Strategic Planning

Chapter 8
 Chapter outline
• Nature of strategic planning
• Benefits and limitations of strategic planning
• Analyzing proposed new programme
• Analyzing ongoing programme
• Strategic planning process
 Nature of strategic planning
• The process of deciding on the programme
that the organization will undertake and on
the approximate amount of resources that will
be allocated to each programme over the next
several years is known as Strategic Planning.
• Relation to strategy formulation
 Relation to Strategy Formulation
• After management arrives at goals of the
organization in strategy formulation, strategic
planning process then takes goals and
strategies as given and develops programs to
carry out strategies and achieve goals
efficiently and effectively.
 Studies made during planning process may
indicate desirability of changing goals or
strategies, while formulation usually includes
a preliminary consideration of programs that
will be adopted as a means of achieving these
goals.
Strategic planning is systematic, having annual
process with prescribed procedures &
timetables; while strategy formulation is
unsystematic.
 In a formal strategic planning process, an
important first step often has to be to write
descriptions of organization's goals and
strategies
 Benefits of strategic planning
• Framework for developing the budget
• Management development tool
• Mechanism for forcing managers to think long
term
• Means of aligning managers with corporate
strategies
 Limitations of strategic planning
• Planning can end up becoming a form filling,
bureaucratic exercise, devoid of strategic
thinking
• Strategic planning is time consuming and
expensive
• Forfeiting the inputs of line managers
 Program Structure & Content
• In most industrial organizations, programs are product
families, plus R & D, general and administrative expenses, not
in existing products.
• In service organizations, programs correspond to types of
services rendered by the entity. Typical strategic plan covers a
period of five future years rupee amounts for each plan show
approximate magnitude of its revenues, expenses and capital
expenditures.
• If strategic plan is structured by business units, the “Charter”,
specifying boundaries within which business unit is expected
to operate, is also stated.
 Organizational Relationships

 In some organizations, controller organization prepares

strategic plan, as they may be skilled primarily in
detailed analytical techniques required in fine-tuning
annual budget & analyzing variances between actual &
budgeted amounts.
 In other organizations, separate planning staff may
support in analytical skills and broader outlook that
may not exist in controller set up.
 Headquarter staff members should facilitate, not
intervene in strategic planning process.
 Top management style

• Some Chief Executives prefer to make decisions without

benefit of a formal planning apparatus
• In some companies, Chief Executive want some overall
plan for business, but by temperament has an aversion
to paperwork.
• In other companies, senior management prefers
extensive analysis and documentation of plans and
formal part of system is relatively elaborate.
• Designers must correctly diagnose style of senior
management and fit the system accordingly.
 Analyzing proposed new programme
• Proposals for programs are essentially either
reactive or proactive.
• Ideas for new programs can originate
anywhere in the organization i.e. CEO,
planning staff etc.
• Planners should have full implementation and
its consequent significant investment only if
tests indicate about proposal’s good chance of
success.
 Analyzing proposed new programme
• Capital investment analysis
- NPV
- IRR
- PBP
• Capital Investment Analysis:
 There are at least four reasons for not using
PV in analyzing all proposals:
1. Proposal is obviously very attractive
2. Estimates involved are so uncertain that PV
calculations cannot draw reliable conclusions
3. Rationale for the approach is something
other than increased profitability
4. There is no feasible alternative to adoption
 Either NPV or IRR is found for analysis
 Rules
• Companies usually publish rules and
procedures for approval of capital expenditure
proposals of various magnitudes
• Rules also contain certain guidelines for
preparing proposals and general criteria for
approving proposals
 Avoiding Manipulation
• Sponsors who know that their project with
negative NPV is not likely to be approved may
have a gut feeling that project should be selected
• In some cases, sponsors may make optimistic
estimates of sales revenues or reduce allowances
for contingencies in some of cost elements
• Analyst may place reliance on sponsors having an
excellent track record
 Models
• There are specialized techniques like risk
analysis, sensitivity analysis, simulation,
scenario planning, game theory, option pricing
models etc.
• Planning staff should know such methods and
use them in situations when required.
 Analyzing ongoing programme
• Value chain analysis

• Activity- based costing

 Analyzing ongoing programme
• Value chain analysis
- Linkage with suppliers
- Linkage with customers
- Process linkage within the value chain
of the firm
 Process linkages with Value Chain of the Firm:
 Individual activities within a firm are not
independent but rather are interdependent.
 Efficiency of design portion of value chain can
be improved by reducing number of separate
parts and increasing their ease of manufacture.
 Efficiency of inward portion i.e. preceding
production, can be improved by reducing
number of vendors, by Just-in-time deliveries,
by having computer system placing automatic
orders etc.
 Efficiency of production portion can be
improved by increased automation, by
rearranging machines into cells and by better
production control systems
 Efficiency of outward portion (i.e. from
factory door to customer) can be improved by
having customers place orders electronically,
by changing locations of warehouses etc.
 Such efficiency-oriented initiatives involve
trade-offs e.g. direct computer orders may
speed up delivery but order filling costs may
increase
 Analyzing ongoing programme

Supplier’s
supplier firm
supplier

Customer’s
Firm Customers
customer
 Analyzing ongoing programme
• Activity-based costing
- Cost pool
- Cost drivers
With conversion costs, new system assigns
R & D, general and administrative and
marketing costs to products.
 Basis of allocation or cost driver, for each of
cost centers reflect cause of cost incurrence.
Advocates of ABC maintain that a meaningful
assessment of full cost today must involve
assigning overhead in proportion to activities
that generate it in long run.
• Use of ABC information:
 It may show that complex products with
many separate parts have higher design and
production costs than simple products
 Many engineering change orders have higher
unit costs than other products
 Information on magnitude of such differences
may lead to changes in policies relating to full
line v/s focused product line, product pricing,
make or buy decisions, adding/deleting
products
 Strategic planning process
1. Reviewing and updating the strategic plan
from last year
2. Deciding on assumptions and guidelines
3. First iteration of the new strategic plan
4. Analysis
5. Second iteration of the new strategic plan
6. Review and approval