distinguish between strategic and tactical plans.

5.Recognize when directional plans are preferred over specific plans.

6.Define management by objectives and identify its common elements.

7.Outline the steps in the strategic management process.

8.Describe the four grand strategies.

9.Explain SWOT analysis.

10.Describe how entrepreneurs identify a competitive advantage.

Opening Vignette

SUMMARY

While traditional business used to operate on the adage that if a business could compete if it executed two of the three criteria well ---price, quality, or service---Zane’s Cycles sells the most bikes in the Bradford, Connecticut area. Chris Zane started the business nearly 20 years ago when he was a 16-year-old high school student. Is there a secret to Chris’s success? If there is, it’s largely due to his ability to plan well and execute those plans.

Chris decided to become a distributor for premium bike manufacturer, Trek. This meant Chris would have to ship assembled bikes directly to the airline industry has shown that businesses today must execute all three well if they want to remain competitive. Customers are demanding more, and new, smaller airlines such as JetBlue, Southwest, and Air Tran are managing to provide all three (price, quality, and service). And, they’re gaining market share quickly---much to the dismay of the traditional big airlines such as United, US Airways, Delta, American, Northwest, or Continental.

In fact, during the past decade, most of the large commercial carriers such as those above have been plagued with high costs, poor performance, aging aircraft, and a disgruntled customer base. Today, most of the major airlines in the United States are fighting for survival. Many have reorganized, restructured, and even filed for bankruptcy. The terrorist attacks of September 11, 2001 simply compounded the problem, as it caused a dramatic downturn in commercial air traffic.

Previously, new airlines focusing on low-cost fares---like People Express in the 1970s---have come quickly into the market and have disappeared with almost the same blinding speed. For their effort, they historically never gained more than 5 percent of the commercial air traffic market. But today’s smaller airlines understand that the flying public is demanding more for less. These airlines are raising the bar with higher quality and improved customer services. For instance, JetBlue passengers fly on newer, roomier aircraft. And, in just over a decade, these high quality, customer-service driven, low cost airlines like JetBlue have increased their market share from 5 to 30 percent of the market---and they are the only airlines that are profitable.

Several of the major airlines now understand the need to offer price, service and quality to survive. For example, United is offering low-cost, full service fares on its Ted Airline (Ted being the last 3 letters in United). Delta has introduced Song as its low-cost spin-off. The airline industry has changed. Those airlines that anticipate, or even get in front of, the change are the ones who will survive.

customers. These shipments would have to be 100 percent perfect—no quality problems would be acceptable—and deliveries would have to be made in a competitive period of time. Furthermore, Zane’s cycles would be required to have ample inventory at all times.

Trek’s requirements were demanding but Chris felt he was up to the task. Zane sent all ordering customers a questionnaire. He wanted to know their height, inseam, and their bike-riding habits. He recognized that “one size fits all” didn’t apply to the Trek bikes. When this information was returned, Zane Cycle employees used it for custom-fitting the bike. Bikes were then shipped nearly completely assembled. The few parts that needed to be assembled—like the handle bars and the pedals—were accompanied with detailed “how to install” instructions and a 24-hour 800 number to call a bike technician with any questions about the bike. In his first year, Zane’s Cycles achieved 184 percent of the Trek goal, and did not have one quality complaint. Shortly thereafter, Trek named Zane’s Cycles as its exclusive distributorship.

To date, Chris Zane’s plans and actions have allowed him to achieve his goal of growing the company. He now has more than 40 employees, with more than $5 million in annual revenues. His next step? Take the company to $12 million in annual revenues in the next five years.

Teaching notes

1.Discuss with students the following questions.

Why was JetBlueZane’s Cycles able to compete successfully with United, Sears, or American, Wal-Mart, or any of the other region’s large commercial airlinesretail outlets? What, if anything, set JetBlueZane’s Cycles apart? Did this happen by accident?

What plans did Chris ZaneJetBlue implement to be able to achieve their market share increase from 5 to 30 percent and their profitability?

How realistic is it that the large airlines will change? Do you think they will go out of business? Why or why not? 184 percent of the Trek goal with no quality complaints?

How realistic are Zane’s plans for growing the next phase of his company?

I.PLANNING DEFINED

A.Introduction (PPT 3-4)

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).

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.

Teaching Notes ______

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II.PLANNING IN UNCERTAIN ENVIRONMENTS

A.Introduction

Technological, social, political, economic, and legal changes are ever-present.

Contemporary managers must plan effectively to ensure an organization’s survival.

B.Why Should Managers Formally Plan?

Managers should engage in planning for at least four reasons.

a)Planning provides direction.

b)It reduces the impact of change.

c)Planning minimizes waste and redundancy.

d)It sets the standards to facilitate control. (See Exhibit 3-1).( PPT 3-5)

Planning establishes coordinated effort.

a)Understanding where the organization is going and what must be contributed to reach the objectives, helps members to coordinate their activities and fosters teamwork.

A lack of planning can cause various organizational members or their units to work against

one another.

Planning reduces uncertainty.

It clarifies the consequences of actions.

It is precisely what is needed when managing in a chaotic environment.

Planning also reduces overlapping and wasteful activities.

Finally, planning establishes objectives or standards that facilitate control.

Teaching Notes ______

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C.What Are Some Criticisms of Formal Planning? (PPT 3-6)

Formal planning by managers makes intuitive sense.

a)An organization needs direction.

Planning may create rigidity.

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)If that assumption is faulty, managers who follow a plan may have trouble.

2)Forcing a course of action when the environment is fluid can be a recipe for disaster.

3. Plans can’t be developed for a dynamic environment.

a) Most organizations today face dynamic change in their environments.

1) That means a random and unpredictable business environment.

2) Managing chaos and turning disasters into opportunities requires flexibility.

4. 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.

1)The rapid rise of Apple Computer in the late 1970s and throughout the 1980s was

attributed, in part, to the creativity and anti-corporate attitudes of one of its

cofounders, Steven Jobs.

2)Ultimately Jobs was ousted and with his departure came increased organizational

formality—the very thing he despised because it hampered creativity.

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.

c) Some companies have found much of their success to be the result of forging into

uncharted waters, designing and developing new industries as they go.

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.

D.The Bottom Line: Does Planning Improve Organizational Performance?

Contrary to the critics, the evidence generally supports having formal plans.

However, organizations that formally plan do not always outperform those that don’t.

Conclusions from studies of the relationship between planning and performance. (PPT 3-7)

a)There are generally higher profits, higher return on assets with a formal planning process.

b)The quality of the process and appropriate implementation of the plans probably contribute more to 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.

4. Self-Assessment # 25 “How Good Am I at Personal Planning?”

Teaching Notes ______

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III.TYPES OF PLANS

A.Exhibit 3-2 illustrates the relationship of types of plans. (PPT 3-8)

Breadth—strategic versus tactical.

Time frame—long term versus short.

Specificity—directional versus specific.

Frequency of use—single use versus standing.

B.How Do Strategic and Tactical Planning Differ? (PPT 3-9, 3-10, 3-11)

Strategic plans apply to the entire organization, establish the organization’s overall objectives, and seek to position the organization in terms of its environment.

a)These plans drive the organization’s efforts to achieve its goals.

b)They serve as a basis for forming the tactical plans.

Tactical plans (operational plans) specify the details of how to achieve the overall objectives.
Strategic and tactical plans differ in three primary ways.

a)Time frame.

1)Tactical plans tend to cover shorter periods of time.

2)Strategic plans tend to cover five years or more.

b) Scope

1) They also cover a broader area and deal less with specifics.

c) Whether they include a known set of organizational objectives.

1) Strategic plans include the formulation of objectives.

2) Tactical plans assume the existence of objectives.

3)Tactical plans describe how those objectives will be attained.

Teaching Notes ______

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C.In What Time Frame Do Plans Exist? (PPT 3-9)

Short term covers less than one year.

Any time frame beyond five years is classified as long term.

The difference between short- and long-term plans is important given the length of future commitments and the degree of variability organizations face.

a)Plans should extend far enough to see through those commitments that are made today.

b)The greater the uncertainty, the more plans should be of the short-term variety.

c)Shorter-term plans allow for more flexibility.

D.What Is the Difference Between Specific and Directional Plans? (PPT 3-13)

It appears intuitively correct that specific plans are always preferable to directional, or loosely guided, plans.

a)Specific plans have clearly defined objectives.

Specific plans are not without drawbacks.

a)They require clarity and a predictability that often does not exist.

When uncertainty is high, and management must maintain flexibility in order to respond to unexpected changes, directional plans may be preferable.

a)See Exhibit 3-3. (PPT 3-12)

Directional plans, on the other hand, identify general guidelines.

a)They provide focus but do not lock managers into specific objectives or specific courses of action.

1)A specific plan might aim to cut costs by 10 percent and increase revenues by 8 percent in the next six months.

2)A directional plan might aim at improving corporate profits between 6 and 12 percent during the next six months.

E.How Do Single-Use and Standing Plans Differ? (PPT 3-14)

A single-use plan is used to meet the need of a particular or unique situation.

a)Example, when Sears purchased Lands’ End, top managers used single-use plans to guide the acquisition, and “fold in” the activities from Lands’ End operations.

Standing plans are ongoing, providing guidance for repeatedly performed actions.

a)Example, the standing “registration” plan at your college or university. The dates have changed, but the process works in the same way semester after semester.

Teaching Notes ______

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IV.MANAGEMENT BY OBJECTIVES

A.Locke and Goal-Setting Theory

The value of setting objectives in organizations—known as goal-setting theory.

Proposed 35 years ago by Edwin A. Locke.

a)Claimed that setting specific employee goals increase performance.

b)Suggested that difficult goals, when accepted by the employee, resulted in even higher performance than easy goals do.

c)Suggested that employee performance feedback led to higher performance than when feedback was lacking.

d)Research in following years have supported Locke’s claims.

B.What Is MBO? (PPT 3-15)

Management by objectives is not new. The concept goes back almost fifty years.

Its appeal is its emphasis on converting overall objectives into specific objectives.

MBO makes objectives operational by cascading them down through the organization.

a)See Exhibit 3-4. (PPT 3-16)

b)MBO works from the bottom up as well as from the top down.

c)The result is a hierarchy that links objectives at one level to those at the next level.

d)For the individual employee, MBO provides specific personal performance objectives.

C.What Are the Common Elements in an MBO Program? (PPT 3-17)

There are four ingredients common to MBO programs.

a)The objectives in MBO should be concise statements of expected accomplishments.

b)The manager and employee jointly choose the goals and how they will be achieved.

c)Each objective has a concise time period in which it is to be completed (e.g., three months, six months, or a year).

d)MBO seeks to give continuous feedback on progress toward goals both through ongoing feedback to individuals and periodic formal appraisal meetings.

Teaching Notes ______

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D.Does MBO Work?

Assessing the effectiveness of MBO is a complex task.

When a person’s ability and acceptance of goals are held constant, more difficult goals lead to higher performance.

a)Specific hard goals produce a higher level of output than no goals or generalized goals.

b)Feedback also favorably affects performance.

c)MBO implies that goals must be perceived as feasible.

There is little relationship between the method of setting goals and resulting performance.

a)When goal difficulty is held constant, assigned goals frequently do as well as participatively determined goals.

b)It is not possible to argue for the superiority of participation.

c)One major benefit of participation, it appears to induce individuals to establish more difficult goals.

Studies of actual MBO programs confirm that MBO effectively increases employee performance and organizational productivity.

a)Top management commitment to MBO is critical for it to reach its potential.

E.How Do You Set Employee Objectives? (PPT 3-18)

Employees should have a clear understanding of what they’re attempting to accomplish.

Every manager can better facilitate this process by following these guidelines.

a)Identify an employee’s key job tasks.

b)Establish specific and challenging goals for each key task.

c)Allow the employee to actively participate.

d)Prioritize goals.

e)Build in feedback mechanisms to assess goal progress.

f)Link rewards to goal attainment.

F.Is There a Downside to Objectives?

Not everyone supports the value of setting objectives.

One of the most vocal critics was the late W. Edwards Deming.

a)Deming felt that employees tend to focus on the goals by which they will be judged, so they may direct their efforts toward quantity of output (what’s being measured) and away from quality.

b)Deming believed that employees tend to view objectives as ceilings rather than as floors.

Specific goals also encourage individual achievement rather than promote a team focus.

Specific goals may limit employees’ potential and discourage efforts for continuous improvement.

How can the criticisms of objectives be overcome?

a)Ensure that employees have multiple goals, all of which have a quality component.

b)Treat MBO as an ongoing activity.

1)Regularly review goals with employees and make changes when warranted.

c)Reward employees for setting difficult goals, even if they aren’t fully achieved.

Teaching Notes ______

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V.THE IMPORTANCE OF AN ORGANIZATIONAL STRATEGY

A.Before the Early 1970s

Managers generally assumed that better times lay ahead.

Plans for the future were merely extensions of where the organization had been in the past.

B.The 1970s and 1980s

However, the energy crisis, deregulation, accelerating technological change, and increasing global competition, as well as other environmental shocks undermined this approach.

These changes forced the development of a systematic means of analyzing the environment, assessing their organization’s strengths and weaknesses, and identifying opportunities where the organization could have a competitive advantage.

a)Thinking strategically—General Electric’s approach following the September 11, 2001 attack in the United States.