Essentials of Management: Planning and Management by Objectives PDF

Chapter 4: Essentials of Planning and Managing by Objectives Chapter 5: Strategies, Policies, and Planning Premises Chapter 6: Decision-Making Part 2 Closing: Major Principles and Guides for the Managerial Function of Planning  LEARNING OBJECTIVES After studying this chapt...

Chapter 4: Essentials of Planning and Managing by Objectives Chapter 5: Strategies, Policies, and Planning Premises Chapter 6: Decision-Making Part 2 Closing: Major Principles and Guides for the Managerial Function of Planning  LEARNING OBJECTIVES After studying this chapter, you should be able to: 1. Understand what managerial planning is and why it is important 2. Identify and analyze the various types of plans and show how they relate to one another 3. Outline and discuss the logical steps in planning and see how these steps are essentially a rational approach to setting objectives and selecting the means of reaching them 4. Explain the nature of objectives 5. Describe how verifiable objectives can be set for different situations 6. Outline the evolving concepts in management by objectives 7. Understand the model of the systems approach to management by objectives 8. Describe the benefits of management by objectives 9. Recognize the weaknesses of management by objectives and suggest ways to overcome them You are now familiar with the basic management theory and have been introduced to the five essential managerial functions: planning, organizing, staffing, leading, and controlling. In Part 2 of this book, we shall discuss planning. In designing an environment for the effective performance of individuals working together in a group, a manager’s most essential task is to see that everyone understands the group’s mission and objectives and the methods for attaining them. If group effort is to be effective, people must know what they are expected to accomplish. This is the function of planning. It is the most basic of all the managerial functions. Planning involves selecting missions and objectives and deciding on the actions to achieve them; it requires decision-making, that is, choosing a course of action from among alternatives. Plans thus provide a rational approach to achieving preselected objectives. Planning also strongly implies managerial innovation, as will be discussed in Chapter 6. Planning bridges the gap from where we are to where we want to go. It is also important to point out that planning and controlling are inseparable—the Siamese twins of management (Figure 4-1). Any attempt to control without plans is meaningless, since there is no way for people to tell whether they are going where they want to go (the result of the task of control) unless they first know where they want to go (part of the task of planning). Plans thus furnish the standards of control.  FIGURE 4-1 Close relationship of planning and controlling TYPES OF PLANS Plans can be classified as (1) missions or purposes, (2) objectives or goals, (3) strategies, (4) policies, (5) procedures, (6) rules, (7) programs, and (8) budgets. Missions or Purposes* The mission or purpose (the terms are often used interchangeably)1 identifies the basic purpose or function or tasks of an enterprise or agency or any part of it. Every kind of organized operation has, or at least should have if it is to be meaningful, a mission or purpose. In every social system, enterprises have a basic function or task assigned to them by society. For example, the purpose of a business generally is the production and distribution of goods and services. The purpose of a state highway department is the design, building, and operation of a system of state highways. The purpose of the courts is the interpretation of laws and their application. The purpose of a university is teaching, research, and providing services to the community. Mission or purpose The basic purpose or function or tasks of an enterprise or agency or any part of it. Innovative Perspective Google's Mission Google is well known as the world’s leading Internet search engine. While its success is a function of numerous factors, its clear and focused mission has created an unambiguous direction for the company that has set in motion the steps to its global success. As listed on its website, “Google’s mission is to organize the world’s information and make it universally accessible and useful.”2 This simple and clear mission helps inform and contextualize all that Google does. The mission is also helpful in directing employee actions in daily duties, as each task should be in support of its mission. A clear and direct mission inspires and directs and is a necessary condition for organizational success. Now part of the holding company, Alphabet, Google’s mission remains focused. Although we do not do so, some writers distinguish between mission and purpose. While a business, for example, may have a social purpose of producing and distributing goods and services, it can accomplish this by fulfilling a mission of producing certain lines of products. The mission of an oil company, like Exxon, is to search for oil and to produce, refine, and market petroleum and petroleum products, from diesel fuel to chemicals. The mission of Du Pont has been expressed as “better things through chemistry,” and Kimberly- Clark (noted for its Kleenex trademark) regards its business mission as the production and sale of paper and paper products. In the 1960s, the mission of the National Aeronautics Space Administration (NASA) was to get a person to the moon before the Russians. It is true that in some businesses and other enterprises, the purpose or mission often becomes fuzzy. For example, many conglomerates have regarded their mission as synergy, which is accomplished through the combination of a variety of companies. www.exxon.com www.dupont.com www.kimberly-clark.com www.nasa.gov An organization’s mission is also often accompanied by its vision. For example, the core mission of the University of San Francisco (USF) is to “promote learning in the Jesuit Catholic tradition.” USF’s vision is to “be internationally recognized as a premier Jesuit Catholic, urban university with a global perspective that educates leaders who will fashion a more humane and just world.”3 What is the vision and mission of your organization? Does it inspire? Objectives or Goals Objectives or goals (the terms are used interchangeably in this book) are the ends toward which activity is aimed. They represent not only the end point of planning, but also the end toward which organizing, staffing, leading, and controlling are aimed. The nature of objectives and management by objectives (MBO) will be discussed in greater detail later in this chapter. Objectives or goals The ends toward which activity is aimed. Strategies For years, the military used the word strategies to mean grand plans made in light of what it was believed an adversary might or might not do. While the term still usually has a competitive implication, managers increasingly use it to reflect broad areas of an enterprise’s operation. In this book, strategy is defined as the determination of the basic long-term objectives of an enterprise and the adoption of courses of action and allocation of resources necessary to achieve these goals. Strategy The determination of the basic long-term objectives of an enterprise and the adoption of courses of action and allocation of resources necessary to achieve these goals. For example, a company may have a strategy of rapid growth in sales and market share at the expense of profit. Or the firm may select a focus strategy on a core business or a diversification strategy across multiple businesses. Strategies can be adjusted, but given the significant allocation of resources (i.e., time and capital) needed to support a strategy, a company’s strategy tends to be in place for an extended period of time. Policies Policies also are plans in that they are general statements or understandings that guide or channel thinking in decision-making. Not all policies are “statements”; they are often merely implied from the actions of managers. The president of a company, for example, may strictly follow—perhaps for convenience rather than as policy— the practice of promoting from within; the practice may then be interpreted as policy and carefully followed by subordinates. In fact, one of the problems of managers is to make sure that subordinates do not interpret as policy minor managerial decisions that are not intended to serve as patterns. Policies General statements or understandings that guide or channel thinking in decision-making. Policies define an area within which a decision is to be made and ensure that the decision will be consistent with and contribute to an objective. Policies help decide issues before they become problems, make it unnecessary to analyze the same situation every time it comes up, and unify other plans, thus permitting managers to delegate authority and still maintain control over what their subordinates do. There are many types of policies. Examples include policies of hiring only university-trained engineers, encouraging employee suggestions for improved cooperation, promoting from within, conforming strictly to a high standard of business ethics, and setting competitive prices. Procedures Procedures are plans that establish a required method of handling future activities. They are chronological sequences of required actions. They are guides to action rather than to thinking and they detail the exact manner in which certain activities must be accomplished. For example, Case Western University outlines three steps for its appraisal process: (1) setting performance objectives, (2) performing a mid-year review of the objectives, and (3) conducting a performance discussion at the end of the period.4 Procedures often cut across departmental lines. For example, in a manufacturing company, the procedure for handling orders may involve the sales department (for the original order), the finance department (for acknowledgment of receipt of funds and for customer credit approval), the accounting department (for recording the transaction), the production department (for the order to produce the goods or the authority to release them from stock), and the shipping department (for determination of shipping means and route).5 Procedures Plans that establish a required method of handling future activities. A few examples illustrate the relationship between procedures and policies. Company policy may grant employees vacations; procedures established to implement this policy will provide for scheduling vacations to avoid disruption of work, setting rates of vacation pay and methods for calculating them, maintaining records to ensure each employee of a vacation, and spelling out the means for applying for leave. Rules Rules spell out specific required actions or nonactions, allowing no discretion. They are usually the simplest type of plan. “No smoking” is a rule that allows no deviation from a stated course of action. The essence of a rule is that it reflects a managerial decision that a certain action must—or must not—be taken. Rules are different from policies, in that policies are meant to guide decision-making by marking off areas in which managers can use their discretion, while rules allow no discretion in their application. Rules spell out specific required actions or nonactions, allowing no discretion. Programs Programs are a complex of goals, policies, procedures, rules, task assignments, steps to be taken, resources to be employed, and other elements necessary to carry out a given course of action; they are ordinarily supported by budgets. They may be as major as an airline’s program to acquire a $20 billion fleet of jets or a five-year program to improve the status and quality of its thousands of flights. Or they may be as minor as a program formulated by a single supervisor to improve the morale of workers in the parts manufacturing department of a farm machinery company. Program A complex assembly of goals, policies, procedures, rules, task assignments, steps to be taken, resources to be employed, and other elements necessary to carry out a given course of action. Budgets A budget is a statement of expected results expressed in numerical terms. It may be called a “quantified” plan. In fact, the financial operating budget is often called a profit plan. A budget may be expressed in financial terms; in terms of labor hours, units of product or machine hours; or in any other numerically measurable terms. It may deal with operation, as the expense budget does; it may reflect capital outlays, as the capital expenditure budget does; or it may show cash flow, as the cash budget does. One of the most comprehensive budgets is prepared by the Office of Management and Budget of the White House.6 The budget proposal is then presented to the Congress by the president of the United States. Budget A statement of expected results expressed in numerical terms. Since budgets are also control devices, we reserve our principal discussion of them for Chapter 19 on control techniques. However, making a budget is clearly planning. The budget is the fundamental planning instrument in many companies. It forces a company to make in advance—whether for a week or for five years—a numerical compilation of expected cash flow, expenses and revenues, capital outlays, or labor- or machine-hour utilization. The budget is necessary for control, but it cannot serve as a sensible standard of control unless it reflects plans. STEPS IN PLANNING The practical steps and diagramed in Figure 4-2 are of general application. In practice, however, one must study the feasibility of possible courses of action at each stage.  FIGURE 4-2 Steps in planning 1. Being Aware of Opportunities Although it precedes actual planning and is therefore not strictly a part of the planning process, an awareness of opportunities* in the external environment as well as within the organization is the real starting point for planning. All managers should take a preliminary look at possible future opportunities and see them clearly and completely, know where their company stands in light of its strengths and weaknesses, understand what problems it has to solve and why, and know what it can expect to gain. Setting realistic objectives depends on this awareness. Planning requires a realistic diagnosis of the opportunity situation. 2. Establishing Objectives The second step in planning is to establish objectives for the entire enterprise and then for each subordinate work unit. This is to be done for the long term as well as for the short range. Objectives specify the expected results and indicate the end points of what is to be done, where the primary emphasis is to be placed, and what is to be accomplished by the network of strategies, policies, procedures, rules, budgets, and programs. Enterprise objectives give direction to the major plans, which by reflecting these objectives define the objective of every major department. Major departmental objectives, in turn, control the objectives of subordinate departments and so on down the line. In other words, objectives form a hierarchy. The objectives of lesser departments will be more accurate if subdivision managers understand the overall enterprise objectives and the derivative goals. Managers should also have the opportunity to contribute ideas for setting their own goals and those of the enterprise. 3. Developing Premises The next logical step in planning is to establish, circulate, and obtain agreement to utilize critical planning premises such as forecasts, applicable basic policies, and existing company plans. Premises are assumptions about the environment in which the plan is to be carried out. It is important for all the managers involved in planning to agree on the premises. In fact, the major principle of planning premises is this: the more thoroughly individuals charged with planning understand and agree to utilize consistent planning premises, the more coordinated enterprise planning will be. Premises Assumptions about the environment in which the plan is to be carried out. Principle of planning premises The more thoroughly individuals charged with planning understand and agree to utilize consistent planning premises, the more coordinated enterprise planning will be.  Forecasting is important in premising: What kinds of markets will there be? What volume of sales? What prices? What products? What technical developments? What costs? What wage rates? What tax rates and policies? What new plants? What policies with respect to dividends? What political or social environment? How will expansion be financed? Forecasts should be based on careful research that uses rigorous analytical techniques. 4. Determining Alternative Courses The fourth step in planning is to search for and examine alternative courses of action, especially those not immediately apparent. There is seldom a plan for which reasonable alternatives do not exist and quite often, an alternative that is not obvious proves to be the best. The more common problem is not finding alternatives but reducing the number of alternatives so that the most promising may be analyzed. Even with mathematical techniques and the computer, there is a limit to the number of alternatives that can be thoroughly examined. The planner must usually make a preliminary examination to discover the most fruitful possibilities. 5. Evaluating Alternative Courses After seeking out alternative courses and examining their strong and weak points, the next step is to evaluate the alternatives by weighing them in light of premises and goals. One course may appear to be the most profitable but may require a large cash outlay and have a slow payback; another may look less profitable but may involve less risk; still another may better suit the company’s long-range objectives. There are so many alternative courses in most situations and so many variables and limitations to be considered that evaluation can be exceedingly difficult. Because of these complexities, the newer methodologies and applications and analysis are discussed in Part 6 on controlling. Developing a Business Case is one method to assess alternative courses of actions and make a decision on the best course of action. A strategic business case takes into account market trends, the competitive environment, and the business model to be applied to the suggested solution in addition to internally focused business metrics. Typically, a business case begins with a clear articulation of the opportunity along with the objectives of the potential course of action. Then, alternative courses of action are identified and data is gathered on each of the likely alternatives that lead to an analysis of these alternatives against the objectives and measures of success. Finally, a choice is made that takes into account relevant risks and a plan is created to implement the chosen course of action. The business case may be communicated in a written document and/or with a presentation. 6. Selecting a Course This is the point at which the plan is adopted—the real point of decision-making. Occasionally, an analysis and evaluation of alternative courses will disclose that two or more are advisable, and the manager may decide to follow several courses rather than the one best course. 7. Formulating Derivative Plans When a decision is made, planning is seldom complete and a seventh step is indicated. Derivative plans are almost invariably required to support the basic plan. 8. Quantifying Plans by Budgeting After decisions are made and plans are set, the final step in giving them meaning, as was indicated in the discussion on types of plans, is to quantify them by converting them into budgets. The overall budget of an enterprise represents the sum total of income and expenses, with resultant profit or surplus, and the budgets of major balance sheet items such as cash and capital expenditures. Each department or program of a business or some other enterprise can have its own budgets, usually of expenses and capital expenditures, which tie into the overall budget. If done well, budgets become a means of adding the various plans and set important standards against which planning progress can be measured. Coordination of Short- and Long-Range Plans Often, short-range plans are made without reference to long-range plans. This is plainly a serious error. The importance of integrating the two types cannot be overemphasized, and no short-run plan should be made unless it contributes to the achievement of the relevant long- range plan. Much waste arises from decisions about immediate situations that fail to consider their effect on more remote objectives. Responsible managers should continually review and revise immediate decisions to determine whether they contribute to long- range programs, and subordinate managers should be regularly briefed on long-range plans so that they will make decisions consistent with the company’s long-range goals. Doing this is far easier than to correct inconsistencies later, especially since short- term commitments tend to lead to further commitments along the same line. OBJECTIVES Objectives were defined earlier as the important ends toward which organizational and individual activities are directed. Since writers and practitioners make no clear distinction between the terms goals and objectives, they are used interchangeably in this book. Within the context of the discussion, it will become clear whether the objectives are long term or short term, broad or specific. The emphasis is on verifiable objectives, which means that at the end of the period, it should be possible to determine whether or not the objective has been achieved. The goal of every manager is to create a surplus (in business organizations, this means profit). Clear and verifiable objectives facilitate measurement of the surplus as well as the effectiveness and efficiency of managerial actions. An objective is verifiable when at the end of the period one can determine whether or not it has been achieved. The Nature of Objectives Objectives state end results, and overall objectives need to be supported by sub-objectives. Thus, objectives form a hierarchy as well as a network. Moreover, organizations and managers have multiple goals that are sometimes incompatible and may lead to conflicts within the organization, within the group, and even within individuals. A manager may have to choose between short- and longterm performance and personal interests may have to be subordinated to organizational objectives. Hierarchy of objectives As Figure 4-3 shows, objectives form a hierarchy, ranging from the broad aim to specific individual objectives. The zenith of the hierarchy is the purpose or mission, which has two dimensions. First, there is the social purpose such as contributing to the welfare of people by providing goods and services at a reasonable price. Second, there is the mission or purpose of the business, which might be to furnish convenient, low-cost transportation for the average person. The stated mission might be to produce, market, and service automobiles. As you will notice, the distinction between purpose and mission is a fine one, and therefore many writers and practitioners do not differentiate between the two terms. At any rate, these aims are, in turn, translated into general objectives and strategies such as designing, producing, and marketing reliable, low-cost, fuel-efficient automobiles. The next level of the hierarchy contains more specific objectives such as those in the key result areas. These are the areas in which performance is essential for the success of the enterprise. More recent business terminology for the same concept is key performance indicator (KPI). Each company will monitor its own KPIs. These are often similar within an industry and may also be similar across industries on some measures (i.e., customer satisfaction). Key result area An area in which performance is essential for the success of the enterprise. Although there is no complete agreement on what the key result areas of a business should be—and they may differ between enterprises—Peter F. Drucker suggests the following: market standing, innovation, productivity, physical and financial resources, profitability, manager performance and development, worker performance and attitude, and public responsibility.7 More recently, however, two other key result areas have become of strategic importance: service and quality.  FIGURE 4-3 Relationship of objectives and the organizational hierarchy Adapted from H. Weihrich and J. Mendleson, Management: An MBO Approach (Dubuque, IA: Wm. C. Brown Co., 1978), p. xi. Used with permission. Examples of objectives for key result areas are the following: to obtain a 10 percent return on investment by the end of calendar year 2021 (profitability); to increase the number of units of product X produced by 7 percent by June 30, 2020, without raising costs or reducing the current quality level (productivity). The objectives have to be further translated into those of divisions, departments, and units down to the lowest level of the organization. Setting Objectives and the Organizational Hierarchy8 As Figure 4-3 shows, managers at different levels in the organizational hierarchy are concerned with different kinds of objectives. The board of directors and top-level managers are very involved in determining the purpose, the mission, and the overall objectives of the firm as well as the more specific overall objectives in the key result areas. Mid-level managers, such as the vice president or manager of marketing or the production manager, are involved in the setting of key result area objectives, division objectives, and departmental objectives. The primary concern of lower-level managers is setting the objectives of departments and units as well as of their subordinates. Although individual objectives, consisting of performance and development goals, are shown at the bottom of the hierarchy, managers at higher levels also should set objectives for their own performance and development. There are different views about whether an organization should use the top-down or the bottom-up approach in setting objectives, as indicated by the arrows in Figure 4-3. In the top-down approach, upper- level managers determine the objectives for subordinates, while in the bottom-up approach subordinates initiate the setting of objectives for their positions and present them to their supervisor. Innovative Perspective Google is famous for launching new businesses in potential future growth areas (e.g., autonomous cars, mobile operating systems, etc.). In 2015, Google formed a new holding company, Alphabet, in which all the current and future businesses that emanate from this organization can enjoy clear leadership and be run independently with oversight and assistance from the Alphabet CEO, Larry Page, and president, Sergey Brin. This organizational form allows for greater scale for Alphabet to pursue new opportunities while still seeking synergies between the subsidiaries. Proponents of the top-down approach suggest that the total organization needs direction through corporate objectives provided by the chief executive officer (in conjunction with the board of directors). Proponents of the bottom-up approach, on the other hand, argue that top management needs to have information from lower levels in the form of objectives. In addition, employees are likely to be highly motivated by and committed to goals that they initiate. Personal experience has shown that the bottom-up approach is underutilized and that either approach alone is insufficient. Multiplicity of objectives Objectives are normally multiple. For example, merely stating that a university’s mission is education and research is not enough. It would be much more accurate (but still not verifiable) to list the overall objectives: Attracting highly motivated students Offering basic training in the liberal arts and sciences as well as a range of professional fields Granting postgraduate degrees to qualified candidates Attracting highly regarded professors Creating and organizing new knowledge through research Operating as a private school supported principally through tuition and gifts of alumni and friends Likewise, at every level in the hierarchy of objectives, goals are likely to be multiple. Some people think that a manager cannot effectively pursue more than two to five objectives. The argument is that too many objectives tend to dilute the drive for their accomplishment. But the limit of two to five objectives seems too arbitrary; managers might pursue more significant objectives. It would be wise to state the relative importance of each objective so that major goals receive more attention than lesser ones. At any rate, the number of objectives managers should realistically set for themselves depends on how much they will do themselves and how much they can assign to subordinates, thereby limiting their role to one of assigning, supervising, and controlling. How to Set Objectives9 Without clear objectives, managing is haphazard. No individual and no group can expect to perform effectively and efficiently unless there is a clear aim. Table 4-1 illustrates some objectives and how they can be restated in a way that allows measurement. TABLE 4-1 Examples of nonverifiable and verifiable objectives Nonverifiable objective Verifiable objective 1. To make a reasonable profit 1. To achieve a return on investment of 12 percent at the end of the current fiscal year 2. To improve communication 2. To issue a two-page monthly newsletter beginning July 1, 2005, involving not more than 40 working hours of preparation time (after the first issue) 3. To improve productivity of the 3. To increase production output by 5 production department percent by December 31, 2005, without additional costs while maintaining the current quality level 4. To develop better managers 4. To design and conduct a 40-hour in-house program on the “fundamentals of management” to be completed by October 1, 2005, involving not more than 200 working hours of the management development staff and with at least 90 percent of the 100 managers passing the exam (specified) 5. To install a computer system 5. To install a computerized control system in the production department by December 31, 2005, requiring not more than 500 working hours of systems analysis and operating with not more than 10 percent downtime during the first  three months or 2 percent thereafter Quantitative and qualitative objectives To be measurable, objectives must be verifiable. This means that one must be able to answer this question: At the end of the period, how do I know if the objective has been accomplished? For example, the objective of making a reasonable profit (Table 4-1) does not state how much profit is to be made, and what is reasonable to the subordinate may not be at all acceptable to the superior. In the case of such a disagreement, it is of course the subordinate who loses the argument. In contrast, a return on investment of 12 percent at the end of the current fiscal year can be measured. It answers these questions: how much or what or when? At times, stating results in verifiable terms is more difficult. This is especially true when it involves the objectives for staff personnel and in government. For example, installing a computer system is an important task, but “to install a computer system” is not a verifiable goal. However, suppose the objective is “to install a computerized control system (with certain specifications) in the production department by December 31, with an expenditure of not more than 500 working hours.” Then, goal accomplishment can be measured. Moreover, quality can also be specified in terms of computer downtime such as “the system shall be operational 90 percent of the time during the first two months of operation.” The list of objectives should not be too longGuidelines for setting objectives Setting objectives is indeed a difficult task. It requires intelligent communication by management and buy-in by employees. The guidelines shown in Table 4-2 will help managers in setting their objectives. TABLE 4-2 Checklist of manager objectives If the objectives meet the criterion, write “+” in the box on the right of the statement. If they do not, mark “–” in the box. 1. Do the objectives cover the main features of my job? □ 2. Is the list of objectives too long? If so, can I combine some □ objectives? 3. Are the objectives verifiable, that is, will I know at the end of the □ period whether they have been achieved? 4. Do the objectives indicate: (a) quantity (how much)? □ (b) quality (how well or specific characteristics)? □ (c) time (when)? □ (d) cost (at what cost)? □ 5. Are the objectives challenging yet reasonable? □ 6. Are priorities assigned to the objectives (ranking, weight, etc.)? □ 7. Does the set of objectives also include: (a) improvement objectives? □ (b) personal development objectives? □ 8. Are the objectives coordinated with those of other managers and □ organizational units? Are they consistent with the objectives of my superior, my department, □ and the company? 9. Have I communicated the objectives to all who need to be informed? □ 10. Are the short-term objectives consistent with the long-term aims? □ 11. Are the assumptions underlying the objectives clearly identified? □ 12. Are the objectives expressed clearly and are they in writing? □ 13. Do the objectives provide for timely feedback so that I can take any □ necessary corrective steps? 14. Are my resources and authority sufficient for achieving the □  objectives? 15. Have I given the individuals who are expected to accomplish the □ objectives a chance to suggest their objectives? 16. Do my employees have control over aspects for which they are □ assigned responsibility? The list of objectives should not be too long, yet it should cover the main features of the job. As this chapter has emphasized, objectives should be verifiable and should state what is to be accomplished and when. If possible, the quality desired and the projected cost of achieving the objectives should be indicated. Furthermore, objectives should present a challenge, indicate priorities, and promote personal and professional growth and development. These and other criteria for good objectives are summarized in Table 4-2. Testing objectives against the criteria shown in the checklist is a good exercise for managers and aspiring managers. Entrepreneurial Perspective Interview with Bryant Tong, Managing Director with Nth Power10 As a venture capitalist with a leading Silicon Valley venture firm, Nth Power, Bryant Tong advises the entrepreneurs of the companies his firm finances in setting aggressive but attainable objectives or milestones. These milestones are not always related to financial targets, as the firms may take many months to develop saleable products. Still, the milestones are key and verifiable such as developing product prototypes, securing intellectual property protection for key products, filling out a management team with the best people, and beginning a sales cycle with potential customers. These objectives or milestones are often linked to additional rounds of financing and so the success of the firm is very much linked toward meeting them. EVOLVING CONCEPTS IN MANAGEMENT BY OBJECTIVES11 MBO is now practiced around the world. Yet, despite its wide application, it is not always clear what is meant by MBO. Some still think of it as an appraisal tool; others see it as a motivational technique; still others consider MBO a planning and control device. In other words, definitions and applications of MBO differ widely. We define MBO as a comprehensive managerial system that integrates many key managerial activities in a systematic manner and is consciously directed toward the effective and efficient achievement of organizational and individual objectives. This view of MBO as a system of managing is not shared by all. While some still define MBO in a very narrow, limited way, we prefer to see it as a comprehensive goal-driven, success-oriented management system (Figure 4-4). Besides being used for performance appraisal, as an instrument for motivating individuals, and in strategic planning, there are still other managerial subsystems that can be integrated into the MBO process. They include human resource planning and development (staffing as well as individual and organization development), career planning (building on personal strengths and overcoming weaknesses), the reward system (paying for performance), budgeting (planning and controlling), and other managerial activities important for a specific position. These various managerial activities need to be integrated into a system. In short, MBO to be effective must be considered a way of managing (Figure 4-4) and not an addition to the managerial job.12 Management by objectives A comprehensive managerial system that integrates many key managerial activities in a systematic manner and is consciously directed toward the effective and efficient achievement of organizational and individual objectives.  FIGURE 4-4 Systems approach to management by objectives Adapted from Heinz Weihrich, Management Excellence: Productivity through MBO (New York: McGraw-Hill, 1985), p. 18. Benefits and Weaknesses of Management by Objectives Although goal-oriented management is now one of the most widely practiced managerial approaches, its effectiveness is sometimes questioned. Faulty implementation is often blamed, but another reason is that MBO may be applied as a mechanistic technique focusing on selected aspects of the managerial process without integrating them into a system. Benefits of management by objectives There is considerable evidence (much of it from laboratory studies) that shows the motivational aspects of clear goals. But there are other benefits: Improvement of managing through results-oriented planning Clarification of organizational roles and structures as well as delegation of authority according to the results expected of the people occupying the roles Encouragement of commitment to personal and organizational goals Development of effective controls that measure results and lead to corrective actions Failures of management by objectives and some recommendations Despite all its advantages, an MBO system has a number of weaknesses. Most are due to shortcomings in applying the MBO concepts. Failure to teach the philosophy of MBO is one of the weaknesses of certain programs. Managers must explain to subordinates what it is, how it works, why it is being done, what part it will play in appraising performance, and above all, how participants can benefit. The philosophy is built on the concepts of self-control and self-direction. Failure to give guidelines to goal setters is often another problem. Managers must know what the corporate goals are and how their own activities fit in with them. Managers also need planning premises and knowledge of major company policies. There is also the difficulty of setting verifiable goals with the right degree of flexibility. Participants in MBO programs report at times that the excessive concern with economic results puts pressure on individuals that may encourage questionable behavior. To reduce the probability of resorting to unethical means to achieve results, top management must agree to reasonable objectives, clearly state behavioral expectations, and give high priority to ethical behavior, rewarding it as well as punishing unethical activities.  In addition, emphasis on short-run goals can be done at the expense of the longer-range health of the organization. Moreover, the danger of inflexibility can make managers hesitate to change objectives, even if a changed environment would require such adjustments. Other dangers include the overuse of quantitative goals and the attempt to use numbers in areas where they are not applicable, or they may downgrade important goals that are difficult to state in terms of end results. For example, a favorable company image may be the key strength of an enterprise, yet stating this in quantitative terms is difficult. There is also the danger of forgetting that managing involves more than goal setting. But even with the difficulties and dangers of managing by objectives in certain situations, this system emphasizes in practice the setting of goals long known to be an essential part of planning and managing. SUMMARY Planning involves selecting the missions and objectives as well as the actions to achieve them. It requires decision-making, which means choosing a future course of action from among alternatives. Planning and controlling are closely interrelated, although they are discussed separately in this book. There are many types of plans such as missions or purposes, objectives or goals, strategies, policies, procedures, rules, programs, and budgets. Once an opportunity is recognized, a manager plans rationally by establishing objectives, making assumptions (premises) about the present and future environment, finding and evaluating alternative courses of action, and choosing a course to follow. Next, the manager must make supporting plans and devise a budget. These activities must be carried out with attention to the total environment. Short-range plans must of course be coordinated with long-range plans.  Objectives are the end points toward which activities are aimed. Objectives are verifiable, if it is possible at the end of the period to determine whether they have been accomplished. Objectives form a hierarchy, starting from corporate missions or purposes going down to individual goals. Managers can best determine the number of objectives they should realistically set for themselves by analyzing the nature of the job and how much they can do themselves and how much they can delegate. In any case, managers should know the relative importance of each of their goals. MBO has been widely used for performance appraisal and employee motivation, but it is really a system of managing. Among its benefits, MBO results in better managing, often forces managers to clarify the structure of their organizations, encourages people to commit themselves to their goals, and helps develop effective controls. Some of its weaknesses are that managers sometimes fail to explain the philosophy of MBO (which emphasizes self-control and self-direction) to subordinates or give them guidelines for their goal setting. In addition, goals themselves are difficult to set, tend to be short term, and may become inflexible despite changes in the environment. People, in their search for verifiability, may overemphasize quantifiable goals. KEY IDEAS AND CONCEPTS FOR REVIEW Planning Mission or purpose Objective or goal Strategy Policy Procedure Rule Program Budget  Planning steps Hierarchy of objectives Key result areas Quantitative and qualitative objectives Verifiability Evolving concepts in MBO Systems approach to MBO Benefits of MBO Weaknesses of MBO Recommendations for improving MBO FOR DISCUSSION 1. “Planning is looking ahead, and control is looking back.” Comment. 2. Draw up a statement of policy and devise a brief procedure that might be useful in implementing it. Are you sure your policy is not a rule? 3. Take an organization that you know and identify its purpose or mission, even if it is not formally stated by the enterprise. 4. To what extent do you believe that managers you have known in business or elsewhere have a clear understanding of their objectives? If you think they do not, how would you suggest that they go about setting their objectives? 5. Some people object to defining long-term goals because they think that knowing what will happen over a long period is impossible. Do you believe this is an intelligent position to take? Why or why not? 6. Do you think that managing by objectives could be introduced in a government agency? A university? A college fraternity or sorority? 7. What are your five most important personal objectives? Are they long or short range? Are the objectives verifiable? 8. In your organization, what does your manager expect from you in terms of performance? Is it stated in writing? If you  wrote down your job objective and your boss wrote down what he or she expects of you, would the two be consistent? 9. How can MBO be applied to a new venture? Give an example. 10. Which company does a better job at managing by objective: Facebook or Google? Explain your position. Which company will be more successful in the next five years? Why? EXERCISE/ACTION STEPS In this chapter, the overall objectives of a university were identified. Develop overall objectives for your university, for your college, and for the various departments in your college. Show how these objectives are interrelated to form a network. ONLINE RESEARCH 1. Use a search engine to look for “management by objectives” and identify how MBO is used: as a planning tool? For managerial appraisal? For motivating people? In conjunction with strategic planning? For developing managers? 2. Search the Internet for the term “budget” and discuss your findings with the class. Management Case Developing Verifiable Goals The division manager had recently heard a lecture on MBO. His enthusiasm, kindled at that time, grew the more he thought about it. He finally decided to introduce the concept and see what headway he could make at his next staff meeting. He recounted the theoretical developments in this technique, cited the advantages to the division of its application, and asked his subordinates to think about adopting it. It was not as easy as everyone had thought. At the next meeting, several questions were raised. “Do you have division goals assigned by the president to you for next year?” the finance manager wanted to know. “No, I do not,” the division manager replied. “I have been waiting for the president’s office to tell me what is expected, but they act as if they will do nothing about the matter.” “What is the division to do then?” the manager of production asked, rather hoping that no action would be indicated. “I intend to list my expectations for the division,” the division manager said. “There is not much mystery about them. I expect $30 million in sales; a profit on sales before taxes of 8 percent; a return on investment of 15 percent; an ongoing program in effect by June 30, with specific characteristics I will list later, to develop our own future managers; the completion of development work on our XZ model by the end of the year; and stabilization of employee turnover at 5 percent.” The staff was stunned that their superior had thought carefully about these verifiable objectives and stated them with such clarity and assurance. They were also surprised about his sincerity in wanting to achieve them. “During the next month, I want each of you to translate these objectives into verifiable goals for your own functions. Naturally, they will be different for finance, marketing, production, engineering, and administration. However you state them, I will expect them to add up to the realization of the division goals.” Questions  1. Can a division manager develop verifiable goals or objectives when they have not been assigned to him or her by the president? How? What kind of information or help do you believe is important for the division manager to have from headquarters? 2. Did the division manager set the goals in the best way? What would you have done? REFERENCES 1. A recent study found no agreement among executives of the meaning of vision. Seven factors, however, were identified in the structure and content of vision statements. They were “formulation, implementation, innovative realism, general, degree of detail, risk propensity, and profit orientation.” 2. https://www.google.com/intl/en/about/, accessed September 12, 2012. 3. https://www.usfca.edu/about-usf/who-we-are/vision-mission, accessed April 22, 2019). 4. Case Western University, www.cwru.edu/finadmin/humres/policies/III-2a.html, accessed March 30, 2002. 5. Michael Hammer and James Champy, however, suggest that many of those steps can be combined. See their book Reengineering the Corporation (New York: Harper Business, 1993). 6. Office of Management and Budget at the White House, www.whitehouse.gov/omb, accessed November 8, 2008. 7. Peter F. Drucker, The Practice of Management (New York: Harper & Brothers, 1954), p. 63. For Drucker’s contributions to management, see http://drucker.cgu.edu/html/ aboutdrucker/index.htm, accessed March 28, 2014, and http://drucker.cgu.edu/html/ aboutdrucker/timelineh.htm, accessed March 28, 2014, which are maintained by the Peter F. Drucker Graduate School of Management; Peter F. Drucker,  Management (Revised Edition), (New York: HarperCollins Publishers, 2008). 8. Parts of this discussion are based on Heinz Weihrich, Management Excellence: Productivity through MBO (New York: McGraw-Hill, 1985), chap. 4. 9. “Planning and Goal Setting for Small Business,” U.S. Small Business Administration MP-6, www.sba.gov/library/pubs/mp- 6.doc, accessed November 16, 2011; Heinz Weihrich, “How to Set Goals that Work for Your Company—and Improve the Bottom Line,” www.usfca.edu/fac- staff/weihrichh/docs/goals.pdf, accessed March 28, 2014. 10. Interview conducted with Bryant Tong of Nth Power on January 9, 2007, by Mark Cannice. 11. See also Heinz Weihrich, “A New Approach to MBO: Updating a Time-honored Technique,” www.usfca.edu/fac- staff/weihrichh/docs/newmbo.pdf, accessed March 28, 2014. 12. Heinz Weihrich, “A Study of the Integration of Management by Objectives with Key Managerial Activities and the Relationship to Selected Effectiveness Measures,” doctoral dissertation, University of California, Los Angeles, 1973; Weihrich, Management Excellence: Productivity through MBO; A. J. Vogl, “Drucker, of Course,” Across the Board, November/December 2000. ________________ * Often, the term vision is mentioned in connection with the discussion of mission. Popular books on management discuss concepts such as goal setting, team management, and orientation toward the future in connection with the discussion of vision. * The word problems might be used instead of opportunities. However, a state of disorder or confusion and a need for a solution to achieve a given goal can more constructively be regarded as an opportunity.  LEARNING OBJECTIVES After studying this chapter, you should be able to: 1. Explain the nature and purpose of strategies and policies 2. Describe the strategic planning process 3. Understand the TOWS Matrix and the business portfolio matrix 4. Describe some major kinds of strategies and policies and the hierarchy of strategies 5. Identify Porter’s generic strategies 6. Discuss the nature of premises and forecasts 7. Analyze your own or your ideal company with the strategy tools discussed Today, most business enterprises engage in strategic planning, although the degree of sophistication and formality varies considerably. Conceptually, strategic planning is deceptively simple: analyze the current and expected future situation, determine the direction of the firm, and develop means for achieving the mission. In reality, this is an extremely complex process that demands a systematic approach for identifying and analyzing factors external to the organization and matching them with the firm’s capabilities.  Planning is done in an environment of uncertainty. No one can be sure if the external as well as the internal environment will be the same next week, much less several years from now. Therefore, people make assumptions or forecasts about the anticipated environment. Some of the forecasts become assumptions for other plans. For example, the gross domestic product forecast becomes the assumption for sales planning, which in turn becomes the basis for production planning and so on. In this chapter, you will learn about the nature and purpose of strategies and policies, the strategic planning process (which identifies the critical aspects of formulating a strategy), the TOWS Matrix (a tool for systematically integrating external and internal factors), the business portfolio matrix (a tool for allocating resources), some major kinds of strategies and policies, the hierarchy of strategies, and generic strategies. Because plans are made in an environment of uncertainty, you will also learn about premising and forecasting. THE NATURE AND PURPOSE OF STRATEGIES AND POLICIES Strategies and policies are closely related. Both give direction, both are the framework for plans, both are the basis of operational plans, and both affect all areas of managing. The term strategy (derived from the Greek word strategos, meaning “general”) has been used in different ways. Authors’ applications differ in at least one major aspect. Some writers focus on both the end points (mission/purpose and goals/objectives) and the means of achieving them (policies and plans). Others emphasize the means to the ends in the strategic process rather than the ends per se. As pointed out in Chapter 4, strategy refers to the determination of the mission (or the fundamental purpose) and the basic long-term objectives of an enterprise, followed by the adoption of courses of action and allocation of resources necessary to achieve these aims. Therefore, objectives are a part of strategy formulation. Strategy The determination of the mission or purpose and the basic longterm objectives of an enterprise, followed by the adoption of courses of action and allocation of resources necessary to achieve these aims. Policies are general statements or understandings that guide managers’ thinking in decision-making. They ensure that decisions fall within certain boundaries. They usually do not require action but are intended to guide managers in their commitment to the decision they ultimately make. Policies General statements or understandings that guide managers’ thinking in decision-making. For example, corporate policies that emphasize diversity and equity in hiring and pay have become more widespread in recent years. These policies do not dictate decisions on individual hiring or pay decisions; they do, however, guide managers’ decisions on these key issues that help the organization achieve higher performance, better morale, and broader societal benefits. The essence of policy is discretion. Strategy, on the other hand, concerns the direction in which human and material resources will be applied in order to increase the chance of achieving selected objectives. Leadership Perspective Lee Kun-Hee Leads the Value- and Policy- driven Samsung Company for Global Recognition1 The Samsung Group is a large Korean conglomerate that focuses on electronics and financial services. In the past, many Korean companies encountered difficulties because they diversified into unrelated fields. In its new approach to management, Samsung  tries to avoid the pitfalls of other companies. At the turn of the century, Samsung initiated a policy designed to make the company a leader in its field, competing against firms such as Sony of Japan. The company is driven by its values and its philosophy, which states: “We will devote our people and technologies to create superior products and services, thereby contributing to a better global society.”2 Samsung realizes the importance of its people and the use of the latest technologies for achieving success in the marketplace. At the same time, it is aware of the responsibility to contribute to society not only in Korea, but also worldwide. Chairman Lee Kun-Hee laid the groundwork for a new approach to management that considers defects a crime. Quality, superior products, and excellent customer service are considered key factors for success in the very competitive environment that has been dominated by Japanese firms. With its “digital management” approach, Samsung attempts to exploit the opportunities created by the information age technologies. Samsung’s values, philosophies, and policies as well as its goal of becoming a global leader in its field have attracted many Korean university students. Will these young people help the company to successfully compete in the global environment? To be effective, strategies and policies must be put into practice by means of plans with increasing details until they get down to the nuts and bolts of operation. The action plans through which strategies are executed are known as tactics. Strategies must be supported by effective tactics. THE STRATEGIC PLANNING PROCESS Although specific steps in the formulation of a strategy may vary, the process can be built, at least conceptually, around the key elements (Figure 5-1) and elaborated in the following:  FIGURE 5-1 Strategic Planning Process Inputs to the Organization The various organizational inputs, including the goal inputs of the claimants, were discussed in Chapter 1 and need no elaboration. Industry Analysis As will be pointed out later in this chapter, Michael Porter suggests that the formulation of a strategy requires the evaluation of the attractiveness of an industry by analyzing the external environment. The focus should be on the kind of competition within an industry, the possibility of new firms entering the market, the availability of substitute products or services, and the bargaining positions of the suppliers as well as the buyers or customers. Enterprise Profile The enterprise profile is usually the starting point for determining where the company is and where it should go. Thus, top managers determine the enterprise’s mission and clarify its geographic orientation such as whether it should operate in selected regions— throughout the home country or even in different countries. In addition, managers assess the competitive position of their firm. Orientation, Values, and Vision of Executives3 The enterprise profile is shaped by people, especially executives, and their orientation and values are important for formulating the strategy. They set the organizational climate and they determine the direction of the firm through their vision that answers the question “What do we want to become?”4 Consequently, their values, their preferences, and their attitudes toward risks have to be carefully examined because they have an impact on the strategy. For example, even if the alternative of distributing spirits may appear profitable, executives may decide against such a strategy because of top management’s value system that condemns alcoholic beverages. Innovative Perspective Apple's Strategy for Innovation5 In August 2012, Apple became the most valuable company in the history of the world commanding a market valuation of well over $600 billion. What enabled Apple to achieve such great success in the market place? Was its strategy exceptionally superior or its execution perfect? How did it achieve its sustainable competitive advantage that allowed it to create such value? One of the factors, if not the leading factor, was Apple’s dedication to distinctive design and superior user interface with its products. Apple’s innovative capacity tied in large part to its late founder, Steve Jobs, drove it to develop not only new products in its main business (e.g. computers), but also to leverage its capacity to  create user-friendly designs to enter new businesses (e.g., music devices and delivery such as iPod and iTunes and mobile phones such as iPhone, and new segments of content consumption such as iPad). Each of these monumental new business successes was driven by an understanding of what the customer implicitly wanted and then putting in place a process of innovation and relentless dedication to design that led to customer craving of these products. Apple’s new innovative iWatch appears to be another example of dedication to distinctive design that anticipates customers’ needs. Time will tell if Apple can maintain its capability to delight its customers with its innovative products. As Apple’s value hovers around $1 trillion today, it seems clear that its capacity to innovate and products that customers demand have continued. Mission (Purpose), Major Objectives, and Strategic Intent6 The mission, also sometimes called the purpose, is the answer to the question “What is our business?” The major objectives are the end points toward which the activities of the enterprise are directed. (These topics were discussed in the previous chapter.) Mission A statement that answers the question “What is our business?” Strategic intent is the commitment to win in the competitive environment. Professors Gary Hamel and C. K. Prahalad analyzed companies that had achieved global leadership.7 They found that these firms had an obsession with winning not only at the top level, but also throughout the organization. This obsession is called strategic intent and is illustrated by Komatsu’s intent to “encircle Caterpillar,” its main rival, or Canon’s idea to “beat Xerox,” or Honda’s intent to become an automotive pioneer, “a second Ford.” The authors point out that strategic intent requires personal effort and commitment. The intent statement is stable over time and focuses on the essence of winning. Strategic intent The commitment to win in the competitive environment. www.caterpillar.com www.xerox.com www.honda.com www.ford.com Entrepreneurial Perspective Interview with Jon B. Fisher, Cofounder of Bharosa, an Oracle Corporation company8 Jon Fisher is a serial Silicon Valley entrepreneur, founding several technology firms, the most recent being Bharosa. Bharosa is an enterprise security software firm that was purchased by Oracle Corporation in 2007. Mr. Fisher’s take on entrepreneurism is centered on what he calls “strategic entrepreneurism.” He defines strategic entrepreneurism as creating and growing a company with the aim of having it acquired by a dominant firm in the industry. In our communication, he elaborated, “Identify the companies that you believe would most benefit from acquiring your company. Of course, you can never control what another company does, but by understanding which company may acquire you and what their own needs may be, you can steer your company in their direction as an acquisition target. Then, when your company gets acquired by this larger corporation, everyone will remark on how lucky you are, not knowing that this was your goal from the beginning.” Fisher’s strategic entrepreneurism is his trademark approach to the strategic planning process of industry analysis, building an enterprise profile to suit the industry the firm is operating in, analyzing strategic alternatives, and making a  strategic choice early in the life of an enterprise. His entrepreneurial success is linked to his strategic intent of “beginning with the end in mind.” A classic serial entrepreneur, Mr. Fisher now leads his new venture, CrowdOptic which focuses on developing middlewear software that applies AI to provide “Intelligent Live Streaming” to create actionable information for enterprise clients.9 Present and Future External Environment The present and future external environment must be assessed in terms of threats and opportunities. The evaluation focuses on the competitive situation as well as on economic, social, political, legal, demographic, and geographic factors. In addition, the environment is scanned for technological developments, for products and services on the market, and for other pertinent factors in determining the competitive situation of the enterprise. Internal Environment 10 Similarly, the firm’s internal environment should be audited and evaluated with respect to its resources and its weaknesses and strengths in research and development, production, operation, procurement, marketing, products, and services. Other internal factors that are important for formulating a strategy should be assessed, including human and financial resources as well as the company image, organization structure and climate, planning and control system, and relations with customers. Development of Alternative Strategies Strategic alternatives are developed on the basis of an analysis of the external and internal environments. An organization may pursue many different kinds of strategies.11 It may specialize or concentrate, as the Korean Hyundai did by producing lower-priced cars (in contrast to General Motors, e.g., which has a complete product line ranging from inexpensive to luxury cars). Under the leadership of its chief executive, Chung Mong Koo, the company introduced the competitively priced sport utility vehicle Santa Fe, which was well received by the market.12 www.hyundai.com www.gm.com Alternatively, a firm may diversify, extending the operation into new and profitable markets. Kmart Corporation formed a Specialty Retailing Group that included stores such as Walden Book Company, Builders Square, Designer Depot, and PayLess Drug Stores. Still another strategy is international expansion to other countries (Chapter 3). Other examples of possible strategies are joint ventures and strategic alliances, which may be appropriate for some firms.13 They are especially suitable for big undertakings in which firms have to pool their resources, as illustrated by the joint venture of General Motors and Toyota to produce small cars in California.14 www.kmart.com www.bordersgroupinc.com (Walden) www.paylessdrug.com www.toyota.com www.nummi.om Under certain circumstances, a company may have to adopt a liquidation strategy by terminating an unprofitable product line or even dissolving the firm, as illustrated by the Savings and Loan Associations, or declare bankruptcy, as exemplified by the energy company Enron. But, in some cases, liquidation may not be necessary; a retrenchment strategy may be sufficient. In such a situation, the company may curtail its operation temporarily. Bowman and Hurry (1993)15 applied Options Theory16 to strategy making, equating resource investments by the organization to the development of options on future courses of action. By developing a portfolio of strategic options through resource investments, the firm can create value and create alternatives to “strike” various options and pursue new strategic alternatives that appear most promising. Options are most valuable when there exists high uncertainty in the future and when there is time for the expiration of the option and when the option is on a potentially large outcome. The deployment of resources to create options to make sustained progress on existing products are referred to as incremental options, while resource investments that create a path to build potential new products are referred to as flexibility options. These are just a few examples of possible strategies. In practice, companies, especially large ones, pursue a combination of strategies. Entrepreneurial Perspective Interview with Art Ciocca, Chairman of the Wine Group17 The Wine Group is the third largest wine company in the world by volume. Mr. Art Ciocca18 is the chairman of the Wine Group and founded it with a management buyout of the wine assets of the Coca-Cola Bottling Company of New York in 1981. The Wine Group gained fame and market share with its innovative “Wine in a Box” product. The move toward this product was in large part a response to its recognition of its competitive price disadvantage in glass bottles relative to larger firms in the industry. Its innovation of the high-quality wine in a box product allowed it to grow rapidly and efficiently with products that met its customers’ demands. Throughout its history, Ciocca has led the Wine Group in successful strategic choices (e.g., the wine cooler market demand of the mid- to late 1980s) with a careful analysis of its competitors’ strengths and its own ability to pick the markets where it could compete effectively and profitably. Ciocca envisions entrepreneurial management as a practice that can and should be employed in organizations of all sizes, not just new ventures. Evaluation and Choice of Strategies19 Various strategies have to be carefully evaluated before the choice is made. Strategic choices must be considered in light of the risks involved in a particular decision. Some profitable opportunities may not be pursued because failure in a risky venture could result in bankruptcy of the firm. Another critical element in choosing a strategy is timing. Even the best product may fail, if it is introduced to the market at an inappropriate time. Moreover, the reaction of competitors must be taken into consideration. When IBM reduced the price of its personal computer in reaction to the success of Apple’s Macintosh computer, firms producing IBM-compatible computers had little choice but to reduce their prices as well. This illustrates the interconnection of the strategies of firms in the same industry. Consistency Testing and Contingency Planning The last key aspect of the strategic planning process is testing for consistency and preparing for contingencies. During all phases of the strategic planning process, consistency testing is essential. Since the future cannot be predicted with a high degree of certainty, contingency plans need to be prepared. For example, a strategy may be prepared with the assumption that the gross domestic product may increase 3 percent annually over the next three years. A contingency plan may also be made in which the scenario includes a major recession. Medium- and Short-Range Planning, Implementation through Organizing, Staffing, Leading, and Controlling Although not a part of the strategic planning process (shown by broken lines in Figure 5-1), medium- and short-range planning as well as implementation of the plans must be considered during all phases of the process. Implementation of the strategy requires organizing, perhaps even reengineering the organization (Part 3), staffing, that is, filling and keeping filled the positions in the organization structure (Part 4), and providing leadership through motivation and effective communication (Part 5). Controls must also be installed for monitoring performance against plans (Part 6). The importance of feedback is shown by the loops in the model. (These aspects of strategy implementation are discussed later in the book.) THE TOWS MATRIX: A MODERN TOOL FOR ANALYSIS OF THE SITUATION Today, strategy designers are aided by a number of matrices that show the relationships of critical variables, such as the Boston Consulting Group’s business portfolio matrix (discussed later). For many years, the SWOT analysis has been used to identify a company’s strengths, weaknesses, opportunities, and threats. The TOWS Matrix has been introduced for analyzing the competitive situation of the company or even of a nation that leads to the development of four distinct sets of strategic alternatives.20 The TOWS Matrix has a wider scope and a different emphasis from the business portfolio matrix. The former does not replace the latter. The TOWS Matrix is a conceptual framework for a systematic analysis that facilitates matching of the external threats and opportunities with the internal weaknesses and strengths of the organization. It is common to suggest that companies should identify their strengths and weaknesses as well as the opportunities and threats in the external environment; but, what is often overlooked is that combining these factors may require distinct strategic choices. To systematize these choices, the TOWS Matrix has been proposed, where T stands for threats, O for opportunities, W for weaknesses, and S for strengths. The TOWS model starts with the threats (T in TOWS), because in many situations a company undertakes strategic planning as a result of a perceived crisis, problem, or threat. Four Alternative Strategies Figure 5-2 presents the four alternative strategies of the TOWS Matrix*. The strategies are based on the analysis of the external environment (threats and opportunities) and the internal environment (weaknesses and strengths): 1. The WT strategy aims to minimize both weaknesses and threats and may be called the Mini-Mini (for “minimize- minimize”) strategy. It may require that the company, for example, form a joint venture, retrench, or even liquidate. 2. The WO strategy attempts to minimize the weaknesses and maximize the opportunities. Thus, a firm with weaknesses in some areas may either develop those areas within the enterprise or acquire the needed competencies (such as technology or persons with needed skills) from outside, in order to enable it to take advantage of opportunities in the external environment. 3. The ST strategy is based on using the organization’s strengths to deal with threats in the environment. The aim is to maximize the former while minimizing the latter. Thus, a company may use its technological, financial, managerial, or marketing strengths to cope with the threats of a new product introduced by its competitor. 4. The SO strategy, which capitalizes on a company’s strengths to take advantage of opportunities, is the most desirable. Indeed, it is the aim of enterprises to move from other positions in the matrix to this one. If they have weaknesses, they will strive to overcome them, making them strengths. If they face threats, they will cope with them so that they can focus on opportunities.  FIGURE 5-2 TOWS Matrix for strategy formulation Time Dimension and the TOWS Matrix So far, the factors displayed in the TOWS Matrix pertain to analysis at a particular point in time. However, external and internal environments are dynamic: some factors change over time, while others change very little. Hence, strategy designers must prepare several matrices at different points in time (Figure 5-3). Thus, one may start with a TOWS analysis of the past, continue with an analysis of the present, and perhaps most important, focus on different time periods (T1, T2, etc.) in the future. Application of the TOWS Merger Matrix for Mergers, Acquisitions, Joint Ventures, and Alliances Companies around the world now use the TOWS Matrix; the matrix has also been included in several modern textbooks on strategic management.21 Recently, the TOWS Matrix concept has been introduced for planning mergers, acquisitions, joint ventures, and alliances.22 Whenever two partners consider joint activities, it is prudent to analyze the strengths and weaknesses for each partner as well as their opportunities and threats. Moreover, their alternative strategies before their association should be considered: the two TOWS Matrices provide a better understanding of the prospective partners before the actual linkage. For example, complementary strengths and weaknesses could result in a competitive advantage for both companies. On the other hand, repetition and overlap may result in duplication of efforts. After the two matrices are evaluated, a third matrix should be developed for the partnership. This is especially important for acquisitions and mergers because of the relative permanency of the resulting entity. Preparing the three TOWS Matrices can also allow potential problems to be identified in more loosely coupled partnerships such as a strategic alliance.23 FIGURE 5-3 Dynamics of the TOWS Matrix BLUE OCEAN STRATEGY: IN PURSUIT OF OPPORTUNITIES IN UNCONTESTED MARKETS24 In the TOWS Matrix discussion, it was shown that companies could use their strengths and overcome their weaknesses by taking advantage of opportunities and coping with threats. It was suggested that the potentially most successful strategy is to use the enterprise’s strengths and to take advantage of opportunities. In the recently published book Blue Ocean Strategy - How to Create Uncontested Market Space and Make the Competition Irrelevant, the authors W. Chan Kim and Renee Mauborgne specifically suggest to focus on opportunities that explore uncontested waters (opportunities) in the “blue ocean” rather than trying to beat the competition in the existing industry or the “red ocean.” The red ocean may be illustrated by the “bloody” current competition in the automobile industry, in which companies try to be a little better than their competitor by, for example, having a lower cost structure. In contrast, the blue ocean strategy may be illustrated by eBay’s online auction by entering a market without competitors. Let us explore further the differences between the red and blue ocean strategies. Traditional competitive strategies, operating in the red ocean, aimed at beating the competition in an existing market. Companies tried to be better than their competitors. Michael Porter at Harvard suggested that companies have to make a strategic choice between differentiation by offering the customers something special for which they are willing to pay a premium price or having a lower cost structure as exemplified by Walmart (discussed later in this chapter). The blue ocean strategy, by contrast, focuses on the uncontested market by offering a product or service that is unique in a market space where there is no competitor, thus making competition irrelevant, as the subtitle of the book “Blue Ocean Strategy” suggests. Rather than competing in an existing demand situation, the blue ocean strategy attempts to create and develop new demand for its products or services. Moreover, the successful company will pursue strategies that focus on differentiation and low cost, as was illustrated by the introduction of the Lexus car that had differentiation features of luxury cars but at a lower price. This way, Toyota, the maker of Lexus, created value for the buyer. Value innovation is more than simply innovation. It is a strategy that requires that the total company is committed to the creation of value for the customer by offering something special with relatively low cost and price (17). To capture the blue ocean and to make the competition irrelevant, Kim and Mauborgne introduce a diagnostic tool and framework for action called The Strategic Canvas. This tool identifies the important relevant factors in an industry in which companies compete. These factors vary from industry to industry. In the airline industry, the factors may, for example, include the price of the airfare, the meals, the friendliness of the service, and so on. Southwest Airline, a successful airline in America, rates low in price, meals, and connections at airport hubs, but it rates higher in service friendliness and frequency of flights than other airlines. Because Southwest had little competition on these criteria where it had high ratings, it pursued a blue ocean strategy. For companies aiming for a blue ocean strategy, four actions should be considered. First, identify and eliminate those factors that may be unimportant to the buyer. Second, if elimination is not an option, consider reducing those factors. Third, raise or strengthen those factors that are unique. Fourth, create new or new and unique factors that are wanted by the buyers but are ignored by the competitors. This was what Southwest Airlines and other enterprises did in charting a blue ocean strategy. How can the blue ocean strategy be applied in formulating a strategy based on the TOWS Matrix in Figure 5-2? The traditional red ocean strategy can be exemplified by the strengths-threats (ST) strategy, whereby a company uses its strengths to cope with the threats created by the competition. Head-on competition often results in a bloodbath through a red ocean strategy. In contrast, the strengths-opportunities (SO) strategy, in which a company uses its strengths to take advantage of opportunities, would be an illustration of a blue ocean strategy. It is true that in the TOWS Matrix analysis opportunities in general were considered, while Kim and Mauborgne focus on unique opportunities that have been neglected by competitors.  There is another blue ocean strategy alternative, namely the WO strategy, in which a company realizes its weakness and recognized that one way to overcome the weakness is to search for unique opportunities to overcome its weakness. Often, a company with weaknesses may be in distress and then may be motivated to search intensely for opportunities that have not been exploited by its competitors, that is, adopting a blue ocean strategy. In summary, companies adopting a blue ocean strategy may pursue both the SO as well as the WO alternative strategies (Figure 5-2). While it may be unavoidable to engage in the ST strategy, enterprises may be wise to first attempt to chart a blue ocean strategy to avoid the bloody confrontation resulting from the ST alternative. Innovation Perspective Zipcar25 One example of a company with a blue ocean strategy is Zipcar, a car-sharing company founded in Cambridge, Massachusetts. The company with a concept new in the United States focuses on an uncontested market by using wireless technology at strategically placed bases in various cities. The company uses a simple reservation system through which customers can view the availability of the car, which can be reserved online. Zipcar faces the big rental companies such as Hertz and Enterprise, “WeCar” in St. Louis, and “I-GO” in Chicago are also beginning to use a similar car-sharing concept. Firms in other countries do likewise. Therefore, to some extent the market is contested. The untapped market for Zipcar would be the use of the sharing concept partnering with other firms by offering, for example, boat sharing or car sharing in cities that do not have such services. The rapid rise of “ride sharing” by Uber and Lyft is putting pressure on the innovative “CarShare” model by Zipcar, as the process of creative destruction continues. THE PORTFOLIO MATRIX: A TOOL FOR ALLOCATING RESOURCES The Boston Consulting Group developed the business portfolio matrix.26 Figure 5-4, a simplified version of the matrix, shows the linkages between the growth rate of the business and the relative competitive position of the firm identified by the market share. Businesses in the “question marks” quadrant, with a weak market share and a high growth rate, usually require cash investment so that they can become “stars,” the businesses in the high growth, strongly competitive position. These kinds of businesses have opportunities for growth and profit. The “cash cows,” with a strong competitive position and a low growth rate, are usually well established in the market; such enterprises are in a position to make their products at low costs. Therefore, their products provide the cash needed for their operation. The “dogs” are businesses with a low growth rate and a weak market share. These businesses are usually not profitable and generally should be disposed of. www.bcg.com FIGURE 5-4 Business portfolio matrix Adapted from The Product Portfolio Matrix, copyright © 1970, the Boston Consulting Group, Inc.  The portfolio matrix was developed for large corporations with several divisions that are often organized around strategic business units (discussed in Chapter 8). While portfolio analysis was popular in the 1970s, it is not without its critics, who contend that it is too simplistic. Also, the growth rate criterion has been considered insufficient for the evaluation of an industry’s attractiveness. Similarly, the market share as a yardstick for estimating the competitive position may be inadequate. MAJOR KINDS OF STRATEGIES AND POLICIES For a business enterprise (and, with some modification, for other kinds of organizations as well), the major strategies and policies that give an overall direction to operation are likely to be in the areas of growth, finance, organization, personnel, public relations, products or services, and marketing. We will elaborate on the last two areas. Products or Services A business exists to furnish products or services. In a very real sense, profits are merely a measure, although an important one, of how well a company serves its customers. New products or services, more than any other single factor, determine what an enterprise is or will be. The key questions in this area can be summarized as: What is our business? Who are our customers? What do our customers want? How much will our customers buy and at what price? Do we wish to be a product leader? What is our competitive advantage? Do we wish to develop our own new products? What advantages do we have in serving customer needs? How should we respond to existing and potential competition? How far can we go in serving customer needs? What profits can we expect?  What basic form should our strategy take? Innovation Perspective Corporate Strategy at the Tata Group27 The Tata Group is India’s biggest conglomerate. The big three parts are Tata Steel, Tata Motors, and Tata Consulting Services. The group invested heavily in cars, steel, power, chemicals, and other products. To develop a more focused strategy, Tata sold the cosmetics, paint, and cement groups while entering new businesses in retail, biotech, telecom, and others. Still, Tata faces several challenges. One is to build a coherent vision while being in different markets and industries. It is indeed a challenge to formulate strategies for almost 100 companies with some 300 subsidiaries in 40 different businesses. Another challenge is how to absorb the struggling Corus mills. With the high demand for energy, Tata focuses on the future by engaging in a low-cost solar project. Other challenges for the future are to decide which businesses to spin-off and which to pursue. Marketing Marketing strategies are designed to guide managers in getting products or services to customers and in encouraging customers to buy. Marketing strategies are closely related to product strategies; they must be interrelated and mutually supportive. As a matter of fact, Peter Drucker regards the two basic business functions as innovation (e.g., the creation of new goods or services) and marketing. A business can scarcely survive without at least one of these functions and preferably both. The key questions that serve as guides for establishing a marketing strategy are: Where are our customers and why do they buy?  How do our customers buy? How is it best for us to sell? Do we have something to offer that competitors do not? Do we wish to take legal steps to discourage competition? Do we need and can we supply supporting services? What are the best pricing strategy and policy for our operation? How can we best serve our customers? HIERARCHY OF COMPANY STRATEGIES In large, diversified companies, the overall strategy may take the form of a hierarchy. At the top of the pyramid is the corporate-level strategy. At this level, executives craft the overall strategy for a diversified company. Decisions are made as to the industries in which the company wants to compete. A portfolio of businesses is often selected to achieve synergies among the business units. The second level in the hierarchy is business strategies, which are usually developed by the general manager of a business unit. These strategies are reviewed and approved or rejected by the chief executive. The aim of the business strategy is to gain a competitive advantage in a particular area of product line. On the third hierarchical level, functional strategies (or policies) are developed. These strategies are devised for departments or other organizational units such as finance, production, marketing, service, and personnel. The aim is to support the business and corporate strategies. PORTER'S INDUSTRY ANALYSIS AND GENERIC COMPETITIVE STRATEGIES28 Professor Michael Porter suggests that strategy formulation requires an analysis of the attractiveness of an industry and the company’s position within that industry. This analysis becomes the basis for formulating generic strategies. Industry Analysis29 In the analysis of the industry, Porter identified five forces: (1) the competition among companies, (2) the threat of new companies entering the market, (3) the possibility of using substitute products or services, (4) the bargaining power of suppliers, and (5) the bargaining power of buyers or customers. On the basis of the industry analysis, a company may adopt generic strategies. These strategies are generic because they may be suitable on a broad level for different kinds of organizations. Any enterprise, however, may use more than one strategy. Overall Cost Leadership Strategy This strategic approach aims at reduction in costs, based to a great extent on experience. Thus, the emphasis may be on keeping a close watch on costs in areas such as research and development, operation, sales, and service. The objective is for a company to have a low-cost structure compared with its competitors. This strategy often requires a large relative market share and cost-efficient operation, as illustrated by the low-cost Ivory soap sold in a broad market. Differentiation Strategy A company following a differentiation strategy attempts to offer something unique in the industry in terms of products or services. Porsche sports cars are indeed special; so is the Caterpillar Company, which is known for its prompt service and availability of spare parts. In the broad consumer market, Dial soap is differentiated from other brands of soap by its use of deodorants. Focused Strategy A company adopting a focused strategy concentrates on special groups of customers, a particular product line, a specific geographic region, or other aspects that become the focal point of the firm’s efforts. Rather than serving the entire market with its products or services, an enterprise may emphasize a specific segment of the market. A low-cost strategy, differentiation, or both may accomplish this. Porter illustrates the focused low-cost strategy with the example of La Quinta Inns, a motel chain that operates in a certain region of the United States and appeals to traveling business representatives, such as salespeople. The focused differentiation strategy may be exemplified by Cray Research Inc., which specializes in very powerful and sophisticated supercomputers. The differentiation allows the company to charge premium prices. In general, a company needs to choose a generic strategy and should not “get stuck in the middle,” according to Porter. A company that gets stuck in the middle needs to decide on a low-cost strategy or offer a differentiated (i.e., unique) product or service in a broad or narrow market. PREMISING AND FORECASTING One of the essential and often overlooked steps in effective and coordinated planning is premising, which is the establishment of and the agreement by managers and planners to utilize consistent assumptions critical to plans under consideration. Planning premises are defined as the anticipated environment in which plans are expected to operate. They include assumptions or forecasts of the future and known conditions that will affect the operation of plans.30 Examples are prevailing policies and existing company plans that control the basic nature of supporting plans. Planning premises The anticipated environment in which plans are expected to operate. A distinction should be drawn between forecasts that are planning premises and forecasts that are translated into future expectancies, usually in financial terms, from actual plans developed. For example, a forecast to determine future business conditions, sales volume, or political environment furnishes premises on which to develop plans. However, a forecast of the costs or revenues from a new capital investment translates a planning program into future expectations. In the first case, the forecast is a prerequisite of planning, and in the second, the forecast is a result of planning. At the same time, plans and forecasts of their future effects often become premises for other plans. The decision by an electric company to construct a nuclear generating plant, for example, creates conditions that give rise to premises for transmission line plans and other plans necessarily dependent on the generating plant being built. Innovation Perspective Nissan's Leaf, the first mass-produced electric car31 When CEO Carlos Ghosn was asked to give a 30-second sales pitch for the all-electric car, he said: “This is the only zero-emission car on the market. Other electric cars use gasoline; this one, there is not one drop. It’s fun to drive, but I can’t describe it. The only way you’ll discover it is by getting behind the wheel. There’s no vibration, no smell, no noise. This is the future—and everything else is going to look obsolete, like sending messages with pigeons.”32 The Brazilian-born CEO Ghosn predicted that within 10 years, electric cars will have 10 percent market share while several studies suggest a much lower market share percentage. The primary targets are young people and women. Since 2006, Nissan had already moved in the direction of the electric car based on the prediction of higher oil prices, the assumption of battery technology progress, and the exploding Asian market with the increased emission problem.  http://www.nissanusa.com/ But Ghosn has its skeptics. The change-oriented Carlos Ghosn even had to convince the 350,000 employees of the importance of preparing for the future. The Leaf is especially targeted for the emerging markets in India, China, Russia, and Brazil. The growth in these countries will also mean growth in pollution-emitting cars; thus, electric cars will help to cope with the emission problem. Clearly, the rise in the production of electric cars from many manufacturers since the introduction of the Nissan Leaf has shown that Ghosn’s vision of the future was on target. Environmental Forecasting If the future could be forecast with accuracy, planning would be relatively simple. Managers would need only to take into account their human and material resources and their opportunities and threats, compute the optimum method of reaching their objective, and proceed with a relatively high degree of certainty toward it. In practice, forecasting is much more complicated. Values and areas of forecasting Forecasting has values aside from its use. First, the making of forecasts and their review by managers compel thinking ahead, looking to the future, and providing for it. Second, preparation of the forecast may disclose areas where necessary control is lacking. Third, forecasting, especially when there is participation throughout the organization, helps unify and coordinate plans. By focusing attention on the future, it assists in bringing a singleness of purpose to planning. The environmental areas that are frequently chosen for making forecasts include the economic, social, political/legal, and technological environments. Forecasting with the Delphi technique One of the attempts to make technological forecasting more accurate and meaningful is the Delphi technique. This technique, developed by Olaf Helmer and his colleagues at the RAND Corporation, has a degree of scientific respectability and acceptance. A typical process of the Delphi technique is: www.rand.org 1. A panel of experts on a particular problem area is selected, usually from both inside and outside the organization. 2. The experts are asked to make (anonymously, so that they will not be influenced by others) a forecast as to what they think will happen and when in various areas of new discoveries or developments. 3. The answers are compiled and the composite results are fed back to the panel members. 4. With this information at hand (but still with individual anonymity), further estimates of the future are made. 5. This process may be repeated several times. 6. When a convergence of opinion begins to evolve, the results are then used as an acceptable forecast. Note that the purpose of the successive opinions and feedback is not to force the experts to compromise but rather, by bringing additional informational inputs to b