FREE online courses on Introduction to Strategic Management - Path to Strategic Management - Phase III Externally Oriented Planning

 

In an environment of rapid change, an unforeseen event can render market forecasts obsolete almost overnight.  Having repeatedly experienced such frustrations, planners begin to lose their faith in forecasting and instead try to understand the basic marketplace phenomena driving change.  The result is often a new grasp of the key determinants of business success and a new level of planning effectiveness.

 

In this phase, resource allocation is both dynamic and creative.  The Phase III planners now look for opportunities to “shift the dot” of a business on a portfolio matrix into a more attractive sector, either by developing new business capabilities or by redefining the market to better fit their companies' strengths.  A Japanese conglomerate with an under-utilised steel-fabricating capacity in its shipyard and a faltering high-rise concrete smokestack business combined them into a successful pollution control venture.

 

In the search for new ways to define and satisfy customer needs, Phase III strategists try to look at their companies' product offerings and those of their competitors from the viewpoint of an objective outsider.  For example, one heavy equipment manufacturer assigned a strategy team to reverse-engineer the competitor's product, reconstruct its manufacturing facilities on paper, and estimate the manufacturing cost for the competitor's product in the competitor's plant.  The team members discovered that design improvements had given the competitor such a commanding advantage in production cost that there was no point in trying to compete on price.  But they also found that their own product's lower maintenance and fuel costs offered customers clear savings on a life-cycle cost advantages.  Over the next three years, the company increased its market share by 30% and doubled its net profit by focusing on these points in its marketing campaign.

 

A distinguishing characteristic of Phase III planning in diversified companies is the formal grouping of related businesses into Strategic Business Units (SBUs) or organisational entities large and homogeneous enough to exercise effective control over most factors affecting their businesses.  The SBU concept recognises two distinct strategic levels: corporate decisions that affect the shape and direction of the enterprise as a whole, the business-unit decisions that affect only the individual SBU operating in its own environment.  Strategic planning is thus packaged in pieces relevant to individual decision-makers, and strategy development is linked to strategy implementation as the explicit responsibility of operating management.

 

There are limitations to the SBU concept.  Many enterprises, such as vertically integrated companies in process-oriented industries e.g. Reliance Industries, cannot be neatly sorted out into discrete business units because their businesses share important corporate resources – sales, manufacturing, and/or R&D. In other situations, strategy may dictate a concerted thrust by several business units to meet the needs of a shared customer group, such as selling to the automotive industry.  In still other cases, the combined purchasing power of several SBUs or the freedom to transfer technologies from one business to another can be more valuable than the opportunity to make profit-oriented decisions in discrete business units.  For example a major supplier of industrial equipment divided its electric utility business into two SBUs, a power generation business and a power transmission business.  Much too late, top management discovered that neither SBU had considered pollution control equipment to be part of its legitimate charter.  As a result, the company found itself unable to bid on that business – which accounted for a full quarter of electric utility capital spending.

 

The most significant way in which Phase III differs from Phase II is that corporate planners are expected to offer a number of alternatives to top management.  Each choice is usually characterised by a different risk/ reward profile or gives priority to a different objective (for example, greater employment security at some cost to the return to the shareholders).  This change is quite pervasive; in fast, one simple way of determining whether a company has advanced to Phase III is to ask managers whether their boss would regard presenting strategy alternatives as a sign of indecisiveness.

 

The “alternate strategies” approach becomes both the strength and the weakness of Phase III planning, for it begins to impose a heavy – sometimes unacceptable – burden on top management.  As the organisational capability for detailed product/ market and business-unit planning spreads through the company, the number of issues raised, alternatives surfaced, and opportunities developed expands alarmingly.  Top managers soon recognise that planners and managers are making explicit choices deep down in the company without top-level participation – and that these decisions could significantly affect their company's long-term competitive strength and well-being.  This knowledge unsettles top management and pushes it to a heavier involvement in the planning process, Phase IV.