Planning within Organizations - Principles of Management

The plans managers formulate within an organization can be differentiated by the levels inthe organization to which the plans apply (strategic or operational plans), the time horizon ofthe plans (short-term or long-term), the number of times the plans are used (standing plansversus single-use plans), and the contingent nature of the plans. We consider each of thesedimensions in turn.

LEVELS OF PLANNING

Planning is performed at multiple levels within an organization. Planning starts at the top ofan organization with a strategic plan, which outlines the major goals of the organizationand the organizationwide strategies for attaining those goals. In complex organizations, suchas a large diversified corporation with multiple business units, there may be three layers ofstrategic planning.

Planning at the corporate level focuses on corporate-level strategy; plansmade at the business level focus on business-level strategy; and planning done at the operatinglevel focuses on operational strategy. Corporate-level strategy is concerned withdeciding which industries a firm should compete in and how the firm should enter or exitindustries. Business-level strategy is concerned with deciding how the firm should competein the industries in which it has elected to participate.

Operating strategy is concernedwith the actions that should be taken at the level of individual functions, such asproduction, logistic, R&D, and sales, to support business-level strategy. (We look in detail atcorporate, business, and operating strategies in subsequent chapters.) Normally an operatingplan is embedded within a business-level strategic plan, and in turn that is embedded withinthe corporate-level strategic plan.

For illustration consider 3M, which is a large diversified company with over 5,000 differentproducts, ranging from Post-it notes and Scotch tape to LCD display screens and surgicaldressings. It is organized into more than 40 different business units that collectively generateover $20 billion in sales. Within a firm of this scale and scope, strategic planning takes placeat multiple levels. At the corporate level, the CEO and his or her direct reports set overallgoals for the organization, choose corporate-level strategies that span the entire organization,and allocate responsibility for implementing those strategies.

Recently 3M has operated witha goal of increasing profits by 12–14 percent per year. The plan for attaining that goal includesa number of strategies, such as requiring all business units to implement programs to improvetheir productivity, making strategic acquisitions to strengthen the competitive position of 3M,and focusing R&D dollars on product development projects that are likely to produce bigbreakthroughs and result in substantial sales revenues and profits.

At the business level, such as 3M’s office supplies division, which makes Post-it notes andScotch tape among other products, the business-level strategic plan details the specific actionsthat will be taken by this unit to attain the goals of the business and establish a competitiveadvantage. These might include, for example, developing new products, exiting product linesthat are not performing well, and taking actions to rationalize its supply chain.

Embedded within business-level strategic plans are operating plans , which specify thegoals for individual functions, the actions they will take to attain these goals, and who is responsiblefor those actions. Within 3M’s medical division there may be an operating plan to develop anew product—let’s say sterile surgical drapes coated with a substance that acts as an antibiotic.The plan may contain goals relating to development time and costs and assign responsibility to ateam drawn from research and development, marketing, and manufacturing to develop the drapesand launch the product.

In the same division, manufacturing personnel might develop an operatingplan for reducing inventory costs. The plan will have a goal—perhaps to reduce inventorycosts by 20 percent—and assign responsibility to specific individuals to attain that goal. Similarly,human resource personnel might develop an operating plan for hiring a sales force to sell a newproduct the division has developed; information systems personnel might develop an operatingplan for using the Internet and e-business software to coordinate the supply chain of the division;marketing personnel might develop an operating plan for promoting the products of the divisionto consumers to enhance the 3M brand and grow revenues and profits.

Planning might not stop here; embedded within operating plans might be unit plans ,which are plans for departments within functions, work teams, or even individuals. Within themanufacturing function in 3M’s office supplies division, for example, a quality assurance departmentcould draw up its own unit plan for improving quality in the division’s manufacturingprocess. Similarly, within the R&D function of the same division several teams of researchersmay be focusing on the development of different technologies; each team will drawup its own unit plan that specifies goals, actions, responsibilities, and resource requirements.

LEVELS OF PLANNING

In sum, unit plans are embedded within operating plans, operating plans are embeddedwithin business-level strategic plans, and business-level strategic plans are embedded withincorporate-level strategic plans. Embedded means that higher-level plans setthe context for lower-level plans. Thus at 3M the corporate-level plan calls for productivity improvement programs to be rolled out across 3M; the plan of a business division outlineshow that is being done within that division; the plan of a function describes how productivityis being improved within the function; and the plan of a department says how that is beingdone within the department.

At the same time, higher-level plans are not formulated in a vacuum;they are formulated after consultation with lower-level managers. When the CEO at 3Mdecides how to allocate development funds to projects within 3M, he or she does so only afterconsulting extensively with the managers responsible for those projects and the business andfunctional levels. Similarly, business-level managers decide which productivity improvementprojects to pursue within their divisions only after consultation with functional and departmentmanagers.

PLANNING HORIZONS

The planning horizon refers to how far out a plan is meant to apply. Most strategic plans,whether at the business or corporate level, are multiyear plans. They are meant to stay in placefor several years (a three- to five-year horizon is typical). If successful, Paul Otellini’s plan for Intel, which we discussed earlier, will drive strategy at the company for years to come. Indeed,it would be dangerous to change strategic plans frequently: This would confuse importantstakeholders such as employees, suppliers, customers, and investors about the direction of theorganization, and they might lose confidence in top management.

There is an exception to the generalization that strategic plans are long-term plans. Organizationssometimes adopt short-term plans to address specific and transitory opportunities orthreats. Such short-term plans are known as tactical plans, which are plans for pursuing transitorycompetitive tactics. Tactical plans outline the actions managers must adopt over theshort to medium term to cope with a specific opportunity or threat that has emerged.

For example, when Lilly-ICOS, a pharmaceutical company, launched its new drug Cialis for erectiledysfunction in 2004, the firm found it difficult to gain share against the market leader,Viagra, even though Cialis worked for up to 36 hours, compared to just 4 hours for Viagra. Soin mid-2004 managers at Lilly-ICOS came up with a tactical plan to get men to try Cialis. Theplan was to roll out a program known as the Cialis Promise.

Under this program, men witherectile dysfunction could receive a voucher for a free trial. If they liked Cialis, they could geta second trial for no charge. If they were not satisfied with Cialis,ICOS committed itself to pay for a competing erectile dysfunctiondrug (such as Viagra). The idea behind this tactic was to getmen to switch from Viagra to Cialis. It seems to have worked—the market share of Cialis doubled to 25 percent in a year.

Operating and unit plans tend to have shorter time horizonsthan strategic plans. Whereas an organization might function withthe same basic strategic plan for years, operating and unit plansmight change regularly as the tasks outlined in them are completedand managers turn their attention to the next task. Forexample, it may take only six months to implement and completea productivity improvement program identified in an operating orunit plan at 3M, so next year that program will not be in the plan,although it may be replaced by another one. Moreover, operatingand unit plans often drive the annual budgeting process at organizations,so they have to be revisited annually.

In sum, strategic plans normally have a three- to five-year timehorizon, although an organization could in theory pursue thesame strategy for much longer. Tactical plans typically have ashort-term horizon (often less than a year) and are adopted to dealwith emerging and transitory opportunities and threats. Operatingand unit plans tend to have short to medium time horizons (one tothree years) because they address specific tasks that have a welldefined beginning and end. But there are exceptions to these generalizations. An organizationmight be forced to change its strategic plan after a year if it clearly is not working, and anoperating plan may be in place for more than five years if its specific tasks take that long.

SINGLE-USE PLANS ANDSTANDING PLANS

In addition to level and time horizon, plans can bedifferentiated by their frequency of use. Some plansare single-use plans: They address unique eventsthat do not reoccur—they are plans for attaining aone-time goal. For example, in 2002 the BoeingCorporation decided to move its corporate headquartersfrom Seattle, where they had been sincethe company was founded, to Chicago. The decisioninvolved the relocation of 330 employees, primarilysenior managers and their support staff, and Boeing had to create a single-use plan to executethis move as quickly and seamlessly as possible.

Once the move was completed, however, the planwas obviously no longer needed. Other cases ofsingle-use plans include plans for converting officefiles from paper to digital format, plans for establishingan organizationwide intranet, or plans forrebranding an organization and rolling out a newcorporate name and logo.

In contrast, standing plans are used to handleevents that reoccur frequently. The idea behind standing plans is to save managers time by givingthem a playbook to which they can refer when a certaintype of event occurs. Standing plans relievemanagers from having to reinvent wheels. One reason why Starbucks has been able to growfrom just 17 stores in 1987 to almost 9,000 stores by 2005 is that managers developed a standingplan that outlines the steps required to find the best store locations, ensure that the storeshave the same look and feel as other Starbucks stores, and open stores quickly. But standingplans like these are not rigid. Intelligent managers recognize that no plan is perfect, and theyuse their cumulative experience to fine-tune standing plans, improving them over time.

CONTINGENCY PLANNING

Many organizations are based in environments characterized by considerable uncertainty andthe possibility that certain events might require a rapid response or an overall change ofstrategy. To anticipate such events, managers might formulate contingency plans.Contingency plans are plans formulated to address specific possible future events thatmight have a significant impact on the organization. There are two types of contingency plans:crisis management plans and scenario plans.

Crisis Management Planning A crisis is a discrete event that can have a severe negativeimpact on an organization or its stakeholders. A crisis management plan is a plan formulatedspecifically to deal with possible future crises. In the wake of the September 11,2001, terrorist attacks on the United States—an obvious crisis if ever there was one—anumber of government organizations drew up crisis management plans that detailed howthey would respond to specific terrorist incidents, including the deliberate release of biologicalpathogens (such as smallpox or anthrax) or chemicals (such as sarin gas).

One of thecompanies experiencing the largest loss of life on September 11 was the bond trading companyCantor Fitzgerald, which occupied the top floors of one of the destroyed twin towers.Nearly 700 of its 1,000 U.S. employees died that day. Yet the company was able to resumebusiness almost immediately because after the 1993 bombing of the World Trade Center,the company had formulated a crisis management plan that included backup computer systemsin New Jersey.

Crises take many different forms—from terrorist attacks and industrial disasters, such asthe gas leak from a Union Carbide plant in Bhopal, India, that killed almost 4,000 people tonatural disasters like the December 26, 2004, tsunami that devastated parts of Southeast Asiaand left 180,000 people dead. Drafting a plan to effectively manage a crisis involves threemain steps: prevention, preparation, and containment.

The best way of dealing with a crisis is to prevent it from happening in the first place ifpossible. In the wake of the September 11, 2001, attacks the U.S. government took a numberof steps to prevent future terrorist attacks, including creating the Department of HomelandSecurity and implementing new regulations for screening passengers and baggage at airports.Another prevention tactic is to build positive relationships with key stakeholders, such as customers,suppliers, investors, and communities. These relationships can act as an early warningsystem, providing managers with information about an impending crisis. In some cases quickaction can avert an impending crisis or limit its impact.

Not all crises can be prevented. Nobody could have predicted or stopped the December 26,2004, tsunami. So managers need to plan for such events. This is the preparation stage of acrisis management plan. Preparation requires an organization to designate a crisis managementteam and a spokesperson that will cope with crises that arise. Preparation also requires adetailed plan of the steps that will be taken to deal with the crisis, to coordinate crisis managementefforts, to manage its aftermath, and to communicate important information to affectedpeople and organizations.

Mt. Rainier, the heavily glaciated volcano in Washington State, is a place of staggeringbeauty; but it is also one of the most dangerous volcanoes in the world. An eruption, anearthquake, or simple weakening of rock caused by erosion could trigger a massive mudslideknown as a lahar that could sweep a wave of debris 100 feet high at 50 miles an hourdown valleys where 100,000 people live.

To limit the effects of such a crisis, managers atthe U.S. Geological Survey and Washington State government agencies have prepared adetailed plan that includes a crisis management team, a permanent lahar detection systemand emergency communication systems, plans for rapid evacuation of towns in the path ofa lahar, regular evacuation training for schools, establishment of shelters for the displaced,and procedures for search and rescue. Although a lahar cannot be prevented, these preparationsare designed to limit the loss of human life associated with such a cataclysmic event.

Finally, there is the containment stage of crisis management. Containment is concernedwith the steps that need to be taken after a crisis has occurred to limit its effects; these actionsneed to be part of the overall crisis management plan.

Containment involves

  1. rapid responseto limit the immediate effects of the crisis;
  2. communication because the truth will emergeanyway, and plenty of evidence suggests it is better to face reality immediately rather than tryto deny that a crisis is occurring;
  3. meeting the needs of those affected by the crisis; and
  4. returning to business as rapidly as possible.

The classic example of successful containment ofa crisis is the response of Tylenol maker Johnson & Johnson to a crisis that arose when fourpeople died after taking cyanide-laced Tylenol capsules. Even though the capsules were tamperedwith after the Tylenol had left the factory, the company immediately recalled all Tylenoland stopped making the product until it had redesigned the product packaging to minimize therisk of future tampering. This quick action cost Johnson & Johnson some sales, but it enhancedthe company’s reputation and quickly rebuilt consumer confidence in the safety of theproduct.

Scenario Planning Scenario planning is based on the realization that the future is inherentlyunpredictable and that an organization should plan for a range of possible futures.Scenario planning involves formulating plans that are based on “what if ” scenarios. In thetypical scenario planning exercise, some scenarios are optimistic and some pessimistic. Teamsof managers are asked to develop specific strategies to cope with each scenario.

A set of indicatorsis chosen as “signposts” to track trends and identify the probability that any particularscenario is coming to pass. The idea is to get managers to understand the dynamic and complexnature of their environment, to think through problems in a strategic fashion, and togenerate a range of strategic options that might be pursued under different circumstances. The scenario approach to planning has spread rapidly among large companies. One surveyfound that over 50 percent of Fortune 500 companies use some form of scenario planningmethods.

The oil company Royal Dutch Shell has perhaps done more than most to pioneer the conceptof scenario planning, and its experience demonstrates the power of the approach. 8 Shellhas been using scenario planning since the 1980s. Today the firm uses two main scenarios torefine its strategic planning. The scenarios relate to future demand for oil. One (“Dynamics asUsual”) sees a gradual shift from carbon fuels such as oil and natural gas to renewable energy.

Scenario Planning

The second scenario (“The Spirit of the Coming Age”) looks at the possibility that a technologicalrevolution will lead to a rapid shift to new energy sources. 9 Shell is making investmentsthat will ensure the profitability of the company in either scenario, and it is carefullytracking technological and market trends.

The great virtue of the scenario approach to planning is that it can push managers to thinkcreatively, to anticipate what they might have to do in different situations, and to learn that theworld is a complex and unpredictable place that places a premium on flexibility.

As a result ofscenario planning, organizations might pursue one dominant strategy related to the scenariothat is judged to be most likely while making some investments that will pay off if other scenariosoccur . Thus the current strategy of Shell is based on the assumptionthat the world will only gradually shift away from carbon-based fuels; but the company is alsohedging its bets by investing in new energy technologies and mapping out a strategy to pursueshould its second scenario come to pass.


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