Summarize the following chapter: (Basic Elements of Planning and Decision Making)

Obviously, insurance companies incur immense risks because of the number of policies they issue, but you may not know that most of them also share their biggest risks with other insurers. Here's how it works.* Let's say that Insurance Co. learns of a hurricane that will obligate it to pay out a large sum of money to people whose property is damaged. It doesn't know exactly how much it will have to pay outits liabilitybut it estimates a total of $100million. IC#1 thus makes a deal with Insurance Co.2 (IC#2). It gives a check for $75million, and in return, IC#2 agrees that IC#1's liability is limited to $100million; if damages are ultimately greater than $100million, IC#2 will pay the difference. What's the advantage to IC#2? It can invest and earn money on the $75million while waiting for claims that may or may not be filed. In other words, buying liability can be a lot like selling insurance. Now, IC#2 might be tempted to claim some of the $75million as income, but that's not a good idea. Why? Because IC#2 holds the money at too great a risk: What if it has to pay it to policyholders who file claims? Let's say, however, that IC#2 is having a bad year and decides to prop up its share price by including a good chunk of the $75million in its annual earnings report. In that case, "[Joseph Cassano is] almost singlehandedly responsible for bringing AIG down and [in the process] the economy of this country. [He] basically took people's hardearned money, gambled it, and lost everything." IC#2 has committed fraud (it's misled investors about its performance), and the question now facing its decision makers is twofold: What will be the compound repercus sions of a bad business decision (making the deal with IC#1) and a bad legal decision (defrauding investors)? How likely is it that insurance company decision makers in the real world would place themselves in such a dilemma? Consider the case of American Inter national Group (AIG), which had become the world's numberone international insurance company by being Insurance Co.2 to just about the whole world. In the mid1980s, AIG branched out from the insurance busi ness and started dealing in the financial market. This end of the business was handled by a branch locatedin London and called AIG Financial Products (AIGFP). AIGFP was basically in the business of taking on finan cial risk from banks and other insurers that didn't want it, and it made a great deal of money by investing the premiums that companies paid it to take on their risk. In addition, in about 2001, AIGFP increasingly started acting like Insurance Co.1 in our example: In particular, under new head Joseph Cassano, it began selling bil lions in risky loans to banks. The banks stood to make money by using the loansthat is, the money owed on themto back securities which, in turn, they sold to various investors, while AIG pocketed fees for handling the sales. What if borrowers of the original loanssay, U.S. homebuyersdefaulted? AIG would have to reim burse the banks to which it had sold those loans. It was risky business, but in August 2007, Cassano assured in vestors that "it's hard for us... to even see a scenario, within any kind of realm or reason, that would see us losing $1 in any of those transactions." In late 2007, when the bottom fell out of the U.S. housing marketwhich in fact furnished the bulk of the risky loans that AIG had been sellingthe company lost $5billion in the final three months of the year. And then it had a really bad year. It's a long story, but we'll simply report here that AIG lost $61.7billion in the third quarter of 2008 alone (that's $28million an hour, every hour on the hour, for three months). As it turns out, AIG didn't have nearly enough money to pay off the loans on which it had gambled, and in retrospect, Cassano's transac tions through early 2006 look more and more like a giant Ponzi scheme: He was attracting new investments with guarantees backed by profits that earlier investments had in fact failed to deliver. Evidence also suggests that Cassano knew that AIG was in serious trouble as early as 2001 or 2002. So what, then, were his motives? Why did he compound a bad business decision by continuing to make transactions that were all but certain to lose large sums of money? And why did he expose himself to potential criminal liability by understating both the risk and the losses to investors? Such questions still mystify more than one Wall Street expert. Cassano was asked to step down in March 2008, as losses continued to pile up. Before the year was out, the U.S. government, fear ing the repercussions of an AIG bankruptcy, had agreed to a bailout which, between September 2008 and June 2010, eventually poured $182billion into the companymore than the value of the gold reserves at Fort Knox. Congresswoman Jackie Speier of California didn't particularly care what Cassano's motives were, but she was convinced that he was

almost singlehandedly responsible for bringing AIG down and [in the process] the economy of this country. [He and his cohorts] basically took people's hardearned money, gambled it, and lost everything. [H]e must be held accountable for the dereliction of his duty and for the havoc he's wrought on America. I don't think the American people will be content... until we hear the click of the handcuffs on his wrists.

Unfortunately, it's hard to build a criminal case against someone for risking a trilliondollar company (or even the whole financial system), so the U.S. government opted to investigate Cassano and his AIGFP team for mislead ing investors. In September 2007, for examplejust two months after Cassano's assurance that AIG wasn't likely to lose as much as $1 on any of his transactionsthe company confirmed probable losses of $352million. By the end of the year, AIG had upped the total to a more realistic $11.1billion in expected losses. As a former fed eral prosecutor put it, "A jump like that in three months raises real questions," but AIG issued a statement say ing that "neither AIG nor AIGFP is aware of any fraud or malfeasance in connection" with Cassano's transactions; AIG's collapse, asserted company officials, resulted from "what, with hindsight, turned out to be bad business decisions." Two years later, federal prosecutors have yet to bring charges against Cassano or anyone else at AIG.1.

Decision Making and the Planning Process

Decision making is the cornerstone of planning. Several years ago, Procter & Gamble (P&G) set a goal of doubling its revenues over a ten-year period. The firm's top manag ers could have adopted an array of alternative options, including increasing revenues by only 25percent or increasing revenues threefold. The time frame for the projected revenue growth could also have been somewhat shorter or longer than the ten-year period that was actually specified. Alternatively, the goal could have included diversifying into new markets, cutting costs, or buying competing businesses. Thus P&G's exact mix of goals and plans for growth rate and time frame reflected choices from among a variety of alternatives. More recently, IBM announced its plan to achieve earnings per share of $20 (up from $11.52 in 2010) by 2015. The company also plans to reach $100 billion in cash flow and return 70 percent to shareholders by that same year.2 This goal, while different from P&G's in several ways, nevertheless reflects the same mix of decisions regarding area, level, and time frame. Clearly, then, decision making is the catalyst that drives the planning process. An orga nization's goals follow from decisions made by various managers. Likewise, deciding on the best plan for achieving particular goals also reflects a decision to adopt one course of action as opposed to others. We discuss decision making per se in Chapter 9. Our focus here is on the planning process itself. As we discuss goal setting and planning, however, keep in mind that decision making underlies every aspect of setting goals and formulating plans.3 The planning process itself can best be thought of as a generic activity. All organizations engage in planning activities, but no two organizations plan in exactly the same fashion. Figure 7.1 is a general representation of the planning process that many organizations attempt to follow. But, although most firms follow this general framework, each also has its own nuances and variations.4 As Figure 7.1 shows, all planning occurs within an environmental context. If managers do not understand this context, they will be unable to develop effective plans. Thus understanding The planning process takes place within an environmental context. Managers must develop a complete, and thorough understanding of this context to determine the organization's mission and to develop its strategic, tactical, and operational goals and plans. the environment is essentially the first step in planning. The four previous chapters cover many of the basic environmental issues that affect organizations and how they plan. With this understanding as a foundation, managers must then establish the organization's mission. The mission outlines the organization's purpose, premises, values, and directions. Flowing from the mission are parallel streams of goals and plans. Directly following the mission are strategic goals. These goals and the mission help determine strategic plans. Strategic goals and plans are primary inputs for developing tactical goals. Tactical goals and the original strategic plans help shape tactical plans. Tactical plans, in turn, combine with the tacti cal goals to shape operational goals. These goals and the appropriate tactical plans deter mine operational plans. Finally, goals and plans at each level can also be used as input for future activities at all levels. This chapter discusses goals and tactical and operational plans.

Organizational Goals

Goals are critical to organizational effectiveness, and they serve a number of purposes. Organizations can also have several different kinds of goals, all of which must be appropriately managed. And a number of different kinds of managers must be involved in setting goals.

Purposes of Goals

Goals serve four important purposes.5 First, they provide guidance and a unified direction for people in the organization. Goals can help everyone understand where the organization is going and why getting there is important.6 Top managers at General Electric have set a goal that every business owned by the firm will be either number one or number two in its industry. This goal helps set the tone for decisions made by GE managers as it competes with other firms like Whirlpool and Electrolux.7 Likewise, P&G's goal of doubling revenues, noted above, helps everyone in the firm recognize the strong emphasis on growth and expansion that is driving the firm, while IBM's goal reflects a clear focus on financial performance. Second, goal-setting practices strongly affect other aspects of planning. Effective goal set ting promotes good planning, and good planning facilitates future goal setting. For example, the ambitious revenue goal set for P&G demonstrates how setting goals and developing plans to reach them should be seen as complementary activities. The strong growth goal should encourage managers to plan for expansion by looking for new market opportunities, for example. Similarly, they must also always be alert for competitive threats and new ideas that will help facilitate future expansion. IBM, meanwhile, is focusing on balancing revenue growth with cost reductions. Third, goals can serve as a source of motivation for employees of the organization. Goals that are specific and moderately difficult can motivate people to work harder, especially if attaining the goal is likely to result in rewards.8 The Italian furniture manufacturer Industrie Natuzzi SpA uses goals to motivate its workers. Each craftsperson has a goal for how long it should take to perform her or his job, such as sewing leather sheets together to make a sofa cushion or building wooden frames for chair arms. At the completion of assigned tasks, workers enter their ID numbers and job numbers into the firm's computer system. If they get a job done faster than their goal, a bonus is automatically added to their paycheck.

"We don't meet our target every year, but . . . we're looking at continuous improvement."

Finally, goals provide an effective mechanism for evalu ation and control. This means that performance can be as sessed in the future in terms of how successfully today's goals are accomplished. For example, suppose that officials of the United Way of America set a goal of collecting $250,000 from a particular small community. If, midway through the campaign, they have raised only $50,000, they know that they need to change or intensify their efforts. If they raise only $100,000 by the end of their drive, they will need to carefully study why they did not reach their goal and what they need to do differently next year. On the other hand, if they succeed in raising $265,000, evaluations of their efforts will take on an entirely different character. In 2009 the Food and Drug Administration (FDA) revealed that it was not meeting the goals it had set for itself for auditing food safety inspection pro grams. To address the issue, the FDA also announced plans to overhaul its inspection pro gram and to tie individual performance ratings to food safety audits.

Kinds of Goals

Organizations establish many different kinds of goals. In general, these goals vary by level, area, and time frame.12 Figure 7.2 provides examples of each type of goal for a fast-food chain.

Level Goals are set for and by different levels within an organization. As we noted earlier, the four basic levels of goals are the mission and strategic, tactical, and operational goals. An organization's mission is a statement of its "fundamental, unique purpose that sets a busi ness apart from other firms of its type, and identifies the scope of the business's operations in product and market terms."13 For instance, Starbucks' mission statement is to be "the premier purveyor of the finest coffee in the world while maintaining our uncompromising principles while we grow." The principles referred to in the mission statement include:

Provide a great work environment and treat each other with respect and dignity.

Embrace diversity as an essential component in the way we do business.

Apply the highest standards of excellence to the purchasing, roasting, and fresh delivery of our coffee.

Develop enthusiastically satisfied customers all of the time.

Contribute positively to our communities and our environment.

Recognize that profitability is essential to our future success.

Hence, the mission statement and basic principles help managers at Starbucks make decisions and direct resources in clear and specific ways. Strategic goals are goals set by and for top management of the organization. They focus on broad, general issues. For example, Starbucks has a strategic goal of increasing the profit ability of each of its coffee stores by 25 percent over the next five years. Tactical goals are set by and for middle managers. Their focus is on how to operationalize actions necessary to achieve the strategic goals. To achieve Starbucks' goal of increasing its per-store profitability, managers are working on tactical goals related to company-owned versus licensed stores and the global distribution of stores in different countries. Operational goals are set by and for lower-level managers. Their concern is with shorterterm issues associated with the tactical goals. An operational goal for Starbucks might be to boost the profitability of a certain number of stores in each of the next five years. (Some managers use the words objective and goal interchangeably. When they are differentiated, however, the term objective is usually used instead of operational goal.)Area Organizations also set goals for different areas. The restaurant chain shown in Figure 7.2 has goals for operations, marketing, and finance. Hewlett-Packard (HP) .

Organizations develop many different types of goals. A regional fast-food chain, for example, might develop goals at several different levels and for several different areas. Accounting manager Split accounts receivable/payable functions from other areas within two years Computerize payroll system for each restaurant this year Pay all invoices within thirty days Advertising director Develop regional advertising campaigns within one year Negotiate 5 percent lower advertising rates next year Implement this year's promotional strategy Restaurant manager Implement employee incentive system within one year Decrease waste by 5 percent this year Hire and train new assistant manager Vice president-nance Keep corporate debt to no more than 20 percent of liquid assets for next ten years Revise computerized accounting system within ve years Earn 9 percent on excess cash this year President and CEO Provide 14 percent return to investors for at least ten years Start or purchase new restaurant chain within ve years Negotiate new labor contract this year Mission: Our mission is to operate a chain of restaurants that will prepare, and serve high-quality food on a timely basis and at reasonable prices. Vice president-marketing Increase per store sales 5 percent per year for ten years Target and attract two new market segments during next ve years Develop new promotional strategy for next year Vice president-operations Open 150 new restaurants during next ten years Decrease food-container costs by 15 percent during next ve years Decrease average customer wait by thirty routinely sets production goals for quality, productivity, and so forth. By keeping activi ties focused on these important areas, HP has managed to remain competitive against organizations from around the world. Human resource goals might be set for employee turnover and absenteeism. 3M and Rubbermaid set goals for product innovation. Simi larly, Bath & Body Works has a goal that 30 percent of the products sold in its retail outlets each year will be new. In addition to its profit growth goals, Starbucks also has financial goals related to return on investment and return on assets.

Time Frame Organizations also set goals across different time frames. In Figure 7.2, three goals are listed at the strategic, tactical, and operational levels. The first is a long-term goal, the second an intermediate-term goal, and the third a short-term goal. Some goals have an explicit time frame (open 150 new restaurants during the next ten years), and others have an open-ended time horizon (maintain 10 percent annual growth). Finally, we should also note that the meaning of different time frames varies by level. For example, at the strategic level, "long term" often means ten years or longer, "intermediate term" around five years or so, and "short term" around one year. But two or three years may be long term at the operational level, while short term may mean a matter of weeks or even days.

Responsibilities for Setting Goals

Who sets goals? The answer is actually quite simple: All managers should be involved in the goal-setting process. Each manager, however, generally has responsibilities for setting goals that correspond to his or her level in the organization. The mission and strategic goals are generally determined by the board of directors and top managers. Top and middle managers then work together to establish tactical goals. Finally, middle and lower-level managers are jointly responsible for operational goals. Many managers also set individual goals for them selves. These goals may involve career paths, informal work-related goals outside the normal array of official goals, or just about anything of interest or concern to the manager.

Managing Multiple Goals

Organizations set many different kinds of goals and some times experience conflicts or contradictions among goals. Nike had problems with inconsistent goals a few years ago. The firm was producing high-quality shoes (a manufacturing goal), but they were not particularly stylish (a marketing goal). As a result, the company lost substantial market share when Reebok and Adidas started making shoes that were both high quality and fashionable. When Nike management recognized and corrected the incon sistencies, Nike regained its industry standing. To address such problems, managers must under stand the concept of optimizing. Optimizing involves balancing and reconciling possible conflicts among goals. Because goals may conflict with one another, the manager must look for inconsistencies and decide whether to pursue one goal to the exclusion of another or to find a midrange target between the extremes. For example, Home Depot first achieved success in the retailing industry by offering do-it-yourselfers high-quality home improvement products at low prices and with good service. The firm then added an additional goal of doubling its revenues from professional contractors. To help achieve this, many Home Depot stores have separate checkout areas and special products for contrac tors. The challenge, however, has been to keep loyal individ ual customers while also satisfying professional contractors.15 Home Depot's biggest competitor, Lowe's, is also optimiz ing, but among different alternativestrying to retain its core customer group (primarily male) while also appealing more to women.16 Starbucks faces optimization challenges as it at tempts to maintain its cachet as an upscale purveyor of fine coffees while also opening roadside drive-through stores. And the airlines almost always seem to face a classic optimizing question carrying more passengers for lower prices or fewer passengers for higher prices.

Organizational Planning

Given the clear link between organizational goals and plans, we now turn our attention to various concepts and issues associated with planning itself. In particular, this section identifies kinds of plans, time frames for planning, who is responsible for planning, and contingency planning.

Kinds of Organizational Plans

Organizations establish many different kinds of plans. At a general level, these include strate gic, tactical, and operational plans.

Strategic Plans Strategic plans are the plans developed to achieve strategic goals. More precisely, a strategic plan is a general plan outlining decisions of resource allocation, pri orities, and action steps necessary to reach strategic goals. These plans are set by the board of directors and top management, generally have an extended time horizon, and address questions of scope, resource deployment, competitive advantage, and synergy. We discuss strategic planning further in Chapter 8.

Tactical Plans A tactical plan, aimed at achieving tactical goals, is developed to implement specific parts of a strategic plan. Tactical plans typically involve upper and middle management and, compared with strategic plans, have a somewhat shorter time horizon and a more specific and concrete focus. Thus tactical plans are concerned more with actually getting things done than with deciding what to do. Tactical planning is covered in detail in a later section.

Operational Plans An operational plan focuses on carrying out tactical plans to achieve operational goals. Developed by middle and lower-level managers, operational plans have a short-term focus and are relatively narrow in scope. Each one deals with a fairly small set of activities. We also cover operational planning in more detail later.

Time Frames for Planning

As we noted previously, strategic plans tend to have a long-term focus, tactical plans an intermediate-term focus, and operational plans a short-term focus. The sections that follow address these time frames in more detail. Of course, we should also remember that time frames vary widely from industry to industry

Long-Range Plans A long-range plan covers many years, perhaps even decades. The founder of Matsushita Electric (maker of Panasonic and JVC electronic products), Konosuke Matsushita, once wrote a 250-year plan for his company!19 Today, however, most managers recognize that environmen tal change makes it unfeasible to plan too far ahead, but large firms like Ford Motor Company and ExxonMobil still routinely develop plans for five- to ten-year intervals. Ford executives, for example, have a pretty good idea today about new car models that they plan to introduce during the next decade. The time span for longrange planning varies from one organization to another. For our purposes, we regard any plan that extends beyond five years as long range. Managers of organizations in complex, volatile environments face a special dilemma. These organizations probably need a lon ger time horizon than do organizations in less dynamic environments, yet the complexity of their environment makes long-range planning difficult. Managers at these companies therefore develop long-range plans but also must constantly monitor their environment for possible changes.

Intermediate Plans An intermediate plan is somewhat less tentative and subject to change than is a long-range plan. Intermediate plans usually cover periods from one to five years and are especially important for middle and first-line managers. Thus they generally parallel tac tical plans. For many organizations, intermediate planning has become the central focus of planning activities. Nissan, for example, fell behind its domestic rivals Toyota and Honda in profitability and productivity. To turn things around, the firm developed several plans rang ing in duration from two to four years, each intended to improve some part of the company's operations. One plan (three years in duration) involved updating the manufacturing technol ogy used in each Nissan assembly factory. Another (four years in duration) called for shifting more production to foreign plants to lower labor costs. And the successful implementation of these plans helped turn things around for Nissan.

Short-Range Plans Managers also develop short-range plans, which have a time frame of one year or less. Short-range plans greatly affect the manager's day-to-day activities. There are two basic kinds of short-range plans. An action plan operationalizes any other kind of plan. When a specific Nissan plant was ready to have its technology overhauled, its managers focused their attention on replacing the existing equipment with new equipment as quickly and as efficiently as possible, to minimize lost production time. In most cases, this was done in a matter of a few months, with actual production halted for only a few weeks. An action plan thus coordinates the actual changes at a given factory. A reaction plan, in turn, is a plan designed to allow the company to react to an unforeseen circumstance. At one Nissan factory, the new equipment arrived earlier than expected, and plant managers had to shut down production more quickly than expected. These managers thus had to react to events beyond their control in ways that still allowed their goals to be achieved. In fact, reacting to any form of environmental turbulence, as described in Chapter 3, is a form of reaction planning. The Change box entitled "How to Price a Body Wrap in a Recession" on page183 shows how events in the economic environment may present a small business owner with a new wrinkle in her pricing strategy.

Responsibilities for Planning

Earlier we noted briefly who is responsible for setting goals. We can now expand that initial perspective and examine more fully how different parts of the organization participate in the overall planning process. All managers engage in planning to some degree. Marketing sales managers develop plans for target markets, market penetration, and sales increases. Operations managers plan cost-cutting programs and better inventory control methods. As a general rule, however, the larger an organization becomes, the more the primary planning activities become associated with

Planning Staff Some large organizations maintain a professional planning staff. General Motors, Caterpillar, Raytheon, Ford, and Boeing all have planning staffs. And although the planning staff was pioneered in the United States, foreign firms like Nippon Telegraph and Telephone have also started using them. Organizations might use a planning staff for a variety of reasons. In particular, a planning staff can reduce the workload of indi vidual managers, help coordinate the planning activities of individual managers, bring to a particular problem many different tools and techniques, take a broader view than individual managers, and go beyond pet projects and particular departments. In recent years, though, some businesses have realized that they can plan more effectively by diffus ing planning responsibility throughout their organization and/or by using planning task forces. For instance, Disney and Shell Oil have eliminated or downsized their centralized planning units.

Planning Task Force Organizations sometimes use a planning task force to help develop plans. Such a task force often comprises line managers with a special interest in the relevant area of planning. The task force may also have members from the planning staff if the orga nization has one. A planning task force is most often created when the organization wants to address a special circumstance. For example, when Electronic Data Systems (EDS) decided to expand its information management services to Europe, managers knew that the firm's normal planning approach would not suffice, and top management created a special plan ning task force. The task force included representatives from each of the major units within the company, the corporate planning staff, and the management team that would run the European operation. Once the plan for entering the European market was formulated and implemented, the task force was eliminated.

Board of Directors Among its other responsi bilities, the board of directors establishes the cor porate mission and strategy. In some companies the board takes an active role in the planning pro cess.22 At CBS, for example, the board of directors has traditionally played a major role in planning. In other companies the board selects a competent chief executive and delegates planning to that in dividual.

Chief Executive Officer The chief executive of ficer (CEO) is usually the president or the chair of the board of directors. The CEO is probably the single most important individual in any or ganization's planning process. The CEO plays a major role in the complete planning process and is responsible for implementing the strategy. The board and CEO, then, assume direct roles in plan ning. The other organizational players involved in the planning process have more of an advisory or a consulting role.

Executive Committee The executive committee is usually composed of the top executives in the organization working together as a group. Committee members usually meet regularly to provide input to the CEO on the proposals that affect their own units and to review the various strategic plans that develop from this input. Members of the executive committee are frequently assigned to various staff committees, subcommittees, and task forces to con centrate on specific projects or problems that might confront the entire organization at some time in the future.

Line Management The final component of most organizations' planning activities is line management. Line managers are those persons with formal authority and responsibility for the management of the organization. They play an important role in an organization's planning process for two reasons. First, they are a valuable source of inside information for other managers as plans are formulated and implemented. Second, the line managers at the middle and lower levels of the organization usually must execute the plans developed by top management. Line management identifies, analyzes, and recommends program al ternatives, develops budgets and submits them for approval, and finally sets the plans in motion.

Contingency Planning and Crisis Management

Another important type of planning is contingency planningthe determination of alterna tive courses of action to be taken if an intended plan of action is unexpectedly disrupted or rendered inappropriate.23 Crisis management, a related concept, is the set of procedures the organization uses in the event of a disaster or other unexpected calamity. Some elements of crisis management may be orderly and systematic, whereas others may be more ad hoc and develop as events unfold. An excellent example of widespread contingency planning occurred during the late 1990s in anticipation of what was popularly known as the "Y2K bug." Concerns about the impact of technical glitches in computers stemming from their internal clocks' changing from 1999 to 2000 resulted in contingency planning for most organizations. Many banks and hospitals, for example, had extra staff available; some organizations created backup computer systems; and some even stockpiled inventory in case they could not purchase new products or materials.24 The devastating hurricanes that hit the Gulf Coast in 2005Katrina and Rita dramatically underscored the importance of effective crisis management. For example, inad equate and ineffective responses by the Federal Emergency Management Agency (FEMA) illustrated to many people that organization's weaknesses in coping with crisis situations. On the other hand, some organizations responded much more effectively. Walmart began ramping up its emergency preparedness on the same day that Katrina was upgraded from a tropical depression to a tropical storm. In the days before the storm struck, Walmart stores in the region were supplied with powerful generators and large supplies of dry ice so they could reopen as quickly as possible after the storm had passed. In neighboring states, the firm also had scores of trucks standing by crammed with both emergency-related inventory for its stores and emergency supplies it was prepared to donatebottled water, medical sup plies, and so forth. And Walmart often beat FEMA by several days in getting those supplies delivered.25 Seeing the consequences of poor crisis management after the terrorist attacks of September 11, 2001, and the 2005 hurricanes, many firms today are actively working to create new and better crisis management plans and procedures. For example, both Reliant En ergy and Duke Energy rely on computer trading centers where trading managers actively buy and sell energy-related commodities. If a terrorist attack or natural disaster such as a hurricane were to strike their trading centers, they would essentially be out of business. Prior to September 11, each firm had relatively vague and superficial crisis plans. But now they and most other companies have much more detailed and comprehensive plans in the event of another crisis. Both Reliant and Duke, for example, have created secondary trading centers at other locations. In the event of a shutdown at their main trading centers, these firms can quickly transfer virtually all their core trading activities to their secondary centers within 30 minutes or less.

Tactical Planning

As we noted earlier, tactical plans are developed to implement specific parts of a strategic plan. You have probably heard the saying about winning the battle but losing the war. Tactical plans are to battles what strategy is to a war: an organized sequence of steps designed to execute strategic plans. Strategy focuses on resources, environment, and mission, whereas tactics focus primarily on people and action.30 Figure 7.4 identifies the major elements in developing and executing tactical plans

Developing Tactical Plans

Although effective tactical planning depends on many factors, which vary from one situation to another, we can identify some basic guidelines. First, the manager needs to recognize that tactical planning must address a number of tactical goals derived from a broader strategic goal.31 An occasional situation may call for a stand-alone tactical plan, but most of the time tactical plans flow from and must be consistent with a strategic plan. For example, top managers at Coca-Cola once developed a strategic plan for cement ing the firm's dominance of the soft-drink industry. As part of developing the plan, they identified a critical environmental threatconsiderable unrest and uncertainty among the independent bottlers that packaged and distributed Coca-Cola's products. To simultaneously counter this threat and strengthen the company's position, Coca-Cola bought several large independent bottlers and combined them into one new organization called "Coca-ColaTactical plans are used to accomplish specific parts of a strategic plan. Each strategic plan is generally implemented through several tactical plans. Effective tactical planning involves both development and execution.

Developing tactical plans Recognize and understand overarching strategic plans and tactical goals Specify relevant resource and time issues Recognize and identify human resource commitments Executing tactical plans Evaluate each course of action in light of its goal Obtain and distribute information and resources Monitor horizontal and vertical communication and integration of activities Monitor ongoing activities for goal achievement

Enterprises." Selling half of the new company's stock reaped millions in profits while effectively keeping control of the enterprise in Coca-Cola's hands. Thus the creation of the new business was a tactical plan developed to contribute to the achievement of an overarching strategic goal.32 Second, although strategies are often stated in general terms, tactics must specify resources and time frames. A strategy can call for being number one in a particular market or industry, but a tactical plan must specify precisely what activities will be undertaken to achieve that goal. Consider the Coca-Cola example again. Another element of its strategic plan involves increased worldwide market share. To facilitate additional sales in Europe, managers developed tactical plans for building a new plant in the south of France to make soft-drink concentrate and for building another canning plant in Dunkirk. The firm has also invested heavily in India.33 Building these plants represents a concrete action involving measurable resources (funds to build the plants) and a clear time horizon (a target date for completion). Finally, tactical planning requires the use of human resources. Managers involved in tactical planning spend a great deal of time working with other people. They must be in a position to receive information from others within and outside the organization, process that information in the most effective way, and then pass it on to others who might make use of it. Coca-Cola executives have been intensively involved in planning the new plants, set ting up the new bottling venture noted earlier, and exploring a joint venture with Cadbury Schweppes in the United Kingdom. Each activity has required considerable time and effort from dozens of managers. One manager, for example, crossed the Atlantic 12 times while negotiating the Cadbury deal.

Executing Tactical Plans

Regardless of how well a tactical plan is formulated, its ultimate success depends on the way it is carried out. Successful implementation, in turn, depends on the astute use of resources, effective decision making, and insightful steps to ensure that the right things are done at the right times and in the right ways. A manager can see an absolutely brilliant idea fail because of improper execution. Proper execution depends on a number of important factors. First, the manager needs to evaluate every possible course of action in light of the goal it is intended to reach. Next, he or she needs to make sure that each decision maker has the information and resources neces sary to get the job done. Vertical and horizontal communication and integration of activities must be present to minimize conflict and inconsistent activities. And, finally, the manager must monitor ongoing activities derived from the plan to make sure they are achieving the desired results. This monitoring typically takes place within the context of the organization's ongoing control systems. For example, managers at Walt Disney Company recently developed a new strategic plan aimed at spurring growth in and profits from foreign markets. One tactical plan developed to stimulate growth involves expanding the cable Disney Channel into more and more foreign markets; another involved expanding the relatively small Disney theme park near Hong Kong that opened in 2006 into a much larger park. Although expanding cable television and expanding a theme park are big undertakings in their own right, they are still tactical plans within the overall strategic plan focusing on international growth.

Operational Planning

Another critical element in effective organizational planning is the development and implementation of operational plans. Operational plans are derived from tactical plans and are aimed at achieving operational goals. Thus operational plans tend to be narrowly focused, have relatively short time horizons, and involve lower-level managers. The two most basic forms of operational plans and specific types of each are summarized

Single-Use Plans

A single-use plan is developed to carry out a course of action that is not likely to be repeated in the future. As Disney plans the expansion of its theme park in Hong Kong, it will develop numerous single-use plans for individual rides, attractions, and hotels. The two most common forms of single-use plans are programs and projects.

Programs A program is a single-use plan for a large set of activities. It might consist of identifying procedures for introducing a new product line, opening a new facility, or changing the organization's mission. As part of its own strategic plans for growth several years ago, Black & Decker bought General Electric's small-appliance business. The deal involved the largest brand-name switch in history: 150 products were converted from the GE to the Black & Decker label. Each product was carefully studied, redesigned, and reintroduced with an extended warranty. A total of 140 steps were followed for each product. It took three years to convert all 150 products over to Black & Decker. The total conversion of the prod uct line was a program.

Projects A project is similar to a program but is generally of less scope and complexity. A project may be a part of a broader program, or it may be a self-contained single-use plan. For Black & Decker, the conversion of each of the 150 products was a separate project in its own right. Each product had its own manager, its own schedule, and so forth. Projects are also used to introduce a new product within an existing product line or to add a new benefit option to an existing salary package.

Plan Description Single-use plan Developed to carry out a course of action not likely to be repeated in the future Program Single-use plan for a large set of activities Project Single-use plan of less scope and complexity than a program Standing plan Developed for activities that recur regularly over a period of time Policy Standing plan specifying the organization's general response to a designated problem or situation Standard operating procedure Standing plan outlining steps to be followed in particular circumstances Rules and regulations Standing plans describing exactly how specific activities are to be carried out.

Standing Plans

Whereas single-use plans are developed for nonrecurring situations, a standing plan is used for activities that recur regularly over a period of time. Standing plans can greatly enhance efficiency by making decision making routine. Policies, standard operating procedures, and rules and regulations are three kinds of standing plans

Policies As a general guide for action, a policy is the most general form of standing plan. A policy specifies the organization's general response to a designated problem or situation. For example, McDonald's has a policy that it will not grant a franchise to an individual who already owns another fast-food restaurant. Similarly, Starbucks has a policy that it will not franchise at all, instead retaining ownership of all Starbucks coffee shops. Likewise, a university admissions office might establish a policy that admission will be granted only to applicants with a minimum SAT score of 1,200 and a ranking in the top quarter of their high school class. Admissions officers may routinely deny admission to applicants who fail to reach these minimums. A policy is also likely to describe how exceptions are to be handled. The university's policy statement, for example, might create the admissions appeals commit tee to evaluate applicants who do not meet minimum requirements but may warrant special consideration.

Standard Operating Procedures Another type of standing plan is the standard operating procedure, or SOP. An SOP is more specific than a policy, in that it outlines the steps to be followed in particular circumstances. The admissions clerk at the university, for example, might be told that, when an application is received, he or she should (1) set up an electronic file for the applicant; (2) merge test-score records, transcripts, and letters of reference to the electronic file as they are received; and (3) forward the electronic file to the appropriate ad missions director when it is complete. Gallo Vineyards in California has a three hundreds page manual of SOPs. This planning manual is credited with making Gallo one of the most efficient wine operations in the United States. McDonald's has SOPs explaining exactly how Big Macs are to be cooked, how long they can stay in the warming rack, and so forth.

Rules and Regulations The narrowest of the standing plans, rules and regulations, describe exactly how specific activities are to be carried out. Rather than guiding decision making, rules and regulations actually take the place of decision mak ing in various situations. Each McDonald's restau rant has a rule prohibiting customers from using its telephones, for example. The university admissions office might have a rule stipulating that if an appli cant's file is not complete two months before the beginning of a semester, the student cannot be ad mitted until the next semester. Of course, in most organizations a manager at a higher level can sus pend or bend the rules. If the high school transcript of the child of a prominent university alumnus and donor arrives a few days late, the director of admis sions might waive the two-month rule. Indeed, rules and regulations can become problematic if they are excessive or enforced too rigidly. Rules and regulations and SOPs are similar in many ways. They are both relatively narrow in scope, and each can serve as a substitute for decision making. An SOP typically describes a sequence of activities, however, whereas rules and regulations focus on one activity. Recall our examples: The admissions SOP consisted of three activities, whereas the two-month rule related to only one activity. In an industrial setting, the SOP for orienting a new employee could involve enrolling the person in various benefit options, introducing him or her to co workers and supervisors, and providing a tour of the facilities. A pertinent rule for the new employee might involve when to come to work each day.

Managing Goal-Setting and Planning Processes

Obviously, all of the elements of goal setting and planning discussed to this point involve managing these processes in some way or another. In addition, however, because major bar riers sometimes impede effective goal setting and planning, knowing how to overcome some of the barriers is important.

Barriers to Goal Setting and Planning

Several circumstances can serve as barriers to effective goal setting and planning; the more common ones are listed in Table 7.2.

Inappropriate Goals Inappropriate goals come in many forms. Paying a large dividend to stockholders may be inappropriate if it comes at the expense of research and development. Goals may also be inappropriate if they are unattainable. If Kmart were to set a goal of having more revenues than Walmart next year, people at the company would probably be embar rassed because achieving such a goal would be impossible. Goals may also be inappropriate if they place too much emphasis on either quantitative or qualitative measures of success. Some goals, especially those relating to financial areas, are quantifiable, objective, and verifiable. Other goals, such as employee satisfaction and development, are difficult, if not impossible, to quantify. Organizations are asking for trouble if they put too much emphasis on one type of goal to the exclusion of the other. A few years ago Starbucks set an ambitious goal of having.

Major barriers Inappropriate goals Improper reward system Dynamic and complex environment Reluctance to establish goals Resistance to change Constraints Overcoming the barriers Understanding the purposes of goals and planning Communication and participation Consistency, revision, and updating Effective reward system.

40,000 locations globally. But in its zeal to meet this target, the company made numerous poor decisions for new sites, cluttered its stores with too much merchandise, and lost its focus on coffee. As a result, when the global recession hit in 2009 Starbucks was forced to postpone new openings, close several hundred underperforming stores, and eliminate several thousand jobs.35 This also stimulated its current focus on improving profitability for individual stores as opposed to simply adding new stores.

Improper Reward System In some settings, an improper reward system acts as a barrier to goal setting and planning. For example, people may inadvertently be rewarded for poor goal-setting behavior or go unrewarded or even be punished for proper goal-setting behavior. Suppose that a manager sets a goal of decreasing turnover next year. If turnover is decreased by even a fraction, the manager can claim success and perhaps be rewarded for the accom plishment. In contrast, a manager who attempts to decrease turnover by 5 percent but actu ally achieves a decrease of only 4 percent may receive a smaller reward because of her or his failure to reach the established goal. And if an organization places too much emphasis on short-term performance and results, managers may ignore longer-term issues as they set goals and formulate plans to achieve higher profits in the short term.

Dynamic and Complex Environment The nature of an organization's environment is also a barrier to effective goal setting and planning. Rapid change, technological innovation, and intense competition can all increase the difficulty of an organization's accurately assessing future opportunities and threats. For example, when an electronics firm like IBM develops a long-range plan, it tries to take into account how much technological innovation is likely to occur during that interval. But forecasting such events is extremely difficult. During the early boom years of personal computers, data were stored primarily on floppy disks. Because these disks had a limited storage capacity, hard disks were developed. Whereas the typical floppy disk can hold hundreds of pages of information, a hard disk can store thousands of pages. Today, computers increasingly store information on shared servers or other devices capable of holding millions of pages. The manager attempting to set goals and plan in this rapidly changing environment faces a truly formidable task.

Reluctance to Establish Goals Another barrier to effective planning is some managers' reluctance to establish goals for themselves and their units of responsibility. The reason for this reluctance may be lack of confidence or fear of failure. If a manager sets a goal that is spe cific, concise, and time related, then whether he or she attains it is obvious. Managers who consciously or unconsciously try to avoid this degree of accountability are likely to hinder the organization's planning efforts. Pfizer, a large pharmaceutical company, ran into problems because its managers did not set goals for research and development. Consequently, the organization fell further and further behind because managers had no way of knowing how effective their R&D efforts actually were.

Resistance to Change Another barrier to goal setting and planning is resistance to change. Planning essentially involves changing something about the organization. As we will see in Chapter 13, people tend to resist change. Avon Products almost drove itself into bankruptcy several years ago because it insisted on continuing a policy of large dividend payments to its stockholders. When profits started to fall, managers resisted cutting the dividends and started borrowing to pay them. The company's debt grew from $3million to $1.1 billion in eight years. Eventually, managers were forced to confront the problem and cut dividends.

Constraints Constraints that limit what an organization can do, another major obstacle Common constraints include a lack of resources, government restrictions, and strong competition. For example, Owens-Corning Fiberglass took on an enormous debt burden as part of its fight to avoid a takeover by Wickes Ltd. The company then had such a large debt that it was forced to cut back on capital expenditures and research and development. And those cutbacks greatly constrained what the firm could plan for the future. Time constraints are also a factor. It is easy to say, "I'm too busy to plan today; I'll do it tomorrow." Effective planning takes time, energy, and an unwavering belief in its importance.

Overcoming the Barriers

Fortunately, there are several guidelines for making goal setting and planning effective. Some of the guidelines are listed in Table 7.2

Understand the Purposes of Goals and Planning One of the best ways to facilitate goalsetting and planning processes is to recognize their basic purposes. Managers should also recog nize that there are limits to the effectiveness of setting goals and making plans. Planning is not a panacea that will solve all of an organization's problems, nor is it an ironclad set of procedures to be followed at any cost. And effective goals and planning do not necessarily ensure success; adjustments and exceptions are to be expected as time passes. For example, Coca-Cola followed a logical and rational approach to setting goals and planning a few years ago when it introduced a new formula to combat Pepsi's increasing market share. But all the plans proved to be wrong as consumers rejected the new version of Coca-Cola. Managers quickly reversed the decision and reintroduced the old formula as Coca-Cola Classic. Thus, even though careful planning resulted in a big mistake, the company was able to recover from its blunder.

Communication and Participation Although goals and plans may be initiated at high levels in the organization, they must also be communicated to others in the organization. Everyone involved in the planning process should know what the overriding organizational strategy is, what the various functional strategies are, and how they are all to be integrated and coordinated. People responsible for achieving goals and implementing plans must have a voice in developing them from the outset. These individuals almost always have valuable information to contribute, and because they will be implementing the plans, their involve ment is critical: People are usually more committed to plans that they have helped shape. Even when an organization is somewhat centralized or uses a planning staff, managers from a variety of levels in the organization should be involved in the planning process. Meanwhile, in discussing the uses of an informationgathering tool called the digital dashboard, our Technically Speaking box on page194, entitled "A New Tool for Driving Decisions," touches upon some interesting arguments both for and against the intensive involvement of top managers in the planning process.

Consistency, Revision, and Updating Goals should be consistent both horizontally and vertically. Horizontal consistency means that goals should be consistent across the organization, from one department to the next. Vertical consistency means that goals should be consistent up and down the organizationstrategic, tactical, and operational goals must agree with one another. Because goal setting and planning are dynamic processes, they must also be revised and updated regularly. Many organizations are seeing the need to revise and update on an increasingly frequent basis. Citigroup, for example, once used a three-year planning horizon for developing and providing new financial services. That cycle was subsequently cut to two years, and the bank now often uses a one-year horizon.

Effective Reward Systems In general, people should be rewarded both for establishing effective goals and plans and for successfully achieving them. Because failure sometimes results from factors outside the manager's control, however, people should also be assured that failure to reach a goal will not necessarily bring punitive consequences. Frederick Smith, founder and CEO of Federal Express, has a stated goal of encouraging risk. Thus, when Federal Express lost $233 million on an unsuccessful service called ZapMail, no one was punished. Smith believed that the original idea was a good one but was unsuccessful for reasons beyond the company's control.

Using Goals to Implement Plans

Goals are often used to implement plans. Formal goal-setting programs represent one widely used method for managing the goal-setting and planning processes concurrently to ensure that both are done effectively. Some firms call this approach management by objectives, or MBO. We should also note, however, that although many firms use this basic approach, they frequently tailor it to their own special circumstances and use a special term or name for it.37 For example, Tenneco Inc. uses an MBO-type system but calls it the "Performance Agreement System," or PAS.

The Nature and Purpose of Formal Goal Setting The purpose of formal goal setting is generally to give subordinates a voice in the goal-setting and planning processes and to clarify for them exactly what they are expected to accomplish in a given time span. Thus formal goal setting is often concerned with goal setting and planning for individual managers and their units or work groups.

The Formal Goal-Setting Process The basic mechanics of the formal goal-setting process are shown in Figure 7.5. This process is described here from an ideal perspective. In any given organization, the steps of the process are likely to vary in importance and may even take a different sequence. As a starting point, however, most managers believe that, if a formal goal-setting program is to be successful, it must start at the top of the organization. Top managers must communicate why they have adopted the program, what they think it will do, and that they have accepted and are committed to formal goal setting. Employees must also be educated about what goal setting is and what their roles in it will be. Having committed to formal goal setting, managers must implement it in a way that is consistent with overall organizational goals and plans. The idea is that goals set at the top will systematically cascade down throughout the organization. Although establishing the organization's basic goals and plans is extremely important, collaborative goal setting and planning are the essence of formal goal setting. The collaboration Formal goal setting is an effective technique for integrating goal setting and planning. This figure portrays the general steps that most organizations use when they adopt formal goal setting. Of course, most organizations adapt this general process to fit their own unique needs and circumstances.

Starting the formal goal-setting program Establishment of organizational goals and plans Collaborative goal setting and planning Communicating organizational goals and plans Meeting Veri

able goals and clear plans Counseling Resources Periodic review Evaluation. involves a series of distinct steps. First, managers tell their subordinates what organizational and unit goals and plans top management has established. Then managers meet with their subordinates on a one-to-one basis to arrive at a set of goals and plans for each subordinate that both the subordinate and the manager have helped develop and to which both are committed. Next, the goals are refined to be as verifiable (quantitative) as possible and to specify a time frame for their accomplishment. They should also be written. Further, the plans developed to achieve the goals need to be as clearly stated as possible and directly relate to each goal. Managers must play the role of counselors in the goal-setting and planning meeting. For example, they must ensure that the subordinates' goals and plans are attainable and workable and that they will facilitate both the unit's and the organization's goals and plans. Finally, the meeting should spell out the resources that the subordinate will need to implement his or her plans and work effectively toward goal attainment. Conducting periodic reviews as subordinates are working toward their goals is advisable. If the goals and plans are for a one-year period, meeting quarterly to discuss progress may be a good idea. At the end of the period, the manager meets with each subordinate again to review the degree of goal attainment. They discuss which goals were met and which were not met in the context of the original plans. The reasons for both success and failure are explored, and the employee is rewarded on the basis of goal attainment. In an ongoing goalsetting program, the evaluation meeting may also serve as the collaborative goal-setting and planning meeting for the next time period.The Effectiveness of Formal Goal Setting A large number of organizations, including Alcoa, Tenneco, DuPont, General Motors, Boeing, Caterpillar, and Black & Decker, all use some form of goal setting. As might be expected, goal setting has both strengths and weaknesses. A primary benefit of goal setting is improved employee motivation. By clarifying exactly what is expected, by allowing the employee a voice in determining expectations, and by basing rewards on the achievement of those expectations, organizations create the powerful motivational system for their employees. Communication is also enhanced through the process of discussion and collaboration. And performance appraisals may be done more objectively, with less reliance on arbitrary or subjective assessment. Goal setting focuses attention on appropriate goals and plans, helps identify superior managerial talent for future promotion, and provides a systematic management philosophy that can have a positive effect on the overall organization. Goal setting also facilitates control. The periodic development and subsequent evaluation of individual goals and plans helps keep the organization on course toward its own long-run goals and plans. On the other hand, goal setting occasionally fails because of poor implement.

NOTE: summary should cover all the contents in the chapter,

and be specific to the point.