Prior to beginning this Interactive Assignment, review the sections of Chapters 5, 8, and 9 in the Abraham’s textbook on Assessing the Company and Operational and Budget Planning. Also read the online articles Analyze Investments Quickly With Ratios (Links to an external site.) (Elmerraji, 2017) and What Is an Annualized Budget? (Links to an external site.) (Ashe-Edmunds, n.d.).
Using the same publicly traded company you used in the Environmental Scanning Interactive Assignment, and the downloadable Operating Budget Template, research the company online by accessing the Mergent University of Arizona Global Campus Library online database which offers company financials, descriptions, history, property, subsidiaries, officers and directors. Also, access the Business Insights: Global University of Arizona Global CampusLibrary online database which offers information on global companies, and industries. It includes SWOT reports, market share data, financial reports, case studies, business news, and company comparison charts. (View the Getting Started With Mergent (Links to an external site.) and Business Insights: Global (Links to an external site.) documents for suggested methods of searching University of Arizona Global Campus Library databases generally as well as specific advice for searching these two databases). You can always conduct research using credible online sources of corporate financial information, just be sure that wherever you obtain financial information that you cite your source.
For this Interactive Assignment, you are going to look at the financial statements for the company you selected and, using the previous quarter’s financial data, interpret the data and propose a budget for the next Quarter based on your current and previous analysis of company performance. Complete the budget template using this Operating Budget Template:
List your current sales, discounts and allowances, net sales, margins, operating costs, and earning before and after taxes.
Choose a minimum of two financial ratios (below) and include in your analysis.
Prepare the next quarter’s budget based on your interpretation of past data.
Include at least two of the following types of relevant financial ratios in your analysis. Review the online article Analyze Investments Quickly With Ratios (Links to an external site.) (Elmerraji, 2017) and Chapter 5 in the Abraham’s textbook to help with this portion of the budget:
Profitability Ratio
Liquidity Ratio
Solvency Ratio
Valuation Ratio
Leverage Ratio
(NOTE: Incorporate the feedback you receive from your instructor and peers and save your work. It will be part of your Strategic Plan Final Project for this course).
Initial Post: In your initial post, provide a brief description of your company and provide a summary of your Operating Budget along with a rationale that supports suggested budgetary changes. Attach your Operating Budget Template to your initial post for review by your instructor and your peers.
Guided Response: Respond to at least two of your fellow students’ posts in with an analysis of their operating budget and provide recommendations to extend their thinking using information from the week’s readings, or examples from current events and/or other scholarly or credible resources, using the Scholarly, Peer Reviewed, and other Credible Sources (Links to an external site.) table for guidance. Properly cite any references according to APA style as outlined in the University of Arizona Global Campus Writing Center’s APA Style (Links to an external site.) resource. You are encouraged to post your required replies earlier in the week to promote more meaningful and interactive discourse in this discussion forum. Continue to monitor the discussion forum until 5:00 p.m. (Mountain Time) on Day 7, and respond with robust dialogue to anyone who replies to your initial post.
Assessing the Company Itself
Learning Objectives
By the time you have completed this chapter, you should be able to do the following:
• Understand what is involved in a thorough financial analysis of a company and how to make sense of
the data.
• Perform an analysis of a company’s strengths, weaknesses, opportunities, and threats (SWOT analysis).
• Determine whether a company has a core competence and a competitive advantage.
• Understand a company’s internal and external value chains.
• Determine the customer-value proposition and how strong it is.
• Understand the significance of brand reputation, how strong it is, and how to manage it.
5
Robert Harding Picture Library/SuperStock
CHAPTER 5Section 5.1 Analysis of Financial Performance and Condition
Chapter Outline
5.1 Analysis of Financial Performance and Condition
5.2 Conducting a SWOT Analysis
5.3 Core Competence and Competitive Advantage
5.4 Competitive Strength
5.5 Value-Chain Analysis
5.6 Brand Reputation, Equity, and Loyalty
5.7 Assessing Management and Leadership
Analyzing and assessing the internal environment of the company is a key part of the strategic-
planning process. The recent financial performance and current financial condition is an obvious
place to start using quantitative data with which to reach an objective conclusion. There are also
more subjective measures including an examination of a company’s competitive strengths and
weaknesses, its capabilities, and determining which, if any of them, might be core competencies
that would give the company a competitive advantage. The value of a company’s brand and the
effectiveness of its management are also taken into consideration.
5.1 Analysis of Financial Performance and Condition
Any analysis of an organization usually begins with careful evaluation of its financial position. To assess
the recent financial performance and current financial condition of the company, you need three to five
years of historical financial data—income statements and balance sheets (see box on financial state-
ments for generic templates)—including the most recent year for which complete data are available.
Financial statements: Generic templates
Income-statement Balance sheet
Total revenues (sales) Assets
Cost of goods sold (COGS) Cash & cash equivalents
Operating income (gross profit) Accounts receivable (A/R)
Selling expenses Inventory
General & administrative (G&A) Other current assets
Earnings before interest & taxes &
depreciation & amortization (EBITDA)
Total current assets
Total fixed assets
Depreciation & amortization Total assets
Earnings before interest & taxes (EBIT) Total liabilities and stockholders’ equity
Net interest expense Accounts payable
Other expense (income) Accrued liabilities
CHAPTER 5Section 5.1 Analysis of Financial Performance and Condition
An annual income statement
presents a financial picture of a
company’s operations over the pre-
vious 12 months. A balance sheet
is a “snapshot” at a point in time
(usually at the close of a company’s
fiscal year) that presents a financial
picture of its assets and the pro-
portion in which those assets are
financed through debt and equity.
In a balance sheet, the total assets
equal the total liabilities (debt)
and stockholders’ equity—the two
sides must “balance.”
A convenient way of analyzing sev-
eral years’ worth of financial data
is to create a spreadsheet and
enter the data for each year in a
different column (Tables 5.1 and
5.2). Doing so enables annual changes in line items and ratios to be computed. More specifi-
cally, a thorough analysis of multiyear financial statements consists of the following elements
(Bangs & Pellecchia, 1999):
• Computing all liquidity, activity, leverage, and profitability ratios for all years.
• Computing year-to-year changes for all line items (in both the income statement and bal-
ance sheet) and all ratios for all years.
• Computing average annual changes over all years for line items and financial ratios.
Net income before taxes (NIBT) Other current liabilities
Income tax expense Total current liabilities
Net income after taxes (NIAT) Long-term debt
Total liabilities
Common stock
Retained earnings
Paid-in capital
Other equity
Total stockholders’ equity
Total liabilities and stockholders’ equity
Each subtotal in bold is equal to the Each subtotal is the sum of elements above it.
previous bold subtotal minus the Total assets = current assets + fixed assets
items in between. For example, Total liabilities = current liabilities + L-T debt
NIAT = NIBT – income tax expense. Total assets = total liabilities + stockholders’ equity
Igor Mazej/iStock/Thinkstock
To properly assess the financial state of a company, you need
three to five years of historical financial data in the form of
income statements and balance sheets.
CHAPTER 5Section 5.1 Analysis of Financial Performance and Condition
• Computing common-size income statements for all years (everything on the income
statement expressed as a percent of revenues).
• Computing a Z- or Z2-score for each year (Calandro, 2007). This computation involves
financial ratios (see box on Z- and Z2-scores).
• Forming a conclusion about how the company has been performing financially (from the
income statements—revenue and NIAT performance) and about its current financial con-
dition (from the balance sheets—financial structure, cash flow, degree of debt, liquidity),
and its overall financial health (Z- or Z2-scores).
Table 5.1: Multiyear income statements for Netflix
In $ Thousands 2000 2001 2002 2003 2004
Subscriptions 35,894 74,255 150,818 270,410 500,611
Sales — 1,657 1,988 1,833 5,617
Total Revenues or Sales 35,894 75,912 152,806 272,243 506,228
Cost of Goods Sold 24,861 49,907 78,136 148,360 276,458
Operating Income 11,033 26,005 74,670 123,883 229,770
Operating Expenses 62,511 59,138 78,606 109,826 194,129
General & Administrative 6,990 4,658 6,737 9,585 16,287
Earnings Before Interest, Taxes,
Depreciation & Amortization (EBITDA)
(58,468) (37,791) (10,673) 4,472 19,354
Depreciation and Amortization — — — — —
Earnings Before Interest & Taxes (EBIT) (58,468) (37,791) (10,673) 4,472 19,354
Interest and other income (1,645) (461) (1,697) (2,457) (2,592)
Interest and other expense 1,451 1,852 11,972 417 170
Net Income Before Taxes (NIBT) (58,274) (39,182) (20,948) 6,512 21,776
Provision for income taxes — — — — 181
Net Income After Taxes (NIAT) (58,274) (39,182) (20,948) 6,512 21,595
Source: Maddox, B., & Thompson, A. A., Jr. (2007). Netflix versus Blockbuster versus Video-on-Demand. A case in Thompson, A. A., Jr.,
Strickland III, A. J., & Gamble, J. E. (Eds.), Crafting and Executing Strategy: Concepts and Cases (15th ed.; pp. C-148 to C-161).
New York, NY: McGraw-Hill.
Table 5.2: Multiyear balance sheets for Netflix
2000 2001 2002 2003 2004
Assets
Cash & cash equivalents 14,895 16,131 59,814 89,894 174,461
Short-term investments — — 43,796 45,297 —
Other current assets — 3,421 3,465 3,755 12,885
Total Current Assets 14,895 19,552 107,075 138,946 187,346
CHAPTER 5Section 5.1 Analysis of Financial Performance and Condition
Net investment in DVD library — 3,633 9,972 22,238 42,158
Other fixed assets 37,593 18,445 13,483 14,828 22,289
Total Fixed Assets 37,593 22,078 23,455 37,066 64,447
Total Assets 52,488 41,630 130,530 176,012 251,793
Liabilities & Stockholders’ Equity
Liabilities
Current liabilities 16,550 26,208 40,426 63,019 94,910
Total Current Liabilities 16,550 26,208 40,426 63,019 94,910
Notes & sub notes payable 1,843 2,799 — — —
Other LT debt 107,362 103,127 748 285 600
Total Liabilities 125,755 132,134 41,174 63,304 95,510
Stockholders’ Equity
Red. conv. preferred stock 101,830 101,830 — — —
Other equity (175,097) (192,334) 89,356 112,708 156,283
Total Stockholders’ Equity (73,267) (90,504) 89,356 112,708 156,283
Total Liabilities &
Stockholders’ Equity
52,488 41,630 130,530 176,012 251,793
Source: Maddox, B., & Thompson, A. A., Jr. (2007). Netflix versus Blockbuster versus Video-on-Demand. A case in Thompson, A. A., Jr.,
Strickland III, A. J., & Gamble, J. E. (Eds.), Crafting and Executing Strategy: Concepts and Cases (15th ed.; pp. C-148 to C-161).
New York, NY: McGraw-Hill.
Financial Ratios
Liquidity Ratios
Current ratio (CR) = Current assets / current liabilities
(When this ratio > 1.0, working capital (current assets – current liabilities) is positive,
which is desirable.)
Quick ratio (QR) = (Current assets – inventory) / current liabilities
Inventory-to-net-working-capital ratio (INV/NWC) = Inventory / (current assets – current
liabilities)
Activity Ratios
Inventory turnover (INV Turns) = Revenues / inventory
Total-asset turnover (TAT) = Revenues / total assets
Average collection period (ACP) (days) = Accounts receivable (A/R) / average daily sales
or revenues/365
CHAPTER 5Section 5.1 Analysis of Financial Performance and Condition
Leverage Ratios
Debt-to-equity ratio (D/E) = Total liabilities / total equity
(When this ratio > 2.0, debt is too high and needs to be reduced; when it is negative, debt is so high
as to exceed the assets of the firm and cause stockholders’ equity to go negative, a serious problem.)
Debt-to-assets ratio (D/A) = Total liabilities / total assets
(When this ratio > 0.67, debt is too high and needs to be reduced; when > 1.0, debt is so high as
to exceed the assets of the firm and cause stockholders’ equity to go negative indicating a serious
problem. Either D/E or D/A ratio is used, not both.)
Times interest earned (TIE) or coverage ratio = EBIT / interest expense
(When this ratio < 1.0, the company doesn’t have enough money to pay the interest on the debt,
a serious condition only experienced with very high debt.)
Profitability Ratios
Net profit margin (NPM) or Net return on sales (NROS) = Net income after taxes (NIAT)
/ revenues
Return on equity (ROE) = NIAT / total stockholders’ equity
Return on assets (ROA) = NIAT / total assets
Two ratios reveal how productive assets are—TAT and ROA; when these are declining, increasing
one’s assets is problematical. Cash flow is made up of operational, financial, and investing cash
flows; when overall cash is increasing from year to year, cash flow is positive, otherwise it is negative.
Z- and Z2-Scores
Z- and Z2-scores are bankruptcy predictors or indicators developed by Edward I. Altman, a profes-
sor of finance at New York University. The Z-Score is based on data from manufacturing companies,
while the Z2-score is based on data for nonmanufacturing companies. Each is a very important
indicator of a company’s financial health or imminent bankruptcy.
Both indicators take the form of a regression equation:
Z-Score = 1.21X1 + 1.4X2 + 3.3X3 + 0.6X4 + 1.0X5
Z2-Score = 6.5X1 + 3.26X2 + 6.72X3 + 1.05X4
Where X1 = Net Working Capital / Total Assets
X2 = Retained Earnings / Total Assets
X3 = Earnings Before Interest & Taxes (EBIT) / Total Assets
X4 = Total Stockholders’ Equity / Total Liabilities
X5 = Sales / Total Assets
CHAPTER 5Section 5.1 Analysis of Financial Performance and Condition
Note that four of the financial ratios have total assets in the denominator and the other has total
debt in the denominator. Thus, increasing assets through borrowing is not a good idea financially
(unless performance improves), while one of the first things to do when a company is in financial
trouble is to sell off some assets and use the proceeds to pay down debt. The final scores are com-
pared to the following cutoffs to assess their significance:
Criteria Safe Region Gray Region Bankrupt Region
(Financially healthy) (In serious trouble)
Z-Score > 2.99 1.81 – 2.99 < 1.81
Z2-Score > 2.59 1.11 – 2.59 < 1.11
The last step in the analysis is the most important. What sense can be made of the numbers?
What picture do they paint of the company’s performance over the past several years and current
condition? You could draw any one of the following conclusions:
1. The company is very well managed, has been performing extremely well, and is in
strong financial condition and overall financial health (all key indicators are good and
none is bad).
2. The company is very well managed, has been performing extremely well, and is in
strong financial condition and overall financial health except for one major bad thing,
for example, having very high debt or declining total-asset turnover (a predominance of
good indicators with one or possibly two bad ones).
3. The company turned in a mixed performance over this period and is neither perform-
ing well nor in serious trouble. The results are, in fact, inconclusive (an equal or roughly
equal number of good and bad indicators).
4. The company’s performance and financial condition is poor and key result indicators
were declining steadily (or precipitously) over time; the company is or should be in seri-
ous financial trouble except for one major good thing, such as increasing revenues (a
predominance of bad indicators with one or possibly two good ones).
5. The company’s performance is poor, and key result indicators were declining steadily
(or precipitously) over time; the company has not been managed well and is in seri-
ous financial trouble (all indicators of performance and condition are bad and none
is good).
After completing the financial analysis, only one of the preceding five conclusions is possible.
Whichever one is selected, it must be supported with selected statistics that summarize the cur-
rent financial performance, condition, and health of the company, or the conclusion isn’t valid.
Because the principal ways for a company to finance any strategic initiative are through cash or
debt (or in the case of a public company, stock), the financial analysis provides essential informa-
tion to top management as to the company’s ability to fund a proposed strategy. As an example,
an analysis of the financial data for Netflix presented in the multiyear income statement (Table
5.1) and multiyear balance sheets (Table 5.2) produces the conclusion summarized in the follow-
ing section.
CHAPTER 5Section 5.2 Conducting a SWOT Analysis
Example of a Financial-Analysis Conclusion
Based on the income statements and balance sheets to 2004, Netflix has performed very well
financially, is in strong financial condition, and financially healthy.
In 2004:
• Revenues increased 86% (for the fourth straight year)
• NIAT increased 231.6% (also for the fourth straight year)
• Current ratio is 1.97 (good working capital)
• D/E ratio is 0.61 (low debt, excellent financial leverage)
• Cash flow is positive, and increased 94.1% to $174.46 million.
This conclusion is #1, where all the indicators are good and none are bad. When the conclusion is
supported by data—particularly from the most recent year—it becomes hard to refute.
5.2 Conducting a SWOT Analysis
Once a company has a firm understanding of where it stands financially, the next part of the
internal assessment is conducting a SWOT analysis, which stands for a company’s strengths, weak-
nesses, opportunities, and threats. To be sure, opportunities and threats are more appropriately
part of an external analysis, but doing a SWOT analysis is so widespread as part of a strategic
analysis that they are discussed together here for convenience. As was discussed in Section 3.2,
the search for opportunities is an integral part of strategic thinking.
Strengths
Strengths and weaknesses are the “internal” aspects of the traditional SWOT analysis. Whenever
something—or someone—is reviewed or assessed, it makes sense to point out the good points or
Discussion Questions
1. What can you tell about a company’s operations from looking at the past few years of income
statements?
2. How much profit a company makes after all its expenses are deducted (NIAT) is shown on the
income statement. Yet, a company cannot “spend” the profits it makes—it can spend only cash,
which is a balance-sheet item. How do you explain this?
3. In a balance sheet, total assets must equal or balance total liabilities + total stockholders’ equity.
In what other ways is this principle of “balancing” useful?
4. In the newspapers, one often reads about companies that are “not managed well financially.”
Given what you have learned in this section (and perhaps in a previous course on finance), what
do you think this means?
5. The Z- and Z2-scores contain similar financial ratios as terms in their regression equations. From
this, the two scores would go up with increasing working capital, retained earnings, EBIT, equity,
and sales, and with decreasing assets and debt. However, all but EBIT and sales are balance-sheet
items. Why do you think such bankruptcy indicators focus on balance-sheet items so heavily?
CHAPTER 5Section 5.2 Conducting a SWOT Analysis
what was done well, as well as the areas that need improvement. They are two sides of the same
coin. This assessment is easy to do superficially, which is often the case, but difficult to do candidly
and realistically. It is nearly always subjective, but less so if done by a group with multiple per-
spectives, which is why companies sometimes hire outside consulting firms to help them analyze
their strengths and weaknesses.
Regardless of who conducts it, the
strength analysis should compare
the firm to itself at some previous
point in its history, perhaps 2–4
years ago, and determine what it
is doing better and what has not
improved.
It might also be useful to think of
strengths as special capabilities or
expertise. These are things a com-
pany does well that have enabled it
to be successful to this point, and
how it has prepared itself to com-
pete in the future. Comparing a
company’s strengths against those
of its competitors and identifying
the industry’s critical success fac-
tors (Section 4.1) also provides a
useful assessment.
Typical strengths that companies have might include the following:
• Adequate financial resources to implement any likely strategy
• Strong cash flow
• Strong brand recognition
• Effective differentiation
• Effective advertising and promotion
• Consistent high quality in products/services
• Effective distribution
• Economies of scale
• Insulation from competition
• Proprietary technology and patents
• Low-cost leader
• Product-innovation skills
• Proven management
• Visionary CEO, strong leader
• Productive corporate culture that supports the strategy
The problem is that it can be easy to classify what a company does “well,” but what exactly con-
stitutes a “strength”? The answer is subjective; it depends on how high a company’s internal
standards are and how widely they are shared. For this reason, it should also compare strengths
(and weaknesses) with its closest competitors. In assessing whether their company’s brand is
a strength or a weakness, executives at Wendy’s must compare the brand to those of McDon-
ald’s and Burger King. Similarly, the athletic apparel offered by Adidas must be compared to the
Sergiy Timashov/iStock/Thinkstock
Evaluating an organization’s strengths based on its competitors
can provide a more accurate assessment of the organization.
CHAPTER 5Section 5.2 Conducting a SWOT Analysis
products offered by Nike. Because Wendy’s and Adidas are established and successful companies,
it is tempting to consider Wendy’s and Adidas to possess strengths in terms of brand and apparel.
These firms’ standing relative to their closest rivals, however, would suggest that these areas are
in fact weaknesses.
Weaknesses
Much like the strengths that a com-
pany may possess, weaknesses are
also internal. They include prob-
lems that need to be corrected,
deficiencies recognized through a
comparison with competitors, or
deficiencies relative to proposed
strategies such as lacking the
resources to grow. Whether or not
what is identified is an actual weak-
ness, it is the perception of a weak-
ness that counts.
Some managers have no problem
admitting to weaknesses when
they are self-evident, while others
find them hard to own up to in the
belief that doing so casts them in a
bad light as an ineffective manager. Sometimes, if a company is having problems and the top man-
agement team is meeting to discuss them, it is not unheard of for one department to find a way of
blaming another department for the company’s problems. The production manager might blame
human resources for inadequate training resulting in low quality. Marketing might complain that
engineering and R&D failed to act on its good market intelligence to create new products. Or R&D
could complain about a cut in its budget for something far less important. In all these examples,
grappling with weaknesses is not about finding who is at fault or who is to blame. It is about gain-
ing a realistic understanding of the company’s weaknesses so that steps can be taken to alleviate
or correct them.
Weaknesses can take many forms, including the following:
• Obsolete facilities
• Key skills and competences missing or obsolete
• No core competence, hence no competitive advantage
• Internal operating problems and inefficiencies
• Too narrow a product line
• Long cycle time to get product out
• Poor marketing skills
• A culture that hasn’t changed with the strategy
• Weak or eroding brand image
• Poor or negative cash flow from operations, including low or negative profits, resulting in
an inability to service debt or fund needed programs
Stockbyte/Thinkstock
When the top management of struggling companies meets, it is
quite common for one department to blame the other for the
company’s poor performance.
CHAPTER 5Section 5.2 Conducting a SWOT Analysis
Weaknesses become real when compared to other
companies in the industry. For example, you might
think your company has low costs and believe that
to be a strength only to discover that your costs are
among the highest in the industry. Suddenly, that
supposed strength becomes a weakness. A new CEO
participating in a SWOT analysis with his or her new
management for the first time will have a different
frame of reference and a different set of standards
from the managers, so the CEO might have difficulty
agreeing with them on what strengths and weak-
nesses the company has. As noted previously, it is the
perception that is important.
These illustrations show that when making any assess-
ment, even a seemingly casual one like identifying a
strength or weakness, you are using an implicit stan-
dard or reference in making it. More experienced
people will tend to be more critical because they may
once have worked in organizations where they have
observed things done better, thus raising their own
standards. Again, the goal here is not to be “right” at
the expense of someone else being “wrong.” Rather,
it is to reach consensus on what is real and problem-
atic so that it can be attended to and the firm’s future
prospects improved.
Opportunities
An analysis of strengths and weaknesses covers what is internal to the firm, but that is only half the
story as it pertains to assessing a company’s potential success or failure. In order to stay competitive
in an industry, one has to go looking for opportunities that would improve the company’s situation.
An opportunity has a specific technical definition; it is a product-market issue. It must include a
product or service the firm offers, including the existing ones, and a defined customer group at
which that product or service is targeted, including the existing ones. The following are examples
of real opportunities (and concentration strategies):
• Staying with an existing product and existing market and penetrating the market further.
• Improving the product for an existing market; that is, implementing a product-development
strategy. Examples include automobile companies producing new models annually, and
software companies releasing upgraded versions of their software.
• Creating a new product for an existing market, which is also a product-development strat-
egy. Examples include Nike offering athletic apparel in addition to athletic shoes for the
same market, Microsoft creating application software for users of its Windows operating
system, and Calvin Klein selling perfumes as well as clothes.
• Expanding the market for an existing product by implementing a market-development
strategy such as promoting the product to appeal to young adults in addition to teenagers
Bill Pugliano/Getty Images
When Ford Motor Company bought Jaguar,
Ford’s company executives found multiple
weaknesses and wondered how Jaguar had
survived.
CHAPTER 5Section 5.2 Conducting a SWOT Analysis
or lowering the price so that more people can afford to buy the product. Facebook, for
example, has gradually expanded its market from young people to people of all ages.
• Finding a new market for an existing product, which is another market-development strat-
egy. Examples abound of companies going regional from being just local or a regional
company going national or entering a new country, all without changing the product or
service. For example, Indian automobile manufacturer Mahindra & Mahindra is planning
to start selling pick-up trucks in the United States by 2016 (Hamprecht, 2011).
If a company goes to the trouble of identifying opportunities, it does so only when doing strategic
planning, usually once a year. But why not institute and formalize an opportunity-finding mecha-
nism that would operate all the time, generating ideas and proposals on a continuous basis? This
is what is truly meant by “being opportunistic.”
Many companies have instituted new-product-development committees that are responsible for
evaluating new-product proposals. For promising proposals, the committee asks for more infor-
mation or requests a prototype demonstration. Proposals that indicate potential for commercial
success are provided with necessary support and development. (Cooper, 1993). While such new
products could form the basis for a future revenue stream, the probabilities for most companies
are distressingly small.
By its very nature, the process can be likened to a funnel, where a large number of items are
successively narrowed to a small number: only a few of the many ideas for new projects are
researched further, even fewer are found to be feasible, fewer in turn are finally adopted, and
fewer still achieve success. Indeed, many fields experience a similar, narrowing effect. Consider
the example of the game of baseball. Each year more than 2 million youngsters worldwide play
on Little League teams, many with dreams of one day making it to the “big leagues.” Players who
actually reach the minor league level number a few thousand while the active rosters in Major
League Baseball include only 750 players.
Contrast such a system to another where the number of ideas vastly increases, and sifting through
them becomes a fulltime job for several people. Avenues for involvement include asking custom-
ers for suggestions, reaching out beyond engineers to all company employees, and accepting ideas
for improvement of all shapes and sizes—not just product innovation. In such an environment, a
company can focus on opportunity-recognition, and rejuvenate its revenue model on an ongoing
basis.
New technology, or more accurately newer technology brought to market faster, is a rich source
of new opportunities. It is a risky business, however, especially when the pace of technological
change is very fast. The key thing that separates the good opportunities from the bad ones is how
well margins can be maintained over time or how well the resulting product can resist imitation or
obsolescence over time. In a hypercompetitive industry, that is difficult to accomplish; companies
should expect only temporary advantages at best (D’Aveni, 1995).
Change produces both threats and opportunities. Many companies, however, worry only about
the threats and do not undertake systematic or frequent enough searches for …
Operational and
Budget Planning
Learning Objectives
By the time you have completed this chapter, you should be able to do the following:
• Understand the differences between operational and budget planning.
• Learn what doing such planning entails and why it must be done.
• Appreciate broader operational issues such as systems and systems thinking, information systems, building
consensus, and the role of policies.
• Understand who is involved in operational planning and issues involved in getting it done before the start
of the new fiscal year.
8
Fuse/Thinkstock
CHAPTER 8Section 8.1 Some Broad Operational Issues
Chapter Outline
8.1 Some Broad Operational Issues
8.2 Operational Planning
8.3 Budget Planning
8.4 Participation in Operational Planning
8.5 Getting It Done in Time
No strategy is useful unless it can be implemented, and no strategy can be implemented with any
degree of success without doing operational and budget planning. This chapter explains how to
do such planning, why it’s important, and other important process issues.
8.1 Some Broad Operational Issues
Some aspects of operational planning are more encompassing than just planning programs, projects,
and tasks for people to do. These include systems and systems thinking, management-information
systems, ensuring participation in the operational-
planning process, and the need for consensus in deci-
sion making. Not only are they more encompassing but
also are determinants of effective strategy execution
and should therefore be taken into account.
Systems and Systems Thinking
Almost everything in the world and even beyond is a
system—from the galactic solar system of which we are
a part to the human body, which has many subsystems
of its own, such as the immune, reproductive, digestive,
and cardiovascular systems, to name a few. A system
is a set of interacting or interdependent components
forming an integrated whole. Corporations are com-
plex social systems, consisting of individuals and units
that work together (or not) to produce products or ser-
vices for their customers that in turn ensure their sur-
vival. Complex systems are self-regulating systems; that
is, they are self-correcting through feedback. In other
words, systems must be responsive to feedback such as
the company’s sales figures, turnover, and other metrics
in order to ensure their competitive edge and survival.
Moreover, the systems approach to understanding
organizations addresses the relationship between the
operation and its environment. It does so by examining
© SOMOS / SuperStock
The world is made up of systems. A system
is a set of interacting or independent com-
ponents forming an integrated whole. Cor-
porations are complex social systems.
CHAPTER 8Section 8.1 Some Broad Operational Issues
the nature of the boundaries between the organization and the outside world. The more perme-
able are an organization’s boundaries, the more the organization is able to place its finger on the
pulse of the competition, the marketplace, and industry trends. Boundaries may be created, for
instance, by employer apathy toward employee development and small travel budgets; an organi-
zation that does not send employees to conferences and training, for instance, establishes a less
permeable boundary between the organization and the industry. Systems with permeable bound-
aries are known as open systems and are preferred to closed systems for their greater functional-
ity and innovativeness. Viewing an organization as an open system requires strategic thinkers to
consider the complex interactions the system has with its environment, as well as the ways in
which the different units within the organization (known as subsystems) import and export ideas,
products, and other resources.
Additionally, systems are characterized by subsystem interdependence. For example, to market
a product, the marketing department must interact with the research and development team to
learn what it needs to know about the product as well as the sales team to provide the sales strat-
egy. In too many organizations, functional units act as if they were isolated from the others. For
example, purchasing may order parts without knowledge of production rates and inventory levels.
In both strategic and operational planning, systems managers must practice systems thinking, or
the realization that affecting one part of the system affects other parts and furthermore that deci-
sions must benefit the whole company and not just a particular functional area to the detriment
of others. The performance of any system, including a company, is thus never equal to the sum
of the performance of its parts considered separately, but rather the product of their interactions
(Ackoff, 1986).
In operational planning, plans should be coordinated between functional units of the organiza-
tion, especially those between which there is an output-input relationship. The higher one’s posi-
tion in the organizational hierarchy, the more emphasis must be placed on having a system-wide
perspective and maintaining awareness of the purposes and goals of the entire organization. Even
at a basic operational level, tremendous coordination is needed. As Russell Ackoff (1986), one of
the most influential management thinkers of our time, says, understanding how one unit’s activi-
ties affect and are affected by other corporate activities is a benefit that “cannot be realized unless
the planning is comprehensive, coordinated, and participative” (pp. 202–203).
There is a class of system models called system dynamics, a detailed discussion of which is beyond
the scope of this text. In simple terms, however, dynamic systems specifically take into account
how an organization as a complex social system behaves and changes. They are used predictively
and can be used to support strategic decisions.
Not many companies employ such models, which take time to develop, calibrate, and learn to use.
More important than the actual models is the thinking they require in terms of feedback loops;
that is, these are positive if self-reinforcing in a positive direction or negative if self-reinforcing
the other way. For example, make more product, sell more product, get more money, make more
product, and so on is a positive feedback loop. When positive and negative feedback loops inter-
act, depending on the data and kind of model created, results are often counterintuitive.
CHAPTER 8Section 8.1 Some Broad Operational Issues
Management-Information Systems (MIS)
Every day, at every level in the organization, decisions get made. Earlier chapters focused on strategic
decisions, while this chapter and the next focus on operational decisions. Simple decisions require
a person’s knowledge and experience or, in some organizations, an established policy may govern
decisions in routine situations. Startup firms operate with the entrepreneur making all the decisions
seemingly “off the cuff,” as speed is of the essence and the entrepreneur knows what he or she is doing.
The more complex decisions become, the less one person or even a group is able to act indepen-
dently. Should special promotions in the Southern United States be continued for another month?
That would depend on how effective the promotions had been in increasing sales, and without
those data the right decision could not be made. Can production throughput be increased by 20%
next year? Without knowing the plant capacity, production costs, and sales forecasts, that ques-
tion also couldn’t be answered. And these are operational decisions. We already know that stra-
tegic decisions need a lot of data to be analyzed and processed before they are made, and even
then no one will know if the right decision was made until a couple of years later when one can
see how the company performed.
With the exception of startups, no company can afford to be without a management-informa-
tion system (MIS). By definition, it must supply the basic information needed by managers for
making decisions. The extent to which it succeeds in
doing this determines the quality of decisions made
(Mason & Hofflander, 1972). Even before the advent
of computers, there were information systems, usually
in the form of reams of paper and information stored
in people’s minds.
A management information system is more than a
stream of unprocessed data that people can access. If
it is just this, it is a databank, not an MIS. An account-
ing system is an example of a databank. Likewise,
financial statements display data—the user deter-
mines what meaning they have.
A management-information system must be tailored
to the needs of the decision-makers it serves. Cloud
computing has made management-information sys-
tems easy to create and maintain. These networked
platforms make the MIS mobile, and data accessible
from laptops, smartphones, and tablets. The useful-
ness of the information depends on its quality, timeli-
ness, completeness, and relevance (Jones & George,
2007). What data are needed? In what form? Col-
lected how often? Can anyone input data into the
system? Can it be trusted? Can anyone use the sys-
tem? In fact, it cannot be designed properly without
first defining the kinds of decisions people make and
the information that would best serve those decision-
makers. Unfortunately, the reverse is often the case,
Goodshoot/Thinkstock
An information management system must
be tailored to the needs of the decision
makers it serves. The usefulness of the
data depends on its timeliness, quality,
completeness, and relevance.
CHAPTER 8Section 8.1 Some Broad Operational Issues
where the MIS is built on data that can be easily collected and stored that people think will be
useful for various decision-makers (Mason & Hofflander, 1972).
Predictive information systems permit decision-makers to draw inferences and make pre-
dictions from the data. Asking the system “what if” questions given certain assumptions
gets a response in the vein of “if that were done, then this is what can be expected to occur.”
The system cannot evaluate the outcome, just provide the information. A financial-plan-
ning-simulation model is a good example; other examples are not even computer-based
but nonetheless function as a predictive information system, like a market-research group
that analyzes data and answers decision-makers’ questions (Mason & Hofflander, 1972).
A more advanced type of information system is a decision-making system, which embodies the
organization’s criteria for choice and actually makes decisions on which the organization can rely
and act. A linear-program model for optimizing distribution routes to minimize costs and use avail-
able trucks is a good example. So-called “action” information systems automatically make the
correct decisions that are acted upon immediately, like process-control applications (Mason &
Hofflander, 1972). One example is measuring the flow of a fluid and regulating a valve to maintain
the flow at a predetermined level—an automatic control system.
From this brief overview, it’s easy to see why management-information systems are easier to
develop for operational decisions than for strategic decision making. However, integrated systems
are found in many companies today that support operations, such as manufacturing resource
planning II (MRPII) and its successor, enterprise resource planning (ERP) systems.
MRPII systems, used in manufacturing companies evolved from the earlier material requirements
planning (MRP), which uses forecasts from sales and marketing to determine demand for raw
Plant Operating
Efficiency
Reliable
Lead Times
Inventory
Management
Information
Management
Customer
Service
Manufacturing
Performance
MRP II
Implementation
Figure 8.1: Overview of MRP II
Source: Adapted from Gunasekaran et al. (2000).
CHAPTER 8Section 8.1 Some Broad Operational Issues
materials (Figure 8.1). MRP and
MRPII systems draw on a master-
production schedule, which is a
breakdown of specific plans for
each product on a line. While
MRP coordinates the purchase of
raw-materials, MRPII generates a
comprehensive production sched-
ule that takes into consideration
machine and labor capacity and
coordinates production runs with
the arrival of materials. An MRPII
output is a final labor and machine
schedule (Monk & Wagner, 2006).
ERP is a process that aims to con-
solidate a company’s departments
and operations into one computer
system that serves each depart-
ment’s individual needs (see Fig-
ure 8.2). The goal of ERP is to create one software solution that serves to integrate the various
moving parts of a company into a unified whole, through which information can be shared,
acted upon, and reviewed on a company-wide basis. ERP is mainly used in large organizations
that can afford the considerable initial cost. An oft-cited example of an ERP software is cus-
tomer-ordering and delivery. A customer’s order transitions seamlessly from sales, the origin
point of the deal, to inventory and warehousing, where the deal is packaged and delivered, to
finance, where invoicing, billing, and payments are handled, and on to manufacturing, where
the purchased product can be replaced if necessary. Most of these operations, however, involve
recording and updating data, not making decisions involving judgment or prediction.
In companies with such integrated information systems, operational planning can be facili-
tated using data from the system and updated in real time as conditions change. For exam-
ple, integrated systems in supermarkets typically include supply-chain, inventory, and finance/
accounting management based on Figure 8.2, but not human-resource management (HRM) or
customer-relationship management (CRM) systems. The emphasis is squarely on cost-control,
which includes not stocking items in small demand and not being stocked out of any item in
demand. Used for that limited but important purpose, the system is useful since margins are
quite thin overall.
Larger companies find they cannot operate without some sort of sophisticated information sys-
tem. Federal Express (FedEx) has communication systems that allow it to coordinate nearly 60,000
vehicles handling an average of 5.2 million packages a day. Its own controllers can override the
flight plans of over 650 aircraft should bad weather or other emergencies arise. Its series of e-busi-
ness tools allows customers to ship and track packages online either on their own or the com-
pany’s website, create address books, generate custom reports, reduce internal warehousing and
inventory-management costs, purchase goods from suppliers, and respond quickly to customer
demands (Thompson, Gamble, & Strickland, 2004).
Information systems often extend beyond the company to suppliers, also. Walmart is unrivaled in
terms of managing its supply chain. For example, its computers transmit daily sales to Wrangler,
JB Reed/Bloomberg via Getty Images
Federal Express uses a communication system that allows it
to coordinate handling an average of 5.2 million packages and
delivering them with nearly 60,000 vehicles.
CHAPTER 8Section 8.1 Some Broad Operational Issues
a supplier of blue jeans. From the information transmitted and “married” to Wrangler’s own sys-
tems, the clothing manufacturer can ship specific quantities of specific sizes and colors to specific
stores from specific warehouses—lowering logistics and inventory costs for both supplier and cus-
tomer and leading to fewer stockouts (Thompson, Gamble, & Strickland, 2004).
Building Consensus
Operational planning is, in essence, a string of decisions that have to be made quickly at whatever
level that planning is done. Unless there is consensus, that is, complete agreement, on a decision
by a group of people, majority rule takes over. There’s nothing intrinsically wrong with that, except
that it introduces the possibility that a minority is not committed to the decision. So how can con-
sensus be built when there is a difference of opinion?
If time allows, it pays to get more data on the alternatives to aid in the decision-making process;
however, that is not always possible. It may be that the lack of consensus is due not just to different
opinions, but also to different positions and political ploys. It is frequently easier to get managers
and people to agree first that consensus is desirable (as well as possible) than it is to obtain it (Ackoff,
1986). The additional time and effort it takes to achieve consensus is more than compensated for by
the surge in motivation after agreement has been reached.
Manufacturing
Resource
Planning
Human
Resource
Management
Customer
Relationship
Management
Supply
Chain
Management
Financial
Management
ERP
System
Figure 8.2: Overview of ERP
Source: Enterprise Resource Planning, from SoftWeb Solutions. Reprinted by permission.
CHAPTER 8Section 8.1 Some Broad Operational Issues
Spotlight on Group Decision Support Systems
Operational planning requires the kind of consensus and buy-in that challenges even the most com-
petent and cooperative human communicators. One solution that many organizations use to stream-
line this process is the Group Decision Support System (GDSS). GDSS has a long history of develop-
ment and applications in team-related tasks. Although the sophistication of the interface and the
platforms for these technologies have improved over the years, the documented outcomes of GDSS
implementation on decision making and group communication have remained stable over close to 30
years of research. Today, most GDSS are supported by a web-based platform that collects, organizes,
and interprets the thoughts and reactions of individuals participating in a group decision-making
effort (Roszkiewicz, 2007). GDSS replaces whiteboards and flipcharts with a projected image, and can
tabulate rankings and evaluations (offering anonymity when desired by meeting leaders and partici-
pants) that individuals input through their keyboards, laptops, tablets, smartphones, or specialized
handheld “clickers” compatible with the system.
In many ways, the GDSS helps level the playing field among meeting participants—the shy individual
hesitant to disagree or advocate for an alternative position; the dominant, outspoken opinion leader;
the fault-finder; the devil’s advocate; and so forth. Although all these roles are important to group
decision making, their individual communication styles often steer meetings down the wrong course
and lead to outcomes that are unrelated to the best interest of the organization. These problems and
other human-communication problems, such as groupthink, interpersonal conflict, and retaliation/
retribution may be magnified by the popularity of web conferencing, where participants contend
with apprehension about using technology, distractions, and lowered personal cues, which research
has shown to be important communication outcomes (Walther, Loh, & Granka, 2005).
GDSS introduces discipline and structure into discussions that can go wrong due to human differ-
ences—without turning human participants into androids. Participants have equal opportunities to
express themselves in brainstorming sessions by posting comments and thoughts to the projection
screen, and vote via automated polling. But meetings supported by GDSS are far from silent; the
meeting facilitator is now freed from the tasks of recording notes and votes and can facilitate more
meaningful conversation. Research indicates that variables such as trust, group synergy, participation,
openness, truthfulness, listening, and perceptions of cooperation are enhanced in GDSS-supported
group environments (Aiken & Martin, 1994).
Further, the accuracy and efficiency of decision making improve when GDSS is implemented (Poole
& Holmes, 1995). As agreements and consensus are reached, the facilitator can encourage the group
to continue the dialogue with the sophisticated graphs and other visuals that GDSS produces quickly
and seamlessly as people participate. Some studies indicate that strategic decision-making time can
be cut in half when GDSS is employed. GDSS-supported meetings yield results that are reliably defen-
sible through the patterns identified and statistics compiled by the system. And, because GDSS also
serves as a cloud repository for meeting communication, participants can retrieve the ideas later.
In summary, research indicates that the implementation of online GDSS decreases negative interpersonal
communication dynamics and enhances the efficacy and quality of decision making and information
gathering. GDSS has applications for a wide range of organizational decision-making tasks, but can play a
critical role in accurate and efficient strategic and operational planning where consensus is important.
Questions for Critical Thinking and Engagement
1. You may already have experience with GDSS; even the clicker-based response systems used in
some classrooms represent a form of this type of technology. If you have experience with some
type of GDSS, what is your reaction to it? Describe how the technology was utilized by your
group, and with what outcomes.
CHAPTER 8Section 8.1 Some Broad Operational Issues
The Role of Policies
A policy is a company directive designed to guide the
thinking, decisions, and actions of managers and their
subordinates (Pearce & Robinson, 2005). Policies play
several roles and serve several purposes. First, it saves
higher management from wasting time making deci-
sions that could be as well handled lower down the
hierarchy. Second, it empowers people lower in the
organization to make those decisions, often where
they should be made. Third, they address issues that
crop up frequently, so the amount of time saved is con-
siderable. Finally, the decisions themselves could save
the company money by, for example, limiting the kinds
of services offered (“Sorry, sir, our policy is to . . .”).
In addition, policies
• establish indirect control over independent
action immediately;
• promote uniform handling of similar activities;
• ensure quicker decisions through using stan-
dardized answers;
• institutionalize basic aspects of organizational
behavior;
• clarify what is expected and facilitate smooth
execution of strategy;
• provide predetermined answers to routine
problems (Pearce & Robinson, 2005).
Examples of policies include Wendy’s purchasing policy that allows local store managers to buy
fresh meat and produce locally rather than from company-owned sources. IBM has a strict mar-
keting policy of not giving free IBM PCs to any person or organization. Packaging-materials giant
Crown, Cork, & Seal’s R&D policy is not to do any basic research. Polaroid Corporation has long-
standing financial policies of never taking on any debt and never making an acquisition. Electronic
Data Systems (EDS) for many years had a customer-service policy of empowering any employee to
drop whatever that person was doing to answer a customer’s call and take care of the problem, at
least by passing it to a more qualified person for help (Pearce & Robinson, 2005).
Policies should be developed in written form, widely distributed throughout the company, and
discussed at all meetings once finalized. In written form, employees can constantly refer to them
Associated Press/Terry Gilliam
Wendy’s Hamburgers’ purchasing policy
allows managers to buy locally produced
fresh meat and produce from local producers
rather than from company-owned sources.
2. Describe a group decision-making experience you have had which might have been enhanced by
the use of GDSS. Describe the challenges your group encountered, and explain how GDSS might
have mitigated or prevented them.
3. Although there are many benefits to GDSS implementation, these technologies are not a pana-
cea. What barriers to their use might exist? What unintended problems might they introduce
into the group decision-making process?
CHAPTER 8Section 8.2 Operational Planning
as an authoritative source until they become second nature. Finally, policies are as useful for what
they don’t cover as for what they do. For instance, many banks have policies that state that a loan
will not be given to a customer who is already overextended.
8.2 Operational Planning
Operational planning involves preparing detailed organizational plans for the coming fiscal year. It
includes programs, projects, and activities that the company is already doing as well as new ones
required by any change in strategy. Detailed plans by organizational unit are part of operational
plans. Finally, it includes coordinating all these activities to make sure they support stated strategies.
The iterative nature of the operational-planning process means that, in practice, draft versions of
plans could go up and down the hierarchical chain more than twice (Figure 8.3). The model depicted
also combines operational and budget planning into the same process, which is what happens in most
companies; however, because the two are significantly different, they shall be discussed separately.
At the conclusion of the strategic-planning process, the vice presidents of the different functions, in
functionally organized companies, take the strategic decisions to their department and, with their
key managers, draft functional objectives to be achieved by the end of the next fiscal year. In other
types of organizations, key operational units get to do the same thing. For example, in marketing,
examples of operational objectives (with the addition of the quantitative element) might be to
improve salespersons’ “hit rate” of converting sales visits into orders, increase advertising effec-
tiveness, increase the effectiveness of each distribution channel, and improve the effectiveness of
Discussion Questions
1. Corporations and all organizations are systems; yet they themselves contain many systems. Is this
possible? Explain.
2. Following on from (1), how might one manage the smaller systems to improve the functioning of
the larger one?
3. How can “systems thinking” improve operational decision making?
4. If some management-information systems are simply databanks, are they really systems? Explain.
5. Many manufacturing companies have realized significant savings from using MRPII or similar
systems. What would you tell them about investing to upgrade those systems into ERP or more
comprehensively integrated systems? How might the additional costs be justified?
6. In a public company, why is the accounting-information system the only system that must be
audited? Would it make sense to audit other parts of the system? Why or why not?
7. Can an information system provide a company with a competitive advantage? If so, how?
8. The point was made that consensus in decision making means total buy-in to the decision and
smoother implementation. How might you tell the difference between real consensus and sev-
eral people just “going along” with the majority?
9. If consensus is desirable to achieve, whatever happened to dissent? Isn’t dissent also considered
a spur to better decision making? Discuss.
10. A bank has a policy of not validating a customer’s parking receipt unless a transaction has been
completed. One day, a customer wanted to see a bank officer who happened to be out of the
office. When he asked to have his parking permit validated, the teller refused. What should the
teller do—stick to the policy and risk losing a customer or make an exception?
CHAPTER 8Section 8.2 Operational Planning
market research. Production objec-
tives could be built around issues of
throughput, quality, cost-reduction,
and even outsourcing.
The directives then go to the actual
operating units that must meet
those objectives—the sales super-
visors or actual sales force for a
smaller company, the advertising
department, market research, pro-
duction or plant operations, quality
control, and so on. Their challenge
is to decide what must be done to
meet that objective by the end of
the fiscal year. This may mean con-
tinuing to do what they have already
been doing, changing what they
have been doing, or even changing
the objective if it appears to be impossible. They must develop a series of tasks and specify who will
be accountable to do what, when, for how much, with a clear output, and summarize their efforts.
…
Implementation
Learning Objectives
By the time you have completed this chapter, you should be able to do the following:
• Recognize good operational plans and distinguish them from weak ones.
• Appreciate the value of tracking progress on all operational plans.
• Appreciate the value of face-to-face meetings with middle managers to discuss negative variances.
• Know why emergent strategies occur and how they might affect a company’s current strategy.
• Manage, improve, and evaluate an existing strategic-planning process.
• Understand the “strategy paradox,” showing how a company’s strength in execution can be simultaneously
its Achilles’ heel.
9
Ivelin Radkov/iStockphoto/Thinkstock
CHAPTER 9Section 9.1 Plans by Organizational Unit
Chapter Outline
9.1 Plans by Organizational Unit
9.2 Tracking Performance Using Metrics
9.3 Emergent Strategies
9.4 Managing the Strategic-Planning Process
9.5 Improving the Strategic-Planning Process
9.6 Assessing the Strategic-Planning Process
9.7 Raynor’s Strategy Paradox
Implementing a strategy in the real world isn’t a leisurely swim across a calm pond on a sunny day,
but rather like crossing from one bank of a raging river to the other, encountering hidden eddies,
fog, driving rain, lightning, and riptides along the way. While not impossible to reach the other
bank (the goal), the task often becomes difficult and one of overcoming obstacles and making
constant adjustments without losing focus or sight of the goal. Even the most brilliant strategy is
worthless if it cannot be implemented.
This chapter focuses on strategy execution and its difficulties, and part of it is devoted to assess-
ing, improving, and managing the strategic planning process itself.
9.1 Plans by Organizational Unit
When an organizational unit gets its plans and budget approved by the level it reports to and on
upward, exactly what is it that gets approved? An operational plan is a document that specifies the
projects or tasks that must be accomplished to achieve particular operational objectives. Details
specified in operational plans include the names of those who will be involved and the individual
responsible for each step of the operation, what equipment will be needed, when each project
will start and end, and the estimated costs for each part of the process. Given the level of detail
required it should come as no surprise that an operational plan can run too many pages if a large
number of projects must be detailed, such as manufacturing hundreds of product lines.
It takes contributions from everyone who will be involved in that unit’s operations to create such
plans. They will make sure that continuing current operations are included in the plans, which
is easily done. What adds a level of complexity and difficulty is incorporating additional tasks
demanded by a change in strategy.
Consider the following scenarios, which illustrate the difficulty in creating operational plans when
asked to do more than simply repeating what was done the previous year:
• Production. A specific higher level of throughput is required to satisfy increased demand,
which will soon require capacity expansion. Can the increased capacity requirement be
CHAPTER 9Section 9.1 Plans by Organizational Unit
met by adding additional shifts, physically expanding the size of the plant, or building a new
plant? Can some of the additional production be outsourced? How many new machines
must be added and of what kind? How many new people must be hired and trained, and
how long might all of this take? Also, consider the scenario where a whole new product
line has been designed and now has to be produced in addition to producing all the other
product lines. How can this best be accomplished? In both scenarios, production capacity
has to be increased.
• Research & Development. Technology advances are affecting the company’s ability to com-
pete. This requires new initiatives to keep up with technology as well as continue with
applied research associated with developing new products. This could mean expanding staff
and facilities or forging stra-
tegic alliances with particu-
lar universities that have
the requisite capabilities to
help the company. Another
option might be finding a
company with the needed
technology and licensing
it. Yet another possibility
might be to start a con-
versation with top man-
agement about possibly
acquiring a small high-tech
company with these capa-
bilities and patents. What is
the best way to do this?
• Marketing. The decision
to expand from being a
regional consumer-products
company (B2C) to a national
business presents a host of
operational challenges. Should the company continue to handle its own distribution or find a
national distributor? How many new retail outlets would it need to find to reach potential cus-
tomers? Would it need to lease additional distribution centers or warehouses? Which specific
parts of the “rest of the country” should be targeted first, second, and so on until the com-
pany covers all of its targeted areas? What advertising media would be most appropriate, and
does going national require television advertising? Should more emphasis be placed on online
rather than brick-and-mortar sales? How can this sales objective be realized most expediently?
• Finance. Consider two scenarios: In the first, the company has decided to invest in either a
new integrated information system or a significant development of the existing one. How
many more software engineers and programmers will be required? Could part of the new
system be licensed and then customized? Without intimate knowledge of the completed
system, how can building it be planned for? Should a consulting firm be engaged with the
requisite experience? Will IT staff need to be hired and trained for the other functions? In
the second scenario, the company’s cash needs for the coming year exceed what it can nor-
mally access. How can it raise more cash? Should receivables be factored? Should a larger
line of credit be negotiated? Should payables be delayed? If appropriate, should some cus-
tomers be asked to prepay? Is there a way to maintain negative working capital to free up
the most cash?
Semen Barkovskiy/Hemera/Thinkstock
Research and development is essential to a company’s ability to
compete. It requires new initiatives to keep up with technology
and develop new products.
CHAPTER 9Section 9.1 Plans by Organizational Unit
Ideally, operating units will have been working on these kinds of changes over a much longer
period, using the formal operational-planning period at the end of the fiscal year to finalize its
plans and match available resources before the new fiscal year begins. And its plans must be done
in some sort of networked way or using Gantt charts to show which projects or tasks can be done
independently of others and which are integral to a particular sequence.
A Gantt chart is a graphic depiction of a project schedule. Gantt charts show the beginning and end
dates of each project component. Some charts also illustrate the dependency relationships between
component activities, or the dependency of one activity upon the completion of another. Gantt charts
may be used to provide up-to-date schedule status using percent-complete shadings (Figure 9.1).
Gantt charts can also be combined with PERT software to produce a critical path of projects (United
Nations Institute for Training and Research (UNITAR), 2004).
When that is done, the total plans for a particular unit should be summarized according to the
review period set by the company. Typically this is each month. The review cannot begin until all
the requisite data have been collected and organized, which usually takes a week after the end of
the month. Actual results are then compared to plan (expected performance and budget) along
the following dimensions:
• For each project completed during the period, data show whether the objective was
achieved, current and total costs, and whether the deadline was met.
• For each ongoing project, data show progress toward achieving the objective, current and
cumulative costs, and a probability that the deadline will be met.
The project leader initially does such a review, with copies given to middle managers on up to
functional heads. If the data are input into a computer system, then those managers will all have
access to monthly summaries.
Task 1
Task 2
Task 3
Task 4
Task 5
Completed
Remaining
Start Date
8/10/2010 2/26/2011 9/14/2011 4/1/2012 10/18/2012 5/6/2013 11/22/2013
Figure 9.1: Example of a Gantt chart
CHAPTER 9Section 9.2 Tracking Performance Using Metrics
9.2 Tracking Performance Using Metrics
Two old adages that are probably familiar to most readers underscore why the use of metrics is so
vital in organizations:
• “What gets measured gets managed.”
• “You can’t improve what you can’t measure.”
By way of illustration, consider the true example of a nonprofit organization that provided edu-
cational workshops for high-school students in an effort to reduce the teen crime rate in the
area around the city in which it operated. The directors were asked how they knew how the
organization was performing and what information was reported to its sponsors periodically.
They said they kept records of student attendance at every workshop they gave, the number of
workshops each week and at which school, who gave the workshops, and the content of each
workshop. In other words, what they said they were going to do and what they did was what
was measured and reported. But how effective were the workshops? What was the purpose
for developing and giving them? Did the teen crime rate decline over the couple of years that
this organization was giving its workshops? And even if they did—which no one knew—was it
because of the workshops?
In this example, the donor was as much at fault as the people in the organization for not insisting
on better measures and better data. Clearly, like many other organizations, this one measured
what is easy to measure, not what needed to be measured. Unfortunately, those running the
programs didn’t know, or had never considered, the difference. There are many ways to measure
performance, but the more systematic and reliable the method is, the more credible the data will
be in supporting strategic plans and their implementation.
Organizations mistakenly measure the results of their activities or effort, not progress toward
achieving objectives. Although impact measurement is important, process evaluation is critical
to strategic management. Evaluating progress at numerous stages throughout implementation
allows the manager and his or her team to make adjustments and modifications to the strategy.
Discussion Questions
1. Clearly, it’s much tougher to translate a change in strategy into operational plans than it is to con-
tinue with an established strategy. In your opinion, is it acceptable to submit a plan that’s full of
uncertainties? Explain your point of view.
2. Can you think of anything else that should be part of a good operational plan?
3. Now that you know more about what is involved in coming up with a good operational plan, do
you believe that strategic planning should be done solely by top management?
4. To what extent, if any, does strategic-planning experience help an operational manager develop
operational plans to support the company’s strategies?
5. To what extent should managers be aware of what’s going on in other parts (e.g., functions) of
the company while preparing operational plans?
6. If quality or effectiveness of a project is important, how can these be incorporated into an opera-
tional plan? Or should a separate project be developed to assess those attributes, requiring addi-
tional expenditures?
CHAPTER 9Section 9.2 Tracking Performance Using Metrics
Operational objectives, discussed in Chapter 8, must be set carefully. Making good progress
toward objectives that were set too low is of little value and won’t implement the strategy prop-
erly. Setting them too high de-motivates the workforce and is just as bad. So let us assume that
“stretch” objectives—set at just the right level but that demand a little more from everyone to
achieve—have been set all the way down the line, plans were devised for every unit that matched
its budget allocations, and that it was these plans that are now being carried out by everyone in
the organization.
How does top management moni-
tor whether everything is “on
track” or “on plan?”
The manager’s job is to collect and
organize current project data for the
review period, by project, in their
respective areas of responsibility.
The example shown in Figure 9.1 is
a step in the right direction, but has
to be summarized for the month.
For example, the figure shows an
almost instantaneous picture for
daily monitoring, a time frame and
level of detail required only by the
people actually doing the work.
From such daily reports and the
status of projects at the end of the
month, a manager would need to
extract and summarize information on each major project, being careful to note which projects
were on schedule and under budget and which weren’t and by how much. The latter could consti-
tute a separate “exception” report of negative variances (discussed in more detail later), which are
projects that have slipped their schedule or are over budget, together with additional information
on how much extra it might cost to get all of them back to meeting their deadline.
The Budget as a Control System
Recall the vignette about Pacifica Corporation recounted in a box in Section 2.9. As part of the
rapid change in its culture, five original managers, including the CFO, were replaced. The CFO was
let go when it was discovered he had no idea how to budget. For six entire months, he had fooled
the CEO into believing that everything was on track. Whenever he was asked if expenses were “on
budget,” the CFO would say “Yes,” and people believed him. After about six months, with costs
clearly skyrocketing, the CFO was asked again if expenses were on track with the original budget.
The real answer was no: Every month, as costs had outpaced the set budget, the CFO had simply
raised the budget to match expenses. Rather than taking action to decrease costs, he had consis-
tently told everyone that things were “on budget.”
The budget is a control system in that it allows management to compare actual performance to
a standard, measure the variance, take action to reduce the variance, reset or update, and test
again. Another example of a control system is a packaging machine that automatically fills boxes
with a precise weight of cereal, signals the operator the moment the filled weight exceeds or falls
Fancy Collection / SuperStock
The manager’s job is to collect and organize current project
data by project.
CHAPTER 9Section 9.2 Tracking Performance Using Metrics
short by a preset small amount, enabling immediate adjustment of the machine. In the case of a
budget as control system, action is taken only if expenses exceed the budget. Further, cumulative
expenses are compared to cumulative budgets so that an operational unit that has overspent one
month can “make up” and spend less than its budget in the following month (Figure 9.2).
One of the hallmarks of a good control system is that corrective action is taken as soon as it is found
to be needed. Why wait until the end of the year to discover that you have gone over budget? At
the other end of the scale, should you check every week? That makes no sense, either. Monthly
checking is about right, and most information systems can provide such information monthly,
either as needed onscreen or in a customized monthly report sent to all operational managers.
In large organizations that have federal contracts, for example, government auditors closely
examine expense reports, time sheets, and invoices related to programs. So, for example, when
a contractor requests increased funding, budget controls are in place to quickly advise regulators
as to the legitimacy of the request. In this way, the government can determine when increased
expenses are justified, or when to tell its contractors to cut costs.
Addressing Negative Variances
Managers in well-run corporations make a point of meeting with their direct reports regularly to
go over progress and discuss any problems. One focus of the meeting should be variances and any
exception reports that detail differences between plans or standards and actual performance. A
Cumulative expenses
Over budget
On budget or
under budget
Cumulative budget
Typically a
monthly cycle
Actual
Target
Action
Update cumulative budget
and cumulative expenses
Update
Variance
Continue as
planned
Reduce expenses
next month
Figure 9.2: The budget as control system
CHAPTER 9Section 9.2 Tracking Performance Using Metrics
negative variance is an instance where a project’s progress is delayed and could miss a deadline,
or where its budget has been exceeded, or where performance comes up short of a quantitative
standard or expectation.
What can be accomplished in such
a meeting between a manager and
a direct report? First, the manager
should learn about the particular
circumstances surrounding nega-
tive variances of some projects,
what might have caused the delays
or budget overruns, and which
other projects might be in jeopardy
as a result. They should ask ques-
tions and listen carefully to the
responses. Both the manager and
direct report should note ques-
tions to which an answer could
not be provided because the direct
report didn’t have the necessary
information.
Second, the manager and direct
report should discuss potential
solutions to the negative variances. Some projects can be pulled back on track through either
the direct report getting project personnel to acknowledge problems and solve them, helping
them to find solutions, and trying to remove obstacles that might be delaying progress. Also,
if budgets are overrun, a new lower budget that compensates for the overrun must be com-
municated to project personnel. The manager should focus on projects where there is a direct
relationship between schedule and budget. That is, where speeding them up will cost more,
and conversely, where reducing the budget results in unacceptable delays. It is in precisely such
situations that any critical-path software becomes invaluable, because it lets a project leader or
supervisor try out different alternatives until both parameters (project time and budget) meet
expectations.
Third, the manager should insist that the direct report file—within the next couple of days—a
revised plan containing the points that were discussed that will bring projects and budgets back
in line.
Finally, meetings represent an opportunity for the manager to strengthen a relationship with the
direct report. In most cases, the meeting is just between the two of them (although inviting other
project managers who are in a better position to provide explanations is also common). What is
the direct report most worried about? Is the communication between them as “open” as it needs
to be? What’s really going on? Taking the time to delve a little deeper and offer guidance and
counseling is often well worth the time.
Be mindful of a couple of potential red flags: Some managers don’t like hearing or dealing with bad
news and might even tell their reports they don’t want to hear it. So if a supervisor is repeatedly
age fotostock/SuperStock
Well-run corporations have their manager’s report in every
month to track progress and discuss any problems that have
arisen.
CHAPTER 9Section 9.2 Tracking Performance Using Metrics
told that “everything is okay,” he or she might well suspect that it’s not. The manager will have to
dig deeper and even go to chat informally with the direct report’s colleagues and team members.
A manager also needs to be sensitive to whether a direct report is losing control of the team or his
or her responsibilities. If the employee feels overwhelmed and relatively powerless to stem the
tide, a real problem exists.
This kind of face-to-face meeting with a direct report goes on up and down the hierarchy. Typically,
a manager might have a half dozen to a dozen direct reports, some fewer, some more. A manager
should schedule all meetings with direct reports over the course of a day or two before meeting
with his or her own supervisor, taking on the role of “direct report.”
If this description of the organization conveys the idea that this is one massive control system, that
is exactly the intent. During execution or implementation of a strategy, doing the work and con-
trolling the work—its quality, timeliness, and adherence to a budget—is vital. And in the spirit of
a good control system, actual performance is compared to a standard, the variance noted (espe-
cially negative variance), solutions developed, and a correction applied as soon as possible. Data
collected about performance, especially as part of an information system, are essential, but a con-
trol system needs more; that’s why the face-to-face meetings are imperative and why everyone
in the hierarchy must follow through and put the corrections into effect to improve performance
the following month.
This description also gives the impression that managers take part in many meetings, and that
too is by design. With so many meetings to prepare for and attend, when do managers get time
to do their real work? Perhaps this is the fallacy. Recall the definition of a manager as “someone
who gets work done through other people.” The time spent in meetings is the work. Whether that
time is wasted or not is another issue and goes directly to whether the person conducting the
meeting is an effective manager. Managing well is difficult, challenging, and time-consuming, but
ultimately very satisfying. The job gets done on time and within budget, and your direct reports
grow and develop into productive, congenial team members.
Discussion Questions
1. It’s easy to measure what training was given, to whom, by whom, how often, and whether it was
within budget. What measures would you suggest to determine the effectiveness of such train-
ing? Is it important?
2. Midway through the year, all managers are told that budgets need to be slashed. What is their
likely response? Do all operational managers line up to “make their case” for not cutting budgets
on their projects? Do vice presidents and other senior-level managers make the decisions as to
where and what to cut?
3. With each manager receiving a monthly report about project progress and budget compliance,
what additional benefit is gained from a face-to-face meeting?
4. If you were a manager who had to oversee people and projects, would you look forward to your
monthly face-to-face meetings? Under what circumstances might you dread them? If you can
think of any, how could you improve the situation?
CHAPTER 9Section 9.3 Emergent Strategies
9.3 Emergent Strategies
There is one type of strategy that occurs only during operational execution. Emergent strate-
gies, first proposed by Henry Mintzberg of McGill University, arise as a result of an organization’s
response to unexpected events as a strategy is being implemented. In Mintzberg’s terms, an
intended strategy is akin to the “best” strategy that was developed in Section 6.4 and chosen in
Section 7.2. Such a strategy, when implemented, is then called a deliberate strategy. If it fails for
whatever reason, it is considered an unrealized strategy (Figure 9.3).
As the deliberate strategy is executed, a pattern may emerge that was not intended when the
strategy was first proposed. Actions that were taken one at a time take on a cumulative effect
and become a strategy. For example, a supplier serving restaurants has an opportunity to serve a
hotel, and later another hotel, and so on until it becomes clear over time that the company has
diversified into the related market of hotels. That is an emergent strategy that was never a part of
the strategy the company set out to implement. Combined with the deliberate strategy of serv-
ing restaurants, it evolves into the realized strategy of serving the hospitality industry. This is also
sometimes referred to as an umbrella strategy.
There is much validity to viewing strategy in this way, from how it’s formulated to what actu-
ally happens in practice. Real life is messy and rarely do plans actually happen the way they are
intended. Few strategies are purely deliberate, just as few are purely emergent; the former allows
for no learning while the latter means no control (Mintzberg, Ahlstrand, & Lampel, 1998). Reality
is some combination of the two.
Accepting the notion of emergent strategies allows the organization to learn from customers and
to increase its capacity to experiment with new ideas. That is not to say that learning doesn’t
Realized
Strategy
Unrealized
Strategy
Deliberate
Strategy
IntendedStrategy
Em
erg
ent
Stra
tegy
Figure 9.3: Deliberate and emergent strategies
Source: From Stanley C. Abraham, Strategic Planning: A Practical Guide for Competitive Success, p. 157.
Copyright © Emerald Publishing Group Limited. Reprinted by permission.
CHAPTER 9Section 9.4 Managing the Strategic-Planning Process
occur without an emergent strategy; one of the important byproducts of the strategic thinking
and planning process is to increase strategic learning and to update everyone’s mental models in
a similar way. The very act of implementing a strategy involves all kinds of learning, which benefits
the next round of strategic planning.
Keeping one’s eyes open for a pattern that signals an emergent strategy is another way for
a company to stay agile and flexible. In times of constant and rapid change, taking advan-
tage of opportunities “on the run” as well as formally through strategic thinking is a sign of a
healthy company. Should the emergent strategy become so powerful as to swamp the deliber-
ate strategy, the company can always have an impromptu strategic-planning meeting and, with
the board’s approval, acknowledge what is happening and capitalize on it with full budgetary
support.
9.4 Managing the Strategic-Planning Process
Strategic planning is usually carried out by a group of people in a company, and a formal process
needs to be established to get such a group to coordinate their efforts and work as one. What
follows is a set of guidelines for setting up and managing the strategic-planning process in a com-
pany, building on the discussion in previous chapters, which describe a process for doing strategic
thinking and strategic planning. Insofar as the abilities of different companies to perform strategic
planning and implement a formal process vary greatly, such guidelines are difficult to write. A few
basic assumptions were made in formulating them:
• Most small- to medium-sized organizations do not have a good understanding of strategic
planning and therefore either do not perform it at all or do something they “think” is stra-
tegic planning.
• Companies that do strategic planning and use a formal process could benefit by bench-
marking their process with these guidelines.
• Many companies do strategic planning without reflecting on whether it is done well or
provides the organization with value. That is, they do so without the benefit of any strate-
gic thinking.
Before the process of strategic planning is begun, it would be a useful exercise for members of top
management to assess the company’s inventory of needs. One device that could accomplish this
is a brief questionnaire such as the following strategy quiz.
Discussion Questions
1. Is it possible for a company to experience emergent strategies all the time? Is that the same as
saying that it has no strategy? Explain.
2. Mintzberg and his associates characterize deliberate strategies as exhibiting control but no learn-
ing, whereas emergent strategies exhibit the opposite. Do you agree? Why or why not?
3. Do you believe that companies in general find it difficult to realize an intended strategy? If so, is
it because of emergent strategies cropping up all the time or simply poor execution?
CHAPTER 9Section 9.4 Managing the Strategic-Planning Process
Table 9.1: Strategy Quiz: How strategic is your organization?
Answer each question either with a Yes or No by checking the appropriate column next to it. Your
answers will be scored based on the number of “No” responses.
Questions Yes No
1. Are you realizing the full potential of your company and people?
2. Do you have a five-year vision for your company?
…
Why Choose Us
- 100% non-plagiarized Papers
- 24/7 /365 Service Available
- Affordable Prices
- Any Paper, Urgency, and Subject
- Will complete your papers in 6 hours
- On-time Delivery
- Money-back and Privacy guarantees
- Unlimited Amendments upon request
- Satisfaction guarantee
How it Works
- Click on the “Place Order” tab at the top menu or “Order Now” icon at the bottom and a new page will appear with an order form to be filled.
- Fill in your paper’s requirements in the "PAPER DETAILS" section.
- Fill in your paper’s academic level, deadline, and the required number of pages from the drop-down menus.
- Click “CREATE ACCOUNT & SIGN IN” to enter your registration details and get an account with us for record-keeping and then, click on “PROCEED TO CHECKOUT” at the bottom of the page.
- From there, the payment sections will show, follow the guided payment process and your order will be available for our writing team to work on it.