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Chapter 06 - Planning, Strategy, and Competitive Advantage

Planning and Strategy (NOTE: Very 1
thing is to form the business)
A. Planning is a process managers use to identify and select appropriate goals and courses of
action for an organization. The organizational plan that results from the planning process details how
managers intend to attain those goals. The cluster of managerial decisions and actions to help an
organization attain its goals is its strategy. Planning is a three-step activity:
1. Determining the organizations mission and goals. A mission statement is a broad declaration of
an organizations purpose that identifies the importance of the organizations products to its
employees and customers and distinguishes the organization from its competitors.
2. Formulating strategy. Analyze current situation and develop strategies.
3. Implementing strategy. Allocate resources and responsibilities to achieve strategies.

The Nature of the Planning Process: To perform the planning task, managers:
1. Establish and discover where an organization is at the present time
2. Determine where it should be in the future, its desired state
3. Decide how to move it forward to reach that future state.
Why Planning Is Important
1. It is necessary to give the organization a sense of direction and purpose.
2. It is a useful way of getting managers to participate in decision making about the appropriate goals
and strategies for an organization.
3. It helps coordinate managers of the different functions and divisions of an organization to ensure
that they all pull in the same direction and work to achieve its desired future state.
4. It can be used as a device for controlling managers within an organization.
Henri Fayol said that effective plans should have four qualities:
1. Unity means that at any time only one central plan is put into operation.
2. Continuity means that planning is an ongoing process.
3. Accuracy means that managers should attempt to collect and use all available information.
4. The planning process should have enough flexibility so that the plans can be altered and changed if
the situation changes.
Levels of Planning: In large organizations, planning usually takes place at three levels of
management: Corporate, Divisional-(SBU) Strategic Business Unit-regional, and
1. At the corporate level are the CEO, other top managers, and their support staff.
Divisional/Regional/Strategic Business Unit (SBU)
1. Define the business
2. Establish major goals

2. At the divisional/SBU level are the different divisions or business units that compete in distinct
industries of the company, usually led by a divisional manager.
3. Each division has its own set of functions or departments, such as manufacturing, marketing, R&D,
human resources, etc.
Levels and Types of Planning
1. The corporate-level plan contains top managements decisions pertaining to the organizations
mission and goals, overall strategy, and structure.
2. Corporate-level strategy indicates in which industries and national markets an organization intends
to compete and why.
3. At the business (SBU) level, the managers of each division create a business-level plan detailing
long-term divisional goals that will allow the division to meet corporate goals and the divisions
business-level strategy and structure.
4. Business (SBU)-level strategy states the methods a division or business intends to use to compete
against its rivals in an industry.
5. A functional (Dept)-level plan states the goals that the managers of each function will pursue to
help the division attain its business-level goals.
6. Functional-level strategy is a plan of action to improve the ability of each of an organizations
functions to perform its task-specific activities in ways that add value to an organizations goods and
Time Horizons of Plans (p.192): Plans differ in their time horizon, the periods of time over
which they are intended to apply.
1. Long-term plans have a horizon of five years or more.
2. Intermediate-term plans have a horizon between one and five years.
3. Short-term plans have a horizon of one year or less.
4. A corporate-level or (SBU) business-level plan that extends over several years is typically treated as
a rolling plan, a plan that is updated and amended every year to take account of changing conditions
in the external environment.
Standing Plans and Single-Use Plans
1. Standing plans are used in situations in which programmed decision making is appropriate.
Standing plans include a policy, a rule, and a standard operating procedure (SOP).
2. Single-use plans are developed to handle non-programmed decision making. They include:
a. Programs, which are integrated sets of plans for achieving certain goals.
b. Projects, which are specific action plans created to complete various aspects of a program.

Determining the Organizations Mission and Goals
Defining the Business: To determine an organizations mission, managers must first define its
business by asking three questions:
1. Who are our customers?
2. What customer needs are being satisfied?
3. How are we satisfying customer needs?
Establishing Major Goals: Once the business is defined, managers must then establish a set of
primary goals to which the organization is committed. These goals give the organization a sense of
direction or purpose. Strategic leadership is the ability of the CEO and top managers to convey a

compelling vision of what they want the organization to achieve to their subordinates. Goals typically
possess the following characteristics:
They are ambitious, that is, they stretch the organization, and require managers to improve its
performance capabilities.
They are challenging but realistica goal that is impossible to attain may prompt managers to give
The time period in which a goal is expected to be achieved should be stated. This injects a sense of
urgency and acts as a motivator.

Formulating Strategy
In strategy formulation, managers work to develop the set of strategies that will allow an organization
to accomplish its mission and achieve its goals.
SWOT Analysis A SWOT analysis is a planning exercise in which managers identify internal
organizational strengths, weaknesses, opportunities, and threats. Based on a SWOT analysis,
managers at each level of the organization identify strategies that will best position the organization
to achieve its mission and goals.
The 1st step in SWOT analysis is to identify an organizations strengths and weaknesses that
characterize the present state of the organization.
The 2nd step requires managers to identify potential opportunities and threats in the environment
that affect the organization in the present or may affect it in the future.
step, upon completion of the SWOT analysis, managers can begin developing strategies that
allow the organization to attain its goals by taking advantage of opportunities, countering threats,
building strengths, and correcting organizational weaknesses.
The Five Forces Model: Michael Porters five forces model is another well-known model that
helps managers focus on the most important competitive forces, or potential threats, in the external
environment. They are:
1. the level of rivalry among organizations within an industry
2. the potential for entry into an industry
3. the power of large suppliers
4. the power of large customers
5. the threat of substitute products.
The term hyper-competition applies to industries that are characterized by permanent, ongoing,
intense competition brought about by advancing technology or changing customer tastes, fads and

IV. Formulating Business-Level Strategies
Michael Porter formulated a theory of how managers can select a business-level strategy to give them
a competitive advantage in a particular market or industry. According to Porter, to obtain higher
profits, managers must choose between two basic ways of increasing the value of an organizations
1. Differentiating the product to increase its value
2. Lowering the costs of making the product
Porter also argues that managers must choose between serving the whole market or serving just one
Low-Cost Strategy

1. With a low-cost strategy, managers try to gain a competitive advantage by focusing the energy of all
the organizations departments on driving the organizations costs down.
2. Organizations pursuing a low-cost strategy can sell a product for less than their rivals, and still make
a good profit.
Differentiation Strategy
1. With a differentiation strategy, managers try to gain a competitive advantage by focusing all the
energies of the organizations departments on distinguishing the organizations products from those
of competitors.
2 As the process of making products unique and different is expensive, organizations that successfully
pursue a differentiation strategy often charge a premium price for their products.
Stuck in the Middle
According to Porter, a company cannot pursue a low-cost and differentiation strategy
simultaneously. He refers to managers and organizations that have not selected between the two as
being stuck in the middle.
Focused Low-Cost and Focused Differentiation Strategies
Porter identified two other business-level strategies used by companies aiming to serve the needs of
customers in one or a few segments of the market.
1. A company pursuing a focused low-cost strategy serves one or a few segments of the market and
aims to be the lowest-cost company serving that segment.
2. A company pursuing a focused differentiation strategy serves just one or a few segments of the
market and aims to be the most differentiated company serving that segment.

V. Formulating Corporate-Level Strategies
Corporate-level strategy is a plan of action that determines the industries and countries an
organization should invest its resources in to achieve its mission and goals.
Concentration on a Single Industry: This is a corporate-level strategy in which a company reinvests
its profits to strengthen its competitive position in its current industry. It is an appropriate strategy
when managers see the need to reduce the size of their organizations to increase performance.
Vertical Integration (p.195): It is the corporate-level strategy that involves a company expanding
its business operations either backward into a new industry that produces inputs for the companys
products (backward vertical integration) or forward into a new industry that uses, distributes, or
sells the companys products (forward vertical integration). Managers pursue vertical integration
because it allows them to either add value to their products by making them special or unique or to
lower the costs of making and selling them.
Although vertical integration can increase an organizations performance, it can also reduce an
organizations flexibility to respond to changing environmental conditions.
Vertical integration may sometimes reduce a companys ability to create value when the
environment changes. Therefore, many companies outsource the production of component parts
to other companies and exit the components industryby vertically disintegrating backwards.
Diversification: It is the strategy of expanding operations into a new business or industry in order
to produce new goods or services. There are two main types of diversification: related and unrelated.
Related Diversification: It is the strategy of entering a new business or industry to create a
competitive advantage in one or more of an organizations existing divisions or businesses.

Synergy is obtained when the value created by two divisions cooperating is greater than the value
that would be created if the two divisions operated separately. To pursue related diversification
successfully, managers seek new businesses in which existing skills and resources can be used to
create synergies.
Unrelated Diversification: Managers pursue unrelated diversification when they establish divisions
or buy companies in new industries that are not related to their current businesses or industries.
By pursuing unrelated diversification, managers can buy a poorly performing company and use
their management skills to turn around its business, thereby increasing its performance.
Unrelated diversification allows managers to engage in portfolio strategy, which is the practice of
apportioning financial resources among divisions to increase financial returns and spread risks
among different businesses.
International Expansion: Corporate-level managers must decide on the appropriate way to
compete internationally. If an organization needs to sell its products abroad or compete in more than
one national market, managers must ask themselves to what extent should their company customize
its products features and marketing campaign to suit differing national conditions.
Global strategy is selling the same standardized product and using the same basic marketing
approach in each national market.
If managers decide to customize products and marketing strategies to specific national conditions,
they adopt a multidomestic strategy.
The major advantage of global strategy is the significant cost savings associated with not having to
customize products and marketing approaches. The major disadvantage is that by ignoring
national differences, managers are vulnerable to local competitors.
The major advantage of multi-domestic strategy is that by customizing product offerings and
market approaches, managers are able to gain market share or charge higher prices. The major
disadvantage is that customization raises production costs and puts the company at a price
Choosing a Way to Expand Internationally: Before setting up foreign operations, managers must
analyze the forces in the environment of a particular country and choose the best method to expand
and respond to those forces in the most appropriate way.
Importing and Exporting: A company engaged in exporting makes products at home and sells
them abroad. A company engaged in importing sells products at home that are made abroad
(products it makes itself or buys from other companies).
Licensing and Franchising:
In licensing, a company allows a foreign organization to take charge of both manufacturing
and distributing one or more of its products in the licensees country or region of the world
in return for a negotiated fee.
In franchising, a company sells to a foreign organization the rights to use its brand name
and operating know-how in return for a lump sum payment and a share of the franchisers
Strategic Alliances: In a strategic alliance, managers pool or share their organizations resources
and know-how with those of a foreign company, and the two organizations share the rewards or
risks of starting a new venture in a foreign company.
A joint venture is a strategic alliance among two or more companies that agree to jointly establish
and share the ownership of a new business.

Risk is reduced and a capital investment is generally involved.
Wholly Owned Foreign Subsidiaries: When managers decide to establish a wholly owned foreign
subsidiary, they invest in establishing production operations in a foreign country, independent of
any local direct involvement. This method is much more expensive than the others but also offers
high potential returns.

Planning and Implementing Strategy
After identifying appropriate strategies, managers confront the challenge of putting those strategies
into action. Strategy implementation is a five-step process:
1. Allocating responsibility for implementation to the appropriate individuals or groups.
2. Drafting detailed action plans that specify how a strategy is to be implemented.
3. Establishing a timetable for implementation that includes precise, measurable goals linked to the
attainment of the action plan.
4. Allocating appropriate resources to the responsible individuals or groups.
5. Holding specific individuals or groups responsible for the attainment of corporate, divisional, and
functional goals.