MCS- STRATEGIC PLANNING

STRATEGIC
PLANNING
MANDHADI DINESH KUMAR
GOGINENI POORNA CHAND
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STRATEGY P L A N N I N G

CONTENTS
Analyzing Proposed
01 Introduction
 Definition
02 New Programs
 Nature of Strategic Planning  Capital Investment Analysis
 Evolution of Strategic Planning
 Benefits & Limitations

Analyzing Ongoing
03 Programs 04 Strategic Planning
Process
 Value Chain Analysis  Reviewing and updating the Strategic Plan
 Activity Based Costing  Deciding on assumptions and guidelines
 Use of ABC Information  First iteration of new strategic plan
 Analysis
 Second iteration of strategic Plan
 Final Review and approval
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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 program
over the next several years.
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Relation to Strategy Formulation:

 Strategy formulation is the process of deciding on new
strategies, whereas strategic planning is the process of
deciding how to implement the strategies.
 In the strategy formulation process, management arrives at
the goals of the organizations and creates the main
strategies for achieving the goals. The strategic planning
process then takes the goals and strategies as given and STRATEGY
develops programs that will carry out the goals and
strategies efficiently and effectively
 Strategic planning is systematic; there is an annual strategy
planning process with prescribed procedures and
timetables.
 Strategy formulation is unsystematic
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Evolution of Strategic Planning:

 Fifty years ago, management did give some thought to
strategic planning but not in a systematic and coordinated
way
 A few companies started formal strategic planning in the
late 1950s, but most early efforts were failures
 staff people rather than line staff did most of the work,
participants spent more time in filling the forms rather
than deep thinking about alternatives and selecting the
best options
 Currently, many organizations appreciate the advantages
of making a plan for the next 3 to 5 years. But not
universally accepted
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BENEFITS
A framework for developing the operating budget: An operating budget involves resource commitments for the
next year; it is essential that such resource commitments are made with a clear idea of where the organization is
heading over the next several years. A strategic plan provides that broader framework.

A Company With out Strategic Planning Process

A Company with Strategic Planning Process

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CONTD..
A management development tool: Formal strategic planning is an excellent management education and
training tool. It provides the managers to think about strategies and their implementations.

A mechanism to force managers to think long-term: Managers are more concerned about managing the
present, day-to-day problems than thinking about future plans. Formal strategic planning forces managers to
make time for important long-term issues.

Help in aligning managers with corporate strategies: The debates, discussions and negotiations that take place
during the planning process help clarify corporate strategies, units and align managers with such strategies and
show the implications of corporate strategies for individual managers.
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LIMITATIONS
 Strategic planning could end up becoming a form-filling, bureaucratic exercise devoid of strategic planning: In
order to avoid this situation, it is necessary for the organization to review periodically whether fresh ideas are
coming as a result of strategic planning process.

 Creation of large strategic planning department and delegating the preparation strategic planning to the staff
department: Strategic planning is a line management function and the role of the staff in the strategic planning
department should be kept to minimum and their role should be of a catalyst, an educator and a facilitator of the
planning process

 Strategic planning is time consuming and expensive: Lots of time is devoted by the senior management and
managers at other levels in the organization. A form process is not worthwhile, if the senior management does
not desire, organization small and relatively stable, and in organizations where reliable estimates about the future
cannot be made
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ANALYSING PROPOSED
NEW PROGRAMS
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Ideas for new programs can originate anywhere in the organisation with the chief executive, with the
headquarters planning staff or in the various parts of the operating organisation. Some responsibility
centres are more likely source than others

CAPITAL INVESTMENT ANALYSIS

 Most of the Proposals require significant new capital. The techniques for analysing capital investment proposals
attempt to find either

 The Net Present Value (NPV) of the project

 The Internal Rate of Return (IRR)

 An important point is that these techniques are used in only about half the situations in which, conceptually,
they are applicable.

 There are at least four reasons for not using present value techniques in analysing all proposals
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CONTD…
 The proposal may be so attractive that a calculation of its net present value is unnecessary.
e.g. a newly developed machine that reduces costs substantially.

 The estimates involved in the proposal are so uncertain that making present value calculations are not
worth the effect. Since one can’t draw a reliable conclusion from unreliable data. For e.g., the
estimates of sales volume of new products for which no good market data exist. In these situations,
payback method is used.

 The rationale for the proposal is something other than increased profitability e.g., investments made
to improve employee morale, the company’s image or safety.

 The proposed investment is necessary to comply with guidelines of ‘Regulatory Authorities’. For
example: environmental laws.
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The following are some considerations that are useful in implementing capital expenditure evaluation systems.

 Rules: Companies, usually, have rules and procedures for the approval that can be approved by the plant manager,
subject to annual budgetary amount and larger amounts go to business unit heads, CEO or to the board of
directors. The rules also contain guidelines for preparing proposals and general guidelines for approving them.

 Avoiding manipulation: To avoid manipulation of estimates by sponsors, the project analyst should have some
great feeling. The reputation of project sponsors with excellent track record can provide a safeguard.

 Models: In addition to the basic capital budgeting model, there are specialized techniques, such as: risk analysis,
simulation, scenario, planning, and game theory, option processing models, contingent claim analysis and decision
trace analysis. The planning staff should require their use in situations.
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ANALYSING ONGOING
PROGRAMS
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VALUE CHAIN ANALYSIS

The value chain for any firm in any business is the linked set of value creating activities to produce a product
from basic raw materials source for component suppliers to the ultimate end use produce delivered into the
final consumers’ hands. Each firm must be understood in the context of the overall chain of value creating
activities of which it is only a part.

From a strategic planning perspective, the value chain concept highlights three potential useful areas.

 Linkage with suppliers

 Linkage with customers

 Process linkages within the value chain of the firm

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 Linkage with suppliers

The linkages with suppliers should be managed so that both the firm and its supplier may benefit in
lowering costs, increasing value or both.

Profit Improvement Opportunities through linkage with Suppliers

Suppliers
Supplier Firm
supplier
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 Linkage with customers

customer linkages can be just as important as supplier linkages since it becomes mutually
beneficial.

Profit Improvement Opportunities through linkage with Customers

Customers
Firm Customer
customer
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 Process linkages within the value chain of the firm

Value chain analysis explicitly recognizes the fact that the individual value activities within a firm are not
independent but rather are interdependent. The company might want to analyse the process linkages
within the value chain, seeking to improve their EFFICIENCY.

Profit Improvement Opportunities

through process linkage with in the value chain

MANUFACTURING
RAW MATERIALS

DISTRIBUTION
MARKETING

SERVICE
R&D
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EFFICIENCY
INWORD PORTION EFFICIENCY
Improved
 By reducing the number of vendors
 By having a computer system for place orders automatically
 By limiting deliveries to “just in time” amounts (which reduces inventories), and
 By holding vendors responsible for quality and which reduces/estimates inspection costs.
.

PRODUCTION PORTION EFFICIENCY

Improved
 By increased automation and perhaps
 By using robots,
 By rearranging machines into “cells”, each of which performs a series of related production steps and by
better production control systems

OUTWORD PORTION EFFICIENCY

Improved
 By having customers place orders electronically
 By changing the locations of warehouses
 By changing the channels of distribution and placing more or less emphasis on distributors and wholesalers.
 By improving the efficiency of warehouse operations; and
 By changing the mix between company operated trucks and transportation by outside agencies.
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ACTIVITY-BASED COSTING
Increased computerization and automation in factories have led to important changes in systems for collecting and using cost
information. Some fifty or sixty years back, most companies allocated overhead costs to products by means of plant wide
overhead rate based on direct labour hours or direct labour cost in rupees. Today, an increasing number of companies collect
costs for:
 Material-related costs (such as transportation, storage, and purchase department costs)
ABC
separately from other manufacturing costs.
 Manufacturing costs for individual departments, individual machines or individual “cells”
which consist of group of machines that perform a series of related operations on a product.
In these cost centres, direct labour costs may be combined with other costs, denoting
conversion cost i.e., the labour and factory overhead cost of converting raw materials and
parts into finished products.
 The newer systems assign R&D, general, administrative and marketing costs to products.
 The newer system also uses multiple allocation bases. The word activity is often used
instead of cost centre and cost driver used instead of the basis of allocation and the cost
system is called Activity Based Cost system (ABC).
 The basis of allocation or cost driver for each of the cost centers reflects the cause of cost
incurrence, that is, the element that explains why the amount of cost incurred in the cost
centre or activity varies.
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USES of ABC
 ABC system provides accurate costing of product/service.

 Management has better understanding of over head costs

 The system utilises unit cost rather than total cost

 ABC system integrates well with six sigma

 It supports performance management and score cards

 The system enables costing of processes, supply chains and value streams.

 ABC system helps in benchmarking other products.

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STRATEGIC
PLANNING
PROCESS
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01 Renewing and Updating The

Strategic Plan From Last Year

Deciding as Assumptions and

Guidelines 02
03 First Iteration of The Strategic Plan

Analysis
04
05 Second Iteration of The Strategic
Plan

Final review and approval

06
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Renewing and Updating the Strategic Plan From Last Year

Actual experience for the first few months of the current

year is already reflected in the accounting reports and
these are extrapolated for the current best estimate of the
year as a whole.
If the computer programme is sufficiently flexible, it can
extend the impact of the current forces to years beyond
the current year, if not, rough estimates are made
manually.
The implications of new plans decisions on revenues,
expenses, capital expenses and cash flows are
incorporated.
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Deciding as Assumptions and Guidelines

The updated strategic plan includes broad assumptions like

 The growth in gross national product

 Cyclical movements
 The rate of general inflation
 Labour rates
 Prices of important raw materials
 Interest rates
 Selling prices
 Market conditions such as the actions of the competitors and
 The impact of government legislations in each of the countries in which the company operates..

These assumptions are re-examined and if necessary, changed to incorporate the latest information
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First Iteration of The Strategic Plan

The business units and other operating units prepare their “first cut” of the strategic plan.
It may include different operating plans than those included in the current plan such as change
in marketing tactics; these are supported by reasons.
The completed strategic plan consists of details about
 Income statements (Inventory, Accounts receivable and the Balance sheet items)

 Number of employees

 Sales and Production information (Quantitative)

 Expenditures for plant & other capital acquisitions

 Any unusual cash flows

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Analysis
 The analysis is done both by the planning staff and by the marketing, production and other functional
executives at headquarters through discussions.
 In many cases, the sum of the business unit plan reveals a planning gap i.e., the sum of the individual
plans does not add up to the attainment of the corporate objectives.
 There are three ways to close a planning gap:

(A) To find opportunities for improvements in the business unit plan

(B) To make acquisitions or
(C) To revise the corporate objective.

Senior management usually focuses on the first option.

Comparisons with past performance, with the performance of other companies or with standard costs for
certain types of activities may indicate opportunities for improvement’
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Second Iteration of The Strategic Plan

Analysis of the first submission may lead to revision of the plan of certain business units, but it
may also lead to change in the assumptions and guidelines that affect all business units.

Example:
The aggregation of all plans may indicate that the cash drain from increasing inventories and
capital expenses is more than the company can safely tolerate; if so, there may be a
requirement for postponement of expenditures throughout the organization. These decisions
lead to a revision of the plan
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Final Review and Approval

 The revised plan usually is discussed at length in a meeting of senior corporate officials.

 The plan maybe presented at a meeting of the BOD.

 Final approval comes from the Chief Executive Officer.

 The approval should come prior to the beginning of the budget preparation process,

because the strategic plan is an important input to that process.

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T H A N K Y O U…!