Chapter 7

STRATEGIC PLANNING

Nature of Strategic Planning

Strategic Plan: a formal statement of plans. Strategic Planning: the process of preparing & revising the statement. Strategic Planning is the process of deciding on the programs that the organization will undertake and on the approximate amount of resources that will be allocated to each programs over the next several years.

Relation to Strategy Formulation

Strategy formulation vs Strategic planning? Strategy formulation: the process of deciding new strategies. Strategic planning: the process of deciding how to implement the strategies.

Benefits of Strategic Planning

Can give the organization: 1. A framework for developing the annual budget. 2. A management development tool. 3. A mechanism to force managers to think long term. 4. A means of aligning managers with the longterm strategies of the company.

Exhibit 8.1 A Company without Strategic Planning Process Exhibit 8.2 A Company with Strategic Planning Process
Strategic Option A
Strategic Option B Strategic Option C Strategic Option D Budgeting

Strategic Option A Strategic Option B Strategic Option C Strategic Option D Budgeting

Strategic Option A Strategic Option C

Budgeting

Limitations of Strategic Planning

1.

2.

3.

A danger that planning can end up becoming a form-filling, bureaucratic exercise, devoid of strategic thinking. An organization may create a large strategic planning department & delegate the preparation of strategic plan to that staff department. Strategic planning is time consuming & expensive.

Continued
A formal strategic planning process is not needed in a small, relatively stable organization. It is not worthwhile in organization that can not make reliable estimation about the future.

Analyzing Proposed New Programs

Ideas for new programs can originate anywhere in the organization. Proposal for programs are essentially either reactive or proactive. Capital Investment Analysis

Net present value of the project Internal Rate of Return

Only if applicable

Analyzing Ongoing Programs

Several analytical techniques can aid in this process.
Value Chain Analysis

Activity Based Costing (ABC)

Value Chain Analysis

The value chain for any firm is the linked set of value creating activities of which it is a part, from acquiring basic raw materials for component suppliers to making the ultimate end-use products & delivering it to final consumers. Three potentially useful areas:
1. 2.

3.

Linkages with suppliers. Linkages with customers. Process linkages within the value chain of the firm.

Process Linkages with the Value Chain of the Firm

Value chain analysis explicitly recognizes the fact that the individual value activities within the firm are not independent but rather are interdependent. Improving efficiency throughout the process linkages within the value chain.

Move materials from vendors, through production, & to the customer at the lowest cost, in the shortest time, & of acceptable quality. Reducing the number of separate parts & increasing their ease of manufacture.

Continue

Improving efficiency of every activity within the chain.

Efficiency of the inward portion

Ex: reducing the number of vendors, having a computer system place orders automatically.

Efficiency of the production portion

Ex: increased automation, better production control system.

Efficiency of the outward portion

Ex: having customer place order electronically, changing the location of warehouse & channel of distribution

Activity-Based Costing

The cost center is activity. The basis of allocation is cost driver. ABC when use as the strategic planning process, may provide useful insight: Ex:

It may show that complex products with many separate parts have higher design & production costs than simpler products. Products with low volume have higher unit cost than high volume products.

Those information may lead changes in strategies.

Strategic Planning Process

1. 2. 3. 4. 5. 6.

Reviewing & updating the strategic plan from last year. Deciding on assumptions & guidelines. First iteration of the new strategic plan. Analysis Second iteration of the new strategic plan. Review & approval.