session 4 - shandong university

Session 4

Essentials of Planning

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Basics of Planning

Planning is defined as the process of coping

with uncertainty by formulating future courses

of action to achieve specific results

Planning sets the stage for all other major

managerial functions

Planning is a never-ending process…

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Planning: The Primary Management

Function

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Uncertainty – Reality of Organization

State uncertainty: unpredictable environment

Will it rain on the day of our wedding?

Effect uncertainty: unpredictable impacts of

environmental changes

Will outdoor guests be uncomfortable if it rains?

Response uncertainty: unpredictable

consequences of decisions

Will our outdoor wedding reception still be fun if we decide

to have it inside rented tents and it doesn’t rain?

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Organizational Responses to Uncertainty

Defenders: “Be very good at doing a few things”

relying on a primary technology and/or a narrow product line to remain competitive.

Prospectors: “Stay a step ahead of the competition”

seeking first-mover advantage by aggressively making things happen and not waiting for them to happen.

Analyzers: “Follow the leader” following the market leader and imitating what works, avoiding expensive

R&D mistakes.

Reactors: “If it ain’t broken, don’t fix it” waiting for adversity (e.g., declining sales) to occur before taking

corrective action.

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Essentials of Planning

Having a PLAN – objective (end) plus an action statement (means) What, when , and how things should be

accomplished considering organization’s capabilities and environmental uncertainties

Important components:

Types of planning

Organizational mission

Objectives & priorities

Planning/control cycle

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Types of Planning

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Types of Planning (cont’d)

Strategic planning: determining how to

pursue long-term goals with available resources.

Intermediate planning: determining subunits’

contribution with allocated resources.

Operational planning: determining how to

accomplish specific tasks with available

resources.

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Criteria for Effective Mission Statements:

Organizational mission: A clear, formally written, and publicized statement that guides the organization by1. defining the organization for key stakeholders.

2. creating an inspiring vision of the organization.

3. outlining how the vision will be accomplished.

4. establishing key priorities.

5. stating a common goal and foster togetherness.

6. creating a philosophical anchor for the organization.

7. generating enthusiasm and a “can do” attitude.

8. empowering organization members to believe every individual is a key to success.

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Strategic Intent (Vision)

The “holy grail”

Leveraging of a firm’s resources, capabilities, and core competencies to accomplish the firm’s goals in the competitive environment

Internally focused

Seek to ensure that all of the organization’s employees are focused on achieving the firm’s

goals

“To be the leader in the global document market.”

----Xerox

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Bush’s decision to lay his party’s holy tax

grail on the table was not so much the

product of an epiphany as it was incremental

dawning that something must be done.

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Strategic Mission

An application of strategic intent

A statement of a firm’s unique purpose and the scope of its operations in product and market terms

Externally focused

Establish a firm’ individuality, inspiring and relevant to all stakeholders

“Connecting, informing and entertaining people

everywhere in innovative ways that will enrich their lives.”

----Time Warner

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Stakeholders Stakeholders are the individuals and groups

who…

can affect, and are affected by, the strategic outcomes

achieved

have enforceable claims on a firm’s performance

Types of stakeholders

Capital market stakeholders…shareholders, major

capital suppliers

Product market stakeholders…customers, suppliers,

host communities, unions

Organizational stakeholders…all employees

Stakeholders’ interests may conflict

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Your Mission Statement?

So for group project, you will create a company…

What is your company’s mission statement?

Remember, you should include the mission statement in your written report.

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Strategic Management

Strategy is an integrated externally-oriented perception

of how to achieve the organization’s mission.

Strategic management is the ongoing process of

ensuring a competitively superior fit between an

organization and its changing environment.

Strategic Management = Strategic

Planning + Implementation + Control

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Strategic Management Process

Study the external and internal environments

Identify marketplace opportunities and threats

Determine how to use core competencies

Use strategic intent to leverage resources, capabilities and core competencies and win competitive battles

Integrate formulation and implementation of strategies

Seek feedback to improve strategies

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Strategic Management Process

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Step 1:

Formulation of a Grand Strategy

Grand Strategy

A general explanation of how the organization’s

mission is to be accomplished.

Situational Analysis

Finding the organization’s niche by performing a

SWOT (Strengths, Weaknesses, Opportunities,

and Threats) analysis to match unfolding

opportunities with resources being acquired.

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Determining Grand Strategy Through

SWOT Analysis

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The External

Environment

This is a

“must know”

model

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True or False?

Demographic, economic, political/legal,

sociocultural, technological, and global are

the six elements comprising the industry

environment.

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False!!!

Demographic, economic, political/legal,

sociocultural, technological, and global

are the six elements comprising the

GENERAL environment.

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The External Environment: General

Environment

Dimensions in the broader society that influence

and industry and the firms within it

Economic

Socio-cultural

Global

Technological

Political/legal

Demographic

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The External Environment : Industry

Environment Set of factors directly influencing a firm and its

competitive actions and competitive responses

Threat of new entrants

Power of suppliers

Power of buyers

Threat of product substitutes

Intensity of rivalry among competitors

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The External Environment:

Competitor Environment

All of the companies that the firm competes

against.

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Analysis of the External Environments:

What to Analyze?

General environment

Focused on the future

Industry environment

Focused on factors and conditions influencing a firm’s

profitability within an industry

Competitor environment

Focused on predicting the dynamics of competitors’

actions, responses and intentions

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Analysis of the External Environments:

Why Analyze?

To identify opportunities and threats:

Opportunity A condition in the general environment that if exploited,

helps a company achieve strategic competitiveness

Threat A condition in the general environment that may hinder

a company’s efforts to achieve strategic competitiveness

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Analysis of the External Environments:

How to Analyze?

Four-step process:

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General Environment (I)

The Demographic Segment

Population size

Age structure

Geographic distribution

Ethnic mix

Income distribution

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General Environment (II)

The Economic Segment

Inflation rates

Interest rates

Trade deficits or surpluses

Budget deficits or surpluses

Personal savings rate

Business savings rates

Gross domestic product

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General Environment (III)

The Sociocultural Segment

Women in the workplace

Workforce diversity

Attitudes about quality of worklife

Concerns about environment

Shifts in work and career preferences

Shifts in product and service preferences

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General Environment (IV)

The Global Segment

Significant international

events

Emerging and changing

global markets

Global outsourcing

Access to resources on a

global basis

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General Environment (V)

The Technological Segment

Product innovations

Applications of knowledge

Focus of private and

government-supported R&D

expenditures

New communication

technologies

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General Environment (VI)

The Political/Legal Segment

Antitrust laws

Taxation laws

Deregulation philosophies

Labor training laws

Educational philosophies and

policies

Intellectual property

enforcement

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True or False?

Firms can easily control the

elements of the six segments of the

general environment.

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False!!!

Firms can NOT directly control the

elements of the six segments of the

general environment.

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Industry Environment

Industry Defined

A group of firms producing products that

are close substitutes

Firms that influence one another

Includes a rich mix of competitive strategies

that companies use in pursuing strategic

competitiveness and above-average returns

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Porter’s Five Forces of Competition Model

This is a

“must know”

model

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A More Traditional Look of Porter’s Model

2. New entrants

5. Industry

competitors

Intensity of rivalry

3. Buyers

4. Substitutes

1. Suppliers

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1st Force:

Threat of New EntrantsBarriers to entry

Economies of scale

Product differentiation

Capital requirements

Switching costs

Access to distribution channels

Cost disadvantages independent of scale

Government policy

Expected retaliation

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2nd Force:

Bargaining Power of Suppliers

Supplier power increases when:

Suppliers are large and few in number

Suitable substitute products are not available

Individual buyers are not large customers of suppliers and there are many of them

Suppliers’ goods are critical to buyers’ marketplace success

Suppliers’ products create high switching costs.

Suppliers pose a threat to integrate forward into buyers’ industry

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3rd Force:

Bargaining Power of Buyers

Buyer power increase when:

Buyers are large and few in number

Buyers purchase a large portion of an industry’s total output

Buyers’ purchases are a significant portion of a supplier’s annual revenues

Buyers can switch to another product without incurring high switching costs

Buyers pose threat to integrate backward into the sellers’ industry

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4th Force:

Threat of Substitute Products

The threat of substitute products increases

when:

Buyers face few switching costs

The substitute product’s price is lower

Substitute product’s quality and

performance are equal to or greater than

the existing product

Differentiated industry products that are valued

by customers reduce this threat

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5th Force: Intensity of Rivalry Among

Competitors

Industry rivalry increases when:

There are numerous or equally balanced competitors

Industry growth slows or declines

There are high fixed costs or high storage costs

There is a lack of differentiation opportunities or low switching costs

When the strategic stakes are high

When high exit barriers prevent competitors from leaving the industry

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Interpreting Industry Analyses

Low entry barriers

UnattractiveIndustry

Suppliers and buyers have strong positions

Strong threats from substitute products

Intense rivalry among competitors

Low profit potential

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Interpreting Industry Analyses

AttractiveIndustry

High entry barriers

Suppliers and buyers have weak positions

Few threats from substitute products

Moderate rivalry among competitors

High profit potential

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True or False?

The five forces model

(buyers/suppliers/new

entrants/substitutes/rivalry) is a

firm-level analytical model.

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False!!!

The five forces model (buyers/suppliers/new entrants/substitutes/rivalry) is an INDUSTRY-level analytical model.

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Competitor Analysis

Competitor Intelligence The ethical gathering of needed information and data that

provides insight into:

A competitor’s direction (future objectives)

A competitor’s capabilities and intentions (current

strategy)

A competitor’s beliefs about the industry (its

assumptions)

A competitor’s capabilities

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Competitor Analysis

Components

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Components of Internal Analysis

This is a

“must know”

model

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Resources

Are the source of a firm’s capabilities

Represent inputs into a firm’s production process

Alone, does not yield a competitive

advantage

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Resources: Tangible and Intangible

Tangible resources

Financial resources

Physical resources

Technological resources

Organizational resources

Intangible Resources

Human resources

innovation resources

Reputation resources

Tangible and intangible resources, which

are more important?

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Capabilities Firm’s capacity to deploy resources that have

been purposely integrated to achieve a desired

end state

Emerge over time through complex interactions

among tangible and intangible resources

Developed in specific functional areas or as part

of a functional area

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Core Competencies

Resources and capabilities that serve as a source of a

firm’s competitive advantage

Distinguish a company competitively and reflect its

personality

“Crown jewels of a company”

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True or False?

A firm’s resources and capabilities always

lead to competencies.

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False!!!

A firm’s resources and capabilities DO

NOT always lead to competencies.

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Discovering Core Competencies (I)

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#1: Valuable?

Help a firm neutralize threats or exploit opportunities

#2: Rare?

Not possessed by many others

#3: Costly-to-imitate?

Historically unique? A unique and a valuable organizational culture or brand name

Causally ambiguous? The causes and uses of a competence are unclear

Socially complex? Interpersonal relationships, trust, and friendship among managers, suppliers, and customers

#4: Nonsubstitutable?

No strategic equivalent

Checklist of Four Criteria

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Discovering Core Competencies (II)

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Team Project: SWOT Analysis

Your goal in this exercise is to conduct

SWOT analysis for your company!

Remember, you should include the SWOT

analysis in your written report.

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Thinking Strategically: Synergy

Synergy occurs when two or more variables interact to produce an effect greater than the sum of the effects of any of the variables acting independently (Kreitner, 2007: 191). Synergy has been called the 1+1=3 effect.

Types of synergy Market synergy: extending products to new markets.

Cost synergy: savings from combinations of common-base operations, resources, and facilities.

Technological synergy: the transfer and application of technologies to new markets.

Management synergy: complementary skills that make for more effective overall management.

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Thinking Strategically: Porter’s Generic

Competitive Strategies

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Business-Level Strategy

An integrated and coordinated set of commitments

and actions the firm uses to gain a competitive

advantage by exploiting core competencies in

specific product markets

Business-level

Strategy

Which good or

service to provide

How to

manufacture it

How to

distribute it

Key Issues:

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Customers: Business-Level Strategic Issues

Customers are the foundation of successful

business-level strategy

Who will be served by the strategy?

What needs those target customers have that the

strategy will satisfy?

How those needs will be satisfied by the strategy?

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Customer Needs—Who?

Determining the Customers to Serve

CustomersIndustrialMarkets

ConsumerMarkets

Market Segmentation

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Strategic Focus: Southwest

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Types of Business-Level Strategies

This is a

“must know”

model

69

#1: Cost Leadership StrategyWhat is it?

Acceptable features at the lowest cost

Relatively standardized products

Cost saving actions required by this strategy:

Building efficient scale facilities

Tightly controlling production costs and overhead

Minimizing costs of sales, R&D and service

Building efficient manufacturing facilities

Monitoring costs of activities provided by outsiders

Simplifying production processes

70

#1: Cost Leadership Strategy Defending Against

5 Competitive Forces

Can frighten off new entrants due to: Their need to enter on a large scale in order to be cost competitive

The time it takes to move down the learning curve

Can mitigate suppliers’ power by: Being able to absorb cost increases due to low cost position

Being able to make very large purchases, reducing chance of

supplier using power

Can mitigate buyers’ power by: Driving prices far below competitors, causing them to exit, thus

shifting power with buyers back to the firm

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#1: Cost Leadership Strategy Defending Against 5 Competitive Forces (cont.)

Can fend off product substitutes, because cost leader

is well positioned to: Make investments to be first to create substitutes

Buy patents developed by potential substitutes

Lower prices in order to maintain value position

Can deter rivals, because: Rivals hesitate to compete on basis of price

Lack of price competition leads to greater profits

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Processes used to produce and distribute good or

service may become obsolete due to competitors’

innovations

Focus on cost reductions may occur at expense of

customers’ perceptions of differentiation

Competitors, using their own core competencies,

may successfully imitate the cost leader’s strategy

#1: Cost Leadership Strategy Competitive Risks

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#2: Differentiation StrategyWhat is it?

Being different

Nonstandardized products

Customers value differentiated features more

than they value low cost!

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#2: Differentiation Strategy Defending Against 5 Competitive Forces

Can defend against new entrants because: New products must surpass proven products

New products must be at least equal to performance of proven

products, but offered at lower prices

Can mitigate suppliers’ power by: Absorbing price increases due to higher margins

Passing along higher supplier prices because buyers are loyal to

differentiated brand

Can mitigate buyers’ power because: Well differentiated products reduce customer sensitivity to price

increases

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#2: Differentiation Strategy Defending Against 5 Competitive Forces (cont.)

Well positioned relative to substitutes because

Brand loyalty to a differentiated product tends to reduce

customers’ testing of new products or switching brands

Defends against rivals because:

Brand loyalty to differentiated product offsets price

competition

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The price differential between the differentiator’s

product and the cost leader’s product becomes too

large

Differentiation ceases to provide value for which

customers are willing to pay

Experience narrows customers’ perceptions of the

value of differentiated features

Counterfeit goods replicate differentiated features of

the firm’s products

#2: Differentiation Strategy

Competitive Risks

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#3 & 4: Focus StrategiesWhat is it?

Serve a particular competitive segment

Particular buyer group (e.g. youths or senior citizens

Different segment of a product line (e.g. professional

craftsmen versus do-it-yourselfers

Different geographic markets (e.g. East coast versus West

coast)

Types of focused strategies Focused cost leadership strategy

Focused differentiation strategy

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#3 & 4: Focus StrategiesWhat factors drive them?

Large firms may overlook small niches

A firm may lack the resources needed to compete in

the broader market

A firm is able to serve a narrow market segment

more effectively than can its larger industry-wide

competitors

Focusing allows the firm to direct its resources to

certain value chain activities to build competitive

advantage

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A focusing firm may be “outfocused” by its

competitors

A large competitor may set its sights on a firm’s

niche market

Customer preferences in niche market may change

to more closely resemble those of the broader

market

#3 & 4: Focus StrategiesCompetitive Risks