Chapter 9   Strategic Management

In this chapter, we look at an important part of the planning that managers do: developing organizational strategies. Every organization has strategies for doing what it’s in business to do. And managers must manage those strategies effectively. Focus on the following learning outcomes as you read and study this chapter.

LEARNING OUTCOMES 

9.1 Define strategic management and explain why it’s important.
9.2 Explain what managers do during the six steps of the strategic management process.
9.3 Describe the three types of corporate strategies.
9.4 Describe competitive advantage and the strategies organizations use to get it.
9.5 Discuss current strategic management issues.

A MANAGER’S DILEMMA 

Mergers. Strategic alliances. Downsizing. Spin-offs. Global expansion and contraction. To¬day’s news is filled with examples of changing organiza¬tional strategies.  In the chapter-opening “A Manager’s Dilemma,” students learn about the challenges facing Addicting Games, a supplier of online cell phone games for teens.  Addicting Games, which was acquired by MTV Networks in 2005, hosts 5.3 million unique monthly visitors.  Now Vice President, Kate Connally, is faced with the strategic challenge of how to sustain this level of energy. 

In this chapter, we examine the strategic management process as it relates to the planning function. As you introduce this chapter and share this case, have students discuss the importance of an organization’s environment to their goals and plans.  Also, what role does national culture play in setting goals and strategy? Ms. Connally must design effective strategies to successfully implement the mission of Addicting Games in a dynamic environment.  Students are asked to imagine themselves in his role and to consider the value of using SWOT analysis in planning effective strategies that will lead to high performance and continued success.  How can the principles of strategic management guide Ms. Connally as she develops this new strategy?

CHAPTER OUTLINE 

INTRODUCTION
 Effective managers recognize the role that strategic management plays in their organization’s performance. Throughout this chapter, students discover that good strategies can lead to high organizational performance.

1. STRATEGIC MANAGEMENT
 Managers must carefully consider their organization’s internal and external environments as they develop strategic plans. They should have a systematic means of analyzing the environment, assessing their organization’s strengths and weaknesses, identifying opportunities that would give the organization a competitive advantage, and incorporating these findings into their planning. The value of thinking strategically has an important impact on organization performance.
A. What Is Strategic Management?
1. Strategic management is what managers do to develop the organization’s strategies.
2. Strategic management involves all four of the basic management functions—planning, organizing, leading, and controlling.
B. Why Is Strategic Management Important?
1. Strategic management has a significant impact on how well an organization performs.
2. In today’s business world, organizations of all types and sizes must manage constantly changing situations.
3. Today’s companies are composed of diverse divisions, departments, functions, and work activities that must be coordinated.
4. Strategic management is involved in many of the decisions that managers make.

2. THE STRATEGIC MANAGEMENT PROCESS
 The strategic management process is a six-step process that encompasses strategic planning, implementation, and evaluation. (See Exhibit 9-1)
A. Step 1:  Identifying the Organization’s Current Mission, Goals, and Strategies
1. Every organization needs a mission which is a statement of the purpose of an organization. The mission statement addresses the question: What is the organization’s reason for being in business?
2. The organization must also identify its current goals and strategies.
B. Step 2:  Doing an External Analysis
1. Managers in every organization need to conduct an external analysis. Influential factors such as competition, pending legislation, and labor supply are included in the external environment.
2. After analyzing the external environment, managers must assess what they have learned in terms of opportunities and threats.  Opportunities are positive trends in external environmental factors; threats are negative trends in environmental factors.
3. Because of different resources and capabilities, the same external environment can present opportunities to one organization and pose threats to another.
C. Step 3:  Doing an Internal Analysis
1. Internal analysis should lead to a clear assessment of the organization’s resources and capabilities.
2. The organization’s major value-creating skills and capabilities that determine its competitive weapons are the organization’s core competencies.
3. Any activities the organization does well or any unique resources that it has are called strengths.
4. Weaknesses are activities the organization does not do well or resources it needs but does not possess.
5. Organizational culture is important in internal analysis; the company’s culture can promote or hinder its strategic actions.
6. SWOT analysis is an analysis of the organization’s strengths, weaknesses, opportunities, and threats.
D. Step 4:  Formulating Strategies
1. After the SWOT, managers develop and evaluate strategic alternatives and select strategies that are appropriate.

2. Strategies need to be established for corporate, business, and functional levels.
E. Step 5:  Implementing Strategies
1. A strategy is only as good as its implementation.
F. Step 6:  Evaluating Results

3. CORPORATE STRATEGIES
 Strategic planning takes place on three different and distinct levels: corporate, business, and functional. (See Exhibit 9-3).
A. Corporate Strategy. Corporate strategy is an organizational strategy that determines what businesses a company is in, should be in, or wants to be in, and what it wants to do with those businesses.
1. There are three main types of corporate strategies:
a. A growth strategy is a corporate strategy that is used when an organization wants to grow and does so by expanding the number of products offered or markets served, either through its current business(es) or through new business(es).
b. A stability strategy is a corporate strategy characterized by an absence of significant change in what the organization is currently doing.
c. A renewal strategy is a corporate strategy designed to address organizational weaknesses that are leading to performance declines. Two such strategies are retrenchment strategy and turnaround strategy.
a. How are corporate strategies managed? Corporate Portfolio Analysis is used when an organization’s corporate strategy involves a number of businesses. Managers can manage this portfolio of businesses using a corporate portfolio matrix, such as the BCG matrix.  The BCG matrix is a strategy tool that guides resource allocation decisions on the basis of market share and growth rate of SBUs. (See Exhibit 9-4)
LEADERS WHO MAKE A DIFFERENCE

Ursula Burns, CEO of Xerox, was the first African-American woman to lead a Fortune 500 Company. Starting as a summer engineering intern more than 30 years ago, Ms. Burns has a reputation for being bold.  She took on the established culture of Xerox, known for being polite, courteous, and discreet with her bold talk and blunt attitude. Her challenge at Xerox is crafting strategies that will help it prosper and be an industry leader in a digital age where change is continual.

4. COMPETITIVE STRATEGY
A business strategy (also known as a competitive strategy) is strategy focused on how the organization will compete in each of its businesses.
A. The Role of Competitive Advantage.  A competitive advantage is what sets an organization apart, that is, its distinctive edge.  An organization’s competitive advantage can come from its core competencies.
1. Quality as a Competitive Advantage.  If implemented properly, quality can be one way for an organization to create a sustainable competitive advantage.
2. Sustaining Competitive Advantage.  An organization must be able to sustain its competitive advantage; it must keep its edge despite competitors’ action and regardless of evolutionary changes in the organization’s industry.
3. Michael Porter’s work explains how managers can create and sustain a competitive advantage that will give a company above-average profitability.   Industry analysis is an important step in Porter’s framework. He says there are five competitive forces at work in an industry; together, these five forces determine industry attractiveness and profitability.  (See Exhibit 9-5). Porter proposes that the following five factors can be used to assess an industry’s attractiveness:
1) Threat of new entrants. How likely is it that new competitors will come into the industry?
2) Threat of substitutes. How likely is it that products of other industries could be substituted for a company’s products?
3) Bargaining power of buyers. How much bargaining power do buyers (customers) have?
4) Bargaining power of suppliers. How much bargaining power do a company’s suppliers have?
5) Current rivalry. How intense is the competition among current industry competitors?
B. Choosing A Competitive Strategy. According to Porter, managers must choose a strategy that will give their organization a competitive advantage. Porter identifies three generic competitive strategies. Which strategy managers select depends on the organization’s strengths and core competencies and the particular weaknesses of its competitor(s).
a. A cost leadership strategy is a business or competitive strategy in which the organization competes on the basis of having the lowest costs in its industry.
b. A differentiation strategy is a business or competitive strategy in which a company offers unique products that are widely valued by customers.
c. A focus strategy is a business or competitive strategy in which a company pursues a cost or differentiation advantage in a narrow industry segment.
d. An organization that has been not been able to develop either a cost or differentiation advantage is said to be “stuck in the middle.”
e. Subsequent research indicates that it is possible, though very difficult, for organizations that are stuck in the middle to achieve high performance.
f. Functional strategy is the strategies used by an organization’s various functional departments to support the business or competitive strategy.

5. CURRENT STRATEGIC MANAGEMENT ISSUES
A. The Need for Strategic Leadership. Strategic leadership is defined as the ability to anticipate, envision, maintain flexibility, think strategically, and work with others in the organization to initiate changes that will create a viable and valuable future for the organization.  Top managers can provide effective strategic leadership by eight principles including: determining the organization’s purpose or vision, exploiting and maintaining the organization’s core competencies, developing the organization’s human capital, creating and sustaining a strong organizational culture, creating and maintaining organizational relationships, reframing prevailing views by asking penetrating questions and questioning assumptions, emphasizing ethical organizational decisions and practices, and establishing appropriately balanced organizational controls. (See Exhibit 9-6.)
B. The Need for Strategic Flexibility.  There is guarantee that a well thought out strategy will lead to positive outcomes.   A key element to the strategic management process is the, the ability to recognize major external changes, to quickly commit resources, and to recognize when a strategic decision isn’t working. Exhibit 9–6 provides suggestions for developing strategic flexibility.
C. New Directions in Organizational Strategies
1. E-Business Strategies.  Using the Internet, companies have created knowledge bases that employees can tap into anytime, anywhere.  E-business as a strategy can be used to develop a sustainable competitive advantage; it can also be used to establish a basis for differentiation or focus.
2. Customer Service Strategies.  These strategies give customers what they want, communicate effectively with them, and provide employees with customer service training.
3. Innovation Strategies.  These strategies focus on breakthrough products and can include the application of existing technology to new uses. An organization that is first to bring a product innovation to the market or to use a new process innovation is called a first mover.  Exhibit 9-7 lists the advantages and disadvantages associated with being a first mover.

LET’S GET REAL: MY RESPONSE
Sid Gokhale
President
Dowden Custom Media
Montvale, NJ

For Addicting Games, a SWOT will emphasize an important weakness – little or no knowledge of the iphone gaming platform. Sid Gokhalke lays out three action steps to address this problem: (1) form focus groups to see how they use the iphone; (2) examine how other companies bring games to the iphone; and (3) test games with iphone uses. While students are likely to see the opportunity that exists in the cell phone game market, it is important to consider if Addicting Games weaknesses can first be overcome and then other external threats mitigated.

Answers to Review and Discussion Questions 

1. Explain why strategic management is important.
Strategic management is important for three reasons. First, it makes a difference in how well organizations perform. Second, it’s important for helping managers cope with continually changing situations. Finally, strategic management helps coordinate and focus employee efforts on what’s important.

2. Describe the six steps in the strategic management process.
The six steps in the strategic management process encompass strategy planning, implementation, and evaluation. These steps include the following: (1) identify the current mission, goals, and strategies; (2) do an external analysis; (3) do an internal analysis (steps 2 and 3 collectively are known as SWOT analysis); (4) formulate strategies; (5) implement strategies; and (6) evaluate strategies. Strengths are any activities the organization does well or unique resources that it has. Weaknesses are activities the organization doesn’t do well or resources it needs but doesn’t have. Opportunities are positive trends in the external environment. Threats are negative trends.

3. How could the Internet be helpful to managers as they follow the steps in the strategic management process?
The Internet provides voluminous information conveniently and quickly about competitors, environmental factors, and customers. This information improves the manager’s ability to make sound strategic management decisions as he or she faces continuously changing environmental conditions.

4. How might the process of strategy formulation, implementation, and evaluation differ for (a) large businesses, (b) small businesses, (c) not-for-profit organizations, and (d) global businesses?
All companies, large or small, profit or not-for-profit, domestic or global benefit from the process of strategy formulation.  The major difference that exists between the different types of companies and the process they go through centers around the development of their mission and goals.  For example, the owners of a small business might not want to pursue the goal of growth and instead focus on stability.  For not-for-profit organizations, the goal is not about making money for owners or stockholders but about how to find a way to effectively and efficiently maximize their resources to benefit others.  In a global organization, while the SWOT would be more involved due to the number of potential elements involved, it remains the same except the goals extend beyond serving one country or market.

5. Should ethical considerations be included in analyses of an organization’s internal and external environments? Why or why not?
Ethical considerations should permeate every activity of an organization. As a firm’s strategy is the basis for their plans, when ethics are not considered then the organization is likely to ignore potential ethical problems.

6. Describe the three major types of corporate strategies and how the BCG matrix is used to manage those corporate strategies.
A growth strategy is when an organization expands the number of markets served or products offered, either through current or new businesses. The types of growth strategies include concentration, vertical integration (backward and forward), horizontal integration, and diversification (related and unrelated). A stability strategy is when an organization makes no significant changes in what it’s doing. Both renewal strategies—
retrenchment and turnaround—address organizational weaknesses that are leading to performance declines. The BCG matrix is a way to analyze a company’s portfolio of businesses by looking at a business’s market share and its industry’s anticipated growth rate. The four categories of the BCG matrix are cash cows, stars, question marks, and dogs.

7. Describe the role of competitive advantage and how Porter’s competitive strategies help an organization develop competitive advantage.
An organization’s competitive advantage is what sets it apart, its distinctive edge. A company’s competitive advantage becomes the basis for choosing an appropriate competitive strategy. Porter’s five forces model assesses the five competitive forces that dictate the rules of competition in an industry: threat of new entrants, threat of substitutes, bargaining power of buyers, bargaining power of suppliers, and current rivalry. Porter’s three competitive strategies are as follows: cost leadership (competing on the basis of having the lowest costs in the industry), differentiation (competing on the basis of having unique products that are widely valued by customers), and focus (competing in a narrow segment with either a cost advantage or a differentiation advantage).

8. “The concept of competitive advantage is as important for not-for-profit organizations as it is for profit organizations.” Do you agree or disagree with this statement? Explain, using examples to make your case.
Not-for-profit and for-profit companies compete for customers.  In the case of not-for-profit companies, those customers are donors and like any market are limited in size.  To be effective non-for-profit companies need something that will attract donors like for-profit companies attract customers.  For example, United Way has an established network of businesses that regularly donate money as part of their yearly pledge drives.  Another example is Mary Komen’s, known for their work with breast cancer awareness, that has established a series of runs and walks across the United States and has even had success in publicizing their cause with the NFL.

9. Explain why strategic leadership and strategic flexibility are important.
Strategic leadership is the ability to anticipate, envision, maintain flexibility, think strategically, and work with others in the organization to initiate changes that will create a viable and valuable future for the organization and includes eight key dimensions. Strategic flexibility—that is, the ability to recognize major external environmental changes, to quickly commit resources, and to recognize when a strategic decision isn’t working— is important because managers often face highly uncertain environments

10. Describe e-business, customer service, and innovation strategies.
Using the Internet, companies have created knowledge bases that employees can tap into anytime, anywhere.  E-business as a strategy can be used to develop a sustainable competitive advantage; it can also be used to establish a basis for differentiation or focus. Customer service strategies give customers what they want, communicate effectively with them, and provide employees with customer service training. Innovation strategies focus on breakthrough products and can include the application of existing technology to new uses. An organization that is first to bring a product innovation to the market or to use a new process innovation is called a first mover.

ETHICS DILEMMA 

This ethical dilemma focuses on the use of killer whales for entertainment.  Orcas are big business and have been quite profitable for amusement parks. In this case, students are asked about the ethical dilemmas involved with the strategic decision to use an animal as organizational asset and what factors influence this type of decision.  Some students may see no problem in holding animals in captivity for profit and while some trainers have been injured and killed by orcas, the same could be said for rodeo horses, pet snakes, and pit bulls. On the other hand, using animals in this way is not acceptable to everyone.  Some see this as immoral and there are a growing number of advocacy groups that promote animal rights i.e. PETA. These groups represent a growing threat to companies like SeaWorld as they seek to change legislation and influence customers.

SKILLS EXERCISE:  DEVELOPING YOUR  BUSINESS PLANNING SKILLS 
This exercise uses the development of a business plan as a way to introduced students to skills needed for organizational planning.  Students are asked to following nine steps and put together a business plan for the one of the following ideas:
1. Haircuts at home (you make house calls)
2. Olympic snowboarding computer game
3. Online apartment rental listing
4. Voice-activated house alarm

WORKING TOGETHER:  TEAM EXERCISE 

This exercise asks students to work in small groups of three to four to find examples of company mission statements.  Once these mission statements are found, students should evaluate them on the information presented in Exhibit 9-2 and then come up with different types of strategies to accomplish those missions.  Mission statements can be found by going to company websites or through other publications (i.e. annual reports).  Finding mission statements for companies is not always easy.  Some companies do not use the words ‘mission statement’ and instead use terms like ‘statement of goals’ or ‘objectives.’ This exercise should be used as an out-of-class assignment.

Your Turn to be a Manager 

• Do a personal SWOT analysis. Assess your personal strengths and weaknesses (skills, talents, abilities). What are you good at? What are you not so good at? What do you enjoy doing? What don’t you enjoy doing? Then, identify career opportunities and threats by researching job prospects in the industry you’re interested in. Look at trends and projections. You might want to check out the information the Bureau of Labor Statistics provides on job prospects. Once you have all this information, write a specific career action plan. Outline five-year career goals and what you need to do to achieve those goals.

• Using current business periodicals, find two examples of each of the corporate and competitive strategies. Write a description of what these businesses are doing and how each represents a particular strategy.

• Pick five companies from the latest version of Fortune’s “Most Admired Companies” list. Research these companies and identify, for each, its (a) mission statement, (b) strategic goals, and (c) strategies being used.

• Steve’s and Mary’s suggested readings: Adrian Slywotzky and Richard Wise, How to Grow When Markets Don’t (Warner Business Books, 2003); Jim Collins, Good to Great: Why Some Companies Make the Leap...and Others Don’t (Harper Business, 2001); Michael E. Porter, On Competition (Harvard Business School Press, 1999); James C. Collins and Jerry I. Porras, Built to Last: Successful Habits of Visionary Companies (Harper Business, 1994); and Gary Hamel and C. K. Prahalad, Competing for the Future (Harvard Business School Press, 1994).

• Customer service, e-business, and innovation strategies are particularly important to managers today. We described in the chapter specific ways that companies can pursue these strategies. Your task is to pick customer service, e-business, or innovation and find one example for each of the specific approaches in that category. For instance, if you choose customer service, find an example of (a) giving customers what they want, (b) communicating effectively with customers, and (c) providing employees with customer service training. Write a report describing your examples.

• In your own words, write down three things you learned in this chapter about being a good manager.

• Self-knowledge can be a powerful learning tool. Go to mymanagementlab and complete these self-assessment exercises: How Well Do I Handle Ambiguity? How Creative Am I? How Well Do I Respond to Turbulent Change? Using the results of your assessments, identify personal strengths and weaknesses. What will you do to reinforce your strengths and improve your weaknesses?

Answers to Case Application Questions 

Gaga Over Gaga

1. How is strategic management illustrated by this case story?
There is a lot at stake when a label decides to invest in a new star.  In today’s highly competitive music industry, there is a great deal of planning that goes on behind the scenes – just like a company that launches a new product. According to the case, “Gaga’s persona has been a calculated strategy.” It would be risky for any record label to put in the time and energy into a new star without planning for competitive advantage or strategic planning.

2. How might SWOT analysis be helpful to Lady Gaga as she and her advisors manage her career?
A SWOT can be used for many purposes.  In this case, a SWOT analysis could help point the singer into the best type of music, considering her singing ability, and point toward new technological opportunities that might be under utilized by other artist.

3. What competitive advantage do you think Lady Gaga is pursuing? How is she exploiting that competitive advantage?
From the case, Lady Gaga has “savvy awareness of the power of digital media and her exceptional ability to exploit it.” and “Her persona is built for the online generation.” This is important as fans often download songs from the internet for free and in the process deny record labels revenue for record sales.  Gaga has also taken advantage of new contract formats, such as the 360-degree deal, where a label invests more money upfront—on marketing, for example—but in return, gets a piece of merchandise sales, touring revenue, and other earnings artists usually kept for themselves. And last but not least, Gaga's persona is one that “cuts across disparate subcultures” which results in the potential to attract a diversified fan base.

4. Do you think Lady Gaga’s success is due to external or internal factors or both? Explain.
Students may have a strong opinion on Gaga’s talent.  However, it is possible that Gaga could be in the right place at the right time - taking advantage of an opportunity that exists in the record industry. Remember Vanilla Ice? Whether she has the pipe’s to stay in the music biz will show in the long term.

5. What strategic implications does the suggestion that her ability to remain a music industry mainstay depends on her ability to evolve have?
For companies to remain on top for any length of time, they must be flexible and continually innovate. On the other hand, it is difficult to radically change a product without losing the image the company has worked so hard to build.  As Lady Gaga is currently riding the fashion ‘wave,’ she and her team will have to tread carefully the line between totally re-inventing herself to stay relevant or staying true to what made her a success to begin with.

Faded Signal

1. What strategic mistakes did Nokia make in the U.S. market?
While Nokia still does well in other countries, it has recently struggled in the US. Nokia’s biggest mistake in the US was that it thought it knew better what the customer wanted than the customers themselves.  Seeing the buzz created by the iphone, Nokia neglected the growing fondness for apps and touch screens and believed that its products were superior.  Another mistake has to do with the different technologies used by cellphones (GSM vs. CDMA).  Nokia was initially slow to adapt to the technology currently used by a majority of US cell phone users.

2. Why do you think a “smart” company makes “dumb” mistakes?
One of the paradoxes of businesses is that many times they are the victims of their own success.  A good example of this phenomenon is Ford’s model T.  Having designed a great car, Ford didn’t see the need to update the model it believed was superior to its competitors.  While Ford rested on his laurels, other car manufacturers were listening to customers and providing the options and features that customers wanted.

3. What strategies is Nokia using to revitalize its North American business?
Nokia is using its partnerships with AT&T, Qualcomm, and Microsoft to expand their reach in the United States.  On one hand, this could be viewed as a growth strategy.  Take this statement from the case, “Everything you see us doing is to build the broad set of capabilities to take us broader and deeper into the U.S. market.” On the other hand, in light of their resent failures what they are doing could be viewed as a turnaround strategy.

4. How could Nokia have done better at using strategic management? What does this case story tell you about strategic management?
Obviously, Nokia made the mistake of underestimating the competition (i.e. Apple) and not paying attention to the customer. When companies fail to take these considerations into account when determining their strategy, then they are sure to fail.  The principle that they neglected is that strategic management cannot be made in a vacuum.  The external environment and the competitive environment must be considered when planning.

ADDITIONAL CHAPTER INFORMATION 

The Strategy + Business Web site features valuable sources for strategic management applications.  This Web site is located at [www.strategy-business.com].

Planning Tools and
Techniques Module

In the study of this module, students will have an opportunity to learn essential knowledge about the planning tools and techniques that can help any business to reach the objectives driven by its organizational mission.
MODULE OUTLINE 
INTRODUCTION
 This section introduces some of the basic planning tools and techniques that can be used by managers in helping organizations to achieve their goals.
1. TECHNIQUES FOR ASSESSING THE ENVIRONMENT
 The following techniques have been developed to assist managers in assessing the organization’s environment:
A. Environmental Scanning
 Environmental scanning is the screening of large amounts of information to anticipate and interpret changes in the environment. Research has shown that both large and small companies with advanced environmental scanning systems have increased their profits and revenue growth.
1. Competitor intelligence is an environmental scanning activity by which organizations gather information about competitors.  In using this fastest-growing environmental scanning activity, companies seek to identify their competitors, learn what their competitors are doing, and gain information about the possible effect of competitors’ actions on their organization.
2. Global scanning is an especially important type of environmental scanning used by managers to assess changes and trends in the global environment through the gathering of vital global information.
B. Forecasting
 Environmental scanning provides the foundation for developing forecasts, which are predictions of outcomes.
1. Forecasting techniques can be grouped into two main categories:
a. Quantitative forecasting applies a set of mathematical rules to a series of past data to predict outcomes.
b. Qualitative forecasting uses the judgment and opinions of knowledgeable individuals to predict outcomes.
c. Exhibit PM-1 describes some popular forecasting techniques.
2. Managers must consider effectiveness when deciding which forecasting techniques to use.
a. Forecasting techniques are most accurate when the environment is not rapidly changing and when it is used to predict nonseasonal events.
b. The following suggestions may improve forecasting effectiveness:
1) Use simple forecasting techniques.
2) Involve more people in the process.
3) Compare every forecast with “no change.”
4) Do not rely on a single forecasting method.
5) Do not assume that you can accurately identify turning points in a trend.
6) Forecasting is a managerial skill and can be practiced and improved.
C. Benchmarking
 Benchmarking is the search for the best practices among competitors or noncompetitors that lead to their superior performance.
The benchmarking process usually follows four steps (see Exhibit PM-2):
1. A benchmarking planning team is formed. The team’s initial task is to identify what is to be benchmarked, identify comparative organiza¬tions, and determine data collection methods.
2. The team collects internal and external data.
3. The data are analyzed to identify performance gaps and the cause of differences.
4. An action plan is prepared and implemented.
2. TECHNIQUES FOR ALLOCATING RESOURCES
 Resources are the assets of the organization including financial, physical, human, intangible, and structural/cultural.
A. Budgeting
A budget is a numerical plan for allocating resources to specific activities. Budgets are widely used because they can be applied to a wide variety of organizations and units within an organization. Exhibit PM-3 describes the different types of budgets that managers might use.  Exhibit PM-4 provides 7 examples for improving the budget process.
B. Scheduling
 Scheduling is detailing what activities have to be done, the order in which they are to be completed, who is to do each, and when they are to be completed. Some useful scheduling tools include the following.
1. The Gantt chart, developed by Henry Gantt, who was an associate of Frederick W. Taylor, is a scheduling chart that shows actual and planned output over a period of time. (See Exhibit PM-5)
2. A load chart is a modified Gantt chart that schedules capacity by entire departments or specific resources. (See Exhibit PM-6)
3. The Program Evaluation and Review Technique (PERT) is a technique for scheduling complicated projects comprising many activities, some of which are interdependent.
a. A PERT network is a flowchart diagram showing the sequence of activities needed to complete a project and the time or cost associated with each.
b. The steps in developing a PERT network are outlined in Exhibit PM-7 and involve the following key terms:
1) Events are end points that represent the completion of major activities in a PERT network.
2) Activities are the time or resources needed to progress from one event to another in a PERT network.
3) Slack time is the amount of time an individual activity can be delayed without delaying the whole project.
4) The critical path is the longest sequence of activities in a PERT network.
c. Refer to Exhibit PM-9 to see an example of a PERT network.
C. Breakeven Analysis
 Breakeven analysis is a technique for identifying the point at which total revenue is just sufficient to cover total costs. (See Exhibit PM-10)
D. Linear Programming
 Linear programming is a mathematical technique that solves resource allocation problems. (See Exhibit PM-11.)

3. CONTEMPORARY PLANNING TECHNIQUES
 Project management and scenario planning are two planning techniques that are appropriate for planning in an environment that is both dynamic and complex.
A. Project Management.
 A project is a one-time-only set of activities that has a definite beginning and ending point in time. Project management is the task of getting a project’s activities done on time, within budget, and according to specifications.
1. Project Management Process
 In a typical project, work is done by a project team whose members are assigned from their respective work areas to the project and who report to a project manager.
2. Role of the Project Manager
a. The only real influence project managers have is their communica¬tion skills and their power of persuasion.
b. Team members seldom work on just one project; they’re usually assigned to two or three at any given time.
B. Scenario Planning
 A scenario is a consistent view of what the future is likely to be.
1. Developing scenarios is also known as contingency planning.
2. The intent of scenario planning is not to try to predict the future, but to reduce uncertainty by playing out potential situations under different specified conditions.
3. Scenario planning is difficult to use when forecasting random events.
4. Exhibit PM-14 lists some suggestions for preparing for unexpected events.

Answers to Review and Discussion Questions 

1. Describe the different approaches to assessing the environment.
Environmental scanning is the screening of large amounts of information to anticipate and interpret changes in the environment. Environmental scanning establishes the basis for forecasts, which are predictions of outcomes. Forecasting techniques fall into two categories: quantitative and qualitative. Quantitative forecasting applies a set of mathematical rules to a series of past data to predict outcomes. These techniques are preferred when managers have sufficient hard data that can be used. Qualitative forecasting, in contrast, uses the judgment and opinions of knowledgeable individuals to predict outcomes.  Benchmarking is the search for the best practices among competitors or noncompetitors that lead to their superior performance.

2. Describe the four techniques for allocating resources.
The four techniques are budgeting, scheduling, breakeven analysis and linear programming. A budget is a numerical plan for allocating resources to specific activities.  Scheduling is detailing what activities have to be done, the order in which they are to be completed, who is to do each, and when they are to be completed. Breakeven analysis is a technique for identifying the point at which total revenue is just sufficient to cover total costs. Linear programming is a mathematical technique that solves resource allocation problems.
3. How does PERT network analysis work?
A PERT network is a flowchart diagram that shows the sequence of activities needed to complete a project and the time or costs associated with each activity. With a PERT network, a manager must think through what has to be done, determine which events depend on one another, and identify potential trouble spots.  To construct a PERT network, four terms are needed.  Events are end points that represent the completion of major activities. Activities represent the time or resources required to progress from one event to another. Slack time is the amount of time an individual activity can be delayed without delaying the whole project. The critical path is the longest or most time-consuming sequence of events and activities in a PERT network.

4. Why is flexibility so important to today’s planning techniques?
Project schedules should always have some degree of flexibility built in, or even a slight delay would throw off the completion of the entire project.  Slack time allows for some aspects of the project to continue if there is delay or accident occurring in another part of the project.  If there is no slack time, or flexibility, multiple parts of the project would fail to begin on time resulting in increased costs from vendors, penalties, or loss opportunity costs.
 5. What is project management, and what are the steps managers use in planning projects?
Project management is the task of getting a project’s activities done on time, within budget, and according to specifications. The essential features of the project planning process are shown in Exhibit PM-13 and include in order: defining objectives, identifying activities, establishing sequences, estimating time for activities, determining project completion date, comparing with objectives, and determining additional resource requirements.

6. It’s a waste of time and other resources to develop a set of sophisticated scenarios for situations that may never occur. Do you agree or disagree? Support your position.
 Although the situations depicted in scenarios may never actually occur, the process of developing a scenario can prove to be worthwhile. In developing a scenario (whether it is simple or sophisticated), a manager exercises creativity and critical thinking skills that can help him/her respond quickly and effectively in unrelated situations. Practicing the development of scenarios can increase confidence in one’s leadership ability, and it provides opportunities for growing in the ability to be decisive under pressure.
7. Do intuition and creativity have any relevance in quantitative planning tools and techniques?  Explain.
 Yes, intuition and creativity may have relevance in determining the factors to be analyzed or the scenarios to be developed. The planning tools and techniques provide a way for the manager to quantitatively assess a situation, but the manager still needs to be creative in setting up the components to be studied.
8. The Wall Street Journal and other business periodicals often carry reports of companies that have not met their sales or profit forecasts. What are some reasons a company might not meet its forecasts? What suggestions could you make for improving the effectiveness of forecasting?
 A company could fail to meet its forecasts for a number of reasons. For instance, the internal or external economic situation might experience a decline. A technological advancement may render a company’s product useless, or a new competitor might enter the marketplace. However, the possibility of these types of developments does not justify eliminating forecasting. Rather, doing forecasts for different scenarios can increase the effectiveness of an organization’s ability to forecast in general. Even the use of fairly simple forecasting techniques can improve the effectiveness of forecasting. Moreover, shortening the length of the time forecast can help improve the effectiveness of an organization’s forecasting efforts.
9. In what ways is managing a project different from managing a department or other structured work area? In what ways are they the same?
 A project manager is concerned with a one-time-only set of activities that has a definite beginning and ending point in time, whereas a manager of a department or other structured work area supervises an ongoing set of activities with no single, specific ending date. However, both types of management must complete activities on time, within budget, and according to specifications. In addition, both types of management involve the four management functions of planning, organizing, leading, and controlling.
10. What might be some early warning signs of: (a) a new competitor coming into your market; (b) an employee work stoppage; or (c) a new technology that could change demand for your product?
Remaining alert to the external and internal environments of the organization is a key responsibility of every manager. The activities named in the answer to Question 6 above are important ways to discover news about competitors and technological trends. One of the vital qualities of excellent managers is their approachability and the trust they have established between their employees and themselves. When employees trust their manager and do not fear repercussions if they report knowledge about impending negative events, a manager may learn about potential problems in time to avert disaster.

ADDITIONAL CHAPTER INFORMATION 

American Productivity and Quality Center (APQC) Founder and Chairman Jack Grayson describes organizations who benchmark as being humble enough to admit that another company is better at something and being wise enough to learn how to match or surpass that company.
Benchmarking is the process of identifying, sharing, and using best practices to improve business processes.  Implementing best practices provides the greatest opportunity for strategic, operational, and financial advantage.  Many professional organizations have established benchmarking resources on their Web sites.  APQC provides an excellent set of resources on benchmarking, best practices, and other quality-related resources.
Students can visit the APQC Web site at [http://www.apqc.org] to review the various resources and tools available to contemporary organizations that are seeking to improve their quality and processes.