PLANNING

Planning is the management function that involves setting goals and deciding how to best achieve them. Setting goals and developing plans helps the organization to move in a focused direction while operating in an efficient and effective manner. Long-range planning essentially is the same as strategic planning; both processes evaluate where the organization is and where it hopes to be at some future point. Strategies or plans are then developed for moving the organization closer to its goals. Long-range plans usually pertain to goals that are expected to be met five or more years in the future.

People often confuse the role of planning and scheduling. They are different methodologies and utilize a different set of tools. Planning takes a futuristic view and sets anticipated timelines, while scheduling focuses on an organization's day-to-day activities. For example, most enterprise resource planning (ERP) systems are good at the planning function, but are very poor at the scheduling function. A tool like finite capacity scheduling (FCS) is necessary to facilitate the daily tracking of material and labor movements.

LONG-RANGE PLANNING
AND STRATEGIC MANAGEMENT

Since the purpose of strategic management is the development of effective long-range plans, the concepts often are used interchangeably. The traditional process models of strategic management involve planning organizational missions; assessing relationships between the organization and its environment; and identifying, evaluating, and implementing strategic alternatives that enable the organization to fulfill its mission.

One product of the long-range planning process is the development of corporate-level strategies. Corporate strategies represent the organization's long-term direction. Issues addressed as part of corporate strategic planning include questions of diversification, acquisition, divestment, and formulation of business ventures. Corporate strategies deal with plans for the entire organization and change relatively infrequently, with most remaining in place for five or more years.

Long-range plans usually are less specific than other types of plans, making it more difficult to evaluate the progress of their fulfillment. Since corporate plans may involve developing a research-intensive new product or moving into an international market, which may take years to complete, measuring their success is rarely easy. Traditional measures of profitability and sales may not be practical in evaluating such plans.

Top management and the board of directors are the primary decision makers in long-range planning. Top management often is the only level of management with the information needed to assess organization-wide strengths and weaknesses. In addition, top management typically is alone in having the authority to allocate resources toward moving the organization in new and innovative directions.

WHY ENGAGE
IN LONG-RANGE PLANNING?

Research has found that firms engaged in strategic planning outperform firms that do not follow this approach. Managers also appear to believe that strategic planning leads to success, as the number of firms using strategic planning has increased in recent years. Because planning helps organizations to consider environmental changes and develop alternative responses, long-range planning seems particularly useful for firms operating in dynamic environments.

A review of studies regarding long-range and strategic planning and performance allows a number of generalizations to be made about how long-range planning can contribute to organizational performance.

1. Long-range plans provide a theme for the organization. This theme is useful in formulating and evaluating objectives, plans, and policies. If a proposed objective or policy is not consistent with the existing theme, it can be changed to better fit the organization's strategies.
2. Planning aids in the anticipation of major strategic issues. It enhances the ability of a firm to recognize environmental changes and begin courses of action to prevent potential problems. Rewarding employees for recognizing and responding to environmental changes sensitizes employees to the need for planning.
3. Planning assists in the allocation of discretionary resources; future costs and returns from various alternatives can be more easily anticipated. Strategies also reflect priorities resulting from multiple objectives and business-unit interdependencies.
4. Plans guide and integrate diverse administrative and operating activities. The relationship between productivity and rewards is clarified through strategic planning, guiding employees along the path to the desired rewards. Strategies also provide for the integration of objectives, avoiding the tendency for subunit objectives to take precedence over organizational objectives.
5. Long-range planning is useful for developing prospective general managers. Strategic planning exposes middle managers to the types of problems and issues they will have to face when they become general managers. Participation in strategic planning also helps middle managers to see how their specialties fit into the total organization.
6. Plans enable organizations to communicate with groups in the environment. Plans incorporate the unique features of the product or company that differentiate it from its competitors. Branding communicates to the public an image of product attributes (e.g., price, quality, and style). Similarly, dividend policies make a difference in the attractiveness of a stock to blue-chip, growth, and speculative investors.

THE STRATEGIC MANAGEMENT/
LONG-RANGE PLANNING PROCESS

The first basic step in long-range planning is the definition of the organization's mission. Essentially, the mission is what differentiates the organization from others providing similar goods or services. Strategies are developed from mission statements to aid the organization in operationalizing its mission.

Long-range planning primarily is the responsibility of boards of directors, top management, and corporate planning staffs. Strategic decision makers are responsible for identifying and interpreting relevant information about the business environment. Thus, a key part of strategic management involves identifying threats and opportunities stemming from the external environment and evaluating their probable impact on the organization.

Environmental analysis, another key component of long range-planning, identifies issues to be considered when evaluating an organization's environment. The environment consists of two sets of factors. These include the macro-environment, consisting of factors with the potential to affect many businesses or business segments, and the task environment, with elements more likely to relate to an individual organization. Industry analysis is an especially important part of analyzing the specific environment of an organization.

Internal characteristics of an organization must be thoroughly identified and accounted for in order to effect long-term planning. Internal factors can represent either strengths or weaknesses. Internal strengths provide a basis upon which strategies can be built. Internal weaknesses represent either current or potential problem areas that may need to be corrected or minimized by appropriate strategies. Internal planning issues commonly involve the functional areas of finance, marketing, human resource management, research and development, operations/production, and top management.

Once the organization's mission is determined and its internal and external strengths and weaknesses are identified, it is possible to consider alternative strategies that provide the organization with the potential to fulfill its mission. This process essentially involves the identification, evaluation, and selection of the most appropriate alternative strategies. Strategic alternatives include strategies designed to help the organization grow faster, maintain its existing growth rate, reduce its scope of operations, or a combination of these alternatives. Corporate grand strategies are evaluated later in this discussion.

Strategy implementation is another important part of long-range planning. Once a strategic plan has been selected, it must be operationalized. This requires the strategy to be implemented within the existing organizational structure, or the modification of the structure so that it is consistent with the strategy. Implementing a strategy also requires integration with the organization's human component.

A final element of long-range planning is strategic control, which evaluates the organization's current performance and compares this performance to its mission. Strategic control essentially brings the strategic management process full circle in terms of comparing actual results to intended or desired results.

CORPORATE-LEVEL PLANS

Corporate-level plans are most closely associated with translating organizational mission statements into action. In a multi-industry or multiproduct organization, managers must juggle the individual businesses to be managed so that the overall corporate mission is fulfilled. These individual businesses may represent operating divisions, groups of divisions, or separate legal business entities. Corporate-level plans primarily are concerned with:

1. Scope of operations. What businesses should we be in?
2. Resource allocation. Which businesses represent our future? Which businesses should be targeted for termination?
3. Strategic fit. How can the firm's businesses be integrated to foster the greatest organizational good?
4. Performance. Are businesses contributing to the organization's overall financial picture as expected, in accordance with their potential? The business must look beyond financial performance to evaluate the number and mix of business units. Has the firm been able to achieve a competitive advantage in the past? Will it be able to maintain or achieve a competitive advantage in each business in the future?
5. Organizational structure. Do the organizational components fit together? Do they communicate? Are responsibilities clearly identified and accountabilities established?

CORPORATE PORTFOLIO ANALYSIS

The Boston Consulting Group (BCG) Model is a relatively simple technique for helping managers to assess the performance of various business segments and develop appropriate strategies for each investment within the corporate portfolio.

The BCG Model classifies business unit performance on the basis of the unit's relative market share and the rate of market growth. Products and their respective strategies fall into one of four quadrants. The typical starting point for a new business is as a question mark. If the product is new, it has no market share but the predicted growth rate is good. What typically happens is that management is faced with a number of these types of products, but with too few resources to develop all of them. Thus, long-range planners must determine which of the products to attempt to develop into commercially viable products and which ones to drop from consideration. Question marks are cash users in the organization. Early in their life, they contribute no revenues and require expenditures for market research, test marketing, and advertising to build consumer awareness.

If the correct decision is made and the product selected achieves a high market share, it becomes a star in the BCG Model. Star products have high market share in a high growth market. Stars generate large cash flows for the business, but also require large infusions of money to sustain their growth. Stars often are the targets of large expenditures for advertising and research and development in order to improve the product and to enable it to establish a dominant industry position.

Cash cows are business units that have high market share in a low-growth market. These often are products in the maturity stage of the product life cycle. They usually are well-established products with wide consumer acceptance and high sales revenues. Cash cows generate large profits for the organization because revenues are high and expenditures are low. There is little the company can do to increase product sales. The plan for such products is to invest little money into maintaining them, and to divert the large profits generated into products with more long-term earnings potentials (i.e., question marks and stars).

Dogs are businesses with low market share in low-growth markets. These often are cash cows that have lost their market share or are question marks the company has elected not to develop. The recommended strategy for these businesses is to dispose of them for whatever revenue they will generate and reinvest the money in more attractive businesses (question marks or stars).

CORPORATE GRAND STRATEGIES

Corporate strategies can be classified into three groups or types. Collectively known as grand strategies, these involve efforts to expand business operations (growth strategies), maintain the status quo (stability strategies), or decrease the scope of business operations (retrenchment strategies).

GROWTH STRATEGIES.

Growth strategies are designed to expand an organization's performance, usually as measured by sales, profits, product mix, or market coverage. Typical growth strategies involve one or more of the following:

1. Concentration strategy, in which the firm attempts to achieve greater market penetration by becoming very efficient at servicing its market with a limited product line.
2. Vertical integration strategy, in which the firm attempts to expand the scope of its current operations by undertaking business activities formerly performed by one of its suppliers (backward integration) or by undertaking business activities performed by a business in its distribution channel.
3. Diversification strategy, in which the firm moves into different markets or adds different products to its mix. If the products or markets are related to its existing operations, the strategy is called concentric diversification. If the expansion is in products and markets unrelated to the existing business, the diversification is called conglomerate.

STABILITY STRATEGIES.

When firms are satisfied with their current rate of growth and profits, they may decide to employ a stability strategy. This strategy basically extends existing advertising, production, and other strategies. Such strategies typically are found in small businesses in relatively stable environments. The business owners often are making a comfortable income operating a business that they know, and see no need to make the psychological and financial investment that would be required to undertake a growth strategy.

RETRENCHMENT STRATEGIES.

Retrenchment strategies involve a reduction in the scope of a corporation's activities. The variables to be considered in such a strategy primarily involve the degree of reduction. Retrenchment strategies can be subdivided into the following:

1. Turnaround strategy, in which firms undertake a temporary reduction in operations in an effort to make the business stronger and more viable in the future. These moves are popularly called downsizing or rightsizing. The hope is that a temporary belt tightening will allow the firm to pursue a growth strategy at some future point.
2. Divestment, in which a firm elects to spin off, shut down, or sell a portion of its business. This strategy would commonly be used with a business unit identified as a dog by the BCG Model. Typically, a poor performing unit is sold to another company and the money is reinvested in a business with greater potential.
3. Liquidation strategy, which is the most extreme form of retrenchment. Liquidation involves the selling or closing of the entire business operation, usually when there is no future for the business. Employees are released, buildings and equipment are sold, and customers no longer have access to the product. This generally is viewed as a strategy of last resort, and is one that most managers work hard to avoid.

The purpose of an organization is its role as defined by those who maintain authority over it. How the organization elects to fulfill this role constitutes its plan. Mission statements differentiate the organization from other organizations providing similar goods or services. Objectives are the intermediate goals or targets to be completed as the organization fulfills its mission. Plans outline how a firm intends to achieve its mission. Policies provide guidelines or parameters within which decisions are made so that decisions are integrated with other decisions and activities.