Chapter 8 Outline

By Loretta Davis,2014-05-16 21:01
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SWOT analysis is a planning exercise in which managers identifyBased upon a SWOT analysis, managers at each level of the organization identify

    Chapter 8 Outline

    I. Planning and strategy

    A. Planning is a process that managers use to identify and select appropriate goals and courses of

    action for an organization.

    a. The organizational plan that results from the planning process details how managers intend

    to attain those goals.

    b. The cluster of decisions and actions that managers take to help an organization attain its

    goals is its strategy.

    c. Planning is a three-step activity.

    i. The first step is determining the organization’s mission and goals. A mission statement

    is a broad declaration of an organization’s purpose that identifies the organization’s

    products and customers and distinguishes the organization from its competitors.

    ii. The second step is formulating strategy.

    iii. The third step is implementing strategy.

    B. The nature of the planning process to perform the planning task, managers:

    a. Establish and discover when an organization is at the present time’

    b. Determine where it should be in the future, and

    c. Decide how to move it forward to reach that future state.

    C. Why planning is important: planning is the activity of determining where an organization is at

    the present time and deciding where it should be in the future.

    a. Managers must consider the future and forecast what may happen in order to deal with

    future opportunities and threats.

    b. Planning is often difficult because managers must often deal with a complex and

    uncertain external environment, incomplete information, and bounded rationality.

    c. Planning is important for four main reasons

    i. It is necessary to give the organization a sense of direction and purpose.

    ii. It is a useful way of getting managers to participate in decision-making about

    the appropriate goals and strategies for an organization.

    iii. it helps coordinate managers of the different functions and divisions to ensure

    that they all are pulling the same direction.

    iv. A plan can be used as a device for controlling managers within an organization.

    d. Henri Fayol, the originator of the model of management discussed in chapter one, said

    that effective plans should have four qualities: unity, continuity, accuracy, and


    i. unity means that at any one time only one central plan is put into operation.

    ii. continuity means that planning is an ongoing process.

    iii. accuracy means that managers should attempt to collect all available


    iv. The planning process should have enough flexibility so that plans can be altered

    and changed if the situation changes.

    D. Levels of planning in large organizations: planning usually takes place at three levels of

    management: corporate, business or division, and department or functional.

    a. At the corporate level are the ceo, other top managers, and their support staff.

    b. At the business level are the different divisions or business units that compete in distinct

    industries of the company, usually led by a divisional manager.

c. Each division or business unit has its own set of divisional managers who control

    planning strategy for their particular division of unit. d. Each division has its own set of functions or departments, such as manufacturing,

    marketing, r&d, human resources, etc.

    E. Levels and types of planning

    a. The corporate-level plan contains top management’s decisions pertaining to the

    organization’s mission and goals, overall strategy, and structure.

    b. Corporate-level strategy indicates in which industries and national markets an

    organization intends to compete and why. c. At the business level, the managers of each division create a business-level plan

    detailing long-term divisional goals that will allow the division to meet corporate goals

    and the division’s business-level strategy and structure. d. business-level strategy states the methods a division or business intends to use to

    compete against its rivals in an industry.

    F. time horizons of plans: plans differ in their time horizon, or intended duration.

    a. long-term plans have a horizon of five years or more. Intermediate-term plans have a

    horizon between one and five years.

    b. short-term plans have a horizon of one year or less.

    c. A corporate-level or business-level plan that extends over five years is typically treated

    as a rolling plan, a plan that is updated and amended every year to take account of

    changing in the external environment.

    d. Most organizations have an annual planning cycle, linked to their annual financial


    II. Standing plans and single-use plans

a. Standing plans are used in situations in which programmed decision-making is

    appropriate. Standing plans include:

    i. when the same situations occur repeatedly, managers develop policies, rules

    and standing operating procedures to control the way in which employees

    perform their tasks.

    ii. A policy is a general guide to action and a rule is a formal, written guide to


    iii. A standard operating procedure is a written instruction describing the exact

    series of actions that should be followed in a specific situation.

    b. Single-use plans are developed to handle nonprogrammed decision-making. Single use

    plans include:

    iv. Programs, which are integrated sets of plans for achieving certain goals.

    v. projects, which are specific action plans created to complete various aspects of

    a program.

    c. Scenario planning, also known as contingency planning, is the generation of multiple

    forecasts of future conditions followed by an analysis of how to respond effectively to

    each of those conditions. The great strength of scenario planning is its ability to

    anticipate the challenges of an uncertain future and help managers to think strategically

    about it.

    G. Determining the organization’s mission and goals a. Defining the business: to determine an organization’s mission, managers must first

    define its business by asking three questions:

    i. Who are our customers?

    ii. What customer needs are being satisfied?

    iii. How are we satisfying customer needs

    b. Establishing major goals. Once the business is defined, managers must then establish a set of primary goals to which the organization is committed. These goals give the

    company a sense of direction and commitment.

    i. Strategic leadership, the ability of the ceo and top managers to convey a

    compelling vision of what they want subordinates to achieve is an important

    part of the process

    ii. Goals typically possess the following characteristics:

    1. They are ambitious, stretch the organization, and require managers to

    improve its performance capabilities.

    2. They are challenging but realistica goal that is impossible to attain

    may prompt managers to give up.

    3. The time period in which a goal is expected to be achieved should be

    stated. This injects a sense of urgency and acts as a motivator.


    III. Formulating strategy

    A. In strategy formulation, managers work to develop the set of strategies that will allow an

    organization to accomplish its mission and achieve its goals.

    a. It begins with managers systematically analyzing an organization’s current situation

    and then developing strategies to accomplish its mission and achieve its goals.

    b. SWOT analysis is a planning exercise in which managers identify organizational

    strengths, weaknesses, opportunities, and threats. Based upon a SWOT analysis,

    managers at each level of the organization identify strategies that will best position

    the company to achieve its mission and goals.

    i. The first step in SWOT analysis is to identify an organization’s strengths and

    weaknesses that characterize the present state of the organization.

    ii. The next step requires managers to identify potential opportunities and

    threats in the environment that affect the organization at the present or

    may affect it in the future.

    iii. When SWOT analysis is completed, managers can begin developing

    strategies. These strategies should allow the organization to attain its goals

    by taking advantage of opportunities, countering threats, building strengths,

    and correcting organizational weaknesses

    c. The Five Forces Model: Michael Porter’s Five Forces Model is another well known

    tool that helps managers focus on the most important external environmental

    forces that are potential threats. They are:

    i. the level of rivalry among organizations within an industry

    ii. the potential for entry into a industry

    iii. the power of suppliers

    iv. the power of customers

    v. and the threat of substitute products.

    d. The term hypercompetition has be coined to describe those industries that are

    characterized by permanent, ongoing, intense, competition brought about by

    advancing technology or changing customer tastes, fads and fashions

    IV. Formulating business level strategies

    A. Michael Porter also formulated a theory of how managers can select a business-level

    strategy to give them a competitive advantage in a particular market or industry.

    a. According to Porter, managers must choose between two basic ways of increasing

    the value of an organization’s products:

    i. differentiating the product to add value or

    ii. lowering the costs of value creation.

    b. Porter also argues that managers must choose between serving the whole market

    or serving just one segment.

    B. Based upon those choices, one of the four following strategies must be selected

    a. Low-Cost Strategy

    i. With a low-cost strategy, managers try to gain a competitive advantage by

    focusing the energy of all the organization’s departments on driving the

    organization’s costs down.

    ii. Organizations pursuing a low-cost strategy can sell a product for less than

    their rivals and still make a profit.

    b. Differentiation Strategy

    i. With a differentiation strategy, managers try to gain a competitive

    advantage by focusing all the energies of the organization’s departments on

    distinguishing the organization’s products from those of competitors.

    ii. Because the process of making products unique and different is expensive,

    organizations that successfully pursue a differentiation strategy often

    charge a premium price for their products.

    c. “Stuck in the Middle”

    i. According to Porter, a company cannot pursue a low-cost and

    differentiation strategy at the same time. He refers to managers who have

    selected between the two as being “stuck in the middle.”

    ii. Exceptions to this rule exist.

    d. Focused Low-Cost and Focused Differentiation Strategies

    i. Porter identified two other strategies used by companies wishing to

    specialize by serving the needs of customers in only one or a few segments

    of the market.

    1. A company pursuing a focused low-cost strategy serves one or a

    few segments of the market and aims to be the lowest-cost

    company serving that segment.

    2. A company pursuing a focused differentiation strategy serves just

    a few segments and aims to be the most differentiated firm serving

    that market segment.

    V. Formulating corporate-level strategies

    A. Corporate-level strategy is a plan of action that determines the industries and countries an

    organization should invest its resources in to achieve its mission and goals.

    a. Managers of effective organizations actively seek out new opportunities to use

    organizational resources to satisfy customer needs.

    b. Also, some managers must help their organizations respond to threats due to

    changing forces in the task or general environment.

    B. The principal corporate-level strategies that managers use are: 1) concentration on a single

    industry, 2) vertical integration, 3) diversification and 4) international expansion.

    a. An organization benefits from pursuing any of these only when the strategy helps

    increase the value of the organization’s goods for customers

    b. Concentration on a single industry: a corporate-level strategy aimed at

    concentrating resources in one business or industry is used by most organizations as

    they are beginning to grow and develop.

    c. Concentration on a single industry can be an appropriate strategy when managers

    see the need to reduce the size of their organization, in order to improve


    C. Vertical integration: vertical integration is the corporate-level strategy that involves a company expanding its business operations either backward into a new industry that

    produces inputs for the company’s products (backward vertical integration) or forward into

    a new industry that uses, distributes, or sells the company’s products (forward vertical


    a. Managers pursue vertical integration because it allows them to either add value to

    their products by making them special or unique or to lower the costs associated

    with the creation of value creation.

    b. Vertical integration can help an organization to grow rapidly, but it can be a problem

    because it can reduce an organization’s flexibility to respond to changing

    environmental conditions.

    c. Some companies have exited the components industry, thus vertically disintegrating,

    by outsourcing the production of component parts to other companies.

    D. Diversification: diversification is the strategy of expanding operations into a new business

    or industry and producing new goods or services there are two main types of diversification:

    related and unrelated.

    a. Related diversification: related diversification is the strategy of entering a new

    business or industry to create a competitive advantage in one or more of an

    organization’s existing divisions or businesses

    i. Synergy is obtained when the value created by two divisions cooperating is

    greater than the value that would be created if the two divisions operated

    separately. In pursuing related diversification, managers seek new

    businesses in which existing skills and resources can be used to create


    b. Unrelated diversification: managers pursue unrelated diversification when they

    enter new industries or buy companies in new industries that are not related to

    their current businesses or industries.

    i. By pursuing unrelated diversification, managers can buy a poorly

    performing company and use their management skills to turn the business

    around, thereby increasing its performance.

    ii. Managers also engage in unrelated diversification to pursue, which is the

    practice of apportioning financial resources among divisions in order to

    increase and financial returns and decrease risks.

    c. Too much diversification can cause managers to lose control of their organization’s

    core business, according to research.

    E. International expansion: corporate-level managers must decide on the appropriate way to

    compete internationally.

    a. If competing in more than one national market, managers must ask themselves to

    what extent their company should customize its product’s features and marketing

    plans to suit differing national conditions.

    b. Global strategy is selling the same standardized product and using the same basic

    marketing approach in each national market.

    c. If managers decide to customize products to specific national conditions, they adopt

    a multidomestic strategy.

    d. Both strategies have their advantages and disadvantages.

    i. The major advantage of a global strategy is the significant cost savings

    associated with not having to customize products and marketing

    approaches to differing national conditions.

    ii. Its disadvantage is that by ignoring national differences, managers may

    leave themselves vulnerable to local competitors that do differentiate their


    iii. The advantages and disadvantages of a multidomestic strategy are the

    opposite of those of a global strategy

    e. Choosing a way to expand internationally: a more competitive global environment

    has proven to be both an opportunity and threat to organizations.

    i. Before setting up foreign operations, managers must analyze the forces in

    the environment of a particular country and choose the best method to

    expand and respond to those forces in the most appropriate way.

    ii. There are four basic ways of operating in the global environment:

    1. Importing and exporting: this method is least complex, has fewer

    risks, and has been made easier by the internet.

    2. Licensing and franchising: in licensing, a company allows a foreign

    organization to take charge of both manufacturing and distributing

    one or more of its products in the licensee’s country or region of the

    world in return for a negotiated fee.

    a. In franchising, a company sells to a foreign organization the

    rights to use its brand name and operating know-how in

    return for a lump sum payment and a share of the

    franchiser’s profits.

    b. Primarily manufacturers pursue licensing, whereas

    franchising is used primarily by service organizations.

    iii. Strategic alliances: in a strategic alliance, managers pool or share their

    organization’s resources and know-how with those of a foreign company

    and the two organizations share the rewards and risks of starting a new

    venture in a foreign company.

    1. A joint venture is a strategic alliance among two or more companies

    that agree to jointly establish and share the ownership of a new


    2. Risk is reduced and a capital investment is generally involved.

    Wholly owned foreign subsidiaries: when managers decide to

    establish a wholly owned foreign subsidiary, they invest in

    establishing production operations in a foreign country,

    independent of any local investments.

    a. This method is much more expensive than others but also

    offers the highest potential returns.

    VI Planning and implementing strategy

A. After identifying appropriate strategies, managers confront the challenge of putting those

    strategies into action for the purpose of changing the organization.

    B. B. Strategy implementation is a five-step process:

    a. Allocating responsibility for implementation to the appropriate individuals or groups.

    b. Drafting detailed action plans that specify how a strategy is to be implemented.

    c. Establishing a timetable for implementation that includes precise, measurable goals

    linked to the attainment of the action plan.

    d. Allocating appropriate resources to the responsible individuals or groups

    responsible for the attainment of corporate divisional, and functional goals.

    e. Holding specific individuals or groups responsible for the attainment of corporate,

    divisional, and functional goals.

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