CHAPTER 7 Basic Elements of Planning and Decision Making Part III of this book is entitled PLANNING AND DECISION MAKING. Its fundamental purpose is to discuss the first basic management function—planning and decision making. Part III has four chapters. Chapter 7 introduces the basic elements of planning and decision making. Chapter 8 focuses on strategy and strategic planning. Chapter 9 addresses the management of decision making. Entrepreneurship is the focus of Chapter 10. Teaching Tip: Some instructors prefer to cover the material in Chapter 10 separately at the end of the course. If you prefer this method, the chapter is written so that it can be covered “out of sequence.” CHAPTER SUMMARY Chapter 7 is the first of four devoted to planning and decision making. Its purpose, therefore, is to introduce the basic elements of this management function and to build a foundation for the more detailed coverage of the material that follows in the remaining chapters of the part. LEARNING OBJECTIVES After covering this chapter, students should be able to: 1. Summarize the function of decision making and the planning process. 2. Discuss the purpose of organizational goals, identify different kinds of goals, discuss who sets goals, and describe how to manage multiple goals. 3. Identify different kinds of organizational plans, note the time frames for planning, discuss who plans, and describe contingency planning. 4. Discuss how tactical plans are developed and executed. 5. Describe the basic types of operational plans used by organizations. 6. Identify the major barriers to goal setting and planning, how organizations overcome those barriers, and how to use goals to implement plans. American International Group (AIG) benefitted financially by acting as the insurer for insurance companies. In effect, it mitigated the risks for insurance companies by taking on those risks itself. When the bottom fell out of the housing market in 2007, AIG lost billions of dollars and showed how risks its strategy was. Teaching Tip: Take a couple of insurance and investment banking companies as examples – say, Travelers and Goldman Sachs – and examine how these companies managed their risks. LECTURE OUTLINE I. DECISION MAKING AND THE PLANNING PROCESS Teaching Tip: Stress for students that the planning process portrayed in Figure 7.1 reflects an orderly and logical sequence of steps. In reality, of course, the actual planning process used in any given situation will likely reflect some variation in this process. Decision making drives planning. Decisions underlie the establishment of organizational goals, for example, and the formulation and implementation of all plans. In order to plan effectively, managers must understand the environmental context in which the organization exists. They must establish a mission that includes the organization’s purpose, premises, values, and directions. Strategic goals and plans are devised from the mission statement; tactical goals and plans are generated from the strategic goals and plans; and operational goals and plans are devised from the tactical goals and plans. Cross-Reference: Note for students that we are simply introducing decision making here. It is covered much more thoroughly in Chapter 9. II. ORGANIZATIONAL GOALS A. Purposes of Goals Goals help to achieve four purposes. 1. Goals provide guidance and a unified direction for people in the organization. 2. Goals promote good planning. 3. Goals motivate employees. 4. Goals provide an effective mechanism for evaluation and control. Discussion Starter: Ask students to think about their own personal goals. Then ask them to evaluate each of those goals in terms of the purpose it serves. B. Kinds of Goals 1. There are four basic levels of goals. An organization’s mission is a statement of its fundamental, unique purpose that sets it apart from other firms of the same type. The mission also identifies the scope of the business’s operations in product and market terms. Strategic goals are set by and for the top managers of the organization who focus on broad, general issues. Tactical goals are set by and for middle managers who focus on how to operationalize actions necessary to achieve the strategic goals. Operational goals are set by and for lower-level managers who focus on shorter-term issues associated with the tactical goals. 2. Goals are set for different areas such as finance, marketing, or human resources. 3. Goals are set across different time frames (long-term, intermediate-term, and short-term). The length of each time frame differs by level. C. Responsibilities for Setting Goals All managers should be involved, but each manager generally is responsible for setting goals that correspond to his or her level in the organization. Teaching Tip: Figure 7.2 illustrates the kinds of organizational goals that might be set for a regional fast-food restaurant chain. Group Exercise: After discussing the material in the section titled “Kinds of Goals”, have students construct a hypothetical hierarchy of goals like those shown in Figure 7.2 for different kinds of organizations such as a retailer, a manufacturer, a college or university, and so forth. D. Managing Multiple Goals Goals set by different areas or at different levels may conflict. Optimizing involves balancing and reconciling possible conflicts between goals. Discussion Starter: Ask students to identify situations in which they have had to optimize multiple goals. A very relevant example for students is the trade-off between socializing and studying for a test or between studying for multiple tests during final exam periods. III. ORGANIZATIONAL PLANNING A. Kinds of Organizational Plans 1. Strategic plans—general plans that outline the decisions of resource allocation, priorities, and action steps necessary to reach strategic goals, which are set by the board of directors and top management and have an extended time frame. Cross-Reference: Note that strategic plans are discussed in detail in Chapter 8. 2. Tactical plans—developed to implement specific parts of a strategic plan. Typically, a tactical plan involves upper and middle managers and has a shorter time frame than the strategic plan. 3. Operational plans—focus on carrying out the tactical plans in order to achieve operational goals. They are developed by middle and lower-level managers and have a short-term focus. B. Time Frames for Planning 1. Long-range plans cover many years and vary in length from organization to organization. For our purposes, any plan that extends beyond five years is considered a long-range plan. 2. Intermediate plans cover periods from one to five years and parallel tactical plans. 3. Short-range plans—have a time frame of one year or less and affect a manager’s day-to-day activities. An action plan serves to operationalize any other kind of plan. A reaction plan is a plan designed to allow the company to react to an unforeseen circumstance. C. Responsibilities for Planning 1. Planning staff—The planning staff is a group of planning professionals who help reduce the planning workload of individual managers, help coordinate the planning activities of individual managers, and provide tools and techniques needed to solve problems. Management Update: Planning staffs were once very popular and used by virtually all large organizations. In recent years, however, many firms have cut back or eliminated their planning staffs. This was done to save money and with the idea that operating managers are really more qualified to develop plans. A few experts are still kept on staff, however, to provide support and technical advice. Management Update: As a corollary to the point noted above, planning task forces have become more popular in recent years as firms have attempted to get their operating managers more involved in planning. Extra Example: Tenneco is a good example of a firm that has taken this approach. While Tenneco still has a planning staff, it is much smaller than it was a few years ago. Its members usually provide support for planning task forces composed of operating managers. 2. Planning task force—A planning task force is a group of line managers with a special interest in the area of planning who are grouped together to address a particular issue. Members of the planning staff also may be included in the task force. Management Update: As the role of planning task forces has increased, so too has the role of executive committees. These committees provide a natural analog to a planning task force. That is, the executive committee can represent senior management, and a planning task force can represent line management. The two groups can then work together to effectively develop plans. 3. Board of directors—The board of directors establishes the corporate mission and strategy. 4. Chief executive officer—The CEO plays a major role in the complete planning process and is responsible for implementing the strategy. 5. Executive committee—The executive committee provides input to the CEO on the proposals that affect their own units and reviews the various strategic plans that develop from this input. Extra Example: Again, this closely mirrors the approach used at Tenneco today. The firm’s executive committee works with planning task forces, with the efforts of both supported and assisted by a small planning staff. 6. Line management—Line managers are individuals with formal authority and responsibility for the management of the organization. They provide valuable inside information as plans are formulated and implemented, and they execute the plans developed by top management. D. Contingency Planning Contingency planning is the determination of alternative courses of action to be taken if an intended plan of action is unexpectedly disrupted or rendered inappropriate. Contingency planning usually involves various action points that are used to identify the need to implement alternative plans. Extra Example: Starbucks recently developed a contingency plan. Recent frosts in Brazil drove up the price of coffee beans to the point that Starbucks increased its own prices by 10 percent. It then developed a contingency plan for dealing with future pricing alternatives. If the price of beans drops to previous levels, Starbucks will lower its own prices back to previous levels as well. If bean prices remain high, however, Starbucks will also keep its own prices high. Discussion Starter: Ask students to recall examples of times when they have engaged in contingency planning. A closely related concept is crisis management—the set of procedures the organization uses in the event of a disaster or other unexpected calamity. IV. TACTICAL PLANNING Tactical plans are an organized sequence of steps designed to execute strategic plans. A. Developing Tactical Plans Tactical plans must address a number of tactical goals derived from a broader strategic goal, must deal with specific resource and time issues, and require the use of human resources. B. Executing Tactical Plans For proper execution of tactical plans, a manager must evaluate possible courses of action in light of the goal, make sure each decision maker has the information and resources necessary to get the job done, ensure vertical and horizontal communication to minimize conflicts and inconsistent activities, and monitor ongoing activities derived from the plans to make sure the desired end results are achieved. V. OPERATIONAL PLANNING A. Single-Use Plans A single-use plan is developed to carry out a course of action that is not likely to be repeated in the future. 1. Program—a single-use plan for a large set of activities Extra Example: In 2009, Disney acquired Marvel Comics. The process of integrating the two companies was a program. 2. Project—similar to a program, but generally of less scope and complexity B. Standing Plans A standing plan is used for activities that recur regularly over a period of time. 1. Policy—specify the organization’s general response to a designated problem or situation. Discussion Starter: Give students several examples of policies at your college or university, for example, the school’s policy regarding scholastic honesty or sexual harassment. Ask the students to describe why that policy was developed. In the students’ opinion, is the policy adequately addressing the problem? 2. Standing operating procedure (SOP)—outlines the steps to be followed in particular circumstances. 3. Rules and regulations—describe exactly how specific activities are to be carried out. Interesting Quote: McDonald’s is famed for its SOPs and rules and regulations. To see where this mentality comes from, consider this quote from Ray Kroc, founder of McDonald’s: “The French Fry has become almost sacrosanct for me. Its preparation is a ritual to be followed religiously.” (Fortune, July 3, 1989, 80.) Discussion Starter: Ask students for examples of rules and regulations they have encountered that they did not understand. Group Exercise: Form students into small groups of four or five members each. Have each group identify a rule or regulation. Then have them attempt to find out when and why that rule or regulation was adopted, and how many exceptions are made to it. VI. MANAGING GOAL-SETTING AND PLANNING PROCESSES A. Barriers to Goal Setting and Planning Cross-Reference: Note that Table 7.2 summarizes the barriers to effective goal setting and planning and also lists the methods for overcoming those barriers. 1. Goals may be inappropriate if they are unattainable, if achieving them will mean a setback in another area, and if they place too much emphasis on either quantitative or qualitative measures of success. Extra Example: Athletic departments are sometimes guilty of having inappropriate goals. That is, they may put so much emphasis on winning that they break rules in order to gain a competitive advantage. 2. Improper reward systems can act as a barrier to goal setting and planning. Extra Example: Following from the boxed insert above, reward systems may also encourage this behavior in athletic departments. That is, coaches may be rewarded only for winning even though they may make other contributions and may be doing other parts of their jobs well. Similarly, coaches have been fired for not winning, even though they are performing the rest of their job effectively. 3. How quickly the organization’s environment changes (how dynamic and complex the environment is) can be a barrier to effective goal setting. 4. Some managers are reluctant to establish goals for themselves and their units and act as a barrier to effective planning. 5. People resist change, and because they do, they may become a barrier to goal setting and planning. Cross-Reference: Note that resistance to change is discussed more fully in Chapter 13. 6. Constraints or limits on what an organization can do or is allowed to do can act as a barrier to goal setting and planning. B. Overcoming the Barriers 1. Managers must recognize the purpose and limits of goal setting and planning. 2. People responsible for achieving the goals and implementing the plans should be involved in the process from the beginning. Further, it is important to communicate to everyone involved in the process the overriding organizational and functional strategies and how they will be integrated. 3. Goals should be consistent horizontally, across the organization, and vertically, up and down the organization. Goals and plans need to be revised and updated regularly. 4. People should be rewarded for establishing effective goals and plans and for successfully achieving them. C. Using Goals to Implement Plans Formal goal setting, sometimes called management by objectives or MBO, is a widely used method for managing the goal-setting and planning processes concurrently to make sure that both are done effectively. 1. The purpose of formal goal setting is to give subordinates a voice in the goal-setting and planning processes and to clarify for them exactly what they are expected to accomplish in a given time span. Discussion Starter: Ask students if they have ever worked under a formal goal-setting system. Extra Example: Managers at Cypress Semiconductor use a comprehensive form of MBO to guide virtually all performance. Each employee has dozens of goals, all of which are stored and continually updated in a central computer network. 2. The process of formal goal setting must start at the top. Top managers must communicate why they adopted the process, what it will accomplish, and that they are committed to it. Employees must be educated about formal goal setting and it must be implemented in a consistent manner. The process begins with collaborative goal setting between a manager and a subordinate as the goals are clarified and written down. The resources needed to achieve the goals are discussed and periodic reviews are held to ensure the subordinate is on track in achieving the goals. 3. Formal goal setting can be effective in improving employee motivation, enhancing communication, and making performance appraisals more objective. The process can be ineffective if top management does not support it, if lower-level managers and employees do not accept the goals of the organization, or if there is an overemphasis on quantitative goals and plans. Group Exercise: Have students develop a formal goal-setting system that could be used in teaching a class such as this one. CHAPTER 8 Managing Strategy and Strategic Planning CHAPTER SUMMARY This chapter discusses how organizations manage strategy and strategic planning. It begins by examining the nature of strategic management including its components and alternatives. It then describes the kinds of analyses needed for firms to formulate their strategies. Next it examines how organizations first formulate and then implement business strategies, followed by a parallel discussion at the corporate strategy level. The chapter concludes with a discussion of international and global strategies. LEARNING OBJECTIVES After covering this chapter, students should be able to: 1. Discuss the components of strategy, types of strategic alternatives, and the distinction between strategy formulation and strategy implementation. 2. Describe how to use SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis in formulating strategy. 3. Identify and describe various alternative approaches to business-level strategy formulation. 4. Describe how business-level strategies are implemented. 5. Identify and describe various alternative approaches to corporate-level strategy formulation. 6. Describe how corporate-level strategies are implemented. 7. Discuss international and global strategies. Toyota’s hybrid car, the Prius, is a huge success ever since it was launched in 2000 in the U.S. Its fuel economy and its reduced emissions have attracted a loyal cadre of buyers. However, as the opening case points out, Toyota has been affected by changes in the external environment. In general, hybrid cars sell well when fuel prices are high. But when fuel prices fall, Americans tend to go in for larger cars and SUVs. In addition, Toyota has to deal with the antipathy of its erstwhile supporter, Union of Concerned Scientists (UCS), which is now accusing Toyota of joining with the other automakers to ask for lower fuel economy standards. Discussion Starter: Ask students to describe if they would buy a hybrid car? Would they buy a Prius knowing that Toyota seeks lower CAFÉ standards as do the other car makers? LECTURE OUTLINE I. THE NATURE OF STRATEGIC MANAGEMENT A strategy is a comprehensive plan for accomplishing a firm’s goals. Strategic management is a comprehensive and ongoing process aimed at formulating and implementing effective strategies. Effective strategies are those that promote a superior alignment between the firm and its environment and the achievement of strategic goals. A. The Components of Strategy 1. A distinctive competence is something a firm does exceptionally well. Management Update: For decades, Volvo has been associated with cars that are exceptionally safe. Other car makers seem unable or unwilling to compete with Volvo in those areas. Teaching Tip: Emphasize for students that a distinctive competence always exists in a limited area and does not imply competencies in other areas. For example, Volvos are not known for their sporty performance or their trend-setting appearance. In another example, Wal-Mart has a distinctive competence in keeping prices low, but it is not especially good at offering high-quality products or exceptional service. 2. Scope specifies the range of markets in which a firm will compete. Global Connection: For an international business, the scope component of strategy specifies in which foreign markets the firm intends to compete. 3. Resource deployment specifies how a firm will distribute its resources across the areas in which it competes. Global Connection: For an international business, the resource deployment component of strategy helps determine the relative concentration of firm resources and efforts in various markets. B. Types of Strategic Alternatives 1. Business-level strategy consists of the set of strategic alternatives that a firm chooses from as it conducts business in a particular industry or market. 2. Corporate-level strategy consists of the set of strategic alternatives that a firm chooses from as it manages its operations simultaneously across several industries and several markets. Teaching Tip: Strongly reinforce the point here distinguishing between business- and corporate-level strategies. Extra Example: A good example that helps distinguish between business- and corporate-level strategies is PepsiCo. Among other things, PepsiCo owns Pepsi soft drinks and Frito-Lay (Doritos, Ruffles, etc.). Determining which businesses PepsiCo will own is part of its corporate-level strategy; deciding how each separate business will compete is part of its business-level strategy. Teaching Tip: An additional level of strategy is functional level. This refers to strategies developed for specific functional areas such as marketing, finance, and so forth. C. Strategy Formulation and Implementation 1. Strategy formulation—the set of processes involved in creating or determining the strategies of the firm. 2. Strategy implementation—the methods by which strategies are operationalized or executed within the business. 3. Deliberate strategy—a plan chosen and implemented in order to support specific goals. 4. Emergent strategy—a pattern of action that develops over time in the absence of missions and goals, or despite missions and goals. Discussion Starter: Ask students whether Volkswagen’s reintroduction of the Beetle reflects a deliberate or an emergent strategy. (In reality, it has elements of both—VW knew it needed to do something, which reflects deliberation. But the new Beetle itself was first developed as a concept car and was only produced when there was unexpectedly strong response to it.) II. USING SWOT ANALYSIS TO FORMULATE STRATEGY SWOT—acronym that stands for Strengths, Weaknesses, Opportunities, and Threats. The best strategies (1) exploit opportunities and strengths, (2) neutralize threats, and (3) avoid (or correct) weaknesses. A. Evaluating an Organization’s Strengths Organizational strengths—skills and capabilities that enable a firm to conceive of and implement its strategies. 1. Common organizational strengths—a capability possessed by a large number of competing firms. Competitive parity exists when large numbers of competing firms are able to implement the same strategy. 2. Distinctive competencies—a strength possessed by only a small number of competing firms. Firms that exploit their distinctive competencies often obtain a competitive advantage and attain above-normal economic performance. 3. Imitation of distinctive competencies—the practice of duplicating another firm’s distinctive competence and thereby implementing a valuable strategy. A sustained competitive advantage is a competitive advantage that exists after all attempts at strategic imitation have ceased. Reasons a distinctive competence might not be imitable: a) Its acquisition or development may depend on unique historical circumstances that other firms cannot replicate. b) Its nature and character might not be known or understood by competing firms. c) It is based on complex social phenomena like teamwork or culture. Extra Example: Price competition is among the easiest strategies to imitate. For example, any time an airline lowers its prices to attract new customers, competing airlines are able to imitate its strategy within hours. Discussion Starter: If a low-price strategy is easily imitated, is it likely to lead to a sustainable competitive advantage? Students should realize that that is unlikely. On the other hand, how has low pricing created a sustainable competitive advantage for Wal-Mart? Hint: The students should examine how the low prices are achieved. They will find that Wal-Mart’s actions, such as automating many functions and developing close relationships with suppliers, are themselves not readily imitated. Extra Example: During World War II, Coca-Cola’s CEO decreed that every U.S. soldier abroad should have access to a 5-cent bottle of Coke. With government assistance, the firm built 64 overseas bottling plants. This early entry into global markets gave Coke an advantage over Pepsi that it has never relinquished. B. Evaluating an Organization’s Weaknesses Organizational weaknesses—skills and capabilities that do not enable a firm to choose and implement strategies that support its mission A firm has a competitive disadvantage when it is not implementing valuable strategies that are being implemented by competing firms. C. Evaluating an Organization’s Opportunities and Threats 1. Organizational opportunities—areas that may generate higher performance 2. Organizational threats—areas that make it difficult for a firm to perform at a high level Discussion Starter: Ask students if they think it is easier to assess environment opportunities and threats or organizational strengths and weaknesses. While the latter are more “immediate,” such analysis may also pose threats to individuals within the organization. Cross-Reference: Porter’s five forces model of the competitive environment discussed in Chapter 3 can be used to characterize the extent of opportunity and threat in an organization’s environment. Porter’s five forces are the level of rivalry, power of suppliers, power of customers, threat of substitutes, and threat of new entrants. Group Exercise: Have small groups of students outline a hypothetical SWOT analysis of a local firm and/or your college or university. III. FORMULATING BUSINESS-LEVEL STRATEGIES Teaching Tip: Reinforce again the distinction between business- and corporate-level strategies. Use the PepsiCo example to illustrate formulation and implementation across different levels to remind students of the distinctions. There are three approaches to formulating business-level strategy. A. Porter’s Generic Strategies 1. Differentiation strategy—firm seeks to distinguish itself from competitors through the quality of its products or services Teaching Tip: Note the examples listed in Table 8.1 of the text . As you discuss Porter’s generic strategies, ask students to suggest other examples. 2. Overall cost leadership strategy—firm attempts to gain a competitive advantage by reducing its costs below the costs of competing firms 3. Focus strategy—firm concentrates on a specific market, product line, or group of buyers Global Connection: A good example of the focus strategy is cosmetics and personal care products maker Aveda, which only manufactures products that are made from natural, botanical ingredients. The firm’s products are designed to appeal to customers who are interested in ecology, the environment, or animal’s rights. B. The Miles and Snow Typology 1. Prospector strategy—seeks out new markets and new opportunities and is oriented toward growth and risk taking; a highly innovative firm. Global Connection: Sony also uses a prospector strategy. The firm is constantly on the alert for new product ideas and/or ways to extend its current products into new markets. 2. Defender strategy—concentrates on protecting current markets, maintaining stable growth, and serving current customers. Extra Example: Another good example of a defender is Domino’s Pizza. After losing ground to Pizza Hut and Little Caesar’s, Domino’s has been aggressively working to protect its current market share and gain back what was lost. In contrast to Sony which is a prospector, Matsushita is a defender in the consumer electronics industry. 3. Analyzer strategy—combines elements of prospectors and defenders. Extra Example: Dell Computer also uses an analyzer strategy. Its expansion outside of the personal computer market has been slow and gradual, and it keeps as its primary orientation the protection of its lucrative direct sales niche. 4. Reactor strategy—has no consistent strategic approach; drifts with events, reacting to but failing to anticipate or influence those events. Extra Example: Kmart might be a good example of a reactor. After once ruling the discount world, the firm grew complacent and was eventually passed by Wal-Mart. It had to merge with Sears in order to have a chance of survival. C. Strategies Based on the Product Life Cycle Product life cycle—a four-stage model that shows how sales volume changes over the life of products. Different stages of the life cycle call for different strategies 1. Introduction stage—demand may be very high and sometimes outpaces the firm’s ability to supply the product. Strategies focus on increasing production, keeping quality high, and managing cash flow. 2. Growth stage—more firms begin producing the product and sales continue to grow. Strategies focus on improving quality and differentiating. 3. Maturity stage—overall demand growth for a product begins to slow down and the number of new firms producing the product begins to decline. Strategies focus on keeping costs low and introducing further refinements to the product. 4. Decline stage—demand for the product or technology decreases, the number of organizations producing the product drops, and total sales decline. Strategies focus on finding new uses or markets for the product and keeping costs low. Discussion Starter: Ask students to identify examples of current products or services that appear to be at each stage of the product life cycle. Global Connection: Some firms extend product life cycles by introducing them into less-developed foreign markets. For example, a line of home appliances that is entering the decline stage in Japan, Europe, or the United States might be seen as advanced technology in less developed regions. IV. IMPLEMENTING BUSINESS-LEVEL STRATEGIES A. Implementing Porter’s Generic Strategies Teaching Tip: Note the role and importance of basic business functions in implementing business strategies. 1. Differentiation strategy a. Marketing and sales—emphasize the high-quality, high-value image of the organization’s products or services. b. Accounting and finance—control the flow of funds without discouraging the creativity needed to constantly develop new products and services to meet customer needs. c. Manufacturing—emphasize quality and meeting specific customer needs, rather than simply reducing costs. d. Culture—emphasize creativity, innovation, and response to customer needs. Extra Example: The human resource function can also help implement a differentiation strategy by hiring people who can do high-quality work and training them to perform to the quality standards set by the firm. 2. Overall cost leadership strategy a. Marketing and sales—focus on simple product attributes and how these product attributes meet customer needs in a low-cost and effective manner. b. Accounting and finance—reduce costs through tight financial and accounting controls. c. Manufacturing—emphasize increased volume of production to reduce the per unit costs of manufacturing. d. Culture—focus on improving the efficiency of manufacturing, sales, and other business functions. Discussion Starter: Ask students to suggest circumstances under which a firm that has successfully been using one generic strategy might choose to implement a different generic strategy. B. Implementing Miles and Snow’s Strategies 1. Prospectors need to encourage creativity and flexibility. Decentralization often
facilitates this. 2. Defenders tend to downplay creativity and innovation, focusing efforts on lowering costs or improving the performance of current products. 3. Analyzers must maintain their current businesses and be somewhat innovative in new businesses. Discussion Starter: Again, solicit ideas about why a firm that is successfully pursuing one of Miles and Snow’s strategies might appropriately decide to implement a different one. Group Exercise: Have groups of students identify differences and similarities between Porter’s generic strategies and Miles and Snow’s strategies. V. FORMULATING CORPORATE-LEVEL STRATEGIES Teaching Tip: Again, reinforce the distinction between business-level and corporate-level strategies. Use again the PepsiCo example to remind students of the differences. Most large businesses are engaged in several businesses, industries, and markets. Each business or set of businesses within such a firm is frequently referred to as a strategic business unit, or SBU. Extra Example: PepsiCo is organized around two SBUs—packaged drinks (Pepsi, Lipton, etc.) and snack foods (Frito-Lay). Diversification—the number of different businesses that a firm is engaged in and the extent to which these businesses are related to one another A. Single-Product Strategy Single-product strategy—manufacturing just one product or service and selling it in a single geographic market B. Related Diversification Related diversification—operating multiple businesses that are related to one another 1. Bases of relatedness include common technology, common distribution network, common marketing skills, common brand names and reputation, and common customers. Discussion Starter: Ask students to identify the bases of relatedness between Starbucks coffee and Starbucks ice cream. Extra Example: Ford’s purchase of Jaguar a few years ago (it is now owned by Tata Motors) was an example of related diversification. 2. Advantages of related diversification a) Reduces a firm’s dependence on any one of its business activities and thus reduces economic risk. b) Reduces the overhead costs associated with managing any one business. c) Allows a firm to exploit its strengths and capabilities in more than one business (creates synergies). d) Synergy exists among a set of businesses when the businesses’ economic value together is greater than their economic value separately. Extra Example: A recent trend in organizations today is a reduction in the number of businesses, to create an organization that consists of SBUs that are highly related. Examples include Vivendi’s divestiture of publishing and water utilities in order to focus on electronic media. In another example, Georgia Pacific sold its timber units and refocused on building and paper products. Extra Example: However, when Georgia Pacific considered separating its paper products division from its building products division and creating two companies, investors failed to support the firm, showing that the separation was not seen as creating synergy. C. Unrelated Diversification Unrelated diversification—operating multiple businesses that are not related to one another 1. Presumed benefits: businesses that use this strategy should have stable performance over time and resource allocation advantages. 2. Actual disadvantages: Corporate-level managers may not know enough about the unrelated businesses to provide helpful strategic guidance or to allocate capital appropriately. Also, because firms that implement unrelated diversification fail to exploit important synergies, they are at a competitive disadvantage compared to firms that use related diversification. Extra Example: General Electric is perhaps the most successful firm today that still uses unrelated diversification. GE owns businesses in such disparate industries as aircraft engines, appliances, finance and insurance, and plastics. Extra Example: Seagram’s, a large liquor company, once bought MCA, an entertainment business, from Matsushita Electric. This represents a case of unrelated diversification. VI. IMPLEMENTING CORPORATE-LEVEL STRATEGIES A. Becoming a Diversified Firm 1. A firm can diversify by internal development of its own new products and services within the boundaries of its traditional business operations. Extra Example: The Limited, which began as a women’s clothing chain, added units such as Structure, a men’s clothing chain, Limited Express for more trendy, less expensive styles, and Limited, Too, for children’s fashions. In addition, the firm developed the concepts that became the White Barn Candle Co. and Bath and Body Works. 2. A firm can also become diversified by replacing its former suppliers and customers. a) Backward vertical integration—occurs when a firm stops buying supplies from other companies and begins to provide its own supplies. b) Forward vertical integration—occurs when a firm stops selling to one customer and sells instead to that customer’s customers. Extra Example: In the 1990s, Disney used forward vertical integration when it opened a chain of retail stores to sell Disney products directly to consumers, rather than going through other retailers, as it had done in the past. Extra Example: Many petroleum firms have implemented both backward and forward vertical integration—they extract petroleum, refine it, distribute it, and retail it. 3. Mergers and acquisitions—when two firms are combined Management Update: With the decline in the stock market that began in 2001, mergers and acquisitions are no longer as popular as they were in the 1990s. Companies that merge today are finding it hard to obtain financing for the giant deals. a) Merger—occurs when the two organizations being combined are approximately the same size and a new firm is created. Extra Example: Daimler-Benz and Chrysler merged in 1998, creating the world’s third-largest automobile company. Citibank and Traveler’s Insurance merged, creating Citigroup, the largest financial services firm in the U.S. More recent mega-mergers include the Newell-Rubbermaid and
the Kmart-Sears mergers b) Acquisition—occurs when one of the firms buys the other outright. Extra Example: The Limited has also grown by acquisition. It purchased Lane Bryant (clothes for larger women) and later sold it. It also purchased Victoria’s Secret intimates stores and Abercrombie and Fitch, a popular brand of clothing geared toward young adults. B. Managing Diversification Portfolio management techniques—methods that diversified firms use to make decisions about what businesses to engage in and how to manage these multiple businesses. 1. BCG matrix—provides a framework for evaluating the relative performance of businesses in which a diversified organization operates. The matrix uses two factors to evaluate a firm’s set of businesses: market growth rate and market share. The matrix classifies the types of businesses that a diversified firm can engage in. a) Dogs are businesses that have a very small share of a market that is not expected to grow. b) Cash cows are businesses that have a large share of a market that is not expected to grow substantially. c) Question marks are businesses that have only a small share of a quickly growing market. d) Stars are businesses that have the largest share of a rapidly growing market. Group Exercise: Have groups of students research and collect information about a large diversified firm. (Disney, General Motors, Sears, or Procter and Gamble would all make good examples.) Then have the groups classify the firm’s various businesses into the four cells of the BCG matrix. Teaching Tip: Use Figure 8.3 as a framework for discussing the BCG matrix. 2. GE Business Screen A more sophisticated approach than the BCG matrix, using a nine-cell matrix. Note that using the GE Business Screen parallels the application of SWOT analysis. Teaching Tip: General Electric developed the Business Screen as a refinement and extension of the BCG matrix. Group Exercise: If you had your students do the exercise discussed earlier (classifying a firm’s businesses into BCG matrix cells), have them repeat the exercise (using the same information) for the GE Business Screen. VII. INTERNATIONAL AND GLOBAL STRATEGIES A. Developing International and Global Strategies Managers of international firms face more complexity and uncertainty in formulating and implementing strategies, but their firms also may be able to exploit three sources of competitive advantage. 1. International firms can better exploit global efficiencies. a) Location efficiencies allow firms to locate facilities wherever they can best obtain a cost or differentiation advantage. Global Connection: Microsoft employs many software engineers in India to produce programs for the firm. This is a location efficiency because they are able to obtain high-quality work at a much lower cost than in the U.S. b) Economies of scale enable firms to lower their per unit cost of production because they are manufacturing in large quantities and in facilities that serve several regions. c) Economies of scope lower production costs per unit by sharing expenses across broader product lines. 2. Multimarket flexibility gives firms the ability to respond to changes in one region by making changes to their operations in other regions. 3. Worldwide learning is another advantage for international firms because firms can adopt best practices from wherever they are developed. 4. In practice, however, international firms are not usually able to exploit all three of these advantages simultaneously. For example, location efficiencies require centralization, while worldwide learning requires a more decentralized approach. B. Strategic Alternatives for International Business 1. Firms that use the home replication strategy apply the distinctive competences they developed in their home market to the foreign markets that they enter. This strategy works best when the firm’s competences are valuable in many different types of markets. 2. The multidomestic strategy is used by firms that manage a portfolio of international business as relatively autonomous and independent units. This strategy works best when national demands for customization are high. 3. Firms following a global strategy are doing exactly the opposite of those using a multidomestic strategy. That is, they are standardizing across all countries. This strategy works best for a commodity-like product or in an industry that demands high efficiency. 4. Firms that pursue both centralization and decentralization at the same time, using whichever approach makes more sense in the particular circumstances, are using a transnational strategy. This strategy works best for complex industries and for companies with highly-skilled international managers. CHAPTER 9 Managing Decision Making and Problem Solving CHAPTER SUMMARY This chapter deals with managerial decision making and problem solving. As noted in Chapter 1, decision making relates to all management functions. However, it is most closely related to planning, so we discuss it here in the planning section of the book. After exploring the nature of decision making, we discuss rational and behavioral perspectives on decision making. This is followed by a discussion of group and team decision making. LEARNING OBJECTIVES After covering this chapter, students should be able to: 1. Define decision making and discuss types of decisions and decision-making conditions. 2. Discuss rational perspectives on decision making, including the steps in rational decision making. 3. Describe the behavioral aspects of decision making. 4. Discuss group and team decision making, including the advantages and disadvantages of group and team decision making and how it can be more effectively managed. The chapter opening case profiles the rise of Citibank during the heady days of the mortgage boom and its eventual fall where the sub-prime mortgage crisis hit the economy. By the end of 2008, Citibank’s losses totaled $65 billion, its CEO and several top managers were fired and the government had to bailout the bank. The underlying cause was poor decision making and inadequate controls. Management Update: Vikram Pandit was appointed chief executive officer to succeed Charles Prince (an interim CEO was appointed immediately after Prince’s resignation). LECTURE OUTLINE I. THE NATURE OF DECISION MAKING Management Update: In 2006, Disney acquired Pixar for over $7 billion, thus ending months of speculation as to the future of the relationship between these strategic alliance partners. The two companies had enjoyed a lucrative run for many years, but relationship between Disney’s Michael Eisner and Pixar’s Steve Jobs had been testy in recent times. However, with Robert Iger taking over from Eisner as Disney’s CEO, the two companies were able to agree on this important deal. In 2009, Disney acquired Marvel for over $4 billion. A. Decision Making Defined 1. Decision making is the act of choosing one alternative from among a set of alternatives. 2. The decision making process includes recognizing and defining the nature of a decision situation, identifying alternatives, choosing the “best” alternative, and putting it into practice. a) “Best” implies that decisions should be effective in helping the organization achieve its goals. b) Decisions can be made in response to either problems or opportunities. c) Outcomes of decisions may occur long after the decision is made. Teaching Tip: Make sure students see the subtle distinctions between decision making and the decision making process. B. Types of Decisions 1. A programmed decision is one that is fairly structured or recurs with some frequency or both. Extra Example: Wal-Mart is an example of a firm that relies heavily on programmed decision making. Whenever inventory levels of various products such as coffee makers, electric drills, and folding chairs drop below a predetermined level, replacements are automatically ordered. Teaching Tip: Provide students with an example of a school-related programmed decision that affects them. For example, course offerings, enrollment limits, and exam schedules are often set using programmed decision rules. 2. A nonprogrammed decision is relatively unstructured and occurs much less often. Group Exercise: Ask student groups to identify three examples each of programmed and non-programmed decisions that they have recently made or been affected by. Discussion Starter: Point out to students that programmed decisions are usually less critical to the firm and are made at lower levels of the organization, while nonprogrammed decisions involve top management and important issues. Ask them to explain why this is so. Can the students think of any exceptions, and why did they occur? C. Decision-Making Conditions 1. Decision making under certainty occurs when the decision maker knows with reasonable certainty what the alternatives are and what conditions are associated with each alternative. Teaching Tip: Stress the fact that few management decisions are actually made under a condition of certainty. For example, it is impossible to know with certainty what competitors will do, what new technologies will develop, and so forth. 2. Decision making under risk occurs when the availability of each alternative and its potential payoffs and costs are all associated with probability estimates. Extra Example: Stock analysts are able to make predictions about the price movement of individual stocks or the market as a whole, based on probabilities that were derived from a study of historical stock prices. 3. Decision making under uncertainty occurs when the decision maker does not know all the alternatives, the risks associated with each alternative, or the consequences each alternative is likely to have. Group Exercise: Break students up into small groups. Have each group identify examples they have recently faced that illustrate each decision making condition. Global Connection: Much of the foreign expansion that firms are doing today is characterized by uncertainty. For example, point out to students how social, political, and economic risk in foreign markets all contribute to uncertainty. II. RATIONAL PERSPECTIVES ON DECISION MAKING A. The Classical Model of Decision Making 1. The classical decision model is a prescriptive approach that tells managers how they should make decisions. 2. The classical model assumes that managers are rational and acting in the best interests of the organization, that they have complete information, and that they can eliminate all uncertainty. 3. As a prescriptive model, the classical approach is an ideal and never achieved by managers. Extra Example: Charles Knight, CEO of Emerson Electric, constantly stresses to his managers the need to be rational, logical, and dispassionate when they make decisions. Teaching Tip: Be sure to note the distinction between classical decision making, as discussed here, and the classical management perspective covered in Chapter 2. B. Steps in Rational Decision Making Teaching Tip: Note the details in Table 9.1. The table shows the general steps involved in rational decision making and provides a running example to illustrate each step. 1. Rational decision making keeps the decision maker focused on facts and logic and helps guard against inappropriate assumptions and pitfalls. a) The first step in rational decision making is recognizing that a decision is necessary. To do this, the problem must be defined clearly and fully. Extra Example: After several years of poor financial performance, Kmart defined its decision situation as a need to recover from bankruptcy and to regain lost sales and profits. b) The second step is to identify alternative courses of action that might be effective. Extra Example: Kmart saw its primary options as (1) selling off its specialty store businesses to raise cash, (2) selling off its discount operations and concentrating on specialty retailing, or (3) shutting down the company. c) Next, managers should evaluate the alternatives generated according to its feasibility, satisfactoriness, and affordable consequences. Extra Example: Kmart evaluated each of its three options using the criteria discussed in the text. Option 1 was found to be feasible, satisfactory, and to have affordable consequences. Option 2 was not feasible because no buyer would likely pay what the firm needed. Option 3 was feasible, but management knew that it was not satisfactory to shareholders. d) The next step, the most critical step, is the selection of the “best” alternative. This may be the alternative with the highest combined level of feasibility, satisfactoriness, and affordable consequences. Or, managers may choose to optimize one criterion. Extra Example: Based on its evaluation of the alternatives, Kmart made the decision to sell off its specialty stores. The plan is to use the cash generated by those sales to upgrade the firm’s discount stores and to try to become more competitive with Wal-Mart. e) Implementation occurs when managers put the chosen alternative into practice. f) Finally, managers must follow up and evaluate the results to ensure that the alternative chosen has served its original purpose. If it does not, corrective measures must be taken. Extra Example: Kmart continues to pursue its refocus strategy by closing unprofitable stores, upgrading product lines, cleaning up accounting problems and making operations more efficient. However, the store continues to lose sales to rivals Wal-Mart and Target. Extra Example: Kmart and Sears agreed to merge to form what its managers believe would be a formidable force in the retailing industry. It remains to be seen where the vaunted cost savings would be realized and the merged company can successfully take on its rivals. III. BEHAVIORAL ASPECTS OF DECISION MAKING A. The Administrative Model 1. The administrative model describes how decisions often are actually made. It is based on the assumptions that managers have incomplete and imperfect information, are constrained by bounded rationality, and tend to satisfice when making decisions. a) Bounded rationality suggests that decision makers are limited by their values and unconscious reflexes, skills, and habits, and by less than complete information and knowledge. b) Satisficing suggests that rather than conduct an exhaustive search for the best possible alternative, decision makers tend to search only until they identify an alternative that meets some minimum standard of sufficiency. 2. The administrative model is quite different from the rational model, but is equally useful in understanding decision making. Group Exercise: Have students examine their own personal choices regarding college and major in terms of bounded rationality and satisficing. Discussion Starter: Ask if students think that satisficing is always a bad thing. In fact, so long as high-quality alternatives are being considered, satisficing is an efficient way to make decisions. Teaching Tip: Stress that the rational and administrative models of decision making are not mutually exclusive. Indeed, most decisions are made using ingredients from both models. B. Political Forces in Decision Making A coalition is an informal alliance of individuals or groups formed to achieve a common goal. Discussion Starter: Ask students if they have ever been part of a coalition that determined the outcome of a decision. Cross-Reference: Note that political behavior is discussed more fully in Chapter 17. C. Intuition and Escalation of Commitment 1. Intuition—an innate belief about something without conscious deliberation Extra Example: Intuition is often used by top managers in making decisions. For example, Michael Eisner, former CEO of Disney, has indicated that he relied heavily on his instincts and intuition when decisions had to be made. Teaching Tip: Note that even though managers may sometimes seem to make decisions based purely on intuition, in reality they are also relying on their experience, judgment, and other resources, even if they are doing so unconsciously! 2. Escalation of commitment occurs when managers make a decision and become so committed to it that they stay with it even when it appears to have been wrong. Extra Example: The military is frequently guilty of escalation of commitment. Decision makers will commit funds for a new weapons project, for example, and will continue to fund the project even when information suggests they should stop. Discussion Starter: Ask students if they have ever gambled in Las Vegas or a similar location. Note the tendency among gamblers who lose money to keep playing in the hopes of winning back their money. This represents an escalation of commitment. D. Risk Propensity and Decision Making Risk propensity is the extent to which a manager is willing to gamble in making a decision. Global Connection: The extent to which managers are comfortable with different degrees of risk varies across cultures. For example, English managers tend to avoid risk, U.S. managers are more comfortable with risk, and Italian managers are often quite risky in decision making. E. Ethics and Decision Making Just as decisions are influenced by politics and risk propensity, they are also influenced by the decision makers’ personal ethics or their own beliefs about right and wrong. Discussion Starter: Ask students for examples of recent ethical dilemmas they have faced when making a decision. IV. GROUP AND TEAM DECISION MAKING IN ORGANIZATIONS A. Forms of Group and Team Decision Making 1. Interacting groups and teams—the most common form of group and team decision making. It occurs whenever an existing or newly formed group or team is asked to make a decision. Extra Example: At ODS Corporation in Tokyo, all decisions are made by group consensus. The typical employee spends seven hours a week in group decision-making meetings. Global Connection: Group decision making is very common in Japan. Indeed, managers who make decisions without involving their subordinates are likely to be perceived as bad managers. 2. Delphi groups—used for developing a consensus of expert opinion. The Delphi procedure solicits input from a panel of experts who contribute individually. Their opinions are combined and “averaged.” These results are fed back to the experts and the process continues until a solution is reached. Delphi groups do not meet in person. 3. Nominal groups—an informed group of participants writes down as many alternatives as it can think of. These ideas are listed on a board in round robin fashion. After the ideas are listed, they are discussed. Then the members vote on the alternatives, and the highest-ranking alternative is selected. B. Advantages of Group and Team Decision Making 1. The availability of more information and knowledge. 2. Groups tend to generate more alternatives. 3. Participants in group decision making are more likely to accept the group decision and communicate it effectively to others. 4. For all these reasons, groups tend to make more effective decisions. Discussion Starter: Ask students to recount examples of when they have participated in group or team decision making. Ask if they prefer to make decisions alone or as part of a group or team. C. Disadvantages of Group and Team Decision Making 1. One disadvantage is the additional time and resources required. 2. Group decision making may lead to undesirable compromises. 3. Groupthink, which occurs when the group’s desire for consensus and cohesiveness overwhelms its desire to reach the best possible decision, can occur. Discussion Starter: Ask if any of your students have ever had firsthand experience with any of the advantages or disadvantages of group and team decision making as listed in Table 9.2. D. Managing Group and Team Decision-Making Processes 1. Managers who are aware of the pros and cons of group decision making can be more careful about how they manage the group’s time and resources. 2. Effective managers can avoid dominance by a single member. 3. To avoid groupthink, the group should analyze all alternatives critically and allow divergent viewpoints to be presented. It is also a good idea to ask one member to play the role of devil’s advocate. Instructor Manual for Management Ricky W. Griffin, Robert 9781111969714
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