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Principles of Management Unit 4: Planning and Strategic Management

Planning sets goals and decides how to reach them; strategic management does this for the whole organization against competitors. This unit covers types of plans and goals, the strategic management process, and the frameworks managers use to choose strategies.

Covers: Why managers plan and types of plans, Goals, SMART goals and management by objectives, The strategic management process and SWOT, Corporate strategies and the BCG matrix, Porter's five forces and competitive strategies, Core competencies and competitive advantage, Planning tools: scanning, forecasting and benchmarking

Study guide

Planning gives direction, reduces uncertainty, cuts waste and sets the standards used later in controlling. Goals are desired outcomes, and plans are documents that outline how goals will be met. Strategic plans apply to the entire organization and set overall goals, while operational plans cover a particular area, such as monthly production schedules. Plans can be long-term (usually over three years) or short-term (one year or less), specific (clearly defined, no room for interpretation) or directional (flexible guidelines), and single-use (for a one-time project) or standing (ongoing policies, rules and procedures). Directional plans fit uncertain environments; specific plans fit stable ones.

Good goals are often described as SMART: specific, measurable, attainable, relevant and time-bound. 'Improve service' is weak; 'raise customer satisfaction from 82% to 90% by December' is SMART. Management by objectives (MBO), popularized by Peter Drucker, has managers and employees jointly set specific goals, then review progress regularly and reward results. Goals cascade in a means-ends chain, so each level's goals help achieve the goals of the level above. Managers sometimes distinguish stated goals (official public statements) from real goals (what the organization actually pursues, shown by what it rewards).

Strategic management is what managers do to develop an organization's strategies. The process has six steps: identify the current mission, goals and strategies; do an external analysis to find opportunities and threats; do an internal analysis to find strengths and weaknesses (the last two together form a SWOT analysis); formulate strategies; implement them; and evaluate results. Internal analysis looks for resources and core competencies, the organization's major value-creating skills and capabilities. A competitive advantage is what sets a firm apart and gives it an edge, and it lasts only if rivals cannot easily copy it.

Corporate strategy decides what businesses a company is in. Growth strategies expand through concentration in the current business, vertical integration (backward toward suppliers or forward toward customers), horizontal integration (combining with competitors) or diversification (related or unrelated). Stability strategies keep things as they are, and renewal strategies address decline through retrenchment (minor problems) or turnaround (serious problems). The BCG matrix sorts business units by market growth and relative market share. Stars have high share and high growth; cash cows have high share and low growth and fund other units; question marks have low share in a high-growth market; dogs have low share and low growth and are candidates for selling.

Competitive strategy decides how a business will compete. Michael Porter's five forces model judges industry attractiveness by the threat of new entrants, the threat of substitutes, the bargaining power of buyers, the bargaining power of suppliers, and current rivalry. Porter's generic strategies are cost leadership (lowest cost in the industry), differentiation (unique products customers value) and focus (cost or differentiation in a narrow segment); a firm stuck in the middle with no clear advantage tends to do poorly. Managers also use planning tools: environmental scanning to detect trends, forecasting (quantitative methods like moving averages, or qualitative judgment) and benchmarking, which studies the best practices of leading organizations.

Key ideas

• Planning sets goals and the standards that controlling later uses to judge performance.
• Strategic plans cover the whole organization; operational plans cover specific units and shorter periods.
• Specific plans work in stable environments, and directional plans work under high uncertainty.
• SMART goals and MBO make goals clear, shared and measurable.
• SWOT combines internal strengths and weaknesses with external opportunities and threats.
• The BCG matrix classifies units as stars, cash cows, question marks or dogs using market growth and relative share.
• Porter's five forces judge industry attractiveness, and his generic strategies are cost leadership, differentiation and focus.

Formulas and rules

Common mistakes

• Putting opportunities and threats in the internal analysis; they come from the external environment.
• Confusing vertical integration (moving along the supply chain) with horizontal integration (combining with competitors).
• Calling a high-growth, low-share unit a dog; it is a question mark, while a dog has low growth and low share.
• Assuming specific plans are always better; in a fast-changing environment directional plans are more useful.
• Thinking a firm can be the cost leader and the differentiator at once without risk of being stuck in the middle.

Before the test, make sure you can

• Classify plans by breadth, time frame, specificity and frequency of use.
• Rewrite a vague goal as a SMART goal and explain how MBO works.
• List the six steps of the strategic management process in order.
• Sort factors into a SWOT analysis.
• Calculate relative market share and place a unit in the BCG matrix.
• Identify growth, stability and renewal strategies, including types of integration and diversification.
• Apply Porter's five forces and generic strategies to a company example.
• Describe environmental scanning, forecasting and benchmarking.

Words to know

Planning

Defining goals, establishing strategy and developing plans to coordinate activities.

Strategic plans

Plans that apply to the entire organization and set its overall goals.

Operational plans

Plans that cover a particular operational area of the organization, usually in the short term.

Directional plans

Flexible plans that set out general guidelines rather than specific actions.

Standing plans

Ongoing plans, such as policies, rules and procedures, that guide repeated activities.

Single-use plan

A one-time plan designed to meet the needs of a unique situation.

Management by objectives (MBO)

A process of setting mutually agreed goals and using them to evaluate employee performance.

SWOT analysis

Analysis of an organization's internal strengths and weaknesses and its external opportunities and threats.

Core competencies

The organization's major value-creating capabilities that determine its competitive weapons.

Competitive advantage

What sets an organization apart; its distinctive edge over competitors.

Vertical integration

Growth by gaining control of inputs (backward) or distribution (forward).

Horizontal integration

Growth by combining with competitors.

Related diversification

Growth by entering a different but related industry.

BCG matrix

A tool that classifies business units by market growth rate and relative market share.

Cash cow

A BCG unit with high market share in a low-growth market that generates cash for other units.

Question mark

A BCG unit with low market share in a high-growth market; it needs a decision to invest or divest.

Cost leadership strategy

Competing by having the lowest costs in the industry.

Benchmarking

The search for the best practices among competitors or noncompetitors that lead to superior performance.

Sample practice questions

30 more questions like these, from level 1 to 5, are in the practice set.