Modern Competitive Strategy
3rd Edition
McGraw-Hill/Irwin
Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved
Chapter 2
Strategic Planning and
Decision Making
2-2
What Is Strategic Planning?

Strategic planning should:

Be a line management, not staff, activity.

Require evaluation of the contribution of investments to
financial goals—in the context of industry trends and
competitor behavior.

Extend top management leadership and power

Neutralize decision-making biases.

Overcome organizational drift.

Identify what the organization needs to do to improve its
performance.
2-3
What is Strategic Planning?
(cont’d)

Strategic planning should:

Be distinct from strategy execution.

Act as a tool for management decision-making.

Communicate the organization’s strategy without
jargon and in a conceptually coherent format.

Generate commitment from employees.

Motivate the organization’s systems of financial and
operating control.

Be reviewed regularly and in response to unexpected
and significant market changes.
2-4
Decision Making Biases

Myopia


Sunk costs


Weighting short term over long term outcomes, controlling for
a discount rate
Continuing to invest in failing projects in hope of getting back
the original investment
Bias based on whether a decision is framed in terms of
gains or losses

Tending to be risk seeking in terms of losses and risk adverse
to gains, as described by Prospect theory
2-5
Decision Making Biases (cont’d)

Information availability


Valuing and using information simply because it is favored,
most recent, or readily at hand.
Information anchoring

Overweighting information that appears first in the information
flow.
2-6
Planning in a Single Business

Strategic planning elements:

Mission statement





Include a vision if desired
Analysis of industry and firm’s market position
Financial and operating goals
Strategic initiatives
Program planning within each initiative
2-7
Mission Statement





Describes the scope of the business in terms of its
product line and markets served
May include a statement of the strategic intent of the
business
Should be no longer than several sentences
Should be in a clear and unambiguous language
Should convey the purpose and direction for the firm
2-8
Industry Analysis

Is necessary for an effective strategic plan

Identifies how much firm performance is due to
macroeconomic and industry factors

Provides a baseline for goal setting

Should include a detailed estimate of the direct and
indirect competitors’ strategies

May be improved by scenario planning
2-9
Elements of Industry Analysis

What are the key macroeconomic variables that affect profits in
the industry?

What are the current macroeconomic trends?

What are the critical regulatory factors that influence performance
in the industry?

What are the key industry forces (e.g., powerful buyers, strong
substitutes, ease of entry) affecting firm profitability?

What are the trends in these forces?

What are the entry and exit rates in the industry?

What are the trends in these rates?
2-10
Elements of Industry Analysis (cont’d)

Has the industry passed through a shakeout?

Has the industry experienced significant disruption? If so, how
have entrants competed against incumbents?

If not, are there identifiable forces or products that could be
disruptive to the industry?

What are the key value and cost drivers in the industry?

How is the industry structured into strategic groups based on these
value and cost drivers?
2-11
Elements of Industry Analysis (cont’d)

What is the trend in industry revenue?

Which competitors are growing faster in revenue than the industry
trend? Why?

What are the key competitors the firm faces in its major markets?

What are their strategies and performance levels?

What is the trend in industry profitability?

Which competitors are growing faster in profitability than the
industry trend? Why?
2-12
Elements of Competitor Analysis (cont’d)





What new strategic initiatives and programs have key competitors
developed, if any?
How likely is it that these initiatives will improve the market
positions of these competitors?
How aggressive are these firms in growing their market positions?
How aggressively do these firms defend their positions?
Where is the firm located in this competitive landscape in terms of
its value and cost drivers?
How are the resources and capabilities underlying the value and
cost drivers protected from imitation?
2-13
Financial Goals



Setting goals focuses management attention and pushes
the planning team to articulate which investments are
strategically important
Goals force management to be explicit about its
expectations and assumptions
Three key questions in setting financial goals:



What is the planning period?
What are the key financial metrics?
What should the goals be?
2-14
Planning Period

Depends on the volatility of strategic situation



Extended planning period forces management to articulate its
view on how firm’s performance can be improved as
competition and other industry’s forces evolve
With an increase in rate of market change, length of
planning period must shorten
Managerial resistance to long-term goals makes firms
vulnerable to decline
2-15
Financial and Operating Metrics

Common performance metrics for single business planning:






Revenues
Net profits
Return on Investment
Metrics and goals should be centrally related to the firm’s
economic performance in its product market over time
Interplay of financial and operating metrics is critical for setting
robust objectives
Operating metrics


Reflect the value and cost drivers that determine the firm’s market
position.
Measure the source of revenue growth
2-16
Measures of Business Performance

Accounting measures of performance

Widely accepted, but criticized for:
Managerial control over accounting policies
 Poor valuation of intangible assets


Measures of economic performance

Use capital market variables

Firm’s market value


Tobin’s q
Cost of capital

Capital asset pricing model
2-17
Setting Goals

Managers rely upon:


Firm’s historical performance
Performance of competitors
When firm’s trend is below industry average, it is vulnerable in
the long-term
 When firm’s trend tracks industry average, it is highly subject to
industry forces
 When firm’s trend is above industry average, it needs to focus on
staying ahead

2-18
Setting Goals (cont’d)

Stretch goals:


Push management to exceed expected performance targets
based on firm or industry trends
Stimulate a level of innovation beyond what management has
already imagined.
2-19
Strategic Initiatives


Strategic initiatives are the essence of the strategic plan,
acting as an organizing framework for activities
throughout the firm
Initiatives are categorized as projects that:






Improve the firm’s value drivers
Improve the firm’s cost drivers
Raise customer retention rates
Invest in growth
Terminate or turnaround underperforming activities of the firm
Focus on risk management and compliance
2-20
Programs




Are created to achieve specific strategic initiatives
Are the basic units through which the plan is executed
May be ongoing
Should have:


An accountable manager and documented schedule
A means of being valued financially (e.g., NPV, real options
models)
2-21
Program Valuation

Discounted cash flow analysis

DCF includes the identification of the net present value of a
project


Higher the NPV, the greater the project’s value
Real options analysis


Extension of the financial options models
Useful for projects that are uncertain and irreversible
2-22
Sample Program Template: Strategic
Initiative
Table 12.2a
2-23
Sample Program Template: Strategic
Initiative (cont’d)
Table 12.2b
2-24
Planning in a Multibusiness Firm






Allocate financial resources to the business units through
the internal capital market
Manage the portfolio of businesses to improve corporate
profitability
Manage relationships among the units
Centralize activities
Develop top down initiatives
Build an effective corporate infrastructure
2-25
Resource Allocation


Goal of resource allocation is to invest in and support
those businesses within the portfolio whose projects
produce the highest economic return for the firm
One tool is the Marakon profitability matrix:
2-26
Centralization and Transfers

Interbusiness relationships


The plan outlines how transfer policies are aligned with the
business units’ value and cost drivers.
Centralization of activities

The plan articulates how shared or centralized activities
contribute to business unit performance.
2-27
Top-down Initiatives and Corporate
Infrastructure

Top-down initiatives


The plan provides management with a vehicle to state its
intended initiatives, to develop programs to assess their impact,
and to identify where new initiatives are warranted
Corporate infrastructure

The plan offers an overview of how elements of the corporate
infrastructure (e.g., legal, IT, HR) contribute to business unit
performance or effective compliance
2-28