CruxBusiness Organisation and Management

Planning is thinking out, before acting, what the organisation will do, how, when and who will do it. It links where the organisation stands now with where it wants to be. A plan has two halves: the ends (the objectives to reach) and the means (the course of action chosen to reach them). Choosing the means is a decision, because there is almost always more than one way to reach a goal.

Planning answers five plain questions:

Features of planning

Why planning matters

1. It gives direction. When goals are stated clearly, every department and employee knows what to work towards. Without a plan, people pull in different directions.
2. It improves decisions. Planning forces managers to list alternatives, weigh them and choose the most workable.
3. It helps coordination. Departments plan inside one overall plan, so their efforts fit together.
4. It cuts waste. Thinking the work through in advance removes overlapping and useless activities and puts scarce money and people where they do most good.
5. It encourages new ideas. Being the first function, planning is where fresh ideas are turned into concrete action.
6. It prepares for change. Planning makes managers look ahead and work out responses before events happen. Change cannot be stopped, but its shock can be softened.
7. It sets the standards for control. The targets in a plan are what later results are measured against. Without them a manager cannot even tell whether there is a shortfall.

Where planning falls short

Managers can reduce these limits: keep a good flow of information to planners, forecast carefully, give planning enough time, and let the people who will carry out a plan take part in making it.

Is planning a mere ritual in a fast-changing environment

Some argue that it is: forecasts go out of date quickly, a fixed plan slows the firm down, and the plan document is produced only because procedure demands it. The better view is that planning is not a ritual; it matters more when change is fast, but its form must change.

• Change brings opportunities as well as threats; a firm that has thought ahead can seize them first.
• Thinking through "what if" in advance means the response is ready when the shock comes.
• People still need to know what the firm is trying to achieve, or they react at random.
• Departments still need a common basis for their work, or quick change turns into confusion.
• Results still need a target to be judged against.

Planning becomes a ritual only when it is rigid and mechanical. In a fast-changing setting it should be:

1. Flexible, with options built in and room for revision.
2. Scenario-based, with plans ready for several possible futures (contingency planning).
3. Rolling, reviewed often: for example, a forecast updated every quarter instead of one fixed annual budget.
4. Firm on direction, loose on detail: a clear long-term aim with short-term actions that can change.
5. Fed by constant scanning of the environment, and by the people closest to customers and technology.

Planning follows a logical order of steps. One common way to set them out:

1. Spotting opportunities. Managers take a first look at the openings ahead and at their own strengths and weaknesses. Goals can be realistic only if managers know these.
2. Setting objectives. Objectives are fixed for the whole organisation and then for each unit. They say what is to be achieved and by when. Lower managers should contribute ideas to them.
3. Developing planning premises. The planners agree on a common set of assumptions about the conditions the plan will meet (below).
4. Identifying alternative courses of action. There is usually more than one route to a goal. Routine routes are listed, and for important matters new ones are sought by involving more people. A long list is cut down to the most promising.
5. Evaluating the alternatives. Each route is weighed against the objectives and the premises: its gains, costs, risks and feasibility. Building a new plant may promise the highest return but tie up scarce cash; renting space may return less but put less at stake.
6. Selecting a course. Here the plan is actually adopted: the choice is made. Where figures cannot settle it, the manager's experience and judgement do. Sometimes two or more routes are combined.
7. Drawing up supporting plans. The main plan is broken into derived plans for each department and activity, and is put into numbers through budgets.
8. Implementing and following up. The plan is put into action, which brings in the other functions (people, machines, money). Progress is then monitored so that the objectives are actually met.

Planning premises

A plan works in the future, and nobody knows the future for certain. So the planners must assume things: likely demand, prices, interest rates, tax rates, government policy, rivals' moves. These shared working assumptions are the planning premises. They are built from forecasts, existing plans and past information.

Premises are often grouped in pairs (a standard classification):

A superior's plan becomes a premise for a subordinate's plan: once the board decides to open a new plant, the plant manager plans on that basis.

Plans differ by what they set out to do. Two broad groups first:

• Single-use plans are made for a one-time event or project and are not repeated: a programme, a project, a budget.
• Standing plans are made once for activities that recur, and are revised from time to time: policies, procedures, methods, rules. They speed up routine decisions.

Objectives and strategies sit above both groups and guide them.

Three distinctions DU likes:

1. Policy and rule. A policy guides decisions and leaves discretion; a rule guides action and leaves none.
2. Policy and procedure. A policy says what to aim for; a procedure sets the order of work inside that policy.
3. Strategy and policy. A strategy is about action and committing resources against rivals; a policy is a standing guide for decisions.

A budget is both a plan and a control device: it is made by forecasting (planning), and later the actual figures are compared with it (controlling).

Controlling is making sure that actual performance matches the plan: setting standards, measuring results, comparing them with the standards and correcting any gap. The two functions open and close each round of management, and each is of little use without the other.

"Planning looks ahead, controlling looks back"

• Planning looks ahead: it forecasts, sets goals and chooses actions for the coming period.
• Controlling looks back: it checks results already achieved against the standards to find the gaps.

The saying is useful but only half true:

1. Not all control comes after the event. Feedforward control acts before work starts (checking raw materials before production). Concurrent control corrects work while it is going on.
2. Looking back is done to change the future. A shortfall is measured so that the coming months, and often the next plan, can be corrected.
3. Planning uses the past. Next year's targets start from this year's results, which are the very figures control collected.

So each function faces both ways: planning uses the past to shape the future, and controlling studies the past in order to change the future.

How they depend on each other

Objectives are the end results an organisation wants to reach through its activities. They are the end point of planning: once they are fixed, strategies, policies, programmes and budgets are designed to reach them. Objectives exist for the whole organisation (earn a 15 per cent return on capital) and for each department and person (cut rejections in one plant to 2 per cent).

Objectives form levels, from the broad to the narrow:

Nature of objectives

1. A hierarchy. Top management's aims are broken down into divisional, departmental, sectional and individual objectives. Each lower objective is a means to the one above it.
2. A network. Objectives of different departments are linked: production, sales and finance targets support and limit one another, so they must be consistent. Reaching one at the cost of another harms the whole.
3. Many at once. A firm pursues several aims together (profit, growth, market share, quality, staff welfare, social responsibility) and must balance them.
4. Long-range and short-range. Some take years, others are immediate; short-term targets must lead towards long-term aims.
5. Verifiable. Wherever possible they are specific and in numbers, with a deadline, so progress can be checked. Qualitative aims, such as better morale, are checked through indicators.
6. Clear and known. They are stated simply and told to the people who must reach them.
7. Realistic yet stretching. Reachable with the resources available, but demanding enough to motivate.
8. Flexible. They are revised when the environment changes.
9. Socially acceptable. They must fit the law, ethics and society's expectations.
10. The basis of other functions. They give direction to planning, a basis for organising, a target for motivation and a standard for control. Because departmental objectives are linked, they also coordinate departments.

A common check for a well-written objective is that it is specific, measurable, achievable, relevant and time-bound (often shortened to SMART).

There are two ways of setting an organisation's goals.

• Traditional goal setting is top-down. Top management fixes the goals and passes them down. Each level splits them into sub-goals for the level below. Subordinates receive targets without a say in them. Goals are often broad ("improve performance", "raise sales") and can be reinterpreted, even distorted, as they travel down. Appraisal rests mainly on the superior's judgement of traits and effort.
• Modern goal setting, best known as management by objectives (MBO), is participative. Superior and subordinate agree each person's objectives together, within the organisation's goals. Goals are specific and measurable, people work towards them with much self-control, progress is reviewed regularly, and performance is judged by results.

Management by objectives (MBO) is a system of managing in which each manager and the people reporting to that manager agree in advance on what each person is to achieve, in line with the organisation's goals. The agreed results then guide the day-to-day work and are the yardstick on which each person is judged. The idea is credited to Peter F. Drucker.

MBO makes results, not activity, the basis of management. It turns objectives from statements at the top into specific commitments at every level.

Features of MBO

1. Joint goal setting. Objectives are agreed between superior and subordinate, not simply imposed.
2. A linked hierarchy of objectives. Individual and departmental objectives come from, and support, the organisation's goals.
3. Specific, measurable objectives with time limits, for each key result area (the few areas where results matter most).
4. Participation and commitment. People who help set their objectives are more committed to them.
5. Self-direction and self-control. People choose how to reach their objectives.
6. Periodic review and feedback. Progress is checked at intervals so problems are corrected in time.
7. Results-based appraisal and rewards. Performance is judged by objectives achieved, and rewards follow results.
8. A continuous cycle. Each period's results feed the next period's objectives.

MBO as a comprehensive management system

DU often quotes the view that MBO is a comprehensive system that brings many managerial activities together and aims them consciously at stated objectives. Read it in three parts:

1. Comprehensive. MBO is not just a goal-setting device or an appraisal form; it is a whole way of managing.
2. Integrates managerial activities. The same set of objectives links every function:

1. Consciously directed at stated objectives. Every activity and every person is aimed at specific, agreed results, so effort is focused and can be measured.

1. Set the organisation's objectives. Top management fixes the overall goals and priorities for the period, in line with the mission and strategy.
2. Clarify roles and structure. Each objective is given an owner, and overlapping responsibilities are removed.
3. Set subordinates' objectives jointly. Each subordinate proposes objectives for their own area. Superior and subordinate discuss them and agree targets that are challenging but reachable, with measures and deadlines.
4. Match resources and authority. The superior makes sure the subordinate has the money, information and authority the objectives need.
5. Plan the action and carry it out. The subordinate decides how to reach the objectives and works with freedom (self-control).
6. Review progress periodically. Superior and subordinate meet to check progress, remove obstacles and, if conditions have changed, revise the objectives.
7. Appraise performance at the end of the period. Results are measured against the objectives, and the subordinate also reviews their own results.
8. Reward and recycle. Achievement is recognised and rewarded, and the lessons feed into the next cycle's objectives.

Benefits

• Clear results. Everyone knows exactly what is expected and by when.
• Better planning. Managers must think through results, priorities and resources.
• Commitment and motivation. Taking part in setting objectives makes people own them.
• Fair appraisal. Judging by results achieved is more objective than judging traits.
• Self-control and development. People get freedom to act and learn to manage themselves.
• Better coordination and control. Linked objectives pull departments the same way; reviews catch problems early.

Limitations

• Time and paperwork. Setting, reviewing and recording objectives for everyone takes much time.
• Hard to set good objectives. Some jobs do not reduce to numbers, and measurable targets can crowd out quality and teamwork.
• Short-term focus. Yearly targets can push long-term goals aside.
• Rigidity. Objectives may not be changed when conditions change.
• Pressure and gaming. People may push for easy targets or meet the figure at the cost of what the figure was meant to show.
• Weak support. Without top-management support and real participation, MBO becomes form-filling.

How to make MBO work

1. Commitment from the top. Senior managers must back MBO, practise it themselves and give it time.
2. Clear organisational goals first. Unit and individual objectives can be derived only from a clear mission and overall objectives.
3. Training and communication. Managers and staff must learn how to write measurable objectives and hold reviews.
4. Genuine joint setting of a limited number of specific, challenging but reachable objectives for each key result area.
5. Authority and resources matched to the objectives.
6. Freedom to act, with the subordinate planning the means.
7. Regular reviews that solve problems and revise objectives when conditions change.
8. Appraisal and rewards tied to results, with recognition and development.
9. A balance of quantitative and qualitative objectives, so easy-to-count targets do not push out quality or long-term aims.
10. Little paperwork and a flexible system.
11. Learning from each cycle, carried into the next.

A decision is the option a manager settles on when two or more ways forward are open, picked deliberately to reach some goal. Decision-making is the whole process behind it: spotting the problem, finding the options, weighing them and picking one. The decision is the outcome; decision-making is the process that leads to it.

Peter F. Drucker held that everything a manager does is done through decisions. So writers describe decision-making as the essence of management: a manager decides while planning, organising, staffing, directing and controlling, and in every area (production, marketing, finance, people).

Nature of decision-making

Kinds of decisions

Decisions differ by how much the decision-maker knows about what each alternative will lead to.

Most real business decisions fall under risk or uncertainty; true certainty is rare.

Under uncertainty, some standard decision rules help:

• Optimistic rule (maximax): find the best possible result of each alternative and choose the alternative whose best result is highest.
• Pessimistic rule (maximin): find the worst possible result of each alternative and choose the alternative whose worst result is least bad.

A decision is rational when the choice follows logically from comparing the options on the facts that matter, so the manager could defend it to anyone and it does not reflect personal likes or dislikes. Going purely on a hunch, without the facts, is the opposite.

Perfect (complete) rationality

The classical or economic model assumes a perfectly rational decision-maker, the economic man, who:

1. has one clear objective;
2. knows every possible alternative;
3. knows the result of each alternative with certainty;
4. can rank all the alternatives consistently; and
5. always picks the one that gives the maximum result (he maximises).

The model is a useful logical standard, but real decisions rarely meet its conditions.

Bounded rationality

Herbert Simon argued that human rationality is bounded (limited). Managers try to be rational, but the limits are real:

• Incomplete information: not all alternatives or their results can be known.
• Time and cost: searching further takes time and money.
• Mental limits: nobody can process every factor at once.
• Uncertainty: the future cannot be predicted exactly.
• Conflicting goals: an organisation pursues several goals at once.
• Values, habits and bias: personal feelings colour judgement.
• Organisational limits: policies, politics and past commitments narrow the choice.

So managers do not search for the best possible answer. They simplify the problem, look at a few alternatives one after another, and accept the first one that is good enough to meet their minimum standards. Simon called this satisficing (a blend of "satisfy" and "suffice"), and the decision-maker an administrative man. Bounded rationality explains why managers rely on rules of thumb, routines, past experience and small step-by-step decisions.

Managers can widen the bounds (better information systems, decision tools, group techniques, expert advice), but cannot remove them.

A rational decision follows a sequence of steps:

1. Identify and define the problem. Find the gap between what is happening and what should happen, and separate the real problem from its symptoms. A symptom treated as the problem leads to the wrong cure.
2. Set the objectives and the decision criteria. Decide what the decision must achieve and the yardsticks (cost, time, quality, risk) on which options will be judged, with their relative weight.
3. Gather and analyse the facts. Collect the information on the problem, its causes, and the limits of money, time and policy. Concentrate on the limiting (strategic) factors that matter most.
4. Develop alternatives. List several possible courses of action, using experience, research and creative methods such as brainstorming. Do not jump at the first workable idea.
5. Evaluate the alternatives. Test each against the same criteria: benefits, costs, risks, feasibility. Use numbers where possible, but weigh qualitative factors too.
6. Choose the best alternative. Pick the option that does most for the objective within the limits. In practice, with limited time and information, managers often satisfice (sub-topic 3).
7. Implement the decision. Tell those who must carry it out, win their acceptance and cooperation, assign responsibility and allocate resources.
8. Follow up and evaluate. Compare results with the objective. If the decision is not working, correct it or redefine the problem. The lessons help future decisions.

Techniques that help a manager choose fall into two groups.

Qualitative (judgement-based) techniques

These depend on the decision-maker's own knowledge and judgement. They are used when the problem is new, facts are incomplete or factors cannot be measured.

Several judgement techniques are used by groups (mutual consultation, brainstorming, Delphi, consensus mapping): these are in sub-topic 6.

Quantitative techniques

These use numbers and models to bring precision where data exist.

The decision tree

A decision tree is a diagram of a decision under risk. Read it from left to right:

1. A decision point (drawn as a square) branches into the alternatives.
2. Each alternative leads to a chance point (drawn as a circle) that branches into the possible events, each with its probability. The probabilities at one chance point add up to 1.
3. Each branch ends in a pay-off.
4. Work backwards: at each chance point, find the expected value; at the decision point, choose the alternative with the best expected value.

A tree makes every choice, chance and pay-off visible, and can show a later decision after an event (for example, expand the small plant if demand turns out strong). Its limits: the probabilities are estimates, and a large tree quickly becomes hard to manage.

Simulation

Simulation means building a model (usually on a computer) that behaves like the real system, and trying different decisions on the model to see what would happen, before trying them in reality. It is used where the system is too complex for a formula, or where real trials would be costly or risky. The model is run many times with chance events (random arrivals of customers, breakdowns, demand swings) to see the range of results.

Group decision-making is when two or more people together define a problem, weigh the alternatives and choose, sharing responsibility for the result. Boards, committees, task forces, project teams and quality circles all decide this way. Groups are used mostly for important, complex or new problems, where varied knowledge and acceptance by those affected matter.

The techniques below try to keep the merits and reduce the demerits.

1. Brainstorming. A small group produces as many ideas as possible on a problem in a free session. Criticism is held back, unusual ideas are welcome, and members build on one another's ideas. Only after the session is each idea examined and the useful ones developed. It suits creative problems such as naming a product.
2. Nominal group technique (NGT). Members meet but first work alone:
   • each writes ideas silently and independently;
   • each idea is presented in turn and recorded, without discussion;
   • the group discusses the ideas only to clarify them;
   • each member ranks the ideas privately, and the idea with the highest total ranking is chosen. It stops a few voices dominating and makes everyone contribute.
3. Delphi technique. A panel of experts who never meet and do not know one another's identity answer in writing, guided by a coordinator:
   • define the problem and choose the panel;
   • each expert answers a prepared questionnaire independently, with reasons;
   • the coordinator summarises the answers, without names, showing where views differ;
   • the summary goes back to the experts, who may revise their answers and explain views that differ sharply;
   • the rounds are repeated until the opinions begin to converge;
   • the coordinator reports the agreed view, with any remaining differences, to the decision-makers. Its features are anonymity, several rounds and controlled feedback. It suits long-range forecasts and experts in different places, and keeps rank or a forceful voice from swaying the result. It is slow, and depends on the choice of experts and the coordinator's skill.
4. Consensus mapping. Used to combine the work of several task groups on a many-sided problem. After the groups have listed and evaluated their ideas, facilitators help them sort the ideas into clusters and categories. The groups' schemes are merged into one draft map for the whole group, which members revise until all accept one consolidated map and the decision based on it.
5. Mutual consultation. Meetings and committees bring the ideas and specialist views of several people to bear before the manager decides.
6. Electronic meetings. Members share ideas and vote through networked computers or online platforms, often anonymously. Fast and honest, and suits large groups, but lacks personal contact.
7. Didactic interaction (structured debate). For a yes-or-no decision, the group splits into two sides that argue for and against; the stronger case decides.
8. Devil's advocate and dialectical inquiry. One member deliberately attacks the proposal, or two opposing plans are debated, to expose weak assumptions and guard against groupthink.
9. Quality circles. Small groups of workers from one area meet regularly to find and solve problems in their own work.

The business environment is everything outside a business that it does not command yet that can shape its results: people, institutions and wider forces. Customers, rivals, suppliers, banks, the government, courts, the media, and economic, social, political, legal and technological conditions are all part of it. A change in any of them, such as a new tax, a rival's cheaper product or a shift in what buyers like, can change a firm's sales, costs or profits.

Internal and external environment

• The internal environment is what lies inside the firm and is largely under its control: its owners and managers, employees, departments, resources, systems and culture. It is the base from which the firm meets the outside world, and it decides the firm's strengths and weaknesses.
• The external environment is everything outside the firm. It is largely beyond the firm's control and brings opportunities and threats.

In the strict sense, the business environment means the external environment. Some writers count the internal environment as its innermost layer.

Features

Why it matters

1. A basis for planning and policy. Environmental analysis tells management what to plan for.
2. Spotting threats early. Awareness gives early warning, for example of a foreign rival entering with a cheaper substitute.
3. Spotting opportunities early. A firm that sees an opening first can take the first-mover advantage.
4. Better performance. Firms that monitor their environment and adapt tend to do better for longer.
5. Getting resources. A firm draws its inputs (finance, materials, labour, power) from the environment and sells its outputs back to it.
6. Coping with fast change. Turbulent markets, weaker brand loyalty and fierce competition can be met only by firms that watch and adapt.

The external environment is usually seen in layers, from the closest to the most distant:

Which layers each course names:

• The B.Com Hons syllabus and its teaching guidelines name three layers: micro, meso and macro, together with the internal and external environment.
• The B.Com Prog syllabus names four: micro (immediate), meso (intermediate), macro and international.

The micro environment (immediate, task or operating environment) is made up of the actors close to the firm that directly affect its ability to serve customers and reach its goals. Unlike the macro environment, it is specific to the firm, its effect is direct and immediate, and the firm can influence it to some extent, for example by negotiating with suppliers or building customer loyalty.

Its components:

Some marketing writers list the firm itself (its departments, people and culture) as the first component of the micro environment. Strictly, these make up the internal environment (sub-topic 1).

The meso (intermediate) environment is the setting between the micro and macro layers: the industry, sector, region or network the firm belongs to, with the institutions and policies specific to them. Meso factors are not as close as the firm's own customers and suppliers, nor as remote as national and global forces.

Macro forces often reach a firm through its meso environment. A change in national policy, for example, arrives as a change in the rules for the firm's industry, carried by its industry association and felt across its cluster. Meso conditions shape a firm's opportunities (which markets are open and growing), its costs (inputs, skills, infrastructure) and its competitive position (how many rivals and how strong). The firm can also shape parts of it, through its industry association, its choice of partners and its choice of location.

Elements of the meso environment:

Why it matters: it explains why firms in the same country do differently according to their industry and location, guides the choice of which industry to enter and where to locate, and shows where collective action through associations and clusters helps.

The macro (general or remote) environment is made up of broad forces that affect all firms in a country at the same time. A single firm can do little to change them; it must study and adapt to them. These forces are often remembered as PESTEL: political, economic, social, technological, environmental (natural) and legal.

How the social environment shapes business decisions

1. What to produce. Tastes and values decide demand: a wish to save time has raised demand for ready-to-cook meals and home delivery.
2. Product design and packaging. Products are adapted to local customs, language, sizes and religious needs.
3. Marketing. Messages must respect cultural feelings, and festival calendars shape promotions.
4. Demographic openings. A young or an ageing population creates different markets.
5. Changing families. Smaller families and working couples raise demand for convenience foods, appliances and childcare.
6. People policies. Better-educated staff expect a say in decisions, fair pay, work-life balance and diversity, which pushes management towards more consultative styles.
7. Social expectations. Society expects business to be fair to workers, honest with customers and careful with nature.

How the political environment shapes business decisions

1. Stability and confidence. A stable government and steady policy encourage long-term investment; uncertainty and unrest discourage it.
2. Government policy. Industrial, trade, tax and foreign-investment policies decide which industries grow. A tax change alters costs and prices; a trade policy opens or closes markets.
3. Regulation. Licensing, price, labour, consumer and environmental laws set the rules of operation.
4. Public spending and incentives. Spending on infrastructure or housing, and incentives for chosen industries, create opportunities.
5. Relations with other countries. They affect exports, imports and access to raw materials.
6. The state's role in business. The extent of public-sector activity decides how much room private firms have.

The international environment (B.Com Prog layer)

The international environment covers forces beyond the country: the state of the world economy, trade agreements and tariffs, other countries' policies, exchange rates, and global competition. It matters to any firm that exports, imports, borrows abroad or faces foreign rivals at home.

Environmental uncertainty is the extent to which managers cannot predict what the environment will do. It depends on two things:

• Complexity: how many and how varied the forces are that the firm must deal with.
• Dynamism: how fast and unpredictably those forces change.

A simple, stable environment is easy to forecast. A complex, dynamic one (fast technical change, volatile prices, shifting rules, new rivals) makes forecasts unreliable and plans fragile.

Strategies managers use

A strategy is a broad, comprehensive plan for reaching the organisation's long-term objectives. It has three parts:

1. fixing the long-term objectives;
2. choosing the course of action to reach them; and
3. committing the resources that course needs.

A strategy always looks outward. It takes account of what competitors, suppliers, customers, government, unions and others are likely to do, and of changes in the economic, political, social, legal and technological environment. It sets the firm's direction and scope in the long run: which business to be in, whether to add new lines, and how to win a strong position in its market.

Planning and strategy compared

Planning is the general function of deciding in advance; a strategy is one particular, high-level kind of plan. All strategies are plans, but most plans are not strategies.

Moore grouped strategies by what they deal with: external economic strategies (meeting competition, new technology, conditions of supply), external social strategies (dealing with government, political parties, public bodies and the community) and internal organisational strategies (making the best use of the firm's own people, assets and finance).

Levels of strategy

A firm that runs several businesses treats each as a strategic business unit (SBU) with its own business-level strategy.

Strategic planning is the process by which top management decides the organisation's long-term direction: what business it should be in, what it wants to achieve over the next several years, and how it will use its resources to gain an advantage over competitors in a changing environment. Its output is a strategy that matches the firm's strengths with the opportunities around it.

Features of strategic planning:

• It is done mainly by top management and covers the whole organisation.
• It looks several years ahead and deals with major commitments that are hard to reverse.
• It rests on a study of both the external environment and the firm's own capabilities.
• It is continuous: strategies are reviewed as conditions change.
• It sets the frame within which departmental and operational plans are made.

Steps in strategic planning (strategy formulation and its follow-through)

1. Define the vision and mission. State what the organisation wants to become, why it exists, whom it serves and what it values.
2. Set long-term objectives. Turn the mission into specific, measurable aims: market share, growth, profitability, new markets.
3. Scan the external environment. Study economic, social, political, technological, legal and competitive forces to find opportunities and threats (for example with ETOP, sub-topic 3).
4. Develop planning premises. Agree one shared set of assumptions about future conditions (demand, prices, interest rates, policy, rivals' moves) for everyone working on the plan.
5. Appraise internal capabilities. Assess finance, technology, people, brands and distribution to find strengths and weaknesses.
6. Match them in a SWOT analysis and find the strategic gap. Set strengths and weaknesses against opportunities and threats, and measure the gap between where the firm is and where its objectives require it to be.
7. Identify strategic alternatives. Grow in the present market, develop new products, enter new markets, diversify, merge, form alliances, or cut back.
8. Evaluate and choose. Judge each alternative on its fit with the objectives, risk, resources needed, likely returns and acceptability to stakeholders; choose the best.
9. Prepare for implementation. Turn the strategy into policies, programmes, budgets and procedures; assign responsibility; align structure and leadership with it.
10. Evaluate and control. Measure results against the objectives and adjust the strategy when performance or the environment changes.

Steps 1 to 8 are strategy formulation; steps 9 and 10 carry it into action and keep it on course.

A strategy must fit two things: what the environment offers or threatens, and what the firm can do. Two tools are used after the mission and objectives are set and before alternatives are chosen.

SWOT analysis

SWOT stands for Strengths, Weaknesses, Opportunities and Threats.

The four boxes are then matched to produce strategies:

ETOP

ETOP, the Environmental Threat and Opportunity Profile, is a structured summary of the external environment:

1. Divide the environment into sectors: economic, market, technological, social, political, legal, supplier, competitive, international.
2. List the important factors in each sector.
3. Mark each factor as an opportunity or a threat, often with a sign of its strength and importance.
4. Read the profile to see where the firm faces its most significant opportunities and threats.

ETOP sharpens the O and T parts of SWOT and makes environmental scanning systematic.

How the two are used in forming strategy

1. Diagnosis: ETOP identifies the key outside forces; internal appraisal identifies strengths and weaknesses; SWOT brings them together.
2. Finding the strategic gap between where the firm is and where it wants to be.
3. Generating alternatives from the S-O, W-O, S-T and W-T combinations.
4. Choosing the strategy that fits the firm's strengths to the best opportunities while guarding against threats.
5. Building advantage on what the firm does better than rivals.
6. Monitoring: updated profiles show when the strategy needs revising.

Limits: both are only as good as the information and judgement behind them; listing factors is easier than ranking them; and they describe the position rather than prescribe the answer.

An industry is a group of firms making products that are close substitutes for one another, such as cement or airlines. Industry structure means its economic and competitive features: how many firms there are and how big, how easy it is to enter, how strong buyers and suppliers are, and whether substitutes exist. Industry structure analysis studies these features to judge how fierce competition is, and so how attractive (profitable) the industry is in the long run and where a firm can position itself. It is part of the firm's meso environment.

The best-known framework is Michael E. Porter's five forces model:

Using the model:

• To decide whether to enter or leave an industry.
• To find a position where the forces are weakest: a niche, a differentiated product or a cost edge.
• To influence the forces: brand loyalty raises entry barriers; long-term contracts or backward integration cut supplier power; added services make switching harder for buyers.
• To anticipate change, as technology and regulation shift the forces over time.

To evaluate a company's competitive landscape (the syllabus's practical exercise), take each force in turn, list the facts for the company's industry, rate the force high, medium or low, and conclude on the industry's attractiveness and the company's best position.

Business-level strategy decides how one business (an SBU) will compete in its chosen market to gain a competitive advantage over rivals. Business-level strategic planning means analysing the industry (five forces), understanding customers and rivals, assessing the firm's own resources and capabilities, and choosing a way to compete that gives customers more value than rivals do, or the same value at lower cost.

Michael E. Porter showed that a firm's choice rests on two questions:

1. Source of advantage: the firm wins either through lower cost or through uniqueness.
2. Competitive scope: the firm targets either the broad market or a narrow segment.

These are Porter's generic strategies: cost leadership, differentiation and focus, with focus in two forms.

Cost leadership

The firm aims to be the lowest-cost producer in the industry, selling a standard product to a broad market at a competitive price. It gets there through economies of scale, efficient processes, tight cost control, simple products and good access to inputs. Low cost keeps it profitable even when rivals cut prices. Example: a no-frills airline that flies one aircraft type, sells only online and turns planes round quickly.

Differentiation

The firm offers a product customers see as unique and worth a higher price, through quality, design, brand, technology, features, service or distribution. Customer loyalty makes buyers less sensitive to price. Example: a premium appliance brand known for design and after-sales service.

Focus

The firm concentrates on a narrow segment (a customer group, a product line, a region or a niche) and serves it better than broad-market rivals, who try to serve everyone and so often serve a niche's special needs poorly. Focus suits smaller firms and firms with specialised skills.

• Cost focus: the lowest cost within the segment, offering it a low price by simplifying the product, serving basic needs and staying in one area. Examples: budget hostels for students in one city; low-priced snacks sold only in small towns; a no-frills coaching centre with recorded lectures.
• Differentiation focus: a special offering for the segment that it will pay more for, through specialised design, expertise, service or image. Examples: a jeweller specialising in one community's bridal designs; a clinic treating only sports injuries; premium wildlife-photography tours.

Being stuck in the middle, and the best-cost idea

Porter warned that a firm that tries to do everything without a clear choice may end up stuck in the middle, with neither the lowest costs nor real distinctiveness. Outside Porter's own scheme, some firms deliberately combine fairly low cost with real differentiation to offer good value; this is often called a best-cost approach.

Risks of each strategy

A strategy works when it matches what the firm is good at to what its chosen customers value, in a position rivals find hard to copy. The firm must then line up all its activities behind that one choice.

(B.Com Prog only.) Corporate-level strategy decides which businesses the firm should be in and how its resources are spread across them. The standard grand strategies are four: