STRATEGIC PLANNING

CHAPTER 8

Zuni Barokah, Ph.D.Magister ManajemenFakultas Ekonomika dan Bisnis UGM 2015STRATEGIC PLANNINGNATURE OF STRATEGIC PLANNINGStrategic planningThe first activity in management control process, sequentially

The process of deciding on the programs that the organization will undertake and on the approximate amount of resources that will be allocated to each program over the next several years

Long-range planning or programming

Output: Strategic plan (a formal statement of specific plans about how to get to the companys future direction)Strategy FormulationStrategic PlanningThe process of deciding on new strategies

Makes goals and creates the main strategies to achieve those goalsThe process of deciding how to implement the strategies

Develops programs that will carry out the main strategies and achieve the goals efficiently and effectivelyNATURE OF STRATEGIC PLANNING:Relation to Strategy FormulationStrategy FormulationStrategic PlanningA creative, innovative way of thinking is strongly encourage in its process

UnsystematicInstitutionalized

Systematic NATURE OF STRATEGIC PLANNING:Relation to Strategy FormulationNATURE OF STRATEGIC PLANNING:Evolution of Strategic PlanningFifty years ago: Strategic planning in most companies was unsystematic

In the late 1950s, there were initial formalizing efforts, but failedThe data were too detailedIt was more about filling the forms instead of deep thinkingDone by staff rather than line management

Management learned that it is about program, informal discussion, and decision making among difficult alternativesNATURE OF STRATEGIC PLANNING:Benefits of Strategic PlanningA framework for developing the annual budgetFacilitates the formulation of an effective operating budgetFacilitates optimal resource allocation decisions in support of key strategic optionsSee Exhibit 8.1 and 8.2

A management development tool

A mechanism for forcing management to think long term

A means of aligning managers with corporate strategies

NATURE OF STRATEGIC PLANNING:Limitations (Potential Pitfalls) of Strategic PlanningIt can end up becoming a form-filling, bureaucratic exercise, devoid of strategic thinking

The planning is delegated to the staffs of a large strategic planning department made by the companyForfeiting input from line management and the educational benefits

Time consuming and expensiveNATURE OF STRATEGIC PLANNINGCharacteristics of organizations that may need a formal strategic planningTop management is sure that it is important

The organization is relatively large and complex

Considerable amount of uncertainty exists, but the organization has the flexibility to adjustNATURE OF STRATEGIC PLANNING:Program Structure and ContentPrograms could differ in industrial organizations and in service organizations

Strategic plan typically covers a five future years period, some covers only three years

Relatively long time horizon makes it feasible only for rough estimatesNATURE OF STRATEGIC PLANNING:Organizational RelationshipsSenior management, business units managers and their staffs are involved in strategic planning process

In some, it involves the controller organization, in th other, a separate planning staffNATURE OF STRATEGIC PLANNING:Organizational RelationshipsHQs staff members facilitate, but should not intervene too strong.Functioned as a catalyst

The way strategic planning is conducted varies, depends on the style of the CEOThe system designer should take this style issue into accountANALYZING PROPOSED NEW PROGRAMSIdeas can come from anywhere within the organizationSome units are more likely to generate more ideas

A program proposal could beReactive : a reaction to a perceived threatProactive : an initiative to capitalize on an opportunityANALYZING PROPOSED NEW PROGRAMSThe atmosphere should be conducive to generate ideasA highly structured, formal system is a noIt should be receptive and flexible enough

The adoption of a new program is a series of decisions, not a single all-or-nothing decision.ANALYZING PROPOSED NEW PROGRAMS:Capital Investment AnalysisAnalyzing capital investment proposal techniques:Net Present Value (NPV)Present Value of estimated cash inflows investment amount requiredInternal Rate of Return (IRR)

These techniques are not used for proposals that:Are so obviously attractiveThe estimations involved are so uncertainThe objective is not increased profitabilityThere is no other feasible alternativeANALYZING PROPOSED NEW PROGRAMS:Capital Investment AnalysisConsiderations in implementing capital expenditure evaluation systemsRulesRules and procedures for the approval of proposalsGuidelines for preparing proposals and general criteria for approving proposalsAvoiding manipulationModel

Organization for analysisA proposal may need a long process before it is finally decided to fully implement itANALYZING ONGOING PROGRAMS:Value Chain AnalysisValue chain: the linked set of value-creating activities (see chapter 2)

Value chain concept highlight these potentially useful areasLinkages with suppliersLinkages with customersProcess linkages within the value chain of the firmANALYZING ONGOING PROGRAMS:Value Chain AnalysisA better understanding of cost drivers and value of each activities could improve the efficiency ofThe inward portion (the portion that precedes production)The production portionThe outward portion (after production)

These efficiencies usually involve trade-offsANALYZING ONGOING PROGRAMS:Activity Based CostingActivity instead of cost center, cost driver instead of basis of allocation => activity based cost system (ABC)

Cost driver reflects the cause of cost incurrence

ANALYZING ONGOING PROGRAMS:Use of ABC InformationABC may provide some useful insightsEx 1: complex products design and productioncosts > simpler oneEx 2: low volume products unit costs > high volume oneEx 3: many-setups-products unit cost > the other productEx 4: short-life-cycle products unit cost > long-life-cycle productEx 5: a realized significant cost savings as a result of reducing complexityEtc.STRATEGIC PLANNING PROCESSReviewing and updating the strategic planDuring the year, decisions that change the strategic plan may be taken

Deciding on assumptions and guidelinesBroad assumptions are used and reexamined and changed to incorporate the latest informationEx: GDP, labor rates, interest rates, etc.Many companies hold an annual management meeting to discuss about thisSTRATEGIC PLANNING PROCESSFirst iteration of the new strategic planThe first cut of the strategy, made by business unitsThe complete plan consists ofIncome statementInventory, account receivable, and other key balance sheet itemsNumber of employeesQuantitative information about sales and productionExpenditure for plant and other capital acquisitionAny unusual cash flowA narrative explanation and justificationSTRATEGIC PLANNING PROCESSAnalysisAggregating business unit plansAnalyzing plan in depthExamine the consistencyReveal a planning gap

Second iteration of the new strategic planTo anticipate changes incurred or made during analysis process

Final review and approvalA meeting of senior corporate officialsA meeting of BoD