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Chapter 7 Choosing the Best Strategy A compass positioned on top of a checkbook. age fotostock / SuperStock Learning Objectives By the time you have...

Your text explains why it is important to select the appropriate criteria for strategic planning. Part of this process is establishing metrics to measure the progressive success of the strategic plan. Choose and discuss two metrics that an organization might consider when developing a strategic plan? What are some considerations or criteria that leaders utilize when developing a strategic plan? How might this process work in your current organization or a previous organization?

Chapter 7 Choosing the Best Strategy A compass positioned on top of a checkbook. age fotostock / SuperStock Learning Objectives By the time you have completed this chapter, you should be able to do the following: Select criteria appropriate to the company and its purposes, and appreciate that a wide variety of criteria exists. Use the criteria in a criteria matrix to evaluate strategic-alternative bundles to help select the best one. Recognize the differences between company, partial, functional, and operational objectives, and among objectives, goals, and strategies. Set company-wide objectives with more confidence. Decide on a strategic intent for the company and major programs required to implement the strategy. Understand why contingency planning is necessary and how to devise meaningful triggers and contingencies. Appreciate why the board of directors has to be kept informed and involved throughout the strategic decision-making process. This chapter explains how to choose the best strategy for the company from a number of viable alternatives using carefully selected criteria and how to argue persuasively for its adoption. It also shows how to arrive at the other strategic decisions and keep the board of directors involved through the process. 7.1 Selecting Appropriate Criteria Choosing among alternatives becomes a little easier when each alternative is compared one at a time against a set of criteria. Because such an analysis is often insufficient to decide an issue, the decision may eventually turn on more subjective analysis. What kinds of criteria are appropriate? Because one of the conditions for creating a good bundle is that if implemented, it would lead to success for the company, the criteria to evaluate the bundles should together represent what "success" means to the company and, perhaps, the overall purpose of the company. Depending on the company and its particular situation, the criteria explored in this section are possible candidates that could be used to examine a company's current standing and future outlook. A printout showing market trends. iStockphoto/Thinkstock One of the most important common criteria for choosing a strategy is revenue growth. Shareholder value is a fairly common criterion, not only for choosing from among alternative strategies but also from among alternative investments. It requires the firm to have a model for computing shareholder value so that the computation for each strategic alternative or investment uses common values of discount rates and common assumptions about the future environment. In this way, the results become comparable. Still, many managers and companies believe that one of the principal purposes of strategic planning is to increase shareholder value. So managers should know how to compute shareholder value. Additionally, strategic management and planning is based on an understanding of the relative contribution of brands to shareholder value (Rappaport, 1997). For example, the Coca-Cola brand accounts for 51% of the value of the Coca-Cola Company, which also includes 3,500 other brands such as Dasani, Sprite, and Schweppes (Coca Cola Company, n.d.). When managers have a solid understanding of brand value, they will use this aspect of shareholder value as a key criterion
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in planning. Revenue growth is one of the most common criteria, used more often when a firm's revenue growth has been inadequate or flat, or when issues of market share and market positioning are strategically significant. A striking recent example of revenue growth is illustrated by Iluka Resources, one of 2011's best stock- market performers. Iluka posted a 53% increase in revenue between the third and fourth quarters of 2011 (Iluka grows, 2012). Such performance is often a strong predictor of takeover, a strategic decision made based on the revenue-growth criterion. Profitability should be used when a firm has insufficient working capital or inadequate or negative cash flow, when profits in recent years have been flat or negative, or when it is highly leveraged. Leveraged buyouts (LBOs) rely on huge cash flows and profits during the first year following the LBO, so that the huge debt can be rapidly paid down. However, as a note of caution, it is relatively easy to "mortgage the future" in favor of present profits, for example, by reducing investment in R&D or new-product development, so that, as a criterion, shareholder value may be superior, taking into account as it does a 10-year future stream of earnings. A person holding a stack of $100 bills. Hemera/Thinkstock When a company is looking at the amount of investment money required from investors, an appropriate criterion to consider would be return on investments and how soon the investment may be recouped. Firms vary in their propensity to take risk. They are more inclined to take risks the more that risks have paid off for them in the past and when they have sufficient capital so that they can afford to make mistakes. But degree of risk or riskiness as a criterion is more than this. A firm's culture can, for example, be risk averse, in which case it will avoid risk even when the risk has odds of success that appear to favor it. Risk can be analyzed and measured, but few have the skills to perform such analyses. Instead, they prefer to make a risky decision according to instinct, or assess risk by venturing an opinion or two (guessing), or even ignoring any underlying risk. One way in which risk can be discussed among a group of people who are not risk analysts is as follows: Because all alternative bundles except "status quo" involve doing something the company has never done before, "risk" can be used as a subjective measure of the likelihood that it can implement the bundle successfully. Some alternatives are sure to score higher or lower than others when risk is viewed this way. Amount of investment required is a practical criterion. If a particular strategic alternative requires an amount of capital the firm does not have or cannot secure, then it shouldn't even be considered a bona fide alternative because it fails to meet the criterion of feasibility. Of course, the firm could borrow more money but must be careful not to exceed some value of debt-to-equity ratio required by its creditors or increase its debt to the point where its cash flow cannot service the debt. Obtaining equity capital may be relatively easy for a public company that has been performing well, but not so for a private company. In certain circumstances, the firm could go public and raise some equity capital; in other circumstances, that may not be possible. A firm could find a partner to share some of the risk and put up some of the capital required. But in this case, profits resulting from the strategy must also be shared. Finally, being acquired by the right company could provide the capital needed to finance a strategy, but this step is drastic and should be taken only in the best interests of the company, not just as a means of raising capital. For instance, SEOmoz software CEO and founder Rand Fishkin provided a detailed account in his blog of his experience negotiating an acquisition that ultimately didn't make sense for his company (Fishkin, 2011). In its most simplistic application, all other things being equal, it makes more sense to choose a bundle that requires less investment over another that requires more. Even when a company can come up with the investment required by a particular
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Chapter 8 Operational and Budget Planning An image of a calculator on a printout of a bar graph. Royalty-free 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 this 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. 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 decision 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 A social system within a corporation, shown as a group of people having an informal meeting. SOMOS / SuperStock The world is made up of systems. Systems are a set of interacting or independent components forming an integrated whole. Corporations are complex social systems. For the most part, our world is made up of systems 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. A system is a set of interacting or interdependent components forming an integrated whole. Corporations are complex social systems, consisting of individuals and units that work together (or not) to produce products or services for their customers that ensure their survival. 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 the nature of the boundaries between the organization and the outside world. The more permeable 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 organization 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 boundaries are known as open systems and are preferred to closed systems for their greater functionality 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
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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 strategy. 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 be cognizant that affecting one part of the system affects other parts and furthermore that decisions 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 organization, especially those between which there is an output-input relationship. The higher one's position 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 activities 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 interact, depending on the data and kind of model created, results are often counterintuitive. Management-Information Systems (MIS) Every day, at every level in the organization, decisions are 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 independently. 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 question also couldn't be answered. And these are operational decisions. We already know that strategic 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
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It is true that metrics plays a very important role in strategic planning because it helps the
executives in collecting the data and taking the right decision as according to the situation. But to...

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