Planning and Strategic Management

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CHAPTER 10 PLANNING AND STRATEGIC MANAGEMENT

LEARNING O BJECTIVES

When you have completed this chapter, you will be able to: Explain the differences between formal and functional plans. Recognize the differences between strategic planning and operational planning. Discuss the differences among missions, goals, policies, procedures, and rules. Understand the role of SWOT analysis in planning and strategic management. Discuss the organizational factors that need evaluation in implementing strategic plans.

READING STRATEGIES As you read ● PREDICT what the section will be about. ● CONNECT what you read with your own life. ● QUESTION as you read to make sure you understand the content. ● RESPOND to what you read.

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MANAGEMENT TALK I see“ a future extending far longer” “than the twenty-five years Starbucks has lived so far. In annual strategic planning sessions, our senior management team has been refining WORKPLACE [our] vision to make sure it is both CONNECTIONS audacious and achievable. The company we envision is a great, Understanding enduring one, still zealous about its Management mission of bringing great coffee to everyone everywhere.” In the early 1980s, Howard —Howard Schultz, Schultz predicted that consumers Starbucks Chairman and CEO would support a new type of “coffee bar,” serving specialty coffee and espresso products. Under his leadership, Starbucks grew from a homey little coffee shop in Seattle to a multi-million dollar corporation. Today, Schultz still centers the company’s growth strategy on introducing customers to great coffee. Analyzing Management Skills Why do you think it is important for a company like Starbucks to refine its vision? What other functions might annual strategic planning sessions serve? Applying Management Skills What trends do you think will influence businesses in the next 10 years? If you opened a business today, what things would you do to plan for its future success?

For further reading on managers and management go to: www.businessweek.com

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Section 10.1

WHAT IS THE PLANNING PROCESS? WHAT YOU’LL LEARN Why Plan? ➤ Why businesses use While leaving the movies with your friends on Saturday strategic planning. afternoon, everyone is talking about the big football game ➤ The differences between formal and functional tomorrow. You had hoped to go, but realize that you still have to planning. prepare for your English presentation and Calculus test on Mon- ➤ How to deﬁne short-range, day. You can’t do the work tonight because you are baby-sitting. intermediate, and long- Now you will have to miss out on the game. Effective planning range plans. could have avoided all of these problems. ➤ How to differentiate Key executives in every company spend a considerable between operational and amount of time planning. This process is important to the suc- strategic plans. cess of any business. Planning is the process that businesses use ➤ How grand, business, and to decide the company’s goals for the future and ways to achieve functional strategies work those goals. in a company.

WHY IT’S IMPORTANT Strategic planning develops a course of action for the future in spite of changing economic and social conditions.

KEY TERMS • formal planning • operational planning • strategic planning • grand or corporate strategies • growth strategy • stability strategy • defensive or retrenchment strategy • combination strategy • business strategies • overall cost leadership TIME MANAGEMENT Effective planning is necessary to maintain a balance • differentiation between school and social activities. What kind of plans do you consider to • functional strategies balance your workload?

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Planning prepares managers and businesses to meet the challenges of economic, social, technological, and political changes. Plans also allow businesses to prepare for the future. Without plans, companies would not know how to handle crisis situations. They also would be unable to deal with new developments, such as changes in technology or increased competition. Failing to implement a business plan forced Pittsburgh’s Sutersville Lumber Inc. to shut down. The 51-year-old company was forced to close its doors when the lumber giant, Home Depot, opened three enormous stores in the area—one just three miles away. The majority of Sutersville’s owners refused to allow the chief financial officer to finish her plan of reducing costly inventory and complete the company’s five-store expan- sion. As a result, Sutersville ran out of cash and was forced to file for bankruptcy.

Effective Planning Everything that an effective manager does involves planning. For example, managers who attempt to hire employees without a plan find that they waste company resources constantly hiring and firing workers. Effective planners encourage employees from all areas of the company to participate in plan development. This active participation benefits the organization in several ways:

• Good suggestions can come from any level of management. • Employees have a better understanding of the company’s overall direction. • Employees feel they are part of the process COMMUNICATION When making changes in company and become committed to the plan. policies or procedures, effective managers may hold • Positive participation and pro-company meetings with employees. Why do companies need attitudes improve morale and loyalty to input from many employees to develop a plan? the organization.

Effective planning also gives managers experience and knowledge in understanding the forces that affect a company’s operations. These forces range from new technologies to changes in tax laws. A manager also must keep current with what is happening in the ﬁrm’s industry and with current law. There are several ways to plan effectively. The best managers use combinations of formal and informal planning. They develop plans that look months ahead, as well as those designed to meet changes ﬁve years in the future.

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Formal Planning Formal planning is the systematic studying of an issue and the preparation of a written document to deal with the problem. Some formal plans are simple, but others can be very complicated. A plan to give long-time employees a gold watch is fairly simple. However, a plan to make company stock available to the public, as Amazon.com did in the late 1990s, is complicated. In general, larger companies must prepare more complicated plans than smaller companies. There are three basic ranges, or time spans, for developing business plans:

• Short-range plans cover a one-year period of time. • Long-range plans cover a three-to-ﬁve-year period of time, but some cover as far as 20 years into the future. • Intermediate plans cover the time span between short-range and long-range, generally from one to three or one to ﬁve years.

Operational Versus Strategic Plans

CONNECT Plans cover not only different time spans, but also different kinds of tasks in the workplace. There are two basic types of business plans: Strategic and operational plans are great ways to zero in on your operational and strategic. Operational planning is short-range plan- goals. How might you use these ning. It focuses on forming ideas for dealing with speciﬁc functions in plans to assist with your studies? the company, such as the production of new products. Strategic planning is long-range planning done by the highest management levels in the company, including the president, vice president, and chief operating officer. Different types of planning are illustrated in Figure 10–1.

Strategy In order to develop a plan, you need a course of action or strategy. A strategy is an outline of the basic steps management is going to take to achieve a goal. Strategies exist at three primary levels in a company—grand or corporate, business, and functional.

Grand Strategies PREDICT Grand or corporate strategies provide overall direction for the What do you think is the differ- company. These plans deal with the most important aspects of the ence between a grand or corpo- company’s operations. These include products the company will man- rate plan and a business plan? ufacture and services it will provide; the number of employees it has;

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FIGURE 10–1 Implementing Planning Decisions

Different levels of management are responsible for different kinds of planning. No matter who does the planning, it is important to communicate planning decisions effectively to those implementing the plans.

SENIOR MANAGE- 1 MENT PLANNING Disney’s strategic plan to open theme parks in other countries was the result of a meeting attended by the company’s top officers.

MIDDLE MANAGE- 2 MENT PLANNING However, Disney’s operational plan to SUPERVISORY MANAGEMENT PLANNING put certain toys in the 3 In an organization where there are many levels of stores at DisneyWorld management, like Disney, decisions will be made was developed by by many different people. While top executives may middle- and lower-level decide what kind of restaurants will be placed in the managers. park, lower level managers and restaurant workers may decide on the daily food specials and menu items.

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how much money the company will spend on salaries and beneﬁts; and how the company will market its products to consumers and other businesses. These long-range plans are developed at the highest levels of the company, usually the president or chief operating officer. There are four basic grand strategy types: growth, stability, retrenchment, and QUESTION combination. Why would a company pursue a stability strategy instead of a GROWTH STRATEGY Plans developed when a company tries to growth strategy? expand sales, products, or number of employees are called growth strategies. Under a growth strategy, a company can expand in the following ways:

• Concentration strategy extends the sale of current products or services to a company’s current market. • Vertical integration moves a company into a market it previously served either as a supplier or as a customer. • Diversiﬁcation moves a company into a similar kind of business with new or different products or services.

STABILITY STRATEGY Sometimes a company does not want to, or cannot, expand because it lacks necessary financial resources. In those cases, a company may adopt a stability strategy. A stability strategy is a plan to keep the company operating at the same level that it has for Tips from Robert Half several years. If a company is satisfied with its profits and Ninety-six percent of execu- not seeking growth, this is a good option. Management tives say that communication does not initiate any broad-sweeping actions that could skills are essential to their dramatically affect the entire company. work. Learn what it takes to Stability strategies will most likely succeed in slowly put your ideas into writing, changing, work environments. Company growth is possi- and practice speaking to large ble under a stability strategy, but it will be very slow. The groups of people. owner of Peet’s Coffee and Tea, a group of coffeehouses in the San Francisco Bay area, refused to franchise the business for many years. Owner Gerald Baldwin was con- cerned that the quality of the coffee would suffer if the company tried to grow too quickly. Instead, Baldwin pursued a stability strategy, and the company experienced steady, but slow growth.

RETRENCHMENT STRATEGY Sometimes a company is losing money or wants to reduce its costs. Under these circumstances, the company would adopt a defensive or retrenchment strategy. A defensive or retrenchment strategy is a plan to reverse negative trends in a company, such as losses in sales. Retrenchment strategies became popular in the 1990s, when businesses sought to reverse the excesses of the 1980s and focus on new directions for corporate growth.

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This type of strategy also is used to overcome a crisis or problem, such as competition that undercuts a company’s main prod- L EADING uct. The three most popular types of defensive strategies are: THEW AY • Turnaround is used to regain success. TAKE A BREAK • Divestiture is when a company sells some part of its busi- Everybody wants to get ness, often an unprofitable part or a unit that is not in the his or her chores out of firm’s major line of business. the way quickly. Consis- • Liquidation is when the entire company is sold or dissolved. tently working at top speed leads to burnout COMBINATION STRATEGY Sometimes companies are not sure and errors. Allow your whether to pursue a growth, stability, or retrenchment strategy. It employees to take the is possible that all issues cannot be addressed by implementing time to refuel. Giving just one strategy. A company may decide to adopt what is called them the rest that they a combination strategy. A combination strategy is a plan that need will lead to higher employs several different strategies at once. productivity. Most multiple business companies use some type of combination strategy. Coca Cola, for example, pursued a combination strategy in 1989 when it divested its Columbia Pictures division while expanding its soft drink and orange juice businesses. Companies usually cannot afford to use all of the strategies that might benefit them because they have limited resources and talents. Managers must establish priorities, or the competition will gain an advantage.

Business Strategies While grand or corporate plans affect the entire corporation, business strategies affect only one or two departments. Business strategies are plans that pertain to single departments or units within a company. For example, strategies may deal with marketing issues such as how to reach new customers or how to develop a new product. Business strategies are most effective when they consider the cre- ative input of all employees. They can be classiﬁed as overall cost leadership, differentiation, and focus strategies.

DEFENSIVE STRATEGIES Chrysler corporation was on the verge of bankruptcy when it hired Lee Iacocca as their new CEO. Iacocca let go of a large number of employees and closed 20 plants. Remaining workers agreed to give up part of their salaries and benefits to save the company and by 1982 Chrysler began to show profit. What kind of strategy did Iacocca implement?

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OVERALL COST LEADERSHIP An overall cost leadership strategy is designed to produce and deliver a product or service for a lower cost than the competition. This strategy can be tremendously effective when there are many buyers who are price-sensitive. Wal-Mart, BIC, and McDonald’s all have adopted this strategy with great success.

DIFFERENTIATION A strategy that strives to make the product or service unique is called differentiation . Customers are willing to pay average to high prices for these particular items. Because customers are price-insensitive, companies tend to emphasize quality. Differentiation RESPOND can be achieved through a superior product (Gillette), a quality image What are some examples of prod- (Jaguar), or a brand image (Adidas sportswear). ucts that have become popular through differentiation? FOCUS A focus strategy directs marketing and sales towards a small segment of the market. The company can serve a well-deﬁned market better than competitors that serve a broader market. Some examples of companies that pursue a focus strategy include Colgate-Palmolive, Red Lobster, Federal Express, and Midas.

Functional Strategies The final primary level of strategy is a functional strategy. Functional strategies are short-range operational plans that support business strategies by emphasizing practical implementation. Function or use often deﬁnes plans. The most common functional plans are:

• Sales and marketing: developing new products or services and selling them • Production: producing products or services on time • Financial: dealing with the company’s expenses • Research and development: developing new products, improving on product quality, or improving manufacturing processes to reduce costs • Personnel: managing human resource needs

BUSINESS STRATEGIES Colgate-Palmolive has a 70 percent market share of toothpaste sold to Hispanics. This is attributed to an understanding that three- quarters of Hispanics who watch TV or listen to the radio do so with Spanish-language stations. What kind of business strategy does this illustrate?

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Many functional plans are interrelated. A personnel plan is directly tied to a financial and production plan. The number of employees a company hires, and how much they are paid, depends on company’s finances and the amount of work needed. A production schedule will account for deadlines and seasonal needs, for example, more snow shovels in the winter months. Boeing is an example of a company that learned from past functional planning mistakes. The airline manufacturer was experiencing massive interruptions with its production, human resource, and marketing functions in the manufacture and delivery of its 747-400 airplane. When designing its new 777 airplane, Boeing used a different approach. The company used teams of marketing, engineering, manufacturing, finance, and service representatives so that each functional area knew what the other was doing. The success of this project depended on the interrelationship of functional plans and strategies.

Section 10.1 Assessment

FACTS AND IDEA REVIEW ASSESSING SOCIAL STUDIES SKILLS

1. What is planning and what questions does it answer? Go to the school library and find a recent mag- 2. What is the difference between strategic plan- azine article that focuses on strategic planning. ning and operational planning? Between Write a two-page summary of the article. Include long-range and short-range planning? your comments and personal reaction. Exchange 3. What is the difference between vertical papers with your classmates and discuss. integration and diversification? 4. Under what circumstances would a business adopt a retrenchment strategy? CASE ANALYSIS 5. List the three classifications of business strategies. You are the president of a major sportswear company. Sales have bottomed-out in your CRITICAL THINKING footwear line, but your brand new headband is selling like crazy. You have more orders for 1. Analyzing Information: Why is it necessary headbands than you can fill from your inven- to plan? What are the benefits of planning? tory. You also hear about a company up for sale Give an example of how you plan at home. that manufactures sports watches. Your board 2. Making Comparisons: This year a com- of directors would like to discuss what plan- pany might employ a stability strategy. ning options are under consideration. However, next year it might use a retrench- Apply: Discuss what options are available ment strategy. How could this happen? to you. Include a thorough discussion of the What would the company be like to work different strategies discussed in this section. for this year? Next year?

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Section 10.2

STRATEGIC MANAGEMENT PROCESS WHAT YOU’LL LEARN What Is Strategic Management? ➤ What steps are taken in Business changes so rapidly today that it is difficult for managers the strategic manage- to maintain current plans. It is the responsibility of upper management process. ➤ The objectives of a ment to develop corporate plans for the future and to engage in company’s mission strategic management. Strategic management is the application statement. of the basic planning process at the highest levels of the company. ➤ The differences Through the strategic management process, top management sets between missions goals for the performance of the company. This is done by carefully and goals. formulating, implementing, and evaluating plans and strategies. ➤ How to differentiate The most important part of strategic management is developing among policies, proce- strategic plans. These plans must remain current as changes occur dures, and rules. within and outside of the company. It is possible for a plan to become ➤ How a SWOT analysis outdated because of changes occurring inside a company (a new line of works. products), or outside of the company (new government regulations). ➤ What organizational factors need to be evaluated in implementing a strategic plan.

WHY IT’S IMPORTANT To keep a company competitive and proﬁtable, managers must implement the strategic goals that are set by top-level management.

KEY TERMS • strategic management • formulating strategy • mission statement • goals • SWOT analysis SHARING RESPONSIBILITY Top-level managers often ask middle- and lower- • implementing strategy level managers for their input when making top-level plans. Why would the • evaluating strategy president of the company do this?

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Practicing strategic management doesn’t guarantee that a com-

pany will successfully meet all RUSSIA

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Varmland Vastman- Successful strategic manage- land Uppsala Vasteras Karlstad Orebro ESTONIA Stockholm Sodermanland Nykoping Goteborg Vanern och Bohus Mariestad Vanersborg Linkoping Skagerrak Skaraborg Vattern Ostergotland

Alvsborg Goteborg Jonkoping LATVIA Visby North ment involves many levels of Sea Gotland Kattegat Halland Vaxjo Halmstad Kalmar Kronoberg DENMARK Karlskrona Kristianstad Blekinge Baltic LITHUANIA Sea management. Top-level man- Malmo SWEDEN agement formally develops basic In Sweden, work does not interfere with private life. Man- plans. But once top-level plans agers can expect all tasks to be completed within working are ﬁnalized, different depart- hours and need to schedule all meetings and special ments of the company may be projects accordingly. They do not expect late hours and asked to develop plans for their working on weekends. own areas. A solid strategic management process guarantees that plans are coordinated and are For further reading about supported by everyone at the International Management go to: www.businessweek.com company.

Strategic Management Approach Although different companies use different approaches to the strategic management process, most companies use an approach that is made up of these three phases:

• Formulation, or developing the strategic plan • Implementation, or putting the formulated plan to work • Evaluation, or continuously evaluating and updating the strategic plan

Each of these phases is critical to the success of the strategic management process. If any phase breaks down, it can cause the entire process to fail.

Formulating Strategy All strategic management begins with the development of the strategic plan or formulating strategy. Formulating strategy is developing the grand- and business-level strategies to be used by the company. The company’s internal strengths and weaknesses, as well as threats and opportunities outside of the company, shape the strategies. The ﬁrst part of the formulation phase is to obtain a clear understanding of the current position of the company. This includes identifying the mission, identifying past and present strategies, diagnosing the company’s past and present performance, and setting objectives for the company’s operation.

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CONNECT IDENTIFYING THE MISSION STATEMENT A company always has a mission, or reason for being, when it is created. A mission statement Imagine that you are starting a business selling software to teach outlines why the company exists. It describes the company’s basic ethics to junior high school stu- products and/or services and deﬁnes markets and sources of revenue. It dents. What would you include in is designed to accomplish several goals and ensures a common purpose a mission statement for your within the company (see Figure 10–2). business? Every company’s mission statement will be a little different, but most are short and refer to lofty corporate goals (See Figure 10–3).

Figure 10–2 OBJECTIVES OF THE Figure 10–3 EXAMPLES OF MISSION COMPANY MISSION STATEMENTS

A mission statement is designed to Pfizer Inc.’s Mission Statement accomplish the following objectives: Over the next five years we will achieve • To ensure a common purpose within the and sustain our place as the world’s company. premier research-based health care company. Our continuing success as a • To provide a basis for motivating the use business will benefit patients and our of the company’s resources. customers, our shareholders, our fami- • To develop a standard for allocating the lies, and the communities in which we operate around the world. company’s resources. • To establish a general tone or company climate. AT&T’s Mission Statement • To serve as a focal point for those who We are dedicated to being the world’s best at bringing people together—giving can identify with the company’s purpose them easy access to each other and to and direction and to deter those who the information and services they want— cannot do so from participating further in anytime, anywhere. its activities.

• To facilitate the translation of goals into Harley-Davidson’s Mission Statement a work structure involving the assignment We fulﬁll dreams through the experience of tasks to responsible elements within of motorcycling, by providing to motor- the company. cyclists and to the general public an • To specify company purposes and the expanding line of motorcycles and branded products and services in selected transfer of those purposes into goals in market segments. such a way that cost, time, and performance can be assessed and controlled. There are many different kinds of mission statements that a Companies work hard to develop a mission statement that company might choose to employ. Based on these mission deﬁnes the purpose of the company. What are some other statements, can you identify some elements of a good goals of a mission statement? mission statement?

Adapted from King and Cleland, Strategic Planning and Policy (New York: Van Nostrand Reinhold 1978).

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Management Careers in Focus Hospital Administrator

Nature of the Work Salary Range Hospital administrators plan, organize, Hospital administrators earn about $190,500 coordinate, supervise the delivery of health or more, depending on responsibilities, experi- care, and set the direction of the hospital. In ence, location, and the type and size of the addition, they are involved in marketing, hospital. human resources, and finance. They determine the hospital’s need for services, staff, facilities, CRITICAL THINKING and equipment. They see that the hospital In what situations might hospital adminis- complies with government regulations. trators have to weigh the financial needs of Administrators often speak to community the hospital against the health care needs of groups and encourage people to participate in the community? Why is it important to health programs. They must keep up with a have a balanced understanding of business variety of developments in medicine as well as knowledge and new medical developments? in business and management. What kinds of challenges do you think hos- Working Conditions pital administrators face? Hospital administrators work in comfort- able surroundings. However, hours are often long and the work is stressful. They may be called in at any time to solve problems. Training, Other Qualifications, and Advancement To become a hospital administrator, you INDUSTRY OUTLOOK need a master’s degree or Ph.D in health ser- Hospital administrators vices administration, nursing administration, must understand health- public health, or business administration. The care information technolo- job also requires leadership ability, analytical gies. The market for IT in skills, and the ability to understand and inter- healthcare could reach $56 billion by 2004, and U.S. hospitals and clinics could spend up to pret complex data. Hospital administrators are $748 million on electronic medical record responsible for millions of dollars of facilities systems, up more than 40 percent from 2000. and equipment, and hundreds of employees.

BUSINESS MANAGEMENT

For more information on management careers, go to: busmanagement.glencoe.com

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IDENTIFYING PAST AND PRESENT STRATEGIES To plan for the future, companies need to understand and appreciate their corporate history. Before a strategic change can be developed and implemented, the past and present strategies must be clariﬁed. Strategic managers should ask these general questions: • Has past strategy been developed? • If not, can past history of the company be analyzed to identify the strategy that has evolved? • If yes, has the strategy been recorded in writing?

DIAGNOSING PAST AND PRESENT PERFORMANCE To evaluate how past strategies have worked and to determine if strategic changes are needed, a corporate planner must examine the company’s performance record, asking these questions: • How is the company currently performing? • How has it performed during the past few years? • Is the performance trend moving up or down? Good managers must address all of these questions before attempting to develop any type of future strategy. Once management has an accurate picture of the current status of the company, the next step is to establish goals.

Figure 10–4 AREAS FOR ESTABLISHING GOALS IN MOST COMPANIES

Proﬁtability Measures the degree to which the company is reaching an acceptable level of proﬁts

Markets Reﬂects the company’s position in its marketplace

Productivity Measures the efficiency of internal operations

Products Describes the introduction or elimination of products or services

Financial resources Reﬂects goals relating to the funding needs of the company

Physical facilities Describes the physical facilities of the company

Research and innovation Reﬂects the research, development, and/or innovation objectives

Organization structure Describes objectives relating to changes in the company’s structure and related activities

Human resources Describes the human resource assets of the company

Social responsibility Refers to the commitments of the ﬁrm regarding society and the environment

WORKING WITH In addition to ﬁnancial performance, goals are established in many other areas of a company, including CHARTS marketing and human resources. What are some goals that these two departments might establish?

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STANDARDS AND RULES Companies depend on rules to set standards and implement strategy within an organization. What are some ways that rules are used in your school?

SETTING GOALS Goals are concise statements that provide direction for employees and set standards for achieving the company’s strategic plan. Often goals are set in terms of financial performance, but goals are established in many other areas of the company (see Fig- ure 10–4). To be effective, goals must be reevaluated as the environment and opportunities change. Long-range goals look beyond the current year, while short-range goals come from an in-depth evaluation of these long-range goals. Normally, multiple goals are used to reflect the desired performance. A problem with giving only one goal is that it is often achieved at the expense of other desired goals. For example, if production is the only goal, quality may suffer in attempts to realize max- All About imum production. ATTITUDE POLICIES, PROCEDURES, AND RULES To help in the THE TOUGH KEEP goal-setting and strategy-formulation processes, the man- GOING ager can rely on company policies and procedures. Policies You will accomplish great are broad general guides to action that establish boundaries things if you possess a strong within which employees must operate. For example, a pol- determination to succeed. icy of “answering all written customer complaints in writ- Seemingly impossible tasks ing within 10 days” does not tell a manager exactly how to can be overcome in advance if respond, but it does say it must be done within 10 days. you understand that the road Procedures and rules may be thought of as low-level to your goal can be bumpy. policies. A procedure is a detailed series of related steps or Forge ahead, know that what tasks written to implement a policy. Procedures define you are attempting is not easy, the methods through which policies are achieved. For and don’t give up! example, a company’s procedure on handling customer

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complaints might state that “the customer service representative must note the complaint on Form 622 and forward the yellow copy of the form to the customer complaint supervisor within six hours after receipt of the complaint.” Because procedures do not tell employees what to do in every situation, companies develop rules. Rules detail specific and definite corporate actions that employees must follow. Rules leave little doubt about what is to be done. They permit no flexibility or deviation. For example, “no smoking in the conference room” is a rule.

SWOT ANALYSIS Companies must develop a process that allows them to evaluate overall health. The most utilized process for deter- mining a company’s overall health is called SWOT analysis . SWOT is an acronym for strengths, weaknesses, opportunities, and threats. A SWOT analysis is a technique that evaluates a company’s internal strengths and weaknesses and its external opportunities and threats. RESPOND An internal analysis of the company can identify strengths and How might you beneﬁt from a weaknesses. Assessing the external environment can identify threats SWOT analysis of your preparation and opportunities. This stresses the fact that companies do not operate for the job market? all by themselves—they are affected by their surroundings. St. Anthony Publishing in Reston, Virginia was having problems with one of its newsletters. The company was losing money because subscribers were not renewing subscriptions at the same rate they had in the previous 5 years. St. Anthony Publishing conducted a SWOT analysis. As a result, the company determined that the newsletter was not reporting on technological changes in the industry.

SWOT ANALYSIS Companies conduct SWOT analyses to revise their strategic plans. Why are these analyses important?

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Management Model

Yahoo! Act Two

hen Terry S. Semel walked chief operating officer, Daniel Winto the Sunnyvale (Calif.) Rosensweig, a former president headquarters of Yahoo! Inc. for of CNET Networks Inc., the his ﬁrst day as chief executive group typically includes nine on May 1, 2001, he faced an managers from all corners of unenviable task. Ad sales at the the company. The group sizes Internet icon were plummeting, up business plans to make sure and the new CEO was replacing all new projects bring beneﬁts the well-liked Timothy Koogle, to Yahoo’s existing businesses. who had been pushed aside by It’s all part of the growing the company’s board. Worse, buzz at Yahoo. Using his mix leery employees quickly saw of discipline, sales, and deal- that Semel, a retired Hollywood Terry Semel’s Yahoo, spontaneity making, Terry Semel has pulled exec, didn’t know Internet tech- is out. Order is in. New initiatives off a stunning revival. But can nology and looked stiffly out of used to roll ahead following he pull off Act Two and build place at Yahoo’s playful, egali- free-form brainstorming and a Yahoo into the digital theme tarian headquarters. gut check. Now, they wind their park of his dreams? The fact Two years after taking con- way through a rugged gauntlet that Yahoo shares are banging trol as chairman and CEO, of tests and analysis. on the ceiling and not the Semel has silenced the doubters. Semel’s not kidding about floor is a vivid sign that By imposing his buttoned- the homework. In the old days, Semel’s turnaround may be down management approach Yahoo execs would brainstorm just getting started. on Yahoo, the 60-year-old has for hours, often following Excerpted with permission from engineered one of the most hunches with new initiatives. BusinessWeek, June 2, 2003 remarkable revivals of a belea- Those days are long gone. guered dot-com. Under Semel, managers must CRITICAL THINKING Semel has done nothing prepare exhaustively before What are some differences less than remake the culture of bringing up a new idea if it’s to between the old and new the quintessential Internet have a chance to survive. management styles at Yahoo? company. The new Yahoo is It’s a Darwinian drama that grounded by a host of Old takes place in near-weekly meet- DECISION MAKING Economy principles that Semel ings of a group called the Prod- What are the advantages lugged up the coast from Los uct Council. Dreamed up by a and disadvantages of Angeles. The contrast with couple of vice-presidents and Semel’s management style? Yahoo’s go-go days is stark. At championed by Semel and his Which style do you prefer?

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As a result, St. Anthony Publishing developed a strategic plan to increase coverage of technological developments in that newsletter as well as other newsletters the company published. The most important result of a SWOT analysis is the ability to draw conclusions about the attractiveness of the company’s situation and the need for strategic action.

QUESTION Implementing Strategy Why is implementing strategy Once a company has formulated a strategy, it turns to the imple- often considered one of the most mentation phase of strategic management. Implementing strategy is difficult phases of strategic the action stage of strategic management. Managers need to determine management? and implement the most appropriate company structure, motivate employees, develop short-range goals, and establish functional strategies. This can be the most difficult stage of strategic management. Not only does a company have a strategic history, but it also has existing structures, policies, and systems. Although each of these factors can change, each must be dealt with as part of the implementation process. Structure can be changed, but the costs may be very high. For example, reorganization may result in substantial hiring and training costs for newly structured jobs. A company’s current structure places certain restrictions on STRATEGY EVALUATION Managers must continuously strategy implementation. evaluate and monitor the company’s strategic plan. The strategy must fit with current Why is it necessary to evaluate the strategic plan? company policies, or the conflicting policies must be changed. Sometimes past company policies heavily influence the extent to which future policies can be changed. For example, A.T. Cross Company, the manufacturer of world-class pens and pencils, has a policy of unconditionally guar- anteeing its products for life. Because customers have come to expect this policy, Cross would find this policy difficult to discontinue.

Evaluating and Controlling the Strategic Plan After the company’s strategic plan is put into action, the next chal- lenge is to evaluate strategy. Evaluating strategy is the process of continuously monitoring the company’s progress toward its long- range goals and mission. Managers should ask: • Does the grand strategy need revising? • Where are problems likely to occur?

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The three basic strategy evaluation activities are: • Reviewing external and internal factors that are the bases for current strategies • Measuring performance • Taking corrective action

The emphasis on evaluating strategy is on making the company’s managers aware of the problems that are likely to occur and of the actions to take if they do arise. Continuously evaluating and respond- ing to internal and environmental changes is what strategic management is all about. This allows companies to plan ahead and avoid disaster. Sometimes companies forget the importance of strategic planning and strategic evaluation. Those companies often ﬁnd they have lost their “competitive edge.” Strategic planning and evaluation should be done not just on a predetermined schedule, but as frequently as necessary, as determined by both internal and environmental factors.

Section 10.2 Assessment

FACT AND IDEA REVIEW ASSESSING SOCIAL STUDIES SKILLS

1. What is the most important part of strategic management? Use the Internet or the telephone directory to 2. What are the three phases of the strategic find a local company that does interesting management approach? strategic planning. Either visit or invite the 3. What is the difference between a policy, a owner to class, and ask the following questions: procedure and a rule? 1. What type of strategic planning does your 4. What are the four components of a SWOT company use? analysis? 2. Who is involved? 5. What are three basic evaluation activities? 3. Do you have a mission statement? 4. Is there a downside to strategic planning?

CRITICAL THINKING CASE ANALYSIS 1. Evaluating Information: Give an example of a company policy, procedure and rule. 2. Drawing Conclusions: Comment on the You are the head of human resources at a bank. following statement, “Most companies Last year, you created a strategy that gave every succeed or fail based on their ability to employee one additional week of paid vacation react to environmental changes.” What to retain more employees. Your boss asks you to does this statement have to do with strate- evaluate the effectiveness of that strategy. gic management? Apply: Write a memo explaining how you will evaluate the success of the strategy.

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CHAPTER 10 ASSESSMENT

REVIEWING VOCABULARY

Give a definition and example for each of the following: formal planning functional operational planning strategies strategic planning strategic HAPTER SUMMARY grand or corporate management C strategies formulating growth strategy strategy stability strategy mission statement Section 10.1 defensive or goals Planning defines future objectives. retrenchment strategy SWOT analysis Strategic planning is long range, combination strategy implementing while operational planning is short business strategies strategy range. overall cost leadership evaluating strategy Grand strategies provide direction. differentiation Business strategies concentrate on how to compete in a given industry. RECALLING KEY CONCEPTS Functional strategies deal with the activities of the different functional 1. How does strategic planning differ from opera- areas of the business. tional planning? 2. Define strategic management and explain the Section 10.2 strategic management process. Strategic management determines a 3. What organizational factors need to be evaluated company’s direction and performance. in implementing a strategic plan? Mission statements define purpose. 4. Explain the purpose of SWOT analysis. Why Objectives or goals are statements should it precede strategy selection? that outline desired achievements. 5. What are the three retrenchment strategies? Policies are general guides to action that establish boundaries. Proce- THINKING CRITICALLY dures are a series of related steps for 1. Are mission statements necessary, or have they a specific purpose. Rules are inflex- become obsolete? ible guidelines for employees. 2. How could you conduct a SWOT analysis in your A SWOT analysis is a technique for personal life? evaluating a company’s internal strengths and weaknesses and external opportunities and threats.

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CHAPTER 10 ASSESSMENT

ASSESSING ACADEMIC SKILLS PREPARING FOR SOCIAL STUDIES Using the Internet, ﬁnd a COMPETITIVE EVENTS company that is strong in social responsibility. Make a list of what the company has done for ndicate whether the following statements the local community. Think of a local com- Iare true or false. pany that has made similar commitments to a. A SWOT analysis looks mostly at a the community. company’s strengths. b. Strategic planning is APPLYING MANAGEMENT PRINCIPLES long range and includes the formula- SOLVE THE PROBLEM You work in the tion of goals. admissions office at a local university. The pres- c. Rules are ﬂexible guide- ident of the school is developing a mission lines for employees. statement. She has asked you to research the mission statements of two other schools and evaluate them. Then she would like for you to present the material and discuss what you think needs to be addressed in the new mission statement. Public Speaking Select two universi- ties/colleges that have a written mission statement. Evaluate the mission statement based on length, explanation of academic opportunities, and discussion of student life.

In this chapter you read the Busi- nessWeek Management Model about Yahoo. For more information, go to BusinessWeek online at: www.businessweek.com Using the Internet, ﬁnd a current article on companies like Yahoo, such What should you highlight in your school’s as Excite, Infoseek, or Lycos. What mission statement? How can you distinguish business strategies do these compa- your school from other colleges and universi- nies use? Write a two-page summary of ties? Prepare an oral report by clearly presenting the article and share it with the class. your new ideas based on your ﬁndings.

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