13)The Benefits and Pitfalls of Planning

Having reviewed the nature of planning, we can now discuss its benefits and pitfalls. The benefits are implicit in much of the discussion so far:

1. Planning gives direction and purpose to an organization; it is a mechanism for deciding the goals of the organization.

2. Planning is the process by which management allocates scarce resources, including capital and people, to different activities.

3. Planning drives operating budgets—strategic, operations, and unit plans determine financial budgets for the coming year.

4. Planning assigns roles and responsibilities to individuals and units within the organization.

5. Planning enables managers to better control the organization.

14) Decision making: The strategic planning system we have reviewed in this chapter is an example of a rational decision-making model. In essence, strategic planning is a formal process for making important decisions about strategies, tactics, and operations. More generally, making decisions is a major component of a manager’s job. Strategic planning systems are a subset of what is often referred to as the classic rational model of decision making

15) The rational decision-making model has a number of discrete steps. First, managers have to identify the problem to be solved by a decision. Problems often arise when there is a gap between the desired state and the current state. Second, managers must identify decision criteria, which are the standards used to guide judgments about which course of action to pursue. Third, managers need to weight the criteria by their importance. The weighting should be driven by the overall goals of the organization. Thus for an organization that is trying to reduce costs, a manager choosing cars for a company fleet would probably weight fuel efficiency higher than styling or power. Fourth, managers need to generate alternative courses of action. Fifth, managers need to compare the alternatives against the weighted criteria, and choose one alternative. Sixth, they should implement that choice (for example, issue a purchase order to buy cars). Finally, after a suitable period they should always evaluate the outcome and decide whether the choice was a good one.

16. Decision heuristics are the simple rules of thumb. Decision heuristics can be useful, because the y help us make sense out of complex and uncertain situations. An example of a decision-making heuristic is the so-called 80–20 rule, which states that 80 percent of the consequences of a phenomenon stem from 20 percent of the causes.

Cognitive biases are decision-making errors that we are all prone to making and that have been repeatedly verified in laboratory settings or controlled experiments with human decision makers. Due to the operation of these biases, managers with good information may still make bad decisions.

17. Value chain is a chain of activities that a firm operating in a specific industry performs in order to deliver a valuable product or service for the market. So, the operations of a firm can be thought of as a value chain composed of a series of distinct activities including production, marketing and sales, logistics, R&D, human resources, information systems, and the firm’s infrastructure. We can categorize these activities, or operations, as primary activities and support activities. Primary activities are activities having to do with the design, creation, and delivery of the product; its marketing; and its support and after-sale service.

Support activities are activities that provide inputs that allow the primary activities to occur.

We use the term value chain because each activity adds value to the product offering. These operations are embedded within the internal organization architecture of a firm, which includes the organization structure, controls, incentives, culture, and people of the enterprise. Organization architecture provides the context within which operations take place.

18. The overriding goal of most organizations is superior performance. For the business firm, superior performance has a clear meaning: It is the ability to generate high profitability and increase profits over time. A central task of managers is to pursue strategies that enable their firm to attain superior performance, measured by profitability and profit growth. A principal reason is that firms must compete against rivals for scarce resources.

Competitive advantage - advantage obtained when a firm outperforms its rivals. At the most basic level, competitive advantage comes from two sources: (1) the ability of the firm to lower cost relative to rivals and (2) the ability to differentiate its product offering from that of rivals.

19. Business-level strategy - strategy concerned with deciding how a firm should compete in the industries in which it has elected to participate.

Types of business-level strategy: low-cost strategy and differentiation strategy.

Low-cost strategy - focusing managerial energy and attention on doing everything possible to lower the costs of the organization. Wal-Mart, Dell Inc., and Southwest Airlines are all examples of firms that have pursued a low-cost strategy. All three enterprises focus on offering basic goods and services at a reasonable price, and they try to produce those goods and services as efficiently as possible.

Differentiation strategy - increasing the value of a product offering in the eyes of consumers. A product can be differentiated by superior reliability (it breaks down less often or not at all), better design, superior functions and features, better point-of-sale service, better after-sales service and support, better branding, and so on.