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 proposals 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

Suppliers supplier
supplier firm

Firm

Customers

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