Implementation

Learning Objectives

By the time you have completed this chapter, you should be able to do the following:

• Recognize good operational plans and distinguish them from weak ones. • Appreciate the value of tracking progress on all operational plans. • Appreciate the value of face-to-face meetings with middle managers to discuss negative variances. • Know why emergent strategies occur and how they might affect a company’s current strategy. • Manage, improve, and evaluate an existing strategic-planning process. • Understand the “strategy paradox,” showing how a company’s strength in execution can be simultaneously its Achilles’ heel.

9

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CHAPTER 9Section 9.1 Plans by Organizational Unit

Chapter Outline

9.1 Plans by Organizational Unit

9.2 Tracking Performance Using Metrics

9.3 Emergent Strategies

9.4 Managing the Strategic-Planning Process

9.5 Improving the Strategic-Planning Process

9.6 Assessing the Strategic-Planning Process

9.7 Raynor’s Strategy Paradox

Implementing a strategy in the real world isn’t a leisurely swim across a calm pond on a sunny day, but rather like crossing from one bank of a raging river to the other, encountering hidden eddies, fog, driving rain, lightning, and riptides along the way. While not impossible to reach the other bank (the goal), the task often becomes difficult and one of overcoming obstacles and making constant adjustments without losing focus or sight of the goal. Implementation is like that. Even the most brilliant strategy is worthless if it cannot be implemented.

This chapter focuses on strategy execution and its difficulties, and part of it is devoted to assess- ing, improving, and managing the strategic planning process itself.

9.1 Plans by Organizational Unit When an organizational unit gets its plans and budget approved by the level it reports to and on upward, exactly what is it that gets approved? An operational plan is a document that specifies the projects or tasks that must be accomplished to achieve particular operational objectives. Details specified in operational plans include the names of those who will be involved and the individual responsible for each one, what equipment will be needed, when each will start and end, and the estimated costs for each one. Given the level of detail required it should come as no surprise that an operational plan can run too many pages if a large number of projects must be detailed, such as manufacturing hundreds of product lines.

It takes contributions from everyone who will be involved in that unit’s operations to create such plans. They will make sure that continuing current operations are included in the plans, which is easily done. What adds a level of complexity and difficulty is incorporating additional tasks demanded by a change in strategy.

Consider the following scenarios, which illustrate the difficulty in creating operational plans when asked to do more than simply repeating what was done the previous year:

• Production. A specific higher level of throughput is required to satisfy increased demand, which will soon require capacity expansion. Can the increased capacity requirement be

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CHAPTER 9Section 9.1 Plans by Organizational Unit

met by adding additional shifts, physically expanding the size of the plant, or building a new plant? Can some of the additional production be outsourced? How many new machines must be added and of what kind? How many new people must be hired and trained, and how long might all of this take? Also, consider the scenario where a whole new product line has been designed and now has to be produced in addition to producing all the other product lines. How can this best be accomplished? In both scenarios, produc- tion capacity has to be increased.

• Research & Development. Technology advances are affecting the company’s ability to com- pete. This requires new initiatives to keep up with technology as well as continue with applied research associated with developing new products. This could mean expanding staff and facilities or forging stra- tegic alliances with particu- lar universities that have the requisite capabilities to help the company. Another option might be finding a company with the needed technology and licensing it. Yet another possibility might be to start a con- versation with top man- agement about possibly acquiring a small high-tech company with these capa- bilities and patents. What is the best way to do this?

• Marketing. The decision to expand from being a regional consumer-products company (B2C) to a national business presents a host of operational challenges. Should the company continue to handle its own distribution or find a national distributor? How many new retail outlets would it need to find to reach potential cus- tomers? Would it need to lease additional distribution centers or warehouses? Which specific parts of the “rest of the country” should be targeted first, second, and so on until the com- pany covers all of its targeted areas? What advertising media would be most appropriate, and does going national require television advertising? Should more emphasis be placed on online rather than brick-and-mortar sales? How can this sales objective be realized most expediently?

• Finance. Consider two scenarios: In the first, the company has decided to invest in either a new integrated information system or a significant development of the existing one. How many more software engineers and programmers will be required? Could part of the new system be licensed and then customized? Without intimate knowledge of the completed system, how can building it be planned for? Should a consulting firm be engaged with the requisite experience? Will IT staff need to be hired and trained for the other functions? In the second scenario, the company’s cash needs for the coming year exceed what it can nor- mally access. How can it raise more cash? Should receivables be factored? Should a larger line of credit be negotiated? Should payables be delayed? If appropriate, should some cus- tomers be asked to prepay? Is there a way to maintain negative working capital to free up the most cash?

Hemera/Thinkstock

Research and development is essential to a company’s ability to compete. It requires new initiatives to keep up with technology and develop new products.

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CHAPTER 9Section 9.1 Plans by Organizational Unit

Ideally, operating units will have been working on these kinds of changes over a much longer period, using the formal operational-planning period at the end of the fiscal year to finalize its plans and match available resources before the new fiscal year begins. And its plans must be done in some sort of networked way or using Gantt charts to show which projects or tasks can be done independently of others and which are integral to a particular sequence.

A Gantt chart is a type of bar chart that graphically depicts a project schedule. Gantt charts indicate the start and finish dates of each component of the project. Some Gantt charts also reveal the depen- dency relationships between component activities; that is, the dependency of one activity upon the completion of another is indicated. Gantt charts can be used to show current schedule status using percent-complete shadings (Figure 9.1). Gantt charts can also be combined with PERT software to produce a critical path of projects (United Nations Institute for Training and Research (UNITAR), 2004).

When that is done, the total plans for a particular unit should be summarized according to the review period set by the company. Typically this is each month. The review cannot begin until all the requisite data have been collected and organized, which usually takes a week after the end of the month. Actual results are then compared to plan (expected performance and budget) along the following dimensions:

• For each project completed during the period, data show whether the objective was achieved, current and total costs, and whether the deadline was met.

• For each ongoing project, data show progress toward achieving the objective, current and cumulative costs, and a probability that the deadline will be met.

The project leader initially does such a review, with copies given to middle managers on up to functional heads. If the data are input into a computer system, then those managers will all have access to monthly summaries.

Task 1

Task 2

Task 3

Task 4

Task 5

Completed

Remaining

Start Date

8/10/2010 2/26/2011 9/14/2011 4/1/2012 10/18/2012 5/6/2013 11/22/2013

Figure 9.1: Example of a Gantt chart

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CHAPTER 9Section 9.2 Tracking Performance Using Metrics

9.2 Tracking Performance Using Metrics Two old adages that underscore why the use of metrics is so vital in organizations:

• “What gets measured gets managed.” • “You can’t improve what you can’t measure.”

By way of illustration, consider the true example of a nonprofit organization that provided edu- cational workshops for high-school students in an effort to reduce the teen crime rate in the area around the city in which it operated. The directors were asked how they knew how the organization was performing and what information was reported to its sponsors periodically. They said they kept records of student attendance at every workshop they gave, the number of workshops each week and at which school, who gave the workshops, and the content of each workshop. In other words, what they said they were going to do and what they did was what was measured and reported. But how effective were the workshops? What was the purpose for developing and giving them? Did the teen crime rate decline over the couple of years that this organization was giving its workshops? And even if they did—which no one knew—was it because of the workshops?

In this example, the donor was as much at fault as the people in the organization for not insisting on better measures and better data. Clearly, like many other organizations, this one measured what is easy to measure, not what needed to be measured. Unfortunately, those running the programs didn’t know, or had never considered, the difference. There are many ways to measure performance, but the more systematic and reliable the method is, the more credible the data will be in supporting strategic plans and their implementation.

Organizations mistakenly measure the results of their activities or effort, not progress toward achieving objectives. Although impact measurement is important, process evaluation is critical to strategic management. Evaluating progress at numerous stages throughout implementation allows the manager and his or her team to make adjustments and modifications to the strategy.

Discussion Questions

1. Clearly, it’s much tougher to translate a change in strategy into operational plans than it is to con- tinue with an established strategy. In your opinion, is it acceptable to submit a plan that’s full of uncertainties? Explain your point of view.

2. Can you think of anything else that should be part of a good operational plan? 3. Now that you know more about what is involved in coming up with a good operational plan, do

you believe that strategic planning should be done solely by top management? 4. To what extent, if any, does strategic-planning experience help an operational manager develop

operational plans to support the company’s strategies? 5. To what extent should managers be aware of what’s going on in other parts (e.g., functions) of

the company while preparing operational plans? 6. If quality or effectiveness of a project is important, how can these be incorporated into an opera-

tional plan? Or should a separate project be developed to assess those attributes, requiring addi- tional expenditures?

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CHAPTER 9Section 9.2 Tracking Performance Using Metrics

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The manager’s job is to collect and organize current project data by project.

Operational objectives, discussed in Chapter 8, must be set carefully. Making good progress toward objectives that were set too low is of little value and won’t implement the strategy prop- erly. Setting them too high de-motivates the workforce and is just as bad. So let us assume that “stretch” objectives—set at just the right level but that demand a little more from everyone to achieve—have been set all the way down the line, plans were devised for every unit that matched its budget allocations, and that it was these plans that are now being carried out by everyone in the organization.

How does top management moni- tor whether everything is “on track” or “on plan?”

The manager’s job is to collect and organize current project data for the review period, by project, in their respective areas of responsibility. The example shown in Figure 9.1 is a step in the right direction, but has to be summarized for the month. For example, the figure shows an almost instantaneous picture for daily monitoring, a time frame and level of detail required only by the people actually doing the work. From such daily reports and the status of projects at the end of the month, a manager would need to

extract and summarize information on each major project, being careful to note which projects were on schedule and under budget and which weren’t and by how much. The latter could consti- tute a separate “exception” report of negative variances (discussed in more detail later), which are projects that have slipped their schedule or are over budget, together with additional information on how much extra it might cost to get all of them back to meeting their deadline.

The Budget as a Control System

Recall the vignette about Pacifica Corporation recounted in a box in Section 2.9. As part of the rapid change in its culture, five original managers including the CFO were replaced. The CFO was let go because he did not understand the concept of budgeting but for months had fooled manage- ment into thinking he did. When asked if everything was “on budget,” he would reply, “Yes,” which was accepted at face value given his position as CFO. After about six months, when it became evident that costs were really out of control, he was asked if everything was still on track with the original budget that had been approved. Of course they weren’t. Each month, when expenses had exceeded the budget, he had simply raised the budget amount accordingly and reported that things were “on budget,” rather than take steps to reduce expenses.

The budget is a control system in that it allows management to compare actual performance to a standard, measure the variance, take action to reduce the variance, reset or update, and test again. Another example of a control system is a packaging machine that automatically fills boxes with a precise weight of cereal and signals the operator the moment the filled weight exceeds or

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CHAPTER 9Section 9.2 Tracking Performance Using Metrics

falls short by a preset small amount, enabling immediate adjustment of the machine. In the case of a budget as control system, action is taken only if expenses exceed the budget. Further, cumula- tive expenses are compared to cumulative budgets so that an operational unit that has overspent one month can “make up” and spend less than its budget in the following month (Figure 9.2).

One of the hallmarks of a good control system is that corrective action is taken as soon as it is found to be needed. Why wait until the end of the year to discover that you have gone over budget? At the other end of the scale, should you check every week? That makes no sense, either. Monthly checking is about right, and most information systems can provide such information monthly, either as needed onscreen or in a customized monthly report sent to all operational managers.

In large organizations that have federal contracts, for example, government auditors closely examine expense reports, time sheets, and invoices related to programs. So, for example, when a contractor requests increased funding, budget controls are in place to quickly advise regulators as to the legitimacy of the request. In this way, the government can determine when increased expenses are justified, or when to tell its contractors to cut costs.

Addressing Negative Variances

Managers in well-run corporations make a point of meeting with their direct reports regularly to go over progress and discuss any problems. One focus of the meeting should be variances and any exception reports that detail differences between plans or standards and actual performance. A

Cumulative expenses

Over budget On budget or under budget

Cumulative budget

Typically a monthly cycle

Actual

Target

Action

Update cumulative budget and cumulative expenses

Update

Variance

Continue as planned

Reduce expenses next month

Figure 9.2: The budget as control system

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CHAPTER 9Section 9.2 Tracking Performance Using Metrics

© age footstock/SuperStock

Well-run corporations have their manager’s report in every month to track progress and discuss any problems that have arisen.

negative variance is an instance where a project’s progress is delayed and could miss a deadline, or where its budget has been exceeded, or where performance comes up short of a quantitative standard or expectation.

What can be accomplished in such a meeting between a manager and a direct report? First, the manager should learn about the particular circumstances surrounding nega- tive variances of some projects, what might have caused the delays or budget overruns, and which other projects might be in jeopardy as a result. They should ask ques- tions and listen carefully to the responses. Both the manager and direct report should note ques- tions to which an answer could not be provided because the direct report didn’t have the necessary information.

Second, the manager and direct report should discuss potential solutions to the negative variances. Some projects can be pulled back on track through either the direct report getting project personnel to acknowledge problems and solve them, helping them to find solutions, and trying to remove obstacles that might be delaying progress. Also, if budgets are overrun, a new lower budget that compensates for the overrun must be com- municated to project personnel. The manager should focus on projects where there is a direct relationship between schedule and budget. That is, where speeding them up will cost more, and conversely, where reducing the budget results in unacceptable delays. It is in precisely such situations that any critical-path software becomes invaluable, because it lets a project leader or supervisor try out different alternatives until both parameters (project time and budget) meet expectations.

Third, the manager should insist that the direct report file—within the next couple of days—a revised plan containing the points that were discussed that will bring projects and budgets back in line.

Finally, meetings represent an opportunity for the manager to strengthen a relationship with the direct report. In most cases, the meeting is just between the two of them (although inviting other project managers who are in a better position to provide explanations is also common). What is the direct report most worried about? Is the communication between them as “open” as it needs to be? What’s really going on? Taking the time to delve a little deeper and offer guidance and counseling is often well worth the time.

Be mindful of a couple of potential red flags: Some managers don’t like hearing or dealing with bad news and might even tell their reports they don’t want to hear it. So if a supervisor is repeatedly

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CHAPTER 9Section 9.2 Tracking Performance Using Metrics

told that “everything is okay,” he or she might well suspect that it’s not. The manager will have to dig deeper and even go to chat informally with the direct report’s colleagues and team members. A manager also needs to be sensitive to whether a direct report is losing control of the team or his or her responsibilities. If the employee feels overwhelmed and relatively powerless to stem the tide, a real problem exists.

This kind of face-to-face meeting with a direct report goes on up and down the hierarchy. Typically, a manager might have a half dozen to a dozen direct reports, some fewer, some more. A manager should schedule all meetings with direct reports over the course of a day or two before meeting with his or her own supervisor, taking on the role of “direct report.”

If this description of the organization conveys the idea that this is one massive control system, that is exactly the intent. During execution or implementation of a strategy, doing the work and con- trolling the work—its quality, timeliness, and adherence to a budget—is vital. And in the spirit of a good control system, actual performance is compared to a standard, the variance noted (espe- cially negative variance), solutions developed, and a correction applied as soon as possible. Data collected about performance, especially as part of an information system, are essential, but a con- trol system needs more; that’s why the face-to-face meetings are imperative and why everyone in the hierarchy must follow through and put the corrections into effect to improve performance the following month.

This description also gives the impression that managers take part in many meetings, and that too is by design. With so many meetings to prepare for and attend, when do managers get time to do their real work? Perhaps this is the fallacy. Recall the definition of a manager as “someone who gets work done through other people.” The time spent in meetings is the work. Whether that time is wasted or not is another issue and goes directly to whether the person conducting the meeting is an effective manager. Managing well is difficult, challenging, time-consuming, but ultimately very satisfying. The job gets done on time and within budget, and your direct reports grow and develop into productive, congenial team members.

Discussion Questions

1. It’s easy to measure what training was given, to whom, by whom, how often, and whether it was within budget. What measures would you suggest to determine the effectiveness of such train- ing? Is it important?

2. Midway through the year, all managers are told that budgets need to be slashed. What is their likely response? Do all operational managers line up to “make their case” for not cutting budgets on their projects? Do vice presidents and other senior-level managers make the decisions as to where and what to cut?

3. With each manager receiving a monthly report about project progress and budget compliance, what additional benefit is gained from a face-to-face meeting?

4. If you were a manager who had to oversee people and projects, would you look forward to your monthly face-to-face meetings? Under what circumstances might you dread them? If you can think of any, how could you improve the situation?

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CHAPTER 9Section 9.3 Emergent Strategies

9.3 Emergent Strategies There is one type of strategy that occurs only during operational execution. Emergent strate- gies, first proposed by Henry Mintzberg of McGill University, arise as a result of an organization’s response to unexpected events as a strategy is being implemented. In Mintzberg’s terms, an intended strategy is akin to the “best” strategy that was developed in Section 6.4 and chosen in Section 7.2. Such a strategy, when implemented, is then called a deliberate strategy. If it fails for whatever reason, it is considered an unrealized strategy (Figure 9.3).

As the deliberate strategy is executed, a pattern may emerge that was not intended when the strategy was first proposed. Actions that were taken one at a time take on a cumulative effect and become a strategy. For example, a supplier serving restaurants has an opportunity to serve a hotel, and later another hotel, and so on until it becomes clear over time that the company has diversified into the related market of hotels. That is an emergent strategy that was never a part of the strategy the company set out to implement. Combined with the deliberate strategy of serv- ing restaurants, it evolves into the realized strategy of serving the hospitality industry. This is also sometimes referred to as an umbrella strategy.

There is much validity to viewing strategy in this way, from how it’s formulated to what actu- ally happens in practice. Real life is messy and rarely do plans actually happen the way they are intended. Few strategies are purely deliberate, just as few are purely emergent; the former allows for no learning while the latter means no control (Mintzberg, Ahlstrand, & Lampel, 1998). Reality is some combination of the two.

Accepting the notion of emergent strategies allows the organization to learn from customers and to increase its capacity to experiment with new ideas. That is not to say that learning doesn’t

Realized Strategy

Unrealized Strategy

Deliberate Strategy

IntendedStrategy

Em erg

ent

Stra tegy

Figure 9.3: Deliberate and emergent strategies

Source: From Stanley C. Abraham, Strategic Planning: A Practical Guide for Competitive Success, p. 157. Copyright © Emerald Publishing Group Limited. Reprinted by permission.

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CHAPTER 9Section 9.4 Managing the Strategic-Planning Process

occur without an emergent strategy; one of the important byproducts of the strategic thinking and planning process is to increase strategic learning and to update everyone’s mental models in a similar way. The very act of implementing a strategy involves all kinds of learning, which benefits the next round of strategic planning.

Keeping one’s eyes open for a pattern that signals an emergent strategy is another way for a company to stay agile and flexible. In times of constant and rapid change, taking advan- tage of opportunities “on the run” as well as formally through strategic thinking is a sign of a healthy company. Should the emergent strategy become so powerful as to swamp the deliber- ate strategy, the company can always have an impromptu strategic-planning meeting and, with the board’s approval, acknowledge what is happening and capitalize on it with full budgetary support.

9.4 Managing the Strategic-Planning Process Strategic planning is usually carried out by a group of people in a company, and a formal process needs to be established to get such a group to coordinate their efforts and work as one. What follows is a set of guidelines for setting up and managing the strategic-planning process in a com- pany, building on the discussion in previous chapters, which describe a process for doing strategic thinking and strategic planning. Insofar as the abilities of different companies to perform strategic planning and implement a formal process vary greatly, such guidelines are difficult to write. A few basic assumptions were made in formulating them:

• Most small- to medium-sized organizations do not have a good understanding of strategic planning and therefore either do not perform it at all or do something they “think” is stra- tegic planning.

• Companies that do strategic planning and use a formal process could benefit by bench- marking their process with these guidelines.

• Many companies do strategic planning without reflecting on whether it is done well or provides the organization with value. That is, they do so without the benefit of any strate- gic thinking.

Before the process of strategic planning is begun, it would be a useful exercise for members of top management to assess the company’s inventory of needs. One device that could accomplish this is a brief questionnaire such as the following strategy quiz.

Discussion Questions

1. Is it possible for a company to experience emergent strategies all the time? Is that the same as saying that it has no strategy? Explain.

2. Mintzberg and his associates characterize deliberate strategies as exhibiting control but no learn- ing, whereas emergent strategies exhibit the opposite. Do you agree? Why or why not?

3. Do you believe that companies in general find it difficult to realize an intended strategy? If so, is it because of emergent strategies cropping up all the time or simply poor execution?

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CHAPTER 9Section 9.4 Managing the Strategic-Planning Process

Table 9.1: Strategy Quiz: How strategic is your organization?

Answer each question either with a Yes or No by checking the appropriate column next to it. Your answers will be scored based on the number of “No” responses.

Questions Yes No

1. Are you realizing the full potential of your company and people?

2. Do you have a five-year vision for your company?

3. If so, do you believe your company can achieve it?

4. Are you pleased with your company’s profitability over the past three years?

5. Do you believe the value of your company is increasing over time?

6. Are your company’s sales or revenues growing fast enough?

7. Do you have enough money (including ability to borrow) to get the job done?

8. Do you have a significant advantage over your competitors?

9. Are your products or services competitive?

10. Do you know what your costs are?

11. Are you getting new products to market quickly enough?

12. Does your company do strategic planning every year?

13. Can you state what your company’s strategy is and why it will work?

14. Do you have at least three opportunities you are deciding whether to pursue?

15. Do you know what your company’s principal problems are?

16. If so, do you know what to do about them?

17. Do you have a set of measureable objectives you are trying to achieve?

18. Are you getting the most out of your people?

19. Do your employees know where the company is going and how it will get there?

20. Is your company culture collaborative, innovative, and trusting?

TOTAL

Source: Stan Abraham, www.futurebydesign.biz

Whose Responsibility Is It?

In small companies that perform strategic planning, the CEO or owner typically drives the pro- cess. Occasionally this role is acknowledged as the CEO’s most valuable contribution. For example, Livescribe, a market leader in digital pens, hired a new CEO for the specific task of strategic plan- ning (Takahashi, 2012). Sometimes, he or she might use a consultant or an executive within the organization to conduct the process and help the group decide on the strategies. Most small com- panies and new ventures, however, do no strategic planning for the simple reason that there is only one strategy possible, and the company’s energies are focused on executing it. Examples are restaurants, retail outlets, or small service businesses. Such companies address strategic planning only when faced with several choices or intense competition and, for the first time, are put in a position of not knowing what to do.

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CHAPTER 9Section 9.4 Managing the Strategic-Planning Process

© Kablonk/SuperStock

In smaller companies, the CEO usually does the strategic planning, but in larger compa- nies the responsibility is delegated to a VP or group of individuals.

In midsize to large companies, the job of controlling the process is typically delegated. Ideally, there would be a director of strategic planning to manage the pro- cess. Without such a position, responsibility would go to whoever the CEO believes can do a good job or has some experience with strategic planning, such as the CFO or a functional vice president. If no one wants the assignment or feels able to do it, someone from out- side may be brought in to do it. If manufacturing, R&D, and distribution can be outsourced, so can facilitating the strategic-planning process. However, only plan- ning and conducting the process and achieving its pur- poses should be subcontracted to a consultant. The actual decisions cannot be; the CEO and managers, who alone are accountable for acting on those deci- sions and achieving the company’s objectives, must make them. Some organizations, such as Air France (Air France, n.d.), form ad hoc or standing committees to focus on strategic planning. Others, like Mitsubi- shi (Mitsubishi Electric, n.d.), employ a vice president or C-level executive to direct strategic planning and related initiatives.

The person in charge should make sure all those involved understand what they have to do and give them time to do it. Part of the process is creating stan- dard reporting formats that everyone understands and that facilitate comparisons with later years. At the

outset they should establish a schedule for the process and then enforce it unless a company crisis intervenes. The individual managing the process must remember that these planning tasks are superimposed on people’s regular jobs and are likely to produce negative attitudes and reactions. Only if those involved see the activity as crucial for the company and worthy of being taken seri- ously by everyone will they be motivated to do a good job.

Choosing the Process

Whatever process the company uses for strategic planning must meet certain criteria. Key com- pany managers, particularly the person in charge of the process, must understand it—what it is, what is involved, who should be involved, why it is needed, and how to realize the benefits from using it. The process must be perceived as appropriate and feasible for the company in terms of sophistication, complexity, and culture. The company must be prepared to commit to the process and its outcomes. All involved must agree to take it seriously and implement those strategies and decisions that result from the process.

The person in charge should explore several different approaches, or invite several consultants who specialize in this area to discuss their approaches.

Hiring a consultant to help with doing strategic planning the first time is prudent. Ceding this control (and worry) frees managers and executives to participate in the process. Furthermore, a consultant can control the quality of the discussion and strategic ideas that are proposed, as well

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CHAPTER 9Section 9.4 Managing the Strategic-Planning Process

AP Images/Douglas C. Pizac

The biggest waste of a company’s time and money is to pay for a top managers’ meeting at a rural retreat center and then have no one follow up on implementing any of the business discussed.

as ensure that real data and analyses are used as much as possible rather than opinions and con- jecture. Finally, a consultant can act as facilitator to make sure that all voices are heard, not just one or two people who might dominate discussions. A neutral facilitator is more likely to ensure that people are not just saying what they think the CEO wants to hear, which is a major problem in many companies. Ideally, a consultant should be trusted and one with whom the CEO is comfort- able—someone who can do a good job of guiding participants in the strategic-planning process that is the best fit for the company. An effective consultant should deliver benefits to the process that outweigh the fees charged.

A Suggested Strategic-Planning Process

The following process would work with firms of almost any size. It is generic and can be tailored to fit a particular company. The process has 10 basic steps; some of them could be broken down into sub steps (Figure 9.4). Perhaps the most crucial element in strategic planning is to involve the right people, particularly those who will be called upon to implement the plan. People— depending upon their experience, background, and role in the company—going through the same process of strategic planning will make completely different decisions and achieve com- pletely different results. It is crucial, therefore, to consider carefully who is involved in the pro- cess. As has been discussed, it would limit the effectiveness of the process and of implementation to limit the planning group to just the top management; managers two or three levels down should also be included. If this yields a number that becomes unwieldy for simple meetings, it may be necessary to limit the number that participate or cascade the meetings from one level to the next to accommodate everyone. What is crucial is to obtain as many different perspectives

in the planning process as possible as well as the involvement of peo- ple who implement the strategies. The value of a professional facili- tator becomes more pronounced the larger the group of people involved in the process.

Strategic planning is only meaning- ful if the company fully intends to implement the decisions taken. A common waste of time and money is for a company to bear the cost of top managers meeting at a retreat, sometimes with an expensive facil- itator, making important decisions, on which no one then follows up. The result is business as usual. One can only conjecture some possible reasons for why this happens. Per- haps “going through the motions” of strategic planning soothes some executives’ consciences. Per- haps they believe that “doing the

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CHAPTER 9Section 9.4 Managing the Strategic-Planning Process

planning” is all there is to it, a belief that no one has bothered to correct for them. Perhaps it is the golf game at the resort where the retreat is held that has their real interest. However, it is a waste of time just to go through the motions so a commitment to the process and implementation are requisite elements.

There are a few key strategic decisions to be made, or at least revisited. The first is to confirm a commitment to a vision to which the company aspires. The outcome of the process is deciding on the best strategic bundle in the circumstances. That may even happen to be what the company is currently doing. After that, overall companywide objectives are set. Finally, major programs that are to be implemented and resource allocations are developed in detail.

Follow through will be much more likely if the participants see these decisions as being the best that could be made, that they are feasible yet challenging to achieve, that that there is some urgency in getting them implemented, and that they would result in a stronger and more competi- tive company. Focusing on a small set of objectives increases the chances of them being attained and lessens the likelihood of conflict between objectives that might occur with a larger number. A limited set of objectives would also help focus the company.

The following description of each step in the process shown in Figure 9.4 includes some pointers for making the whole process successful.

1. Situation Analysis (a).

Research done by various groups in the firm

2. Situation Analysis (b).

Critique and elaboration of research done

3. Synthesis.

Identify key strategic issues for the company

4. Create Strategic Alternative Bundles.

Must meet the four criteria

7. Design Major Programs &

Contingencies.

9. Final Check.

Ensure that the detailed plans will in fact achieve the strategic objectives

10. Asses the Process.

Implement the Plans and

Monitor Progress.

5. Choose the Best Bundle.

Perform criteria-based analysis and argue for the

best alternative

6. Set Companywide Objectives.

Choose ones to commit to

8. Operational Planning.

Prepare detailed operational objectives, plans, and budgets

by organizational unit

Figure 9.4: A suggested strategic-planning process

Source: From Stanley C. Abraham, Strategic Planning: A Practical Guide for Competitive Success. Copyright © Emerald Group Publishing Limited. Reprinted by permission.

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CHAPTER 9Section 9.4 Managing the Strategic-Planning Process

Situation Analysis (a) Certain key categories of data need to be collected in this initial research step. Any time that data are collected it is best to obtain a copy of the source document or at least a complete citation of the source. It should be self-evident that it is best to get the most recent data possible. If forecasts can be obtained, the source should be recorded, because it has a huge bearing on the credibility of the fore- cast itself. Finally, key people in the company should be appointed to act as gatekeepers for particular categories of data, and everyone in the organization should know who they are. Everyone can then send items of information or leads about a particular category to these gatekeepers. If done through- out the year, this first step is not needed; otherwise, one must allow sufficient time to collect and analyze the data and prepare useful summaries. Every month, these gatekeepers should summarize and make sense of the data collected to-date, which is then sent to everyone on the planning team.

Substantial preparation should be done for each step. Research and data collection must be based on fact or analysis, not on opinion. Where data cannot be obtained, for example, on competitors that are privately held, make assumptions and move on. Paying for critical data such as economic forecasts or competitive intelligence may be worth considering as it could be an investment. Also consider adding an economist or competitive-intelligence professional to the company’s perma- nent staff if it turns out to be cost-effective.

Situation Analysis (b) Each gatekeeper should make a summary presentation of what is going on in his or her particu- lar category. Such presentations should be based on the data collected and analyzed during the previous 12 months and should include numbers, trends, graphs, and sources wherever possible. The gatekeeper should interpret all the data and conclude with the most significant and relevant facts and trends that will affect the company. This is one way of educating the planning team about changes and implications arising in that particular category. The presenters should encour- age questions in order for complex issues or trends to be understood or challenged. This process should appeal to companies that like structure; an alternative is a series of strategic conversations, discussed in Chapter 2.

Synthesis This step allows the participants to list all critical uncertainties, that is, the key strategic issues that could have a positive or negative impact on the company. “Critical” means those issues that must be addressed in the ensuing strategic plan. Everyone’s suggestions should be solicited first before combining or eliminating any issue.

Create the Strategic-Alternative Bundles This is a creative activity well suited to an extremely diverse group of people. Ideally it would include representatives from different functional areas and levels of the company, with very differ- ent business and industrial backgrounds, newer members of the organization, and seasoned veter- ans. Starting with the list of strategic alternatives and working in small groups, each group should come up with its version of alternative bundles and check to see that they meet all four criteria.

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CHAPTER 9Section 9.4 Managing the Strategic-Planning Process

Digital Vision/Thinkstock

After completing a situation analysis, each manager or gate- keeper should make a brief 30-minute presentation on his or her particular category.

When the small groups have designed the proposed bundles, these can be assesed and debated by the entire planning assemblage. The idea is to synthesize the efforts of the various subgroups into a final grouping of three or four really good bundles that meet the criteria. Experience has shown that this step always takes longer than expected to do well. One idea to force an intelligent critique of the alternatives is to “murder-board” them. Assign a subgroup to tackle each alternative bundle, and instruct them to come up with all the reasons they possibly can as to why that alternative would not work. It is amazing how this extra step adds a humiliating dose of reality to the process, can result in important modifications to the bundle in question, and can even cause one bundle that was going to be considered by the group to be discarded.

Choose the Best Bundle Select a subset of five to six relevant criteria. Evaluate the bundles on each criterion. The entire group of participants should reach consensus that whichever bundle is finally selected really is the best one in the circumstances, and why. Ultimately, everyone should understand that this is how the company will compete over the next three to five years.

Set Companywide Objectives As discussed earlier, this is a three-step process. Depending on the preferred key indicator, such as revenues, NIAT, market share, and D/E ratio, the company needs simply to answer the question, “How far do we want to go this next year and in each of the next two years toward implementing the chosen strategic bundle?” It will depend on the firm’s current resources and those it could additionally access, as well as the nature of the chosen strategies. In addition, it will depend on whether the competitive environment is becoming more difficult or any other threats are loom- ing. Based on how the company has been doing in the recent past, the objectives should be set at a challengingly high level while still being achievable. Most importantly, those who must be accountable for achieving these objectives should agree to the level at which they are set, and that level should be challenging.

Of course, the model assumes a participative way of setting objectives; some CEOs still reserve the right to do this on their own. However, a wise CEO knows that when managers charged with implementing a strategy set their own objectives, they are more likely to achieve them.

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CHAPTER 9Section 9.4 Managing the Strategic-Planning Process

iStockphoto/Thinkstock

One of the more complex steps in the analysis is preparing a detailed account of your operational objectives and plans.

Design Major Programs and Contingencies Some of these major programs are included in the chosen bundle, while others may need to be added. It is this list of programs that will guide the creation of the operational plans. “Contingen- cies” here refer to the trigger/contingency pairs that were discussed in Section 7.4.

Prepare Detailed Operational Objectives and Plans This is one of the more complex steps in the process, but there are many ways to create operational plans. Given the companywide objectives and major programs already iden- tified, the directors of functional units (e.g., marketing, production, finance) and other support units (e.g., materials lab, purchasing) take these as mandates to their respec- tive staff and get them to gener- ate detailed operational plans that would contribute to achieving the objectives and chosen bundle (busi- ness model). At a minimum, these plans should include the following:

• A timeline of specific tasks the unit will undertake during the year • A proposed budget to accomplish them by task and month • Specific details as to who will be participating in these activities and, in particular, the

person who will be responsible for each activity • A list of additional resources, human and material, that will be required to complete the

proposed tasks

Perform a Final Check Once these plans have been drafted, they should be reviewed by top management and/or the director of strategic planning to check their feasibility, verify that the requested budgets do not exceed available funds, and confirm that completing all the planned activities will, in fact, achieve the overall objectives for the company. This mixture of top-down and bottom-up planning may have to endure one or more iterations before the operational plans and budgets are finally approved. For this reason, be sure to allow enough time to complete this process properly and break it down into components as shown in that figure.

Assess the Process Those who participated in the strategic-planning process should be asked to complete a detailed questionnaire about how well the process went and the quality of the decisions made. The follow- ing section discusses measures for improving the process.

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CHAPTER 9Section 9.5 Improving the Strategic-Planning Process

9.5 Improving the Strategic-Planning Process Strategic planning is, at its heart, a process for arriving at strategic decisions and achieving some purpose. However, unlike other processes, the output is not widgets; it is nothing less than the future of the company. Assuming that improving the process will improve the qual- ity of strategic decision making in the future, it should be reviewed every year to see where improvements might be made. Such a review should include every aspect of the process—the quality and adequacy of the data and analyses, whether enough expertise was at hand or applied, the quality and extent of the discussions, the degree to which mental models were changed and unified, whether the key strategic issues were properly identified and well under- stood, and so on.

Questions for Improving the Process

The following questions should help in assessing the strategic-planning process and making improvements for the following year.

Situation Analysis 1. Were sufficient data collected for various parts of the situation analysis? If not, which

particular parts were shortchanged? 2. Was enough time allowed for data collection? Where would more time allowed have

been beneficial? 3. Was enough analysis performed on the data? If not, where would more analysis have

been beneficial? 4. Were credible sources used for data and forecasts? If not, for which kinds of data were

they not credible? 5. For those analyses that used subjective estimates, was there consensus as to how those

analyses turned out? Where particularly did the subjectivity affect the credibility of the ana- lytic findings? Were the opinions of some people given undue weight over those of others?

6. Would the use of outside experts have improved any part of the situation analysis (e.g., having an economist talk to the managers about economic trends for the coming year)?

7. Did the participants in general understand the terms and terminology used in the situ- ation analysis (e.g., core competence)? Were there any terms or concepts that caused confusion?

Discussion Questions

1. You work for a company that has never done strategic planning. Describe the steps you would take to persuade the CEO that going to the trouble of putting a process in place would really ben- efit the company.

2. In your opinion, what might be the most difficult part of the strategic-planning process for a com- pany to develop competence in? Explain your answer.

3. If you had to choose from these two alternatives, which would you choose: good data but poor decision making, or untrustworthy data but good decision making? Why?

4. If a company did operational planning well but had no strategic direction, could it be successful? If it could, why bother doing strategic planning?

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CHAPTER 9Section 9.5 Improving the Strategic-Planning Process

iStockphoto/Thinkstock

After putting together your situation analysis, you should distribute a question- naire to your employees to help you better assess the strategic-planning process.

Strategic Analysis 8. Were enough key strategic issues identified? If not, what might have been added? 9. In hindsight, did the key issues identified really represent the most critical issues facing

the company? If not, why not? Which ones were left out? Was the omission an over- sight, or were some people afraid to articulate it?

10. Did the strategic issues reflect the kind of long-term strategic thinking that participants imagined should have occurred? If not, why not?

11. Were the strategic-alternative bundles sufficiently creative and realistic? 12. When creating them, were participants unduly influenced by what the company is cur-

rently doing, by its current strategies, or by what participants believed the CEO really wanted? If so, how could this be corrected in the future?

13. Did everyone who could have contributed usefully to the process of creating these alter- native bundles actually do so? If not, how could this be corrected?

14. Were the criteria used to evaluate the alternative bundles reasonable for this company? If not, which others should have been used?

15. Did the analysis that was used comparing the alternatives against the criteria produce a believable result? Why or why not?

16. Which of the alternative bundles might the company have been advised to pursue other than the one chosen? Why? Was every point of view given fair consideration? If not, why not?

17. During the sessions choosing a preferred strategic bundle, were participants allowed ample opportunity to express their feelings, agreements, or misgivings? If not, why not?

Recommendations 18. Were the objectives that the company

decided on for the next year appropriate and achievable? If not, why not?

19. Are the objectives for three years from now appropriate and reasonable? Are they unat- tainable as stated, “stretch” objectives (chal- lenging yet attainable), set without much careful thought (e.g., an extrapolation of last year’s), or set too low? Why or why not? What should they have been?

20. Are those who participated pleased and excited about the direction the company is taking now as a result of the strategic-plan- ning exercise? If not, why not?

Some General Questions 21. Did the whole process take too long? Why?

Where could it have been shortened? 22. Did the process stick to the original schedule?

If not, where did it deviate? Might the sched- ule have been unrealistic?

23. If the process did not keep to the original schedule, were there any adverse effects?

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CHAPTER 9Section 9.6 Assessing the Strategic-Planning Process

24. What lessons were learned about the process this year that might be put to good use next year?

25. Has the company’s knowledge of strategic planning increased? How do you know? If not, why not?

26. Was everyone who participated in the process substantially “on the same page,” or did the process conclude with a number of people in significant disagreement? If the latter, how might such disagreements be addressed more fully and resolved?

27. Overall, is the company better off for having been through this strategic-planning exer- cise? Why or why not?

The person responsible for the process should distribute a questionnaire with the preceding ques- tions (or a similar set) to all participants in the process. The responses should be analyzed and the results presented with constructive commentary and suggestions for what should be changed the following year. The analysis and suggestions for change should be discussed at the meet- ing and consensus sought as to which changes should be implemented. Unless such a debriefing takes place, changes made to the process might be resented; in addition, it serves an educational purpose.

9.6 Assessing the Strategic-Planning Process Benefits do not accrue automatically every time a company engages in strategic planning; they are more likely to be realized if they are consciously sought. Both strategic planners and the consul- tant facilitators advising them should strive to ensure that these benefits are realized. The extent to which they are realized, therefore, constitutes an excellent assessment.

The 10 Benefits

The 10 benefits of effective strategic planning may also be viewed as criteria for assessing whether a company is doing strategic planning effectively. The 10 benefits are organized to follow the Asso- ciation for Strategic Planning’s rubric of “Think—Plan—Act.”

Discussion Questions

1. Participating fully in a strategic-planning process is unquestionably a learning experience. Do you think that special training beforehand would make a difference? Why or why not?

2. If strategic-planning participants are sent materials ahead of the process, what should they contain?

3. After a couple of annual iterations of improving the process, an observer might be forgiven for thinking that the process was good enough not to change any more. Give some reasons why that would be wrong.

4. Why is achieving consensus at the post-planning debriefing meeting advisable?

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CHAPTER 9Section 9.6 Assessing the Strategic-Planning Process

1. A Shared Understanding of External Changes To use a military analogy, just as conflicting accounts about an enemy’s strength, position, and deployment make it difficult to devise a winning strategy, so too does the absence of a shared understanding of external changes and their impacts on the company make the crafting of a win- ning strategy extremely difficult. Because changes occur continuously, the only way to keep up with them and even anticipate some is to monitor them year round, and to keep the strategic- planning group and board of directors informed as to key changes and developments in all areas. One person should be responsible for each area and be trained to collect and summarize data in useful form. A summary for the year with emphasis on recent trends should be prepared in advance of the annual strategic-planning meetings and be distributed to participants. To the extent this is done well, the company’s decision making will improve.

2. The Ability to Anticipate Future External Changes A number of well-known techniques enable an organization to explore “soft” assumptions about the future and provide additional options for planning. These include scenario planning, forecasts, and simulations (Section 3.4). It may be that the firm would be advised to engage a consultant that specializes in one of these areas, or pay attention to forecasts that have earned a good reputation over time. Expressed another way, the benefit here is that the resulting information can guide the firm toward actions that enable a preferred scenario to occur, or develop a contingency in case a hoped-for scenario does not occur.

3. The Ability to Search for a Better Strategy or Business Model A company not actively seeking a better strategy is not doing a good job of strategic planning, and its strategic decisions will not be good ones. How else is a company to find a “blue ocean” or situational monopoly with no competition? How else could it guard against being disrupted by a

The 10 Benefits of Effective Strategic Planning

“Think” 1. A shared understanding of external changes 2. The ability to anticipate future external changes 3. The ability to search for a better strategy or business model

“Plan” 4. Having a strategic vision 5. Choosing the best strategy from among viable alternatives 6. A constantly improving strategic-planning process 7. Having the board of directors on the same page

“Act” 8. Becoming a stronger competitor 9. Having an adaptive, innovative culture

10. Having all programs aligned with the vision, strategy, and company objectives

Source: Abraham, S. (2010, February 23). Ten Benefits of Effective Strategic Planning—and Why You Should Want Them All. Presentation at the 2010 ASP National Conference, Pasadena, CA.

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CHAPTER 9Section 9.6 Assessing the Strategic-Planning Process

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Your strategic vision should be realistic, achievable within a specified time frame, inspirational, concise, and memorable.

company outside the industry or even plan a disruption itself in a proactive move? How else could it gain a competitive advantage it lacks or strengthen one it already has?

For every different strategy and business model contemplated, someone in the organization should assess its costs, feasibility, benefits, and risks on an ongoing basis. The results of such assessments play directly into the strategic-decision-making process. Except when the firm needs to act immediately because the decision just won’t wait, the information can wait until the annual strategic-planning process comes around.

4. Having a Strategic Vision Every organization that wants to endure should have a strategic direction and strive to become some- thing. Succeeding is more likely if there is a clear vision and if everyone knows what it is and is moti- vated to help the organization get there. Visions should be realistic (achievable within a set time frame,

5 or 10 years is typical), concise, inspirational, and memorable. They sometimes include a value state- ment, although listing values sepa- rately is more common (Section 2.1).

The real benefit of a clear vision statement is to get everyone in the organization on board and wanting to achieve it; and though cumber- some, everyone in the organization should also have had a hand in cre- ating it or at least providing feed- back before it is adopted. As soon as the organization is close to achiev- ing its vision, it should be changed, being careful to go through the same process of getting buy-in from everyone before adoption.

5. Choosing the Best Strategy from Among Viable Alternatives Choosing from the best options available is a benefit, as it allows people to trust the decision that was made and have faith in the direction the company is headed. This is beneficial only if the strategic planning process generates good viable alternatives and a decision process for selecting the best one.

Having said that, such a “best strategy” doesn’t guarantee success. It must be well executed for the firm to succeed. It is much easier to “sell” the strategy down the line in a company and moti- vate a high level of execution if people know why it is the best from among the options considered.

6. A Constantly Improving Strategic-Planning Process The benefit of improving the process should be clear: better strategic decision making. This might entail involving different people, getting better information, stimulating more spirited discussions

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CHAPTER 9Section 9.6 Assessing the Strategic-Planning Process

and encouraging diverse views, or even using computer software to include inputs from everyone quickly (Warden & Russell, 2001). Without thoughtful annual improvements, an organization is likely to allow its strategic planning to become a rote exercise that is taken less seriously and one that participants, for those very reasons, resist wanting to participate in.

7. Having the Board of Directors on the Same Page For public corporations and nonprofits—and quite a few but not all privately held companies—it is imperative to ensure that the board of directors approves of all strategic decisions before any move to implement them is made. In fact, there are instances where the strategic decision comes from the board, as in resisting a takeover bid or deciding to acquire another company. In the typi- cal case where strategic planning is done by a top-management or strategic-planning team, there has to be some mechanism for the board to be kept apprised of the process. In 2005, manage- ment consulting firm McKinsey & Co. surveyed over 1,000 directors and found that alignment on strategy between the CEO and the board was the number-one reason for success and the number- one reason for failure in CEO appointments (Felton & Keenan Fritz, 2005). In some companies, the CEO is also chairman of the board, and so automatically serves as the desired link.

Boards of directors may have a strategic-planning committee whose chair would attend the meet- ings of the management group and keep the board informed. The benefit, of course, is knowing that the strategic decisions made are in the best interests of the stockholders in the case of a pub- lic corporation or the sponsors and clients in the case of a nonprofit organization. Ultimately it is the board that has responsibility for the strategic direction of the organization.

8. Becoming a Stronger Competitor If strategic planning is done well and the strategy properly executed, then the company will become a stronger competitor. This, of course, is the principal benefit for doing strategic planning in the first place. Many things have to contribute for this benefit to be realized. For example:

• Knowing how your industry and markets are changing • Anticipating and meeting customers’ needs • Getting more customers to buy your product or service • Developing or strengthening a core competence • Knowing what your competitors are up to and outdoing them • Defending one’s position against attack from competitors • Looking for “blue oceans” or monopolies with no competitors • Looking for opportunities to disrupt the industry before someone else does • Maintaining a strong brand and being true to it

Management knows that the company is a stronger competitor if it achieves gains in revenues and market share, and maintains high brand equity, or achieves other established measures of success the company holds dear.

9. Having an Adaptive and Innovative Culture When a company has been following the same strategy for some time, the culture adapts to that strategy and gets it to work. However, if some major change is deemed necessary, such as

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CHAPTER 9Section 9.6 Assessing the Strategic-Planning Process

Miguel Medina/AFP/Getty Images

Apple Computer’s culture encourages innovation and new ideas to look for the “next big thing.” Apple values learning from mistakes, sharing experiences, and developing ideas, no matter what the source.

pursuing a new strategy or adopting a new technology or manufacturing process, and the culture remains what it always was, then the change will not succeed. A mismatched culture is one of the principal reasons why changes and new strategies fail, and it is widely acknowledged that it is difficult to change a culture. The reason that it is difficult is that change imposed from above results in a lot of resistance. Many companies in this predicament resort to wholesale changes in personnel to change the culture.

With an adaptive culture, that dra- conian measure is not necessary. An adaptive culture is one that is willing to change if the reason for doing so makes sense. It is a culture that values open communication, education, teamwork, and individ- ual initiative. Companies that have adaptive cultures make the neces- sary changes over time and succeed.

An innovative culture does not sim- ply encourage innovation and new ideas and look for the next “big thing.” It also puts a high value on learning from mistakes and giving people permission to make mistakes. Innovative cultures encourage the sharing of experiences and develop- ing ideas no matter their source. Two of the best examples of innovative cultures are Apple Inc. and Google.

It would be difficult to make strategic decisions and implement them if the culture were not adap- tive and innovative. The converse, of course, is also true. Making good strategic decisions that call for change and smooth execution will force the culture to be adaptive and innovative. Hiring people with similar traits will ensure that this desirable culture endures.

10. Having All Programs Aligned with the Vision, Strategy, and Company Objectives The importance of aligning everything the company does with its vision, strategy, and company- wide objectives was discussed in the context of operational and budget planning (Chapter 8). The benefit is the assurance of knowing that completing all programs, projects, and activities as planned will result in the strategy being implemented and the vision and company-wide objectives being fully realized (barring unforeseen circumstances).

In too many companies, what employees in the different functional areas and operational units actually do has little to do with the strategy that’s in place, because little or no effort was expended to make sure that the two were aligned. As a result, the strategy fails or “business as usual” tri- umphs. When operational planning is done, critical elements include performance measures (to track progress), appropriate training, and reward and incentive systems.

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CHAPTER 9Section 9.7 Raynor’s Strategy Paradox

9.7 Raynor’s Strategy Paradox According to Michael E. Raynor, some traditional strategic-analysis tools that have been taught for years and are in widespread use (including some discussed in earlier chapters) are passé and could even be counterproductive. He specifically identifies Michael Porter’s finding that a commitment to competitive strategy is the single most important ingredient of any plan (Porter, 1980), and Gary Hamel and C. K. Prahalad’s (1994) revelation of the power of a core competence.

These management tools are, in fact, powerful only if one can predict a future discontinuity with some certainty, which no one can, especially in an unstable economic climate or in an environ- ment of constant change and technological innovation. For example, consider a company such as Mozilla, which relies on open-source development for its flagship product, the Firefox browser. Older models of forecasting the future and strategically planning with those forecasts in mind simply won’t work for an organizational model such as this.

The argument is that the commitment it takes in financial resources and organizational adaptation to implement a strategy or develop a core competence is so significant and time consuming that, when the world inevitably changes, the typical organization cannot adapt quickly. The very strate- gies that at one time were responsible for a company’s success will then seed its destruction. That is Raynor’s strategy paradox (Raynor, 2007).

The solution, according to Raynor, is not to focus on the strategy, but to manage uncertainty so that, whichever way the world changes, one can adapt, survive, and prosper. Raynor illustrates, with the ill-fated story of the failure of Sony’s Betamax, what happens when a company focuses on its well-constructed strategy and fails to heed external changes and manage uncertainty (Abra- ham, 2007). In 1977, Sony had a choice of competing or collaborating with Matsushita, which produced the VHS recorder. Sony had a 60% share of the market, and its Betamax was the best product for recording a TV show and replaying it at a later time (‘’TV shift’’). Then Fox Studios put 50 of its films on both Beta and VHS for people to watch at home. Watching a movie at home required a simple cheap playback device, not the complexity of a TV-shift device that could also record. To its detriment, Sony didn’t adapt. By 1985, VHS had become the new standard and Betamax had less than a 10% market share, which continued to decline. In 1988, Sony pulled the plug on Betamax, a good product with an initially sound marketing plan, but which did not rapidly adapt to market shifts.

Microsoft, on the other hand, has the budget to pursue myriad strategic options, which it can then exercise (develop and quickly try to become the leader) or abandon as appropriate. For instance,

Discussion Questions

1. Of the 10 benefits discussed in this section, which of them, in your opinion, are most often unre- alized and why?

2. Which of these benefits, again in your opinion, are most difficult to realize and why? 3. Do you believe that there are any benefits that companies are less interested in realizing and

therefore, probably won’t? 4. In what ways are these 10 benefits different from the annual improvement cycle recommended

in Section 9.5?

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CHAPTER 9Section 9.7 Raynor’s Strategy Paradox

although it may not have happened soon enough for early adopters of Microsoft’s much-criticized Vista operating system, the company had the resources to put in place Windows 7 as a means of responding to the widespread problems with Vista. Call it hedging one’s bets if you will, but Raynor calls it managing uncertainty.

How, then, is this uncertainty managed, and who should do it? Here, Raynor drew on the pioneering work done by Elliott Jacques, developer of the ‘’requisite organization’’ concept. Jacques investigated why people’s pay at different organizational levels differed, and what was considered ‘’fair pay.’’ His research showed that people who had to make decisions based on a longer time horizon were appropriately perceived as deserving higher pay. Thus, for this reason alone, people at higher levels in an organization were paid more than people at lower levels. Raynor piggybacked on this concept and developed a model of requisite uncertainty. Figure 9.5 summarizes the key levels in an organization and the time horizon over which they tend to make decisions. Raynor is not concerned, here, with compensation. Instead, the exhibit shows that the decisions made with long time horizons (about 20 years) in mind address the greatest stra- tegic uncertainty and, he says, the board of directors should be responsible for making them. The next level down, corporate management (5- to 10-year horizon), explores new markets, technologies, and business models; their job is not to decide how to succeed, but rather that the company be positioned to succeed regardless of what the future holds. Division manage- ment (two-to five-year horizon) chooses the strategy and how they should be implemented. Finally, line and functional managers (with a time horizon restricted in range to less than one year) focus on implementation of strategies already decided on. Notice that from top to bot- tom of the exhibit, the management imperative shifts from ‘’uncertainty’’ to ‘’commitment.’’ A company must not only implement strategies already in play but also, by managing uncertainty, always keep itself in position to change to another strategy should changing circumstances warrant.

Board of Directors

Absolute

Organizational Level

Relative

Time Horizon (years) Strategic Balance

Corporate

SBU/ Divisional

Line/ Functional

Uncertainty

Commitment

10 – ∞

5 – 10

2 – 5

0.25 – 1

20

10

5

1

Figure 9.5: Raynor’s model of requisite uncertainty

Source: From Stanley Abraham, “At ASP, Raynor on managing uncertainty, plus some highlights of lessons from practice,” Strategy and Leadership, Vol. 35 No. 4, 2007, Exhibit 2, 46. Copyright © Emerald Group Publishing Limited. Reprinted by permission.

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CHAPTER 9Summary

Summary Some organizations don’t create operational plans as they would consist of just doing whatever the company is already doing. For most companies, however, change is constant and the push to become a stronger competitor and reduce costs is never ending. Creating operational plans also involves difficult choices; the plan must get the job done, be within the company’s technical and capacity means to do so, and be done for the lowest cost within the allocated budget. Operational plans include projects and programs the company is currently doing, as well as new ones, chang- ing the way current projects are being done. The plan for each project should include start and end dates, equipment needed or used, people involved, who is accountable, and estimated costs for all elements by month.

It’s conventional wisdom that nothing gets managed or improved that isn’t measured. Tracking progress of all projects is therefore critical to keep them “on track and on budget.” Care needs to be exercised to make sure that the right things are being measured. If a better trained workforce is a goal, knowing how many lectures or workshops are given and how many people attended won’t help; a way has to be found of measuring increased effectiveness or capability. For many standard measures, especially in manufacturing and project management, useful software includes Gantt charts and PERT networks with a continually updated critical path.

Managers meet face-to-face with their direct reports regularly to discuss negative variances that have resulted from the previous month’s operations. Negative variances include projects that have either missed their deadlines or have a higher probability of missing them or have exceeded their budgets. The meetings are vital for managers to understand the causes for such variances and discuss possible solutions. In addition, it’s an opportunity to strengthen relationships and understand their direct reports better. Just like classical control systems that are corrected as soon as possible if untoward variances occur, so also in operational management must variances be identified and then corrected as soon as possible. After having met with all direct reports, the manager later takes on the role of direct report when a similar meeting is held with his or her supervisor. Managing is getting things done (right) through people, and such meetings are a criti- cal part of a manager’s job.

While executing a strategy, changes may result in activities being done or opportunities pursued that, in retrospect, bear little resemblance to the original “intended” strategy. Such new activities

Discussion Questions

1. Does Raynor’s strategy paradox negate this book’s premise of good strategic planning at the heart of strategic management? Why or why not?

2. Raynor says that the solution is to manage uncertainty. Isn’t that the purpose of strategic think- ing? Doesn’t strategic thinking try to get a handle on the future and soft assumptions (uncertain- ties) about the future?

3. Raynor’s model of requisite uncertainty, whereby the company continues to execute its strategy while upper levels of management worry about the future, advocates that the board of directors worry about the long-term future. Does this sound realistic to you? Why or why not?

4. Following on from question 3, if the board doesn’t see this as within its purview, who do you think should worry about the company’s long-term future?

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CHAPTER 9Summary

could form an “emergent strategy,” first described by Henry Mintzberg, and, together with the strategy being implemented (“deliberate” strategy), turn into the final “realized strategy.” When intended or deliberate strategies fail, they are considered “unrealized.” Agile or adaptive cultures are best able to handle such real ongoing changes in stride.

Although not an operational plan per se, the strategic-planning process must nevertheless be managed, especially as it is done in addition to managers’ regular responsibilities. It is the respon- sibility of the CEO or possibly the designated vice president, but never a consultant, even though a consultant might facilitate the process. The person responsible for the process should survey all participants, analyze the responses, and report to a debriefing meeting to discuss proposed improvements. A consensus on the proposed improvements should be obtained before imple- menting the changes for the following year.

Finally, implementing a strategy that is working and in which considerable investment has been made might, if conditions abruptly change, also be a company’s Achilles’ heel. Such a company would find it very difficult to change as quickly, like a large oil tanker trying to make a quick turn. This is Raynor’s strategy paradox. His solution is to manage uncertainty better, meaning to not only keep executing its successful strategy but also spend more time looking further ahead (10–20 years) in an effort to get as much lead time as possible to allow the organization to change accord- ingly. Planning at the CEO and board levels, according to Raynor’s “model of requisite uncertainty,” should exclusively be concerned with figuring out what the company should be doing 5-20 years into the future.

Key Terms

control system Comparing actual performance to a standard, measuring the variance, tak- ing action to reduce the variance, resetting or updating, and testing again. Corrective action should be taken as soon as it is found necessary.

deliberate strategy The intended strategy, operationalized and executed.

emergent strategy A strategy the company pursues during implementation that was never a part of the intended strategy.

Gantt chart A type of bar chart that illustrates a project schedule. Gantt charts illustrate the start and finish dates of the terminal elements and summary elements of a project. Terminal elements and summary elements comprise the work breakdown structure of the project.

negative variance An instance where a proj- ect’s progress is delayed and could miss a deadline, or where its budget has been exceeded, or where performance comes up short of a quantitative standard or expectation.

Raynor’s model of requisite uncertainty The decisions made with long time horizons (about 20 years) in mind address the greatest stra- tegic uncertainty. A company must not only implement strategies already in play but also, by managing uncertainty, always keep itself in position to change to another strategy should changing circumstances warrant (with the board and top management worrying about how to cope with changes that might occur over the longer term).

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CHAPTER 9Summary

Raynor’s strategy paradox When the world inevitably changes, the typical organization cannot adapt quickly; the very strategies that at one time were responsible for a company’s success then seed its destruction. That is the strategy paradox.

realized strategy A combination of deliberate and emergent strategies.

unrealized strategy A failed strategy.

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Operational and Budget Planning

Learning Objectives

By the time you have completed this chapter, you should be able to do the following:

• Understand the differences between operational and budget planning. • Learn what this planning entails and why it must be done. • Appreciate broader operational issues such as systems and systems thinking, information systems, building consensus, and the role of policies.

• Understand who is involved in operational planning and issues involved in getting it done before the start of the new fiscal year.

8

Royalty-free

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CHAPTER 8Section 8.1 Some Broad Operational Issues

© SOMOS / SuperStock

The world is made up of systems. A system is a set of interacting or independent com- ponents forming an integrated whole. Cor- porations are complex social systems.

Chapter Outline

8.1 Some Broad Operational Issues

8.2 Operational Planning

8.3 Budget Planning

8.4 Participation in Operational Planning

8.5 Getting It Done in Time

No strategy is useful unless it can be implemented, and no strategy can be implemented with any degree of success without doing operational and budget planning. This chapter explains how to do such planning, why it’s important, and other important process issues.

8.1 Some Broad Operational Issues Some aspects of operational planning are more encompassing than just planning programs, projects, and tasks for people to do. These include systems and systems thinking, management-information

systems, ensuring participation in the operational- planning process, and the need for consensus in deci- sion making. Not only are they more encompassing but also are determinants of effective strategy execution and should therefore be taken into account.

Systems and Systems Thinking

For the most part, our world is made up of systems— from the galactic solar system of which we are a part, to the human body, which has many subsystems of its own, such as the immune, reproductive, digestive, and cardiovascular systems. A system is a set of interacting or interdependent components forming an integrated whole. Corporations are complex social systems, con- sisting of individuals and units that work together (or not) to produce products or services for their customers that ensure their survival. Complex systems are self-reg- ulating systems; that is, they are self-correcting through feedback. In other words, systems must be responsive to feedback such as the company’s sales figures, turn- over, and other metrics in order to ensure their com- petitive edge and survival.

Moreover, the systems approach to understanding organizations addresses the relationship between the operation and its environment. It does so by examining

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CHAPTER 8Section 8.1 Some Broad Operational Issues

the nature of the boundaries between the organization and the outside world. The more perme- able are an organization’s boundaries, the more the organization is able to place its finger on the pulse of the competition, the marketplace, and industry trends. Boundaries may be created, for instance, by employer apathy toward employee development and small travel budgets; an organi- zation that does not send employees to conferences and training, for instance, establishes a less permeable boundary between the organization and the industry. Systems with permeable bound- aries are known as open systems and are preferred to closed systems for their greater functional- ity and innovativeness. Viewing an organization as an open system requires strategic thinkers to consider the complex interactions the system has with its environment, as well as the ways in which the different units within the organization (known as subsystems) import and export ideas, products, and other resources.

Additionally, systems are characterized by subsystem interdependence. For example, to market a product, the marketing department must interact with the research and development team to learn what it needs to know about the product, as well as the sales team to provide the sales strat- egy. In too many organizations, functional units act as if they were isolated from the others. For example, purchasing may order parts without knowledge of production rates and inventory levels. In both strategic and operational planning, systems managers must be cognizant that affecting one part of the system affects other parts and furthermore that decisions must benefit the whole company and not just a particular functional area to the detriment of others. The performance of any system, including a company, is thus never equal to the sum of the performance of its parts considered separately, but rather the product of their interactions (Ackoff, 1986).

In operational planning, plans should be coordinated between functional units of the organiza- tion, especially those between which there is an output-input relationship. The higher one’s posi- tion in the organizational hierarchy, the more emphasis must be placed on having a system-wide perspective and maintaining awareness of the purposes and goals of the entire organization. Even at a basic operational level, tremendous coordination is needed. As Russell Ackoff (1986), one of the most influential management thinkers of our time, says, understanding how one unit’s activi- ties affect and are affected by other corporate activities is a benefit that “cannot be realized unless the planning is comprehensive, coordinated, and participative” (pp. 202–203).

There is a class of system models called system dynamics, a detailed discussion of which is beyond the scope of this text. In simple terms, however, dynamic systems specifically take into account how an organization as a complex social system behaves and changes. They are used predictively and can be used to support strategic decisions.

Not many companies employ such models, which take time to develop, calibrate, and learn to use. More important than the actual models is the thinking they require in terms of feedback loops; that is, these are positive if self-reinforcing in a positive direction or negative if self-reinforcing the other way. For example, make more product, sell more product, get more money, make more product, and so on is a positive feedback loop. When positive and negative feedback loops inter- act, depending on the data and kind of model created, results are often counterintuitive.

Management-Information Systems (MIS)

Every day, at every level in the organization, decisions are made. Earlier chapters focused on stra- tegic decisions, while this chapter and the next focus on operational decisions. Simple decisions

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CHAPTER 8Section 8.1 Some Broad Operational Issues

Goodshoot

An information management system must be tailored to the needs of the decision makers it serves. The usefulness of the data depends on its timeliness, quality, completeness, and relevance.

require a person’s knowledge and experience or, in some organizations, an established policy may govern decisions in routine situations. Startup firms operate with the entrepreneur making all the decisions seemingly “off the cuff,” as speed is of the essence and the entrepreneur knows what he or she is doing.

The more complex decisions become, the less one person or even a group is able to act indepen- dently. Should special promotions in the Southern United States be continued for another month? That would depend on how effective the promotions had been in increasing sales, and without those data the right decision could not be made. Can production throughput be increased by 20% next year? Without knowing the plant capacity, production costs, and sales forecasts, that ques- tion also couldn’t be answered. And these are operational decisions. We already know that stra- tegic decisions need a lot of data to be analyzed and processed before they are made, and even then no one will know if the right decision was made until a couple of years later when one can see how the company performed.

With the exception of startups, no company can afford to be without a management-information system (MIS). By definition, it must supply the basic information needed by managers for making decisions. The extent to which it succeeds in doing this determines the quality of decisions made (Mason & Hofflander, 1972). Even before the advent of computers, there were information sys- tems, usually in the form of reams of paper and information stored in people’s minds.

A management information system is more than a stream of unprocessed data that people can access. If it is just this, it is a databank, not an MIS. An accounting system is an example of a databank. Likewise, financial statements display data—the user determines what meaning they have.

A management-information system must be tailored to the needs of the decision-makers it serves. Cloud computing has made management-information sys- tems easy to create and maintain. These networked platforms make the MIS mobile, and data accessible from laptops, smartphones, and tablets. The useful- ness of the information depends on its quality, timeli- ness, completeness, and relevance (Jones & George, 2007). What data are needed? In what form? Col- lected how often? Can anyone input data into the system? Can it be trusted? Can anyone use the sys- tem? In fact, it cannot be designed properly without first defining the kinds of decisions people make and the information that would best serve those decision- makers. Unfortunately, the reverse is often the case, where the MIS is built on data that can be easily col- lected and stored that people think will be useful for various decision-makers (Mason & Hofflander, 1972).

Predictive information systems permit decision-makers to draw inferences and make predictions from the data. Asking the system “what if” questions given certain

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CHAPTER 8Section 8.1 Some Broad Operational Issues

assumptions gets a response in the vein of “if that were done, then this is what can be expected to occur.” The system cannot evaluate the outcome, just provide the information. A financial-plan- ning-simulation model is a good example; other examples are not even computer-based but none- theless function as a predictive information system, like a market-research group that analyzes data and answers decision-makers’ questions (Mason & Hofflander, 1972).

A more advanced type of information system is a decision-making system, which embodies the organization’s criteria for choice and actually makes decisions on which the organization can rely and act. A linear-program model for optimizing distribution routes to minimize costs and use avail- able trucks is a good example. So-called “action” information systems automatically make the correct decisions that are acted upon immediately, like process-control applications (Mason & Hofflander, 1972). One example is measuring the flow of a fluid and regulating a valve to maintain the flow at a predetermined level—an automatic control system.

From this brief overview, it’s easy to see why management-information systems are easier to develop for operational decisions than for strategic decision making. However, integrated systems are found in many companies today that support operations, such as manufacturing resource planning II (MRPII) and its successor, enterprise resource planning (ERP) systems.

MRPII systems, used in manufacturing companies evolved from the earlier material requirements planning (MRP), which uses forecasts from sales and marketing to determine demand for raw materials (Figure 8.1). MRP and MRPII systems draw on a master-production schedule, which is a breakdown of specific plans for each product on a line. While MRP coordinates raw-material purchasing, MRPII develops a detailed production schedule that accounts for machine and labor capacity and scheduling the production runs according to the arrival of materials. An MRPII output is a final labor and machine schedule (Monk & Wagner, 2006).

Plant Operating Efficiency

Reliable Lead Times

Inventory Management

Information Management

Customer Service

Manufacturing Performance

MRP II Implementation

Figure 8.1: Overview of MRP II

Source: Adapted from Gunasekaran et al. (2000).

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CHAPTER 8Section 8.1 Some Broad Operational Issues

JB Reed/Bloomberg via Getty Images

Federal Express uses a communication system that allows it to coordinate handling an average of 5.2 million packages and delivering them with nearly 60,000 vehicles.

ERP is actually a process that attempts to consolidate all of a company’s departments and functions into a single computer system that serves each depart- ment’s specific needs (see Figure 8.2). The dream of ERP is to have a single software solution integrat- ing the different functions and activities into a seamless whole where information needed for decision making is shared across departments, and the action taken by one department results in appropriate follow-up action up and down the line. ERP is used pri- marily in large corporations that can afford the substantial initial investment. The most often-cited example of an ERP software is cus-

tomer-ordering and delivery. A customer’s order moves smoothly from sales, where the deal is consummated, to inventory and warehousing, which retrieves and packages the order for delivery, to finance, where invoicing, billing, and payments are handled, and on to manufac- turing, where replacement of the bought-and-paid-for product is done. Most of these opera- tions, however, involve recording and updating data, not making decisions involving judgment or prediction.

In companies with such integrated information systems, operational planning can be facili- tated using data from the system and updated in real time as conditions change. For exam- ple, integrated systems in supermarkets typically include supply-chain, inventory, and finance/ accounting management based on Figure 8.2, but not human-resource management (HRM) or customer-relationship management (CRM) systems. The emphasis is squarely on cost-control, which includes not stocking items in small demand and not being stocked out of any item in demand. Used for that limited but important purpose, the system is useful since margins are quite thin overall.

Larger companies find they cannot operate without some sort of sophisticated information sys- tem. Federal Express (FedEx) has communication systems that allow it to coordinate nearly 60,000 vehicles handling an average of 5.2 million packages a day. Its own controllers can override the flight plans of over 650 aircraft should bad weather or other emergencies arise. Its series of e-busi- ness tools allows customers to ship and track packages online either on their own or the com- pany’s website, create address books, generate custom reports, reduce internal warehousing and inventory-management costs, purchase goods from suppliers, and respond quickly to customer demands (Thompson, Gamble, & Strickland, 2004).

Information systems often extend beyond the company to suppliers, also. Walmart is unrivaled in terms of managing its supply chain. For example, its computers transmit daily sales to Wrangler, a supplier of blue jeans. From the information transmitted and “married” to Wrangler’s own sys- tems, the clothing manufacturer can ship specific quantities of specific sizes and colors to specific

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CHAPTER 8Section 8.1 Some Broad Operational Issues

stores from specific warehouses—lowering logistics and inventory costs for both supplier and cus- tomer and leading to fewer stockouts (Thompson, Gamble, & Strickland, 2004).

Building Consensus

Operational planning is, in essence, a string of decisions that have to be made quickly at whatever level that planning is done. Unless there is consensus, that is, complete agreement, on a decision by a group of people, majority rule takes over. There’s nothing intrinsically wrong with that, except that it introduces the possibility that a minority is not committed to the decision. So how can con- sensus be built when there is a difference of opinion?

If time allows, it pays to get more data on the alternatives to aid in the decision-making process; however, that is not always possible. It may be that the lack of consensus is due not just to different opinions, but also to different positions and political ploys. It is frequently easier to get managers and people to agree first that consensus is desirable (as well as possible) than it is to obtain it (Ackoff, 1986). The additional time and effort it takes to achieve consensus is more than compensated for by the surge in motivation after agreement has been reached.

Manufacturing Resource Planning

Human Resource

Management

Customer Relationship Management

Supply Chain

Management

Financial Management

ERP System

Figure 8.2: Overview of ERP

Source: Enterprise Resource Planning, from SoftWeb Solutions. Reprinted by permission.

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CHAPTER 8Section 8.1 Some Broad Operational Issues

Spotlight on Group Decision Support Systems

Operational planning requires the kind of consensus and buy-in that challenges even the most com- petent and cooperative human communicators. One solution that many organizations use to stream- line this process is the Group Decision Support System (GDSS). GDSS has a long history of develop- ment and applications in team-related tasks. Although the sophistication of the interface and the platforms for these technologies have improved over the years, the documented outcomes of GDSS implementation on decision making and group communication have remained stable over close to 30 years of research. Today, most GDSS are supported by a web-based platform that collects, organizes, and interprets the thoughts and reactions of individuals participating in a group decision-making effort (Roszkiewicz, 2007). GDSS replaces whiteboards and flipcharts with a projected image, and can tabulate rankings and evaluations (offering anonymity when desired by meeting leaders and partici- pants) that individuals input through their keyboards, laptops, tablets, smartphones, or specialized handheld “clickers” compatible with the system.

In many ways, the GDSS helps level the playing field among meeting participants—the shy individual hesitant to disagree or advocate for an alternative position; the dominant, outspoken opinion leader; the fault-finder; the devil’s advocate; and so forth. Although all these roles are important to group decision making, their individual communication styles often steer meetings down the wrong course and lead to outcomes that are unrelated to the best interest of the organization. These problems and other human-communication problems, such as groupthink, interpersonal conflict, and retaliation/ retribution may be magnified by the popularity of web conferencing, where participants contend with apprehension about using technology, distractions, and lowered personal cues, which research has shown to be important communication outcomes (Walther, Loh, & Granka, 2005).

GDSS introduces discipline and structure into discussions that can go wrong due to human differ- ences—without turning human participants into androids. Participants have equal opportunities to express themselves in brainstorming sessions by posting comments and thoughts to the projection screen, and vote via automated polling. But meetings supported by GDSS are far from silent; the meeting facilitator is now freed from the tasks of recording notes and votes and can facilitate more meaningful conversation. Research indicates that variables such as trust, group synergy, participation, openness, truthfulness, listening, and perceptions of cooperation are enhanced in GDSS-supported group environments (Aiken & Martin, 1994).

Further, the accuracy and efficiency of decision making improve when GDSS is implemented (Poole & Holmes, 1995). As agreements and consensus are reached, the facilitator can encourage the group to continue the dialogue with the sophisticated graphs and other visuals that GDSS produces quickly and seamlessly as people participate. Some studies indicate that strategic decision-making time can be cut in half when GDSS is employed. GDSS-supported meetings yield results that are reliably defen- sible through the patterns identified and statistics compiled by the system. And, because GDSS also serves as a cloud repository for meeting communication, participants can retrieve the ideas later.

In summary, research indicates that the implementation of online GDSS decreases negative interpersonal communication dynamics and enhances the efficacy and quality of decision making and information gathering. GDSS has applications for a wide range of organizational decision-making tasks, but can play a critical role in accurate and efficient strategic and operational planning where consensus is important.

Questions for Critical Thinking and Engagement

1. You may already have experience with GDSS; even the clicker-based response systems used in some classrooms represent a form of this type of technology. If you have experience with some type of GDSS, what is your reaction to it? Describe how the technology was utilized by your group, and with what outcomes.

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CHAPTER 8Section 8.1 Some Broad Operational Issues

AP Images/Terry Gilliam

Wendy’s Hamburgers’ purchasing policy allows managers to buy locally produced fresh meat and produce from local producers rather than from company-owned sources.

The Role of Policies

A policy is a company directive designed to guide the thinking, decisions, and actions of managers and their subordinates (Pearce & Robinson, 2005). Policies play several roles and serve several purposes. First, it saves higher management from wasting time making deci- sions that could be as well handled lower down the hierarchy. Second, it empowers people lower in the organization to make those decisions, often where they should be made. Third, they address issues that crop up frequently, so the amount of time saved is con- siderable. Finally, the decisions themselves could save the company money by, for example, limiting the kinds of services offered (“Sorry, sir, our policy is to . . .”).

In addition, policies

• establish indirect control over independent action immediately;

• promote uniform handling of similar activities; • ensure quicker decisions through using stan-

dardized answers; • institutionalize basic aspects of organizational

behavior; • clarify what is expected and facilitate smooth

execution of strategy; • provide predetermined answers to routine

problems (Pearce & Robinson, 2005).

Examples of policies include Wendy’s purchasing policy that allows local store managers to buy fresh meat and produce locally rather than from company-owned sources. IBM has a strict mar- keting policy of not giving free IBM PCs to any person or organization. Packaging-materials giant Crown, Cork, & Seal’s R&D policy is not to do any basic research. Polaroid Corporation has long- standing financial policies of never taking on any debt and never making an acquisition. Electronic Data Systems (EDS) for many years had a customer-service policy of empowering any employee to drop whatever that person was doing to answer a customer’s call and take care of the problem, at least by passing it to a more qualified person for help (Pearce & Robinson, 2005).

Policies should be developed in written form, widely distributed throughout the company, and discussed at all meetings once finalized. In written form, employees can constantly refer to them

2. Describe a group decision-making experience you have had which might have been enhanced by the use of GDSS. Describe the challenges your group encountered, and explain how GDSS might have mitigated or prevented them.

3. Although there are many benefits to GDSS implementation, these technologies are not a pana- cea. What barriers to their use might exist? What unintended problems might they introduce into the group decision-making process?

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CHAPTER 8Section 8.2 Operational Planning

as an authoritative source until they become second nature. Finally, policies are as useful for what they don’t cover as for what they do. For instance, many banks have policies that state that a loan will not be given to a customer who is already overextended.

8.2 Operational Planning Operational planning involves preparing detailed organizational plans for the coming fiscal year. It includes programs, projects, and activities that the company is already doing as well as new ones required by any change in strategy. Detailed plans by organizational unit are part of operational plans. Finally, it includes coordinating all these activities to make sure they support stated strategies.

The iterative nature of the operational-planning process means that, in practice, draft versions of plans could go up and down the hierarchical chain more than twice (Figure 8.3). The model depicted also combines operational and budget planning into the same process, which is what happens in most companies; however, because the two are significantly different, they shall be discussed separately.

At the conclusion of the strategic-planning process, the vice presidents of the different functions, in functionally organized companies, take the strategic decisions to their department and, with their key managers, draft functional objectives to be achieved by the end of the next fiscal year. In other types of organizations, key operational units get to do the same thing. For example, in marketing, examples of operational objectives (with the addition of the quantitative element) might be to improve salespersons’ “hit rate” of converting sales visits into orders, increase advertising effec- tiveness, increase the effectiveness of each distribution channel, and improve the effectiveness of

Discussion Questions

1. Corporations and all organizations are systems; yet they themselves contain many systems. Is this possible? Explain.

2. Following on from (1), how might one manage the smaller systems to improve the functioning of the larger one?

3. How can “systems thinking” improve operational decision making? 4. If some management-information systems are simply databanks, are they really systems? Explain. 5. Many manufacturing companies have realized significant savings from using MRPII or similar

systems. What would you tell them about investing to upgrade those systems into ERP or more comprehensively integrated systems? How might the additional costs be justified?

6. In a public company, why is the accounting-information system the only system that must be audited? Would it make sense to audit other parts of the system? Why or why not?

7. Can an information system provide a company with a competitive advantage? If so, how? 8. The point was made that consensus in decision making means total buy-in to the decision and

smoother implementation. How might you tell the difference between real consensus and sev- eral people just “going along” with the majority?

9. If consensus is desirable to achieve, whatever happened to dissent? Isn’t dissent also considered a spur to better decision making? Discuss.

10. A bank has a policy of not validating a customer’s parking receipt unless a transaction has been completed. One day, a customer wanted to see a bank officer who happened to be out of the office. When he asked to have his parking permit validated, the teller refused. What should the teller do—stick to the policy and risk losing a customer or make an exception?

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CHAPTER 8Section 8.2 Operational Planning

market research. Production objec- tives could be built around issues of throughput, quality, cost-reduction, and even outsourcing.

The directives then go to the actual operating units that must meet those objectives—the sales super- visors or actual sales force for a smaller company, the advertising department, market research, pro- duction or plant operations, quality control, and so on. Their challenge is to decide what must be done to meet that objective by the end of the fiscal year. This may mean con- tinuing to do what they have already been doing, changing what they have been doing, or even changing

the objective if it appears to be impossible. They must develop a series of tasks and specify who will be accountable to do what, when, and for how much, with a clear output; and a summary of their efforts.

The operating units then submit their draft plan to their managers, who coordinate with other plans in the functional area, and modify if necessary the objectives and budgets. These then go to top management, who reviews them with knowledge of other plans from the other functional areas. Because no first draft is ever perfect and usually goes over budget, the plans are sent back down for revision. In practice, the revision process takes place in a succession of meetings, at the end of which planning documents are revised. After one or two more iterations, top management approves and finalizes the operational objectives, budgets, and tasks before the fiscal year begins. Only if they have changed significantly might the board get involved again.

For smaller companies, project-management software exists to help in planning projects, espe- cially ones with lots of smaller tasks that must be done both sequentially and in parallel. Project

© Belinda Images/SuperStock

Operational planning concerns detailed organizational plans for the upcoming year, including programs, activities, and projects the company is already doing or will start to do in the future.

CEO and Board

Managers and Employees

Functional VP Level

Approve chosen strategic bundle and company-wide

objectives, programs, and contingencies

Set functional objectives

Review functional plans and adjustments

made to match available resources

Set unit objectives, activities, budgets,

and accountabilities

Negotiate adjustments to plans to match allocated budget

Consolidate functional plans

and budgets

Final approval

Final approval

Figure 8.3: Operational-planning process

Source: From Stanley C. Abraham, Strategic Planning: A Practical Guide for Competitive Success, p. 162. Copyright © Emerald Group Publishing Limited. Reprinted by permission.

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CHAPTER 8Section 8.2 Operational Planning

© Stock connection/SuperStock

After detailed departmental plans are approved, an incentive and rewards pro- gram will help motivate employees to achieve operational objectives.

Evaluation and Review Technique (PERT) has been around for a long time, and is an operational tool useful in planning, scheduling, costing, coordinating, and controlling complex projects such as constructing buildings, assembling a machine, and R&D projects (Siegel, Shim, & Hartman, 1992). Its most valuable use is helping project managers determine when a project will be finished and the likelihood that it will be completed on time. Each task is mapped on a network diagram clari- fying which tasks must be completed before it can be completed, and which other tasks require its completion first. With this information, PERT calculates and identifies a critical path through the network which is the path that takes the longest time to complete (Siegel, Shim, & Hartman, 1992). To avoid missing a deadline, changes could be made, and PERT would keep recalculating a new critical path until the project could be finished on time.

Online project-management solutions are widely available. Most web-based project-management tools offer the same basic options, including task-allocation and tracking, resource-allocation and management, risk management, scheduling timelines and deadlines, document archives, and communication. Online project-management solutions offer users transparent, easy access to files and communications, which in turn enables improved teamwork, enhanced time-management, and improved task efficiency.

Reward Systems

One more thing that must be done and that can’t be done until the detailed departmental plans are finally approved is to put in place a reward system that will be sure to motivate the achievement of operational, and hence strategic, objectives. This is a system of rewards that incentivizes people to excel and achieve beyond expectations, often mis-termed a “reward and incentive system.”

Rewards are primarily (but not exclusively) financial and vary by hierarchical position. The following are typ- ical, although specific company experiences can vary:

• For CEOs and top executives, rewards are typi- cally tied to companywide objectives such as growth in revenues and earnings, profitability ratios such as NPM, ROA, and ROE, and stock- price performance. They may include perfor- mance bonuses, stock options, increases in base pay, profit-sharing, and perks such as mortgage loans, use of a private jet or first-class travel, contribution to retirement plans, and so forth. Some incentives such as restricted stock may include provisions called golden handcuffs because they tie the executive to the company by prohibiting the sale of shares for a specified time period; if the executive leaves before that period is up, the shares are forfeited (Pearce & Robinson, 2005).

• The rewards given to middle managers are typically tied to functional or operational objec- tives such as sales of product lines or in a particular region, quality, throughput, cost sav- ings, new product development, weighted average cost of capital, and myriad others. These include performance bonuses, promotions, raises, profit sharing, and possibly stock options.

• Employees’ and supervisors’ rewards are generally tied to contributing to the achieve- ment of functional or operational objectives as team players, and may include some com- bination of profit sharing, bonuses for exceptional and timely work, and raises.

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CHAPTER 8Section 8.2 Operational Planning

Other rewards, while nonfinancial, are nonetheless important. Intangible rewards range from fre- quent words of praise (or constructive criticism), to special recognition at company gatherings or in its newsletter, increased autonomy, and more challenging assignments.

The financial rewards are based on accurate measurements of company performance that, in turn, typically depend on a reliable and up-to-date MIS. Some companies pay out rewards quar- terly, but most do so annually. In creating the system, executives have to guard against the tempta- tion of functional departments to set their functional and operational objectives too low in order to increase their rewards for achieving those objectives. Some experts maintain that companies should never offer a promotion as a reward for two reasons: It destroys the company’s carefully constructed compensation system, and promotions should be given only to individuals that are ready to assume the greater responsibility of the higher position.

The following is a useful checklist for designing an incentive-compensation (reward) system:

• The performance payoff should be significant—perhaps 10%–12% of base pay, while 20% will command the attention of the potential recipient.

• Incentives should extend to all workers, not just the top executives. • The reward system should be administered with scrupulous care and fairness. • All individuals should know what the reward system is at the beginning of the year or else

they won’t be appropriately motivated. • Incentives and the performance targets on which they are based should not be impossible

to achieve. • Payoffs should occur as soon as possible after results have been acknowledged. • Confine payoffs only to results achieved. Payoffs should not be made for behaviors such as

putting in long hours for a long period, or even going the extra mile but coming up short. Once an exception is made for one person, they will be made for more, and the reward system will quickly get out of hand (Thompson, Gamble, & Strickland, 2004).

Payoffs should never be made when the company’s profits are below a level to make them pos- sible or for average or below-average performance.

Discussion Questions

1. Some organizations (like some universities, for example) are content to keep doing what they have always done. In fact, the strategy and companywide objectives eventually comprise their operational plans added together. How would you persuade such organizations to do planning the other way round?

2. How does an organization specifically benefit from doing operational planning? (Contrast with an organization that might do no operational planning.)

3. Some smaller organizations operate “on the edge” and are forever “putting out fires.” Opera- tional planning isn’t even in their lexicon. If you had an opportunity to talk to the president of such a company, what would you say? How might the conversation go?

4. Restricted stock or “golden handcuff” awards designed to keep executives from leaving also have the effect of fostering risk-averse decision making because of the downside risk borne by the affected executives. Can you see any way of countering this effect?

5. Restricted-stock deals always benefit executives that have them whether or not the firm per- forms well. Does this way of discouraging an executive from leaving make sense to you? Why or why not?

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CHAPTER 8Section 8.3 Budget Planning

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In corporations, the finance department begins the process of estimating the company’s financial resources and arriving at a budget that upper management can implement.

8.3 Budget Planning Budget planning is the process of matching available organizational financial resources (cash on hand, a line of credit or loan, and any investment) with what the organization needs to spend to implement its strategies. It includes revising requests for money from organizational units until their requests and available resources match. What each organizational unit is finally approved to spend constitutes its budget.

The finance department begins the process by coming up with a comfortable estimate of financial resources that is the sum of what the company has and could obtain (through additional borrowing or equity investment). Given knowl- edge of each department’s current spending and the spending implied by the new strategic initiatives, it further arrives at a tentative bud- get total for each department or cost/profit center.

That budget figure is given to each departmental vice president, who makes it available to departmental managers as they do their planning for the year. When they come up

with their initial plan to meet the functional objectives, they itemize every dollar it might cost to do so. If their estimate equals or comes in under the budget figure, there is no problem. If their estimate exceeds the budget figure, they try to adjust as much as they can, but more often will say that the job can’t be done for the budgeted amount.

As Figure 8.3 shows, the department may get their plans back from an upper-management review with a mandate to reduce spending in some way to match the budget. Either depart- mental members become creative and find a way to deliver the mandated reductions or they respond that the only way to get the two numbers to match is to modify the objectives. Of course, the latter reply must include their reasoning for the position, and their supervisor then becomes their advocate.

The revised plans are resubmitted where the CEO and top management have the benefit of look- ing at all the departmental plans and budgets. At this point, they can be persuaded that imple- menting the strategy will indeed take more money than they thought and see whether they can raise the additional capital. If they can, then higher budgets are approved that match the esti- mated spending from all departments, and the budget-planning process ends. If they can’t, then some or all departments are told that they must meet their objectives with the available budget. For example, if adding 10 salespeople was in the marketing plan to help marketing reach its sales objectives, then it might have to get the same objective accomplished with fewer salespeople. The process ends when departmental budgets finally match available financial resources together with their commitment to achieve their functional objectives.

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CHAPTER 8Section 8.3 Budget Planning

Normally, operational and budget planning should be enough to enable each organizational unit and, by extension, everyone in the organization, to know what they have to do and accomplish during the coming fiscal year. However, some organizations also engage in profit planning, which is the process of arriving at an estimate, month by month, of the profit (NIBT) the whole organiza- tion intends to achieve. For each month, the total company budget is subtracted from estimated revenues; the sum of the monthly profits equals the overall NIBT objective for the coming year. Profit planning is not widely used and is considered unnecessary by some strategic planners.

Reducing Costs

The budget-planning process can also be thought of as a process for reducing costs. Not only does it ensure that spending will be covered by real financial resources but also is a forcing function for reducing costs. It’s human nature to take the easy route or continue doing what you have always done. That will happen unless someone requires it to be done for less. The very requirement forces the consideration of alternatives.

Entrepreneurs are often faced with this problem when writing their business plan and trying to seek startup capital. Their first pass at a cash-flow projection often shows that the business might not make enough money, or even make any money at all, which is certainly not what the entrepre- neurs or potential investors want to hear. All the assumptions must be reexamined and, with more research and thought, revised figures are produced of both the revenue model and the expenses. If the revised business plan looks better but still doesn’t come close to achieving the 20%–40% ROI required by typical investors, the entrepreneur considers any and all alternatives to achieving the targeted revenues for less cost. More attractive margins, at least on paper, won’t be possible until he or she is forced to consider lower-cost alternatives. Having had to put so much thought into the revised estimates also makes defending them easier.

For this reason, top management’s first instinct in this process is to force functional and opera- tional units to try to reduce costs. The budget-planning process is so valuable because it forces people to try to lower costs, which wouldn’t happen any other way.

Discussion Questions

1. What risk is the organization running when it approves expenses that exceed available financial resources?

2. Departments of a city or other public entity are well known for trying to spend their entire bud- get allocations so that they will be funded again the following year at least at the same level. If they don’t, they might be viewed as not “needing” their budget allocation and so be allocated a lesser amount. What is wrong with this process?

3. What do you think might happen when, midway through the year, expected financial resources fail to appear (for example, when some funding from a government agency is slashed)? What options might an organization in this position have?

4. Whose responsibility is it in the organization to reduce costs? 5. How does an individual or departmental unit know that something that person or group is doing

can, indeed, be done at lower cost? 6. Following on from (5), if there is a way of knowing, why don’t all corporations avail themselves of

it all the time?

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CHAPTER 8Section 8.4 Participation in Operational Planning

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Involving all employees in the organization makes it easier to avoid things that block new initiatives or are no longer useful in helping the company be more efficient and productive.

8.4 Participation in Operational Planning Just as it’s a mistake to do strategic planning only with the participation of the top-management group, so also is it a mistake to do operational planning with just middle managers. To be sure, middle managers bear the brunt of the responsibility for operational planning because they will be called upon later in the year to implement the plans. But make no mistake, everyone in the com- pany is and ought to be involved, not only in operational planning but also in carrying out the plans.

By virtue of their size, small companies have no option but to involve everyone. Yet exceptions abound. The production manager for a small garment manufacturer complained of being left out of the planning process entirely. The company was being squeezed by its large customers who were forcing the price down to maintain their own profitability. The customers used the approach that if this firm could not supply at the desired price there would be lots of other suppliers that would. The president and co-owner of the company was the one who made the bids to these large clients for future business. Time and again, he bid at a price point that was below cost, because he was convinced that he wouldn’t get the business otherwise, and he never checked first with the production manager who could have advised him of current costs and margins. The result was that it put enormous additional pressure on reducing manufacturing costs while mar- gins all but eroded. This scenario was repeated many times, and this was a management team of only two people.

In large companies, it is all too common not to involve the rank and file in operational planning. In many companies, information is only divulged or passed down on a “need to know” basis, much as in the military or police departments. People at the bottom just do what they are told; it’s part of the job.

As the discussion of organizational change in Section 2.10 made clear, however, smooth and enthusiastic implementation of any task is not possible unless those who are to do the work are involved in the plan- ning. This is much easier said than done. It depends to a large extent on the kind of culture that exists in the company. Cultures that are com- mand-and-control or bureaucratic are by their very nature not inclined to involve everyone as they should, mainly because, as befits those cul- tures, they have been able to do what they do without such involve- ment. Open, adaptive, innovative, nimble organizational cultures as discussed in Section 2.9 would not be able to progress without involv- ing everyone and seeking their input, especially in planning and

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CHAPTER 8Section 8.5 Getting It Done in Time

suggesting new ideas. This culture of openness requires the implementation of participative leader- member behavior, which encourages supportive-relationship behavior and the open sharing of ideas during decision-making and strategic and operational planning.

Another reason to involve everyone in the organization is to make it easier to get people to stop doing things that either get in the way of new initiatives or are no longer useful in helping the company be more efficient and productive. Change involves “forgetting” about and dropping old habits if new ones are to take their place. Change will stall or not take hold to the extent that people cannot or won’t forget what they used to do. It is therefore wise to involve everyone; make sure they understand what they have to do and why; how their job, role, and expectations are changing; how and why they will benefit from the changes; and have a mechanism for repeating the new imperatives often until force of habit takes over, and the changes and improvements become second nature.

8.5 Getting It Done in Time The operational-planning process should be timed so that by the time the new fiscal year starts, all the strategic decisions, operational plans, and budgets have been completed. Final approval of the plans and budgets should be completed within a couple of weeks of the start of the fis- cal year. Bear in mind that both strategic and operational planning take place in addition to people’s regular daily activities. But how long should the strategic- and operational-planning processes take?

There is no simple answer. Consider four scenarios—among many—beginning with the best or ideal situation:

• The company is used to doing strategic planning, and much of the required research is done throughout the year. It is performing well and is used to transforming strategic decisions into operational plans and can get those plans approved in one iteration. The two processes together, especially for small to mid-size companies, take no more than two months.

Discussion Questions

1. The ease with which everyone in the organization can be involved depends on its culture. Might involving everyone actually change the culture? Comment.

2. This section advocated involving everyone. Surely not everyone? Would this include the peo- ple loading boxes in the shipping dock? The janitors? The mailroom clerk? The secretaries? Comment.

3. Following on from (2), if you don’t agree that everyone should be involved, where might your cutoff be? Give reasons for your answer.

4. Following on from (3), if you advocate a cutoff, explain why that might be superior to involving everyone.

5. “Muscle memory” is unquestionably valuable when a new habit must be learned. But how can one get rid of an old habit that has also been engrained in the organization’s “muscles”?

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CHAPTER 8Section 8.5 Getting It Done in Time

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Budget preparation should take two to four weeks, depending on the size of the company.

• Like the scenario just described, but for a well-performing larger company with more divi- sions and vertical layers, coordinating operational and budget planning takes longer but still gets done within 2-1/2 months.

• For a company that is not performing very well, has financial problems, but has some experience with strategic and operational planning.

• This company is constantly putting out fires, lurching from crisis to crisis; strategic and operational planning take back seats, if done at all. If anything is done, it will probably be done badly, with changes continuing to be made after “approvals” have been given. The time frame needed for planning is impossible to estimate.

There are companies, of course, that are run autocratically, with the CEO telling everybody what to do and being the only one to approve anything. In this situation, the combined processes shouldn’t take long at all, perhaps two to four weeks. This was not included as a scenario in the preceding list because, although it might take the least amount of time, it doesn’t qualify as a “best” or “ideal” scenario. However, it often works in that kind of organization.

Sometimes, the process takes lon- ger than anticipated, and the dead- line of the new fiscal year is missed. What usually happens is that the full operational-planning process is aborted, and whatever stage it has reached is hurriedly approved. After all, the start of the new fis- cal year can’t be changed. One way around this dilemma is to shorten the approval cycle. Instead of going all the way up the hierarchy for every approval cycle, as shown in Figure 8.3, plans should only go to a higher level when they are refined much further. This will shorten the operational-planning cycle.

For an organization that has not previously done operational plan- ning, two months is a reasonable

allowance for the first time. In each successive year, familiarity with the process and everyone’s ability to produce better plans should enable the company to be more accurate in scheduling the process without any drop in quality. It is best to start strategic planning as late in the fiscal year as possible while leaving enough time for decent operational and budget planning. The time frame of three months, mentioned earlier, is a whole quarter and really, too long to devote to planning, mainly because conditions will have changed during such a long planning process. For a large organization that has many layers and planning units, operational planning does take more time than anyone would like.

Should a company ever abandon the operational-planning process if time is running out? The short answer is no. As long as management approves what should be allocated and achieved dur- ing the first month of the fiscal year, there will be that additional month to finish the process

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CHAPTER 8Summary

properly. In the next chapter we shall consider some tools that large organizations can use to speed up both strategic and operational planning and keep the “intrusion” of planning in people’s busy lives to a minimum.

Summary This chapter explained the context and importance of operational and budget planning. Oper- ational planning focuses on planning the projects, programs, tasks, and activities the company needs to implement its strategies, and includes both what it already does as well as additional programs it must do the next year. Budget planning focuses on getting all operating units to spend what they need to spend to do what they must do without exceeding the total financial resources that the company has or may have at its disposal for the coming year. As plans take shape for each operational or functional unit, they inevitably undergo changes until their estimated costs match the estimated financial resources allocated to that operational unit.

Operational planning is carried out more effectively when everyone involved in the process under- stands that everything is part of a larger system, that anything they do affects other parts of the sys- tem, and vice versa. That understanding, called systems thinking, is critical in operational planning. In the same vein, having access to the right information for management decision making and action is vital—companies couldn’t operate without such information. Many such systems are nothing more than databanks, forcing the user to make sense of and interpret the data. Transforming them into systems such as MRP II (materials resource planning II) for manufacturing companies or the more encompassing ERP (enterprise resource planning) make such data far more useful, but they require considerable investment, not only in capital, but also in transforming the way people work and learn.

Operational decisions should be based on consensus at each decision-making level, which means complete agreement. Getting a majority vote, for example, means there is a minority that disagrees with the decision, which in turn means that implementation will be that much more difficult.

The chapter also discussed the role of policies in an organization. These are in effect rules that guide behavior in often-encountered situations. That way, in such situations people will make the correct decision all the time. Having the policies in writing allows people to refer to them at any time and gives them the force of law (which, in the company, they are). Policies can cover, for example, how customers and the environment and suppliers are treated, as well as mundane subjects like what can and can’t be included in an expense report. Operational planning must take into account the company’s current policies.

Discussion Questions

1. Suggest one way in which operational and budget planning could suffer if the process were rushed. 2. Imagine that the operational-planning process was well into its third month and already extant

conditions had changed. What should the company do? For example, should plans at the lowest levels be changed first or only those plans most affected by the changed conditions?

3. Following from (2), should just the plans be changed or budgets as well? 4. With more experience in operational and budget planning, it should be possible to get it done in

less time each year. Exactly how important is getting it done quicker?

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CHAPTER 8Summary

Operational planning itself is the process by which objectives are translated into projects, pro- grams, tasks, and activities that get progressively more detailed the further down in the organiza- tion the process goes. Budget planning is done at the same time. Operational units must develop their plans while staying within the budget allocated to each one, requiring first drafts to undergo several revisions in order to balance these two requirements and as they go up and down the orga- nizational hierarchy. One of the unheralded benefits of budget planning is the creativity unleashed in order to reduce costs.

Finally, everyone in the company should be involved in operational and budget planning, not just the managers and supervisors. When this happens, new ideas have a chance to surface, consensus is more likely, and implementation goes more smoothly. Operational and budget planning have to be done fairly quickly just before the start of the new fiscal year. Doing this is difficult without compromising the process and because involvement is an additional burden on top of day-to-day responsibilities. The risk with taking up to three months to do operational and budget planning is that conditions will change during the process, requiring plans to be further changed as a result. Experience helps, as does revising plans first before submitting them up the ladder for approval.

Key Terms

action information systems Automatically make (the right) decisions that are acted upon immediately.

budget planning The process of matching available organizational financial resources (cash on hand, a line of credit or loan, and any investment) with what the organization needs to spend to implement its chosen strategies. It includes revising requests for money from organizational units until their requests and available resources match. What each orga- nizational unit is finally approved to spend constitutes its budget.

consensus Complete agreement.

critical path The path through the network that takes the longest time to complete.

databank A stream of unprocessed data that people can access.

decision-making system Embodies the organi- zation’s criteria for choice and actually makes decisions on which the organization can rely and act.

ERP (enterprise resource planning) A process that attempts to consolidate all of a company’s departments and functions into a single com- puter system that serves each department’s specific needs.

management-information system (MIS) A system that must supply the basic information needed by managers for making decisions.

MRPII (material resource planning II) A detailed production schedule that accounts for machine and labor capacity and scheduling the production runs according to the arrival of materials. An MRPII output is a final labor and machine schedule. Data about the cost of pro- duction, including machine time, labor time, and materials used, as well as final produc- tion numbers, is given by the MRPII system to accounting and finance.

muscle memory Repeating something often enough so that muscles learn what needs to be done and it becomes second nature (they can perform the activity without con- scious thought). The concept is applicable to organizations.

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CHAPTER 8Summary

operational planning Involves preparing detailed organizational plans for the coming fiscal year. It includes programs, projects, and activities that the company is already doing as well as new ones required by any change in strategy. It includes detailed plans by organi- zational unit. Finally, it includes coordinating all these activities to make sure they support stated strategies.

policy A company directive designed to guide the thinking, decisions, and actions of manag- ers and their subordinates.

predictive information systems Permit deci- sion-makers to draw inferences and make predictions from the data.

PERT (project evaluation and review tech- nique) An operational tool useful in planning, scheduling, costing, coordinating, and control- ling complex projects.

reward system A system of rewards that incen- tivizes people to excel and achieve beyond stated objectives.

system A set of interacting or interdependent components forming an integrated whole.

systems thinking The realization that affect- ing one part of the system affects other parts and that what is done must benefit the whole and not just a particular part at the expense of other parts.

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Choosing the Best Strategy

Learning Objectives

By the time you have completed this chapter, you should be able to do the following:

• Select criteria appropriate to the company and its purposes, and appreciate that a wide variety of criteria exists.

• Use the criteria in a criteria matrix to evaluate strategic-alternative bundles to help select the best one. • Recognize the differences between company, partial, functional, and operational objectives, and among objectives, goals, and strategies.

• Set company-wide objectives with more confidence. • Decide on a strategic intent for the company and major programs required to implement the strategy. • Understand why contingency planning is necessary and how to devise meaningful triggers and contingencies. • Appreciate why the board of directors has to be kept informed and involved throughout the strategic- decision-making process.

7

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CHAPTER 7Section 7.1 Selecting Appropriate Criteria

Chapter Outline

7.1 Selecting Appropriate Criteria

7.2 The Criteria Matrix and Choosing the Best Strategy

7.3 Deciding on Objectives

7.4 Contingency Planning

7.5 Keeping the Board of Directors Involved

This chapter explains how to choose the best strategy for the company from a number of viable alternatives using carefully selected criteria and how to argue persuasively for its adoption. It also shows how to arrive at the other strategic decisions and keep the board of directors involved through the process.

7.1 Selecting Appropriate Criteria Choosing among alternatives becomes a little easier when each alternative is compared one at a time against a set of criteria. Because such an analysis is often insufficient to decide an issue, the decision may eventually turn on more subjective analysis. What kinds of criteria are appropriate? Because one of the conditions for creating a good bundle is that if implemented, it would lead to success for the company, the criteria to evaluate the bundles should together represent what “success” means to the company and, perhaps, the overall purpose of the company. Depending on the company and its particular situation, the criteria explored in this section are possible can- didates that could be used to examine a company’s current standing and future outlook.

Shareholder value is a fairly com- mon criterion, not only for choosing from among alternative strategies but also from among alternative investments. It requires the firm to have a model for computing share- holder value so that the computa- tion for each strategic alternative or investment uses common val- ues of discount rates and common assumptions about the future envi- ronment. In this way, the results become comparable. Still, many managers and companies believe that one of the principal purposes of strategic planning is to increase shareholder value. So manag- ers should know how to compute shareholder value.

iStockphoto/Thinkstock

One of the most important common criteria for choosing a strategy is revenue growth.

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CHAPTER 7Section 7.1 Selecting Appropriate Criteria

Additionally, strategic management and planning is based on an understanding of the relative contri- bution of brands to shareholder value (Rappaport, 1997). For example, the Coca-Cola brand accounts for 51% of the value of the Coca-Cola Company, which also includes 3,500 other brands such as Dasani, Sprite, and Schweppes (Coca Cola Company, n.d.). When managers have a solid understand- ing of brand value, they will use this aspect of shareholder value as a key criterion in planning.

Revenue growth is one of the most common criteria, used more often when a firm’s revenue growth has been inadequate or flat, or when issues of market share and market positioning are strategically significant. A striking recent example of revenue growth is illustrated by Iluka Resources, one of 2011’s best stock-market performers. Iluka posted a 53% increase in revenue between the third and fourth quarters of 2011 (Iluka grows, 2012). Such performance is often a strong predictor of takeover, a strategic decision made based on the revenue-growth criterion.

Profitability should be used when a firm has insufficient working capital or inadequate or negative cash flow, when profits in recent years have been flat or negative, or when it is highly leveraged. Leveraged buyouts (LBOs) rely on huge cash flows and profits during the first year following the LBO, so that the huge debt can be rapidly paid down. However, as a note of caution, it is relatively easy to “mortgage the future” in favor of present profits, for example, by reducing investment in R&D or new-product development, so that, as a criterion, shareholder value may be superior, tak- ing into account as it does a 10-year future stream of earnings.

Firms vary in their propensity to take risk. They are more inclined to take risks the more that risks have paid off for them in the past and when they have sufficient capital so that they can afford to make mistakes. But degree of risk or riskiness as a criterion is more than this. A firm’s culture can, for example, be risk averse, in which case it will avoid risk even when the risk has odds of success that appear to favor it. Risk can be analyzed and measured, but few have the skills to perform such analyses. Instead, they prefer to make a risky decision according to instinct, or assess risk by ven- turing an opinion or two (guessing), or even ignoring any underlying risk. One way in which risk can be discussed among a group of people who are not risk analysts is as fol- lows: Because all alternative bun- dles except “status quo” involve doing something the company has never done before, “risk” can be used as a subjective measure of the likelihood that it can imple- ment the bundle successfully. Some alternatives are sure to score higher or lower than others when risk is viewed this way.

Amount of investment required is a practical criterion. If a particular strategic alternative requires an amount of capital the firm does not have or cannot secure, then it shouldn’t even be considered a

Hemera/Thinkstock

When a company is looking at the amount of investment money required from investors, an appropriate criterion to con- sider would be return on investments and how soon the invest- ment may be recouped.

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CHAPTER 7Section 7.1 Selecting Appropriate Criteria

bona fide alternative because it fails to meet the criterion of feasibility. Of course, the firm could borrow more money but must be careful not to exceed some value of debt-to-equity ratio required by its creditors or increase its debt to the point where its cash flow cannot service the debt. Obtaining equity capital may be relatively easy for a public company that has been performing well, but not so for a private company. In certain circumstances, the firm could go public and raise some equity capital; in other circumstances, that may not be possible. A firm could find a partner to share some of the risk and put up some of the capital required. But in this case, profits resulting from the strategy must also be shared. Finally, being acquired by the right company could provide the capital needed to finance a strategy, but this step is drastic and should be taken only in the best interests of the company, not just as a means of raising capital. For instance, SEOmoz software CEO and founder Rand Fishkin pro- vided a detailed account in his blog of his experience negotiating an acquisition that ultimately didn’t make sense for his company (Fishkin, 2011). In its most simplistic application, all other things being equal, it makes more sense to choose a bundle that requires less investment over another that requires more.

Even when a company can come up with the investment required by a particular alternative, an appropriate criterion might be return on investment (ROI, a profitability measure) and how soon the investment can be recouped; a breakeven point in months is desirable. Clearly an alternative with a much shorter breakeven point is more attractive to a firm with scarce resources, and one with a higher ROI is more attractive to a firm for which ROI is a critical measure of performance. It may make sense to choose a bundle that requires a higher investment if that investment can be recouped more quickly and yields a higher return, but note that these are three separate criteria and the bundles are evaluated on each one in turn.

A firm would choose an alternative that suited its existing corporate culture over one that needed a cultural change to make the strategy succeed. Just as “form follows function,” so also does “culture follow strategy.” This means that changing the culture to support the right strategy might be preferable to limiting a company to a strategy that fits the existing culture, or where the existing culture constrains the choice of strategy. Having said that, firms that try to change their strategy assume their culture will also change, then find the strategy almost impossible to implement because the unchanged culture is impeding it. It is well known that changing a corporate culture is exceedingly difficult and, for large organizations, takes a lot of time (recall the discussion in Sections 2.9 and 2.10). If every alternative considered required the culture to change, the alternative that matched the existing company culture the most and would therefore require the least change should, perhaps, be chosen. If a firm does not have a core competence or competitive advantage, it should certainly try to attain one, because com- peting without one results in below-average industry profits and a weak competitive position. Thus, the firm should look for a strategic alternative that would, in time, help it attain a core competence and competitive advantage. If the firm already possesses these attributes, then the alternative that increases the size or duration of the competitive advantage the most should be preferred.

If the industry in which a firm competes has little or no bargaining power with its buyers or suppli- ers, its profitability will be low or subpar and competitive conditions very difficult. Clearly in such a situation, increasing its bargaining power and giving it some leverage is highly desirable. One of the most effective ways of doing this is through differentiating. So, would any of the alternatives in question increase the firm’s bargaining power with either its customers or suppliers?

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CHAPTER 7Section 7.1 Selecting Appropriate Criteria

Hemera/Thinkstock

If there is an opportunity in foreign markets, it is important for a company to develop a global presence, whether it is ventur- ing into the international market for the first time or increasing market share in selected countries.

There may be issues of timing to consider among the alternatives in question. Some alternatives are sensitive to when they are implemented, such as accelerating introduction of a new product or entering a particular market. If implementing an alternative now increases its likelihood of success as opposed to doing it later, this may be reason enough to choose it. Conversely, if doing it now

reduces any advantage you other- wise might have, such as investing in a market push just as the econ- omy turns down sharply or when a competitor introduces a better and cheaper product, then that may be reason enough to reject the alter- native. However, using this crite- rion typically requires more data.

Which alternative will most help the company maintain or increase its technological lead over its com- petitors? Or give it the technologi- cal lead it never had? Or help it become more innovative and tech- nologically competitive?

As more companies realize that their biggest markets lie in foreign countries, developing a global pres- ence could become a prime factor,

whether venturing into international markets for the first time or increasing already substantial market shares in certain countries.

Clearly, some criteria make sense for some companies in certain situations, so should be used carefully. Others, such as revenue growth, profitability, degree of risk, investment required, share- holder value, degree of cultural change required, and competitive retaliation apply to almost all corporate situations.

The criteria you ultimately use in your analysis must fit the organization you are analyzing. For example, to some organizations, profit is the primary indicator of success. Elsewhere, success may be measured by the number of jobs provided to the community, the percentage of profit donated to charitable causes, or the reduction of waste produced during the course of opera- tions. Most of the criteria discussed in this section do not fit the circumstances of a nonprofit organization. The strategic-planning process of an academic department at a state university used the following criteria to help it choose from among several alternatives. Alternatives must accomplish the following:

• Be in the best interests of the department’s faculty • Raise the quality of education and programs • Enhance the department’s reputation with employers • Increase the department’s finances • Make the department more competitive externally

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CHAPTER 7Section 7.2 The Criteria Matrix and Choosing the Best Strategy

© Francisco Cruz/SuperStock

The selection of criteria and rating bundles through the criteria matrix is an opportunity to develop the arguments you can use to defend your preferred choice.

7.2 The Criteria Matrix and Choosing the Best Strategy One method that has been developed as a tool for evaluating strategy bundles is called the criteria matrix. It entails choosing five or six criteria most important to the firm and assigning a numeri- cal rating as a means of identifying the best strategy. Another benefit of creating and using the criteria matrix is to use it as a worksheet in developing defensible and persuasive arguments for your preferred bundle.

Applying the Criteria

Experience has shown that using five or six criteria to evaluate the bundles makes the most sense. This range works because using too few criteria fails to capture the complexity inherent in the bundles, and using too many runs the risk of introducing conflicting criteria and would dilute the effect of each cri- terion on the final outcome.

Which criteria to choose is entirely up to your management team. “Playing” with several criteria can be a useful way to learn of the bundles’ sensitivity to various com- binations of criteria. Managers should supplement this analysis with detailed forecasts and analyses. For example, to assess which bundle might yield the most revenue growth were each one implemented, the team should conduct a more detailed sales forecast for each bundle over the planning horizon (three to five years). Similarly, profitability and shareholder-value analyses should be conducted, rather than guessing. Even though such projec- tions are still estimates and based on assumptions, they require more reflection and thought, and so should be more valuable.

Discussion Questions

1. Many candidates for possible criteria were presented in this section, and it makes sense that the criteria should be related to the company’s purposes or what “success” means to the company. Yet “timing” is one that relates to neither. Which others of the criteria discussed have little or nothing to do with purposes?

2. Following on from question 1, why were such criteria included in the list of possibilities? 3. Which of the criteria discussed would be least likely to be useful in differentiating among alterna-

tive bundles?

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CHAPTER 7Section 7.2 The Criteria Matrix and Choosing the Best Strategy

Notice also that many of these criteria include purposes to doing strategic planning in the first place and what the firm perceives as success. It is fitting that criteria used to chart the future direction of the company be as important to an organization as its fundamental purposes and what it views as success.

The criteria matrix is used to evaluate the bundles against multiple criteria using a scoring system that enables the results of using each criterion to be added up at the end (Table 7.1). The first step is to choose a set of criteria that makes sense for the company. These may include some of those criteria described in the previous section and perhaps others relevant to the company and its present circumstances.

The next step is to assign a rating to each criterion on a 10-point scale. Some criteria are positively correlated and some negatively correlated. An example of the former is revenues: an alternative that might yield high revenue growth is good for the company, but low revenue growth is bad. The two go in the same direction so to speak (high growth = good, low growth = bad), so the criterion “revenue growth” is positively correlated. In such instances the rating would range from 0 to plus 10. A neutral alternative would be scored 0 whereas an alternative that would be strongly favor- able to the company might be a 9 or a 10. An example of a negative correlation is “size of invest- ment required”: an alternative requiring a lot of investment is “bad” for the company, but a small investment requirement is “good.” The two go in opposite directions (a lot = bad, little = good). For a negatively correlated alternative, the rating would range from 0 to minus 10. Thus, an alternative that is not risky at all would get a 0 score, one that is moderately risky a score of perhaps minus 5, and an extremely risky one perhaps minus 7 to minus 10. Table 7.2 lists examples of positively or negatively correlated criteria.

The rating scores are subjective estimates; the absolute value of the rating is not as important as spacing them according to an estimate as to how close or far apart the alternatives are. It is the relative ratings that are critical. The bundles are rated against each criterion independently of any other criterion. When all the ratings are done, the scores are added up to see which alternative has the higher (if evaluating two) or highest total score.

Table 7.1: Criteria matrix for evaluating alternative bundles

Criteria Alternative A Alternative B Alternative C

Revenue growth (P) 8.0 8.0 9.0

Profitability (P) 7.0 7.5 8.5

Shareholder value (P) 8.0 7.0 8.0

Riskiness (N) -8.5 -8.0 -8.5

Investment required (N) -7.0 -9.0 -9.5

Change in culture required (N) -6.5 -8.0 -6.0

Totals 1.0 -2.5 1.5

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CHAPTER 7Section 7.2 The Criteria Matrix and Choosing the Best Strategy

© Raymond Forbes / SuperStock

An objective is a quantitative target to be achieved within a specified time frame.

Arguing Persuasively

In Table 7.1, the alternative bundle that receives the highest total is option C. However, option A’s total score is so close to C’s that it makes arguing for C being the best alterna- tive open to question. This is where other considerations come into play. If market share is particularly important to the company (rev- enue growth), or profitability, or if the company is averse to changing its culture a lot, then the analy- sis would suggest option C. But the table also shows that option C requires the most investment, and if the firm might be unable to raise

Table 7.3: Criteria matrix revised from Table 7.1

Criteria Alternative A Alternative B Alternative C

Revenue growth (P) 7** 8 9*

Profitability (P) 7** 8 9*

Shareholder value (P) 6** 7 9*

Riskiness (N) -7 -8 -9

Investment required (N) -7 -9** -8

Change in culture required (N) -7 -9** -6*

Totals -1 -3 4

*Reasons to select **Reasons to reject

Table 7.2: Positively and negatively correlated criteria

Positively correlated Negatively Correlated

Revenues or revenue growth Capital investment required

Contribution to shareholder value Change in culture required

Return on investment Time to breakeven

Adverse effect on competitors Overall riskiness

Strength of value proposition

Gaining or extending a competitive advantage

Increasing its bargaining power

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CHAPTER 7Section 7.2 The Criteria Matrix and Choosing the Best Strategy

the needed capital, that could be the one reason to reject it. Recall, however, that feasibility is one of the six criteria for creating bundles, so option C should not have been qualified as a bundle if the needed capital couldn’t be raised.

To avoid the situation where there are two alternatives that achieve almost equal ratings, the choice of criteria and assigned ratings are revised until there is a clear winner by at least three points. While this appears to be “fixing” the result, the process is still in “analysis” mode, which means that managers are free to try different criteria and ratings until they are satisfied they have a defensible strategic bundle. After all, defending and being comfortable with the choice of strategy is what this whole exercise is about. It is that ultimate defense before top management or the board of directors that will keep anyone from “fixing” the ratings to yield a preordained result. A preordained or poorly argued result can be spotted a mile away and will damage its pro- ponent’s credibility. So while this analysis is being done, it is important to remember to choose only that alternative that can be supported persuasively; the scoring system will help in that regard. The criteria matrix and the associated process of selecting criteria and rating bundles against them is simply an opportunity to develop arguments to defend or “sell” the preferred choice to others.

The danger with using such a quantitative yet still subjective method to choose a strategic alterna- tive is that it invites criticism precisely because one person’s criteria and ratings may not match any- one else’s. The results are sensitive to the criteria chosen. Using shared or consensus ratings within a group is one way to get around this problem and to try out different combinations of criteria. The principal value of the criteria matrix, however, is to force planners to test their choice of alternatives against different criteria in case other people believe such criteria are important. In the case of dis- agreement, the person who has gone through this exercise will have “done their homework” and be able to discuss—and perhaps refute—another person’s point of view.

Effective Presentations

In this chapter, we review a number of logical and data-based concerns you should have when pre- senting alternative strategic bundles to stakeholders. Undoubtedly, in order to be persuasive, you must have the data to support what you are advocating. However, how you package and present those data are critical concerns. The confidence and competence you demonstrate in proposing a strategy will impact your listeners. Communication researchers and consultants Jennifer Waldeck, Patricia Kearney, and Timothy Plax point to a rich body of research literature that examines the dynamics of persuasion and resistance. What follows is a summary of some of that research and how it applies in your strategic-planning efforts. Employ these research-based strategies to help you think through your oral or written presentation style and content:

1. Assess your stakeholders’ willingness to change. Humans’ inclination to resist change has been widely documented. Central to your persuasive effort is identifying your audience’s present position. a. When they agree at the outset, your persuasive task is to reinforce their commitment and

provide them with some motivation to strengthen their commitment to a strategic change. As inconsistent with a corporate communication strategy as they may seem, emotional appeals are popular and effective ways to energize and motivate others. Finally, when deal- ing with stakeholders who are “with” you, you will benefit from being direct with those sup- portive individuals and telling them exactly what you believe needs to happen.

(continued)

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CHAPTER 7Section 7.2 The Criteria Matrix and Choosing the Best Strategy

In comparing Tables 7.1 and 7.3, note that the latter uses only whole numbers; since the ratings are “educated guesses” in the absence of any data, estimating to one place of decimals belies a level of accuracy that just isn’t there. Arguments involved in the selection of a bundle consist of two parts: (1) reasons why the preferred bundle was chosen, and (2) reasons why the other two were rejected. The best ratings in the table are highlighted in the winning bundle. Thus, in Table 7.3, if option A were “forming new partnerships,” option B were “developing new products,” and option C were “expanding nationally,” the argument would look like this:

The company should expand nationally because doing so would generate the most revenue growth and profitability, increase shareholder value the most, and require the least culture change. Forming new partnerships would generate the least rev- enue growth and profitability and increase shareholder value the least, while devel- oping new products would require the most investment and culture change.

b. When dealing with a hostile or disagreeable audience, avoid direct and overt influence attempts. These will result in activation of an ego-protective defense that your listeners will use to guard what they are already invested in. In these cases, it’s important to modify your expectations and ask for only small amounts of change and slight adjustments to think- ing and behavior. For example, plan to move your audience from more to less disagree- ment in your initial discussions. Second, work to establish common ground and a sense of understanding. Acknowledge areas of agreement. Finally, be prepared to provide extensive amounts of the kinds of evidence and data discussed in this chapter to support your position.

c. When your audience is neutral or undecided, doesn’t know much about the issues you are presenting, or is confused and overwhelmed by the facts, your first objective should be to establish relevance. By providing background information on the issue, you can make the issue professionally relevant to stakeholders and heighten their attention. Although evidence is important with these audiences, you must be cautious not to overwhelm or inundate them, since there is likely to be a learning curve involved.

2. Avoid inflammatory phrases. Steer clear of words and phrases that will make your stakeholders angry, cringe, or uncomfortable. These semantic barriers will distract your audience from listen- ing effectively and evaluating alternatives fairly.

3. Use a two-sided message with refutation. A speaker is most likely to influence an audience by presenting both sides of an issue and taking the time to argue against the position he/she finds undesirable. When you do this, your constituents will perceive you as well-informed, credible, and objective. Just be careful to be objective in opposing others’ points of view, rather than offensive.

4. Inoculate against counterarguments. When you know there are arguments against elements of your strategy (and there always are), it’s a good idea to inoculate the audience against them. Doing so involves identifying those arguments and refuting each with solid evidence, often before they are even raised (because you have anticipated them). As a result, you will arm your audience to resist them.

5. Minimize objections. Spending too much time inoculating against counterarguments detracts from the advantages of your proposal. So just as it’s important to carefully consider the range of strategic alternatives as you are creating your bundle, you should identify only the top two or three critical objections to address in your proposal.

6. Repeat your message using various tactics and media. Leveraging stakeholder support for a pro- posed strategy is rarely accomplished in a single message. In shepherding strategy change, design a message strategy that will expose your constituents to the ideas multiple times and in multiple formats (e.g., presentation, written proposal, podcast, interactive Web-based summary).

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CHAPTER 7Section 7.3 Deciding on Objectives

A final comment on the bundle analysis reflects on how well you have crafted the criteria matrix. It could be that the bundle chosen best meets all the criteria and one of the other two bundles falls short of all the criteria. This means a couple of things: (a) the winning bundle is so much better than the others and the one that falls short of all the criteria is so much worse than the others that it reflects badly on how the bundles were created in the first place (they are all supposed to be good, viable bundles); and (b) the third bundle is left with no reason to reject it, which also hurts the argument. In such a case, the criteria matrix should be reworked so that the winning bundle is still the one that would prevail, but would not be better than the other two on all criteria.

7.3 Deciding on Objectives The recommendations phase concludes the strategic-planning process allowing the recommenda- tions—and the strategy—to be implemented. Recommendations include setting objectives, defin- ing strategic intent, identifying key programs to achieve the objectives, and exploring triggers and contingencies if things do not go as planned. Creating or revising mission and vision statements is also part of this final phase if the organization’s existing statements are no longer valid or if the organization has never had them before.

An objective is a quantitative target to be achieved within a specified time frame. It may seem odd to some that setting objectives comes after choosing a strategy. They may find it more logi- cal to first set objectives and then choose a strategy to achieve them. Ideally, they should be set together, that is, iteratively until they fit with each other. But that is hard to do. Deciding on a strat- egy first makes sense for three reasons. First, it follows naturally from identifying the company’s key strategic issues, which in turn follow logically from the situation-analysis phase. Second, by construing the selection of a strategic alternative bundle as creating a road map or direction for the company, one can then turn one’s attention to deciding how far and how fast to go along that road (i.e., objectives). Last, deciding on the strategy first allows many criteria to be used, enriching the assessment and ultimately the choice of strategy.

Discussion Questions

1. Are the following criteria positively or negatively correlated? Brand reputation Economic value added Changing the cost structure of the firm Cost of maintaining quality Sales per square foot Managerial turnover Weighted average cost of capital (WACC) 2. The section advises that one should use 5–6 criteria in a criteria matrix. Discuss arguments of

your own concerning why using fewer or a larger number of criteria would work or not work. 3. Would using more criteria produce a different result? Would it inspire more or less confidence in

the result? 4. Assume you have developed a good criteria matrix and are now working on a convincing argu-

ment for your winning bundle. But what the criteria matrix reveals, in your opinion, doesn’t make for a convincing argument. What do you do?

5. The overarching purpose of a criteria matrix is to choose a preferred “best” strategy and argue persuasively to others (perhaps even yourself) that it is the best one. Can you think of another method or process that would lead to the same result? Explain it.

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CHAPTER 7Section 7.3 Deciding on Objectives

In addition, there are two problems with setting objec- tives first. Where does the objective—the quantitative target—come from? Other than the case where the current strategy is being continued, setting an objec- tive first lacks a context. For example, to meet a 20% revenue growth objective in two years may be possi- ble by expanding internationally, but not by investing more in R&D. Yet the latter may be the better strategy in the long run. Wouldn’t it make more sense to ask which of the two was capable of generating more rev- enues over the next several years? And where did that 20% number come from?

The second problem with setting objectives first is that, for example, revenue growth becomes the sole criterion for picking a strategy. That is, having set an objective, a strategy is chosen that will best enable the company to meet the objective. Wouldn’t it make more sense to use revenue growth in this instance as one of several important criteria? Would one be as content to achieve the revenue-growth objective if the company were also losing money?

In the end, whichever one is done first—the strat- egy or the objectives—they must both match and be consistent with one another. The strategy determines how the company will compete and where it is going, while the objectives determine the rate of growth and how fast the company can go (what it can achieve) given its resources, capabilities, and aspirations. Great care must be taken to dis- tinguish objectives from strategies. For example, executives often talk of “high growth,” “moder- ate growth,” and “low growth” strategies. Clearly, these growth “strategies” are really objectives reflecting a high, medium, or low increase in sales or revenues. The full range of possible business strategies was covered in Section 3.2.

Setting Objectives

While this model advocates setting objectives after deciding on a preferred strategic alternative, the two must be so well matched that an observer would imagine that they were done together. It is impossible to evaluate or judge a strategy without knowing what the objectives are, and like- wise impossible to judge whether the objectives make sense without knowing how they are to be achieved (the strategy) (Collis & Rukstad, 2008).

Consider this example. A company decides to pursue an accelerated product-development strat- egy and at the same time, change its fairly conservative culture into an innovative one that also val- ues quality. Is this a good strategy? It is impossible to tell unless you also know what the company is trying to achieve, that is, know its objectives. If you were now told that in three years’ time the company expected sales to double and profits to increase by 50% and that it had the resources to

Stockbyte/Thinkstock

One of the steps in setting objectives is to decide on a small number of measures critical to the firm, such as revenues, profit, and debt structure.

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CHAPTER 7Section 7.3 Deciding on Objectives

Stockbyte

Companies have goals because they inspire employees and external constituents to perform better.

carry out this preferred strategy, one now has a basis for either criticizing the strategy or believing that it will work (or even criticizing the objectives). So a strategy without objectives is meaningless.

Consider a second example. A company whose sales have been flat and that has been losing money for two years wants to increase sales by 20% next year and at least break even. Are these good objec- tives? Again, it is impossible to tell unless you know how the company intends to achieve them, which means knowing its strategy and programs. Merely trying to increase sales, typically through a market-development strategy, may be insufficient. The company’s product may be outdated and its cost structure too high. So with the competitive environment the company faces, it will take a well- thought strategy to give an observer confidence that the objectives could and would be achieved. Again, objectives without a strategy are meaningless.

Setting objectives is a three-step process.

Limit the Choices Decide on a small number of measures critical to firm performance. These might typically include revenues, profit, debt structure, and the like. There is no rule as to how many objectives a firm should have. But the more it has, the more difficult it becomes to achieve them all and the greater is the likelihood that some objectives will conflict with others; that is, achieving one will result in not achieving another. About three to four company- wide objectives is typical, one of which is revenues (or market share if it can be accurately measured) and some kind of profit measure: EBIT, NIBT, NIAT, EPS, ROI, ROE, ROS, or ROA—NIAT being the most commonly used. The remaining one or two can be anything of critical importance to the company such as sales per square foot for a retailer, operating income per screen for a movie-theater chain, debt–equity ratio for a fairly leveraged company, and the like. Do not include cost- reduction objectives as one of them because any efforts to reduce costs will show up in improved profit; cost- reduction objectives are important only at an opera- tional not a strategic level. Similarly, other operational or programmatic objectives, such as number of new products produced, percentage of international sales, number of retail outlets served, or increasing production capacity or throughput by X%, while important, should not be part of this set.

Set Annual Objectives Decide on annual values for these critical measures for the next three years. This is difficult to do well. Theory tells us that objectives, to be effective, should be set at a “challenging” level; set too high, they de-motivate because people consider them impossible to achieve, and set too low, they also de-motivate because they are too easily achieved. How does a company find that perfect level? The following five-step process may help.

First, extrapolate from historical data to establish initial values for each objective for the next three years. This is easier to do when you have at least five years of historical data available. Second,

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CHAPTER 7Section 7.3 Deciding on Objectives

make a list of external and internal forces or changes that might act to decrease these beginning values over time, such as intensifying competition, scarcity of borrowed funds, a conservative cul- ture, rapidly accelerating technological innovation in the industry with which the firm cannot keep up, and so on. For each item, indicate, however subjectively, the strength of the negative effect on the objective (high, medium, or low). Third, make a list of external and internal forces or changes that might act to increase these beginning values over time such as a new strategy, company- wide training, a new CEO, a change to a more productive culture, new quality programs, strategic alliances, a new advertising campaign, and so on. For each item, indicate, however subjectively, the strength of the positive effect on the objective (high, medium, or low). Fourth, compare the two lists and decide, for each objective, whether the initial value deserves to be increased or decreased and by how much, depending on the extent to which the positive effects outweigh the negative effects or vice versa. In this way, create a “first cut” of each objective for each of the next three years.

Finally, get feedback from those who are going to be held accountable for achieving the objectives whether the “first-cut” objectives are challenging yet achievable in the circumstances. In fact, get these people involved in the other steps too. For some companies, deciding on strategic objec- tives cannot be done unless the whole range of operational objectives have been created, thought through, and approved, to make sure that the resources to achieve them are available and that they are feasible to achieve in the time frame specified. When they have been well designed, achieving the operational objectives should result in automatically achieving the company-wide objectives.

Match Objectives to Strategy Check that the objectives match the preferred strategy. The preferred strategy and the set of objec- tives must be consistent with each other. For example, if the strategy decided upon is aggressive, the objectives set should also be aggressive. If the strategy is a turnaround, the objectives should reflect this unusual state, showing first stabilization at a lower level followed by growth consistent with the new strategy. If the strategy is designed to maintain market position in a highly competi- tive, mature market, the objectives should not show high growth, but reflect current conditions to a high degree. If the strategy requires a period of heavy investment before it pays off, the objec- tives should reflect that reality. Remember, the objectives indicate what the company considers to be successful performance over time given the changing realities of the industry, marketplace, and the company’s own strategies, resources, and commitments. Thus, not achieving these objec- tives (indicators) means less-than-successful performance, while meeting or exceeding them indi- cates intended or superlative performance in the circumstances.

Types of Objectives

The preceding discussion implicitly assumes that these are company or company-wide objectives. There are also other types of limited objectives. Partial objectives cover only part of some activity, like international sales versus total sales. Functional objectives pertain only to a particular func- tion, like a sales and marketing department increasing the number of salesmen. Operational objec- tives are either subsumed by higher-order objectives (like reducing costs) or are cross-functional, for example, security or systems or plant maintenance, none of which come under any “function” (Table 7.2). All of these other types of objectives will show up during implementation of a strategy. The value of understanding the differences is that at the strategic level, we need company-wide objectives, not functional or operational objectives.

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CHAPTER 7Section 7.3 Deciding on Objectives

Table 7.4: Partial, functional, and operational objectives

Kind of objective Objective Explanation

Partial Increase international sales by 10%/yr Does not address domestic sales

Increase sales from new products introduced during the past three years to 40% of total sales

Does not address sales from existing products

Increase sales to mass merchandisers by 30%/yr

Does not address sales to other retail channels

Functional Double the number of retail outlets Concerns only marketing

Increase throughput by 5%/yr Concerns only production

Redesign the product to reduce purchasing costs by 5%

Concerns only engineering

Operational Reduce costs by 12%/yr The higher-order objective of NIAT takes this into account

Improve quality by reducing the costs of quality by 30%

Insofar as quality is measured this way, it is subsumed by NIAT

Improve the sales “hit rate” from 2% to 6% at year-end

This is an operational objective for marketing

Typically, the most common company-wide objectives are revenues, NIAT (or other profit objec- tive), and one or two other ratios or nonfinancial measures that the company as a whole commits to achieving. These might be volunteer hours donated by employees to the community, a lowered number of quality defects, a lowered turnover rate, or improved safety and accident rates.

Objectives vs. Goals

In many companies, what we now understand to be an objective is often referred to as a goal (and vice versa). To underscore the difference as used here, a goal is defined as a qualitative end-state a company tries for example, “to become more innovative.” Note that progress cannot be mea- sured, and there is no specified time frame.

Why, then, do companies have goals? Because they are intended to inspire. They should sound stirring to employees and to external constituents. The following are some examples of goals:

• Become more innovative • Make the customer #1 • Take care of the environment • Produce better products • Be there for our customers • We’re going to grow • Develop a national presence • Become more efficient

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• Become lean and mean • Streamline our operations

At the same time, goals, precisely because they are not amenable to measurement, let manage- ment off the hook. There’s no incentive to follow through. Management isn’t accountable.

Objectives are written in such a fashion that organizational members will be able to answer the question “Will we know it when we see it or when it happens?” Organizational consultants and authors Beebe, Mottet, and Roach use four criteria for objectives (2003). First, accomplishment of the objective must be observable; we should be able to see the results. Second, objectives must be measurable; that is, some objective metric must yield useful data indicating that an objective has been met. Third, objectives must be specific; a clearly written objective includes precise guide- lines for describing the nature of the objective and the strategies and tactics required to accom- plish it. Finally, as we’ve made clear in our discussions so far about strategic thinking, talking, and management, objectives must be feasible and attainable. Organizations must develop objectives based on a realistic understanding of both internal and external barriers to accomplishment.

Thus, a CEO might be well advised to run a company on objectives alone. It has been said that “you can’t improve what you can’t measure,” and there is much truth in that. Goals imply programs (for example, “produce better products” implies more R&D, engineering, better quality control, and constant customer feedback) and operational as well as company-wide objectives. Incentives for improved performance and results are tied to achieving objectives. Settling for a goal instead implies laziness and an aversion to accountability.

Discussion Questions

1. Companies, both in their public statements and in the way they are managed, make extensive use of goals and objectives. Assuming that they are defined as they are in this presentation, do you think that a company could be managed using just goals? Why or why not?

2. Imagine a company whose managers collectively set objectives at a very conservative level, knowing full well the objectives would be exceeded and all of them would get hefty bonuses as a result. How could this situation be avoided?

3. Is it possible for company-wide objectives to be set last, in effect adding up all the partial and functional objectives? If it is, might that be better or worse than setting them first?

4. At a business school, overall objectives (things like number of courses taught by full-time faculty, ratio of full-time faculty to total faculty, total funding received, etc.) are derived from annual plans of each department (finance, operations, accounting, HR, etc.); that is, the departmental objectives are combined to produce the school’s overall objectives. Yet the school maintains that it does strategic planning. How would you explain to the school that it is mistaken?

5. Companies’ reward and incentive systems are attached to attaining or exceeding certain objec- tives, assuming that profits were also achieved. But little is said or publicized about what hap- pens when such objectives are not achieved. What kinds of penalties would you suggest for not achieving company-wide objectives and functional objectives? How would you gain everyone’s agreement in the first place for a system of penalties as well as bonuses and other rewards?

6. If it didn’t already exist in a company, would developing a system for penalizing failure to meet company objectives be worthwhile?

7. Recall an organization you were part of (needn’t be a company). Did you have goals and objec- tives? What were they? Were they taken seriously?

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CHAPTER 7Section 7.4 Contingency Planning

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In contingency planning, companies tend to look at the short term, medium term, and long term. The standard range for “long term” used to be five years, but due to the rapid pace of technology, it has been reduced to three years.

7.4 Contingency Planning Murphy’s Law states, “If anything can go wrong, it will.” An extension of this is that it always seems to happen at the worst possible time. It is a good idea to contemplate what could go potentially wrong in the future, which is termed a trigger, and what the company would do differently were that to happen, referred to as a contingency.

We therefore talk about trigger-contingency pairs, typically one or two that pertain to next year— the short term—and one or two that could occur three years from now—the long term. In reality, companies may have as many as 20 triggers and contingencies “active” at any time, assuming they do contingency planning. The planning horizon, however, can vary considerably according to the size of the company and the industry. For example, a company like Boeing views the next sev- eral years as “short-term,” about 10–15 years as “medium term,” and 20–30 years as “long term.” Companies in the fashion business view two weeks as “short term,” and a season (3–4 months) as “long term.” For most companies, however, the “standard” long term of five years has now shrunk to three years because of the rapid pace of change, especially in high-technology industries.

Triggers

Triggers should be external, spe- cific, and quantitative. Absent these three qualifiers the company will not know when to invoke the con- tingency plan. It is no use saying, for example, “If profits decline,” or “When things get tough.” Decline how much? Get how tough? Even when trying to address phenomena that cannot be measured—such as a competitor infiltrating your ter- ritory, or, for the Carmike movie- theater case discussed in the previous chapter, “worse” movies being made in a certain year—try to gauge their effect on your sales. For example, if the unknown phe- nomena were to cause your sales to decline, would you do something

differently if your sales fell below target projections by 10%, 15%, or 20%? In this way, you will monitor something you constantly measure, and so can bring into play the contingency plan at just the right moment.

Triggers also come from assumptions you make about the future that are “soft”—that is, about which you lack confidence and which are external to the company. For example, if you are engaged in strategic planning and your company is sensitive to interest rates, you might not know what is going to happen to interest rates next year. You may have tried to obtain information from vari- ous economic forecasts on this variable but, frustratingly, all of them differ in their predictions. So here is something you can do. Simply make the assumption that interest rates are not going up next year (if economic indicators make that at least plausible), and base your planning on that.

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CHAPTER 7Section 7.4 Contingency Planning

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Good contingency plans depend on three guidelines: not reneg- ing on your adopted “best strategy,” not planning for some- thing the company is already doing, and making the contin- gency a solution to the problem.

However, because the assumption is “soft,” create a trigger that admits the possibility that interest rates could go up: “If interest rates go up by more than X percentage points, then . . .” the contin- gency plan takes effect.

Triggers can also emerge from the timing of various imminent occurrences. For example, if new federal legislation is being created to nationalize health care, you may be unsure if this would take place next year or two to three years from now. So create your plans with your best assumption in mind—for example, no health care legislation will be enacted during the period of the planning horizon. However, because the assumption is “soft,” create a trigger, too, that specifies, “If health care legislation were enacted within the next two years, then . . .” the paired contingency will be enacted. Notice that this trigger is quantitative. You can tell exactly when it happens and can therefore invoke the contingency plan. Similarly, you may want to do something differently if two competitors merge or if quota restrictions into some foreign country are imposed or lifted.

For companies focused on increasing sales or market share, it is tempting and understandable to create triggers having to do with not meeting revenue objectives. To do this once is perfectly fine, but to have such a trigger every year gives the impression of obsessive focus in one area. Management’s role is directing and coordinating the many aspects of a company to work together seamlessly to create value, and indeed things could go wrong in many areas, not just in failing to

make a revenue objective. A better approach is to make a list of all the possible things that could go wrong or where your assumptions are soft, and choose the most likely of them as your triggers. Try to choose a different trigger for the long term from what is chosen for the short term. A useful training exercise is to create one trigger-contingency pair based on what might cause a revenue shortfall and one an NIAT shortfall, stating one in the short term and the other in the long term, just to practice creating real- istic trigger-contingency pairs.

Contingencies

Contingencies are precursors to contingency plans. They are a response to a particular trigger;

what a company should do differently if that trigger occurred. Later, when the strategic plan has been prepared for operational implementation, the contingency should be translated into a contin- gency plan complete with details as to who is responsible for it, its budget and schedule, and who must keep it relevant as conditions change.

Good contingencies should follow three guidelines:

• Do not renege on the adopted “best” strategy. For example, suppose the company chose a market-expansion strategic bundle, but there is reason to believe it would be difficult

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CHAPTER 7Section 7.4 Contingency Planning

to implement and pull off. If sales were to drop more than 10% from target projections at any time, it should not set as a contingency, “Cancel the market-expansion strategy and implement a differentiation strategy.” If one does that, it is in effect saying that the strate- gic bundle chosen was not a good choice, and its proponents will instantly lose credibility. Besides, companies cannot—and should not—be in the habit of changing their strategies at the first sign of adversity. Strategies typically take anywhere from two to five years to implement, and the organization must give the chosen strategy a chance to succeed by not changing it until there is absolute certainty it is not working. For any new or modified strat- egy being implemented that does not seem to be working, it is advisable always to suspect first the execution of the strategy, not the strategy itself. That way the contingency should focus on operational changes that could be made to enable the strategy to succeed, not changing the strategy itself. The following are examples of possible operational changes:

» Change the ad campaign or the advertising agency. » Replace the VP Marketing (or any senior manager). » Give the salespeople additional or more technical training. » Do additional and specific market research. » Broaden the distribution channels. » Increase links to your customers and increase their switching costs. » Seek alternative suppliers.

• Do not make something that the company is already doing the contingency. Think about it. What the company has been doing up to the time the trigger is invoked is what got the company into trouble in the first place. If sales are not meeting expectations, do not set as a contingency, “Continue advertising” or “Do more R&D.” The company is already doing those things, and, clearly, sales are still down. So think of something it can do differ- ently, that is, an adjustment to its operations or execution, one that can be implemented quickly, say, in a couple of months.

• Make the contingency a solution to the problem implied in the trigger. If inadequate prof- its are the problem, the contingency should be directed towards increasing profits, not sales. If market share is the problem, do not suggest lowering costs as the contingency, even if it is a matter of doing something different; the two are unrelated.

Because contingencies are in fact back-up plans, they have to be spelled out in great detail, and those responsible for developing them and carrying them out must know who they are and what they must do. Those details are added during the operational phase prior to implementation. Companies that go this extra mile of contingency planning will reap rewards in three ways. First, they will be better prepared for specific uncertainties than companies that have no triggers and contingencies, especially if they work to adjust the contingencies over time as conditions change to keep them current and workable. Second, they will become more adept at anticipating what might go wrong and come up with better triggers and contingencies over time. Third, they will appreciate the need to be alert to key changes in the environment and their company and, over time, create a more flexible company culture.

It is effective to express a trigger/contingency pair in the form of a three-part sentence. For example:

• The external cause of the trigger: “If competitors lowered their prices, . . .” • The quantitative trigger: “causing revenues to lag projections by 15%, . . .” • The contingency: “then the company should increase advertising and promotions.”

Stringing those three parts together—“If competitors lowered their prices, causing revenues to lag projections by 15%, then the company should increase advertising and promotions”—you will find that this simple sentence meets all criteria for creating a good trigger and contingency.

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CHAPTER 7Section 7.5 Keeping the Board of Directors Involved

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In public companies, it is important to keep the board of direc- tors involved in the process because they are directly respon- sible to the shareholders for making strategic decisions.

7.5 Keeping the Board of Directors Involved Strategic planning is a critical part of strategic management and singularly responsible for direct- ing or keeping the company on the right path. In companies that do strategic planning, a top- management team, led by the CEO and ideally including key operational managers, is responsible for doing strategic planning and implementing the decisions made during the process.

In public companies, however, the board of directors is directly responsible to the shareholders for making strategic decisions that ulti- mately benefit the company and, by extension, its stockholders. So what is the role of the board in strategic planning and decision making? The role and level of involvement ranges from almost nothing at one end of the scale to taking over com- pletely at the other, and varies from company to company.

There are two scenarios where board involvement is nonexistent or where it “rubber stamps” execu- tive decisions. In the first there is a high degree of trust between the board and the CEO and top man- agement. In the second the board members have been handpicked by the CEO and agree with all his decisions. In many such cases, the CEO is also the chairperson of the board, making the rela- tionship even cozier. While some companies are fortunate to enjoy mutual trust, nothing is wrong with the latter technically or legally. Whether it is “right” is a matter of opinion.

At the other end of the scale, takeover bids and acquisitions demand full board involvement, and resultant decisions are made solely by the board. Bear in mind that the CEO, CFO, and one or two other key executives are usually also members of the board.

Discussion Questions

1. If “value” implies benefits accruing for a certain level of costs, try to articulate the true value of contingency planning to a company.

2. Contingency planning is needed precisely because certain assumptions about the changing envi- ronment might be “soft” and uncertain. Yet, because of changing conditions both inside and out- side the company, contingency plans—both triggers and contingencies—rapidly go out of date. How often should a company review its contingency planning and keep things current?

3. Triggers assume that progress toward objectives is measured constantly and that actual perfor- mance can be compared to plan performance, say, every month. In your opinion, is this true of most companies? Comment specifically about NIAT performance.

4. Typically, profits are computed quarterly at most, and are done so using accounting principles. To the extent you agree with this, should profits ever be used as a trigger? Discuss.

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CHAPTER 7Summary

Most companies operate somewhere in between these two extremes. Because the efficacy of the board-management relationship differs so much, it is difficult to generalize. What would be useful instead would be to summarize some things a board could and should do to be involved in the strategic-planning process:

• If at all possible, the board should nominate a strategic-planning committee whose responsibility would be to monitor the strategic decisions being made by top manage- ment and involve the whole board if circumstances warrant.

• In the absence of a strategic-planning committee, it may be advisable to have at least one board member present at all strategic-planning meetings as an observer.

• Have the director of strategic planning—or the CEO if one doesn’t exist—send summaries of all reports and research done in preparation for strategic-planning meetings.

• Ask probing questions at board meetings of the CEO and CFO, especially during the stra- tegic-planning process. If the board gets an inkling of the direction the CEO wants to take the company and it disagrees, and if each side is adamant that its direction is right, it is the CEO who gets dismissed.

• Above all, it is the board’s fiduciary responsibility to ensure that the direction and strat- egy the company moves in is in its best interest and that of the stockholders; it has to do whatever it must to carry out that duty.

Summary This chapter described a useful method—the criteria matrix—for evaluating alternative bundles on a number of criteria in order to select the best one. However, choosing which criteria to use is subjective and could affect the outcome. They should be related to the purposes the company is trying to achieve and what “success” means to the company. It therefore makes sense that using such criteria would in fact result in the best bundle for the company. In addition, only five to six criteria should be used, as too few would fail to capture the complexity of a future strategic direc- tion and too many would dilute the impact that each criterion would have on the outcome.

The criteria matrix consists of a table with the alternative bundles as columns and the criteria as rows. Putting numbers or ratings down in each cell must be done carefully. Positively correlated criteria should be rated on a scale of 0 to plus 10, 10 being best, while negatively correlated criteria should be rated on a scale of 0 to minus 10, 0 being best. The magnitude of the rating is not nearly as important as the relative ratings across bundles. Criteria for which every bundle gets the same rating should be deleted; the purpose of choosing criteria includes their ability to

Discussion Questions

1. Somehow, the board of directors has to maintain good relationships with the top management of the company and yet stay at arm’s length, so to speak, to properly perform its role of overseer. How can it best manage this tension?

2. Imagine yourself as a board member: You notice that all is not right between the CEO and the CFO and certain other board members. What would you do?

3. Also as a board member, you have a sudden insight as to what the company might do strategi- cally in the future. What do you with this idea?

4. If the CEO and CFO are insider members of the board, is there any justification for the board appointing a strategic-planning committee?

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CHAPTER 7Summary

differentiate the bundles. Finally, the “winning” bundle must win by at least three points or there will be difficulty arguing for it as the best bundle. If this happens, the ratings and even the criteria need to be changed until it meets that condition.

After determining the bundle with the highest score, a persuasive argument must be created to convince others of the choice. The best argument consists of two parts: why the winning bundle was selected and why the others were rejected. Reasons for selecting the winning bundle include those criteria for which it had the best rating. Reasons for rejecting any bundle include those cri- teria on which it had the worst rating. If the reasons are “unbalanced” (i.e., the winning bundle was best on all the criteria and another bundle was worst on all criteria), it means that the bundles were poorly formed or badly rated in the first place. If all the bundles were good to begin with and the ratings are realistic, the winning bundle should be best on a subset of criteria and the others the worst on other subsets.

Besides choosing a winning strategy and bundle, the company needs to make strategic decisions that include company-wide objectives, strategic intent, major programs, and triggers and con- tingencies. Company-wide objectives are targets the whole company is responsible for produc- ing, whereas functional objectives apply only to functional departments, partial objectives are subsumed under other objectives, and operational objectives are other kinds of nonstrategic objective. The latter three types of objectives are operational, not strategic. Objectives are quan- titative targets to be achieved in a specified time frame, whereas goals are simply qualitative end- states to be achieved in the future and, while they may sound inspirational, lack incentives and accountability.

Because things may go wrong despite the best planning, well-managed companies will do contin- gency planning. This involves, for each contingency, identifying an external assumption that might be “soft” or uncertain (what could go wrong), a quantitative trigger (when should the company do something different to correct the situation), and what the company would do if the trigger were reached. Companies who prepare themselves in this way fare better than those that don’t.

Finally, the board of directors has to be kept informed and involved throughout the strategic-deci- sion-making process. While their involvement varies from hands-off to taking over the strategic decision making completely (as when responding to a takeover bid or making an acquisition offer), boards would do well to do some of the following: strengthen their relationship with the CEO and CFO (insider board members), appoint a strategic-planning committee, sit in on strategic-planning meetings, or receive summaries of all reports and research done in preparation for strategic-plan- ning meetings.

Key Terms

argument The argument for selecting a pre- ferred bundle consists of two parts: (1) reasons why the preferred bundle was chosen, and (2) reasons why the other two were rejected. The reasons are drawn from the criteria matrix.

company-wide objectives Set during the strategic-planning process that the whole com- pany must achieve.

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CHAPTER 7Summary

contingencies Back-up plans and precursors to contingency plans. They are a response to a particular trigger, what a company might do differently if that trigger occurred.

contingency planning Counteracts Murphy’s Law (“If anything can go wrong, it will”) by con- templating what could go wrong in the future (trigger) and what the company would do dif- ferently were that to happen (contingency).

contingency plans Differ from contingencies only in adding operational details, like who is responsible, the budget and schedule, and who must keep the plan current over time.

criteria matrix A matrix for evaluating alterna- tive bundles using 5–6 criteria important to the firm. Uses a scoring system that enables the results of using each criterion to be added up at the end. Absolute ratings are not impor- tant, but relative ratings are. The winning bundle must have at least three points more than any other bundle, otherwise the winning bundle cannot be defended adequately.

criteria Conditions used to evaluate alterna- tive bundles derived from purposes to doing strategic planning and what the firm perceives as “success.” Must be classified as either posi- tively or negatively correlated.

criteria, negatively correlated So labeled because a bundle having less of something is “good” (opposites)—like riskiness or amount of investment required. Bundles using such a criterion are rated on a scale of 0 to –10, 0 being best.

criteria, positively correlated So labeled because a bundle having more of something is “good” (reinforcing)—like revenue growth or profitability. Bundles using such a criterion are rated on a scale of 0 to 10, 10 being best.

functional objectives Objectives that pertain only to a particular function, like increasing the number of salespeople (marketing/sales), increasing throughput or production effi- ciency (production), reducing purchasing costs through redesign (engineering), or reducing the weighted average cost of capital (finance).

objective A quantitative target to be achieved within a specified time frame.

operational objectives Objectives that are either subsumed by higher-order objectives (like reducing costs) or concerning, for exam- ple, security or systems or plant maintenance, none of which come under any “function.”

partial objectives Objectives that cover part of some activity, like international sales vs. total sales, sales from new products vs. all prod- ucts, sales to mass merchandisers vs. all retail channels.

triggers Should be external, specific, and quantitative.

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