Corporate Planning - Literature review Example

Corporate Planning Introduction Corporate planning in a broader sense encompasses vision, strategies and values of the management that governs its direction, allocation of resources and decision making. Planning in corporate companies is guided by several factors which include strengths and weaknesses of the organization, structure of the organization, influence of the environment in policy making, the need to change and the business culture in planning and policy making. Key variables involved in the process vary from industry to industry and company to company within the same industry. Variables relating to industry are multifarious such as status of economy, demographic changes and regulatory regime. Apart from these environmental variables, company specific variables include competition, productivity, profitability and labour relations. Opportunities and threats identified in the environment need to be analyzed with reference to the strengths and weaknesses of the company for mitigating the threats and eliminating the weaknesses to achieve the organizational objectives through efficient allocation of resources. Strategic planning Porter (1988, p. 35) states “Corporate strategy is what makes the corporate whole add up to more than the sum of its business unit parts.” In the hierarchy of planning phases strategic planning is concerned with decisions related to allocation of resources, exploitation of opportunities, mitigating risks, avoiding threats and improving productivity and profitability in the business. Strategic planning is linked to policy decisions, regulatory issues and budgetary constraints with the long terms goals in terms of sustainability, stability and shareholder value. Marrewijk and Werre (2003, p. 1) stated “Each organization should choose its own specific ambition and approach regarding corporate sustainability, matching the organization’s aims and intentions and aligned with the organizational strategy, as an appropriate response to the circumstances in which it operates.” Tactical/operational planning Tactical planning is carried out within the framework of the strategic plan. It involves scheduling of the operations after taking into account the factors such as availability of factors of production, infrastructure, seasonality and competition. Operational planning is required to be carried out at departmental level and covers schedules or targets relating to operations which may include supply chain management, departmental targets, machinery maintenance and recruitment of contract labour. Tactical planning derives its authority and inputs from strategic planning. The inputs could be given by way of resources and targets. Proper delegation of authority ensures utilization of the allocated resources for achievement of the targets. In the operational planning the operations are segregated division wise and the targets are subdivided department wise for exercising control over output by comparing it with the plans. There may be several layers in operational and tactical plan than strategic plan. Time line in planning The understanding of the difference between strategic and tactical/operational planning in right perspective is very important in planning process. The time scale in tactical planning is restricted to few years and integrated into the broader time scale related to strategic plan depending upon the size of the business and the nature of operations which may vary from industry to industry. Time horizon in the case of strategic planning can span into decades depending upon several factors such as business cycle, product cycle, changing tastes and fashions of the customers and technological developments taking place in the industry. The time horizon could be broken down to smaller time scales for execution in stages for better control. The nature of constraints in execution of the plans varies significantly in the case of strategic and operational planning. An integrated approach to planning is essential to eliminate the inconsistencies that may arise due to discrepancies or overlapping of several factors. Operational planning in specific departments or divisions are required to be carried out on a smaller time line of one year or less. Strategic change and innovation The self-scanner checkout terminal has been introduced improve the checking system or to minimize the inconvenience to the customers in super market. It is an innovative product from the angle of the supplier of the system due to its usefulness in administration of queues in super market. However, this change has no strategic importance from the business point of view for super market. It comes under the purview of operational planning as it is related to a function in a particular department. There have been many instruments or products such as trolleys, electronic weighing scales or video monitoring introduced in the evolution of super markets over years. The marketers of these products can move into the competitors’ supermarkets and sell these products. Therefore, use of such contrivances in a business cannot be treated as innovative. The approach to managing the innovation is very important. Chesbrough et al. (2006, p. 1) stated “Open innovation is a paradigm that assumes that firms can and should use external ideas as well as internal ideas, and internal and external paths to markets, as they look to advance their technology.” Technology per se cannot, in the business context, introduce innovation in an organization. Markets provide immense opportunities that should be exploited profitably by the companies. But, at the same time it is fraught with risks. Increasing business value through innovative business practices and processes through innovation is essential and critical for success in business. Change management strategy involves organizational personnel at all levels. In managing change, resistance to changes needs to be taken into account. Development of skills is very important in the dynamic business environment. The change needs to begin from top and the leadership should provide direction and motivate people to embrace the changes. The people in the organization should be convinced about the need for change, growth prospects and ability of the leadership in achieving the objectives. In making changes, willingness on the part of the leaders to accept responsibility is essential. Establishing effective communication at all levels is a prerequisite for change management. Organizational culture should be developed to meet the challenges of change management by identifying the causes of problems, conflicts or differences and remove these obstacles for improving the organizational behaviour. In the change management process all changes are not expected to take place in accordance with the plans. Continuous assessment of implementation is necessary for keeping the management to be prepared for the unexpected. Adaptability of the organization to the environmental changes is very important for its success and sustainable growth. Levels of corporate planning Planning at various levels in a management hierarchy affect all the stakeholders in the business such as creditors and suppliers as they are involved either directly or indirectly. Vision and mission statements govern the structure and values of the company. Corporate level planning inter alia is related to goal setting, area of operation or types of businesses a company wants to do, allocation of resources among various businesses or operations, type of management whether centralized or decentralized and growth strategies whether organic or inorganic. Strategic planning involved at this level is long term in nature. Therefore, an element of uncertainty is inherent in strategic planning. Consequently, planning process and policy making undergoes changes over years keeping in tune with the environmental factors which could be technological, economical or social. Corporate level strategies aim to develop synergies among various divisions of the corporation. Company or unit level planning focuses on business activities of a company within the corporate structure. Planning processes of the companies within the group are in sync with the corporate goals and integrated into the corporate plan. The performance goals for all the divisions within the company are fixed for proper allocation of resources. The opportunities available, risks in the business, competitive advantages and cost advantages are taken into consideration while fixing the divisional or departmental targets. Opportunities, risks and competition relating to the businesses are influenced by external factors and the forecasts based on which the planning is made should be reasonably accurate. Planning at operational level focuses on departmental goals in terms of volume, turnover, cost or profitability involving middle level managers. Operational level planning is associated with business processes in various divisions like finance, manufacturing, marketing and HRD. The strategies are translated into action plans at this level. Depending upon the size of the organizations the departmental plans will be further sub-divided into operational plans involving smaller groups functioning under departments with separate targets. Budget, expressed in financial terms is a business plan closely linked to company or unit level planning with functional goals. While budgets are prepared on annual basis, corporate planning could be short or long term. Levels of planning, management involvement and time-scale According to Dixon (1993, p. 28) “They differ from each other, first, in the time-scale that each level covers, and, secondly, in the amount of detail they contain. As a general rule, the longer the time-period covered by the plan, the less the detail contained in the plan, and the greater the degree of uncertainty and risk involved...The relationship between these factors are illustrated below: Plans Time-scale Degree of detail Seniority of managers Strategic 5-10 years Vague Board level Management 12 mths High Department heads Operational 1-4 weeks Very high junior managers” The time frames and the plans are not very rigid and it could vary due to size of the organization and nature of the industry. Nevertheless, operational plans act as a basis for comparison of actual with the planned performance for the purpose of exercising effective control over the operations and take remedial actions if the deviations are significant or revise the plans to the realistic and achievable levels. The time line of the plan could be continuously changed in the case of rolling plan by discarding the year closed and adding one in future. Based on the achievements in the past and the changes proposed in future, the planning process would be suitably redesigned and reoriented with modifications in the goals, if necessary. Decision making Decision making is involved with choice between alternatives using judgment. The decisions are taken at various levels of management and depending upon the management levels, the significance and nature of decisions vary. (1997, p. 24) stated “interactive character of decision making extends over time so that the development of beliefs, rules and expectations in one organization is intertwined with their development in others.” The context in decision making could be certain, risky or ambiguous. The propensity to take risks varies from person to person. However, the ability to take risks under the available circumstances largely determined by the management level and the authority attached to it. Urgency and importance of the issue forces the people to take decisions based on the information available. The decision support system needs to be established for facilitating decision making process involving complex issues. Adhering to accepted criteria is important in decision making while evaluating the alternatives. When an alternative is chosen for implementation, subsequent evaluation of the action based on feedback enhances quality in decision making. When the environmental factors are not conducive the implementation of decisions could be affected. Therefore, while the decisions are taken with a view to maximise the profits in the business context, minimisation of losses under adverse circumstances is also considered important in decision making. Innovation and its impact on growth strategies In the evolution of a business the internal or external environmental changes necessitates changes in the ways a company doing its business. A progressive management or the promoter with business acumen and intuition will be proactive in taking decisions anticipating changes. Hamel and Prahlad (p. 63) stated “A company’s strategic orthodoxies are more dangerous than its well-financed rivals.” However, most of the companies react to the impacts caused by the environmental forces. Certain incidents or ground level changes in a business trigger actions by the management with a view to protect the growth of the business and ensure sustainability in the long run. Progressive companies are adopting ‘open innovation management’ strategies. Programs such as Total Quality Management (TQM) and Balanced Score Board have been accepted as management tools for improving quality and performance. The management approach to important factors like cost control, productivity and quality needs to be revisited often for sustainability and growth to enhance shareholder value. New innovations in general cause extinction of the existing industries in many cases. For example, convergence of technology acted as a death knell to several industries or severely affected the existing industries which include photocopiers, cameras, projectors and newspapers. Even within the technology sphere cassettes have replaced by discs and the personal computers have been replaced by laptops and both by mobile phones on convergence. Schumpeter (1942, pp-83-84) states “The process of Creative Destruction is the essential fact about capitalism” and argues that competition from new technology strikes at the foundations of the existing firms. New types of industries with innovative technologies and new products grow in a faster pace in economy. Slow diffusion of technology in a country causes distortions in the economy. Creative destruction causes hardships to people in short term due to closure of industries. However, apart from employment generation, creative destruction has increased the peoples’ standard of life and acts as a foundation for vibrant economy. There are also criticisms on creative destruction as it increases instability and uncertainty. Stuart and Milstein (1999, p. 23) observed “It is argued that the emerging challenge of global sustainability is a catalyst for a new round of creative destruction that offers unprecedented opportunities. Todays corporations can seize the opportunity for sustainable development, but they must look beyond continuous, incremental improvements.” Long wave business cycle theory Business cycles are also called as economic cycles which could last for few or several years. Economists detect a pattern in recessions which are recurring in long waves in a capitalistic system. The main proponents of long wave business cycle theory are N.D. Kondratieff and J.A. Schumpeter though several other economists contributed to the development of the theory. Kondratieff “distinguished three kinds of cycles: long ones of fifty years’ duration, middle ones of seven to ten years’, and short ones of three to four years’ He measured long waves by a double decomposition of time series - eliminating the trend and showing the deviations from it smoothed with a nine-year moving average.” (Maddison, 1991, p. 4) The growth of economic activities could be measured by Gross Domestic Product. However, the business cycles are difficult to predict and the effects of government intervention for regulating the growth are uncertain. Short and medium range business cycles Kitchin cycle is a short term business cycle. Increase in demand for products in a growth phase of an economy leads manufacturers to increase their production. The employment generation caused in this process results in increased consumption and demand. This multiplier effect caused in the growth phase will be halted at some point due to excessive production. The downward adjustment in production takes time due to information lag. After reaching equilibrium, the revival takes place again. The understanding of these economic cycles is very important in forecasting and making adjustments in production and inventory levels. Comin et al. (2009, P. 29) stated “the slow diffusion of technologies to Mexico generates a hump-shaped response in Mexican output in response to US shocks.” Juglar identified economic cycles which are 8 to 11 years long. There are four important stages in this cycle, expansion, crisis, recession and recovery. We can observe certain similarities in short term and medium range business cycles. The adjustments between aggregate demand and aggregate supply takes place within the cycle which causes expansion and recovery in the economic process. Forecasting is the basis for planning and budgeting. The companies’ ability to adapt to the economic environment is an important factor for their sustainable growth and development. Learning outcomes and conclusion Planning in business establishes the culture of continuously evaluating the business processes in relation to the plans to identify the barriers in achieving the objectives and take remedial actions on time. Planning ensures systematic approach to directing and controlling in an organization. Without planning directing and controlling will be difficult. Strategic, tactical and operational planning should be seamlessly integrated to avoid overlapping for effective implementation of plans. Environmental changes need to be properly factored in planning for better adaptability and sustainability. For ‘change management strategy’ to be successful, company-wide communication all levels is important. The decision support system in organizations should be strengthened to improve quality in decision making. The company should be willing to embrace new innovative techniques in planning and management. This will not only improve quality and performance in the organization but also make them think ahead of its competitors in business. Timely decision making for reacting to the environmental changes will avoid accumulation of inventories in business and ensure capital investment decisions in line with the economic cycle at appropriate times. References Chesbrough, H., Vanhaverbeke, W. and West, J., 2006. Ed., Open Innovation:Researching a New Paradigm: Researching a New Paradigm, Oxford University Press, Oxford. Comin, D., Loayza, N., Pasha, F. and Serven, L., 2009. Medium – Term Business Cycles in Developing Countries, Policy Research Working Paper 5146. The World Bank Development Research Group Macroeconomics and Growth Team. Dixon, R., 1993. The Management Task, Third Edition, Elsevier, Oxford Hamle, G. and Prahlad C. K., 1989. Strategic Intent, Harvard Business Review, May-June 1989. pp. 63-76 Maddison, A., 1991. Business Cycles, Long Waves and Phases of Capitalist Development (abbreviated version of chapter 4 of A. Maddison, Dynamic Forces in Capitalist Development, Oxford University Press, 1991) [online] Available at: [Accessed 8 April 2013]. Marrewijk, M. and Werre, M., 2003. Multiple Levels of Corporate Sustainability, Journal of Business Ethics, 44: 107-119, 2003. Porter, M. E., 1988. From competitive advantage to corporate strategy, McKinsey Quarterly, Spring 1988, pp. 35-66. Schumpeter, J. A., 1942. Capitalism, Socialism and Democracy, Harper & Row, New York. Shapira, Z., 1997. Organizational Decision Making, Cambridge University Press, Cambridge. Stuart L., H. and Milstein, M. B., 1999. Global Sustainability and the Creative Destruction of Industries, Sloan Management Review (1999), Volume: 41, Issue: 1, pp. 23-33. Read More