“what’s new”

companies

what would you do? DuPont

Nike
DuPont Headquarters, Wilmington, Delaware1 InterContinental Hotels
The DuPont company got its start when Eleuthère Irénée du Pont Hooker Furniture
de Nemours fled France’s revolution to come to America, where, in 1802, he Corporation
built a mill on the Brandywine River in Wilmington, Delaware, to produce Ocean Spray Cranberries
blasting powder used in guns and artillery. In 1902, E.I. du Pont’s great- Kimberly-Clark
grandson, Pierre S. du Pont, along with two cousins, bought out other
Arm & Hammer
family members and began transforming DuPont into the world’s leading
USA Today
chemical company. In its second century, DuPont Corporation would go on
to develop Freon for refrigerators and air conditioners; nylon, which is used Kindermusik International
in everything from women’s hose to car tires; Lucite, a ubiquitous clear Imperial Sugar
plastic used in baths, furniture, car lights, and phone screens; Teflon, fa-
mous for its nonstick properties in cookware and coatings; Dacron, a wash-
and-wear, wrinkle-free polyester; Lycra, the stretchy, clingy fabric used in
activewear and swimwear; Nome, a fire-resistant fiber used by firefighters,
race car drivers, and to reduce heat in motors and electrical equipment;
Corona, a high-end countertop used in homes and offices; and Kevlar, the
“bulletproof” material used in body armor worn by police and soldiers, in
helmets, and for vehicle protection.
You became DuPont’s CEO right as “the world fell apart” at the height of
the world financial crisis. Fortunately, you had early warning from sharply
declining sales in DuPont’s titanium dioxide division, which makes white
pigment used in paints, sunscreen, and food coloring. Sales trends there
can be counted on to indicate what will happen next in the general econ-
omy, so you and your leadership team began working with the heads of all
es
etty Imag

of DuPont’s divisions to make contingency plans in case sales dropped by

berg via G

5 percent, 10 percent, 20 percent, or more. Many DuPont managers thought

you were crazy, until the downturn hit. It was difficult, but with plans to cut
ham/Bloom

6,500 employees at the ready, you were prepared when sales dropped by
20 percent at the end of the year. But when that wasn’t enough, salaried
© Jim Gra

and professional employees were asked to voluntarily take unpaid time

off and an additional 2,000 jobs were eliminated. In all,
these moves reduced expenses by a billion dollars a
year. But one place you refused to cut was DuPont’s re-
search budget, which remained at $1.4 billion per year.
One of the ways in which the Board of Directors
study tips
measures company performance is by comparing
DuPont’s total stock returns to 19 peer companies.
Over the last quarter century, DuPont has regularly Try to expla
in the key c
ended up in the bottom third of the list. This makes of this chap oncepts
ter to a frie
clear that you have one overriding goal: to restore family mem n d or
DuPont’s prestige, performance, and competitive- ber who is
taking the not
ness. The question, of course, is how? Before de- class with y
ciding, there are some big questions to consider. will help yo o u. This
u identify w
First, given sustained weak performance over the areas you n hich
eed to revie
Slobodkin
© iStockphoto.com/Ivan Burmistrov

last quarter century, do you need to step back w.

and consider DuPont’s purpose, that is, the rea-
oto.com/Alex

son that you’re in business? After transitioning

from blasting powder to chemicals, DuPont’s
© iStockph

167
Part 2 Planning

slogan became, “Better things for better living . . . through chemistry.” Is it time, again,
to reconsider what DuPont is all about? Or, instead of an intense focus on DuPont’s
purpose, would it make more sense to make lots of plans and lots of bets so that “a
thousand flowers can bloom”? In other words, would it be better to keep options open
by making small, simultaneous investments in many alternative plans? Then, when
one or a few of these plans emerge as likely winners, you invest even more in these
plans while discontinuing or reducing investment in the others. Finally, planning is a
double-edged sword. If done right, it brings about tremendous increases in individual
and organizational performance. But if done wrong, it can have just the opposite ef-
fect and harm individual and organizational performance. With that in mind, what
kind of goals should you set for the company? Should you focus on finances, product
development, or people? And should you have an overriding goal, or should you have
separate goals for different parts of the company?
If you were the CEO at DuPont, what would you do?

E ven inexperienced managers know that planning and decision making are central parts of
their jobs. Figure out what the problem is. Generate potential solutions or plans. Pick the
best one. Make it work. Experienced managers, however, know how hard it really is to make
good plans and decisions. One seasoned manager says: “I think the biggest surprises are the
problems. Maybe I had never seen it before. Maybe I was protected by my management when
I was in sales. Maybe I had delusions of grandeur, I don’t know. I just know how disillusioning
and frustrating it is to be hit with problems and conflicts all day and not be able to solve them
very cleanly.”2
This chapter begins by examining the benefits and pitfalls of planning. Next, you will learn
how to make a plan that works. Then you will look at the different kinds of plans that are used
from the top to the bottom in most companies. In the second part of the chapter, we discuss
the steps of rational decision making and consider its limitations. We finish the chapter by
discussing how managers can use groups and group decision techniques to improve decisions.

What Is Planning?
Planning, as defined in Chapter 1, is choosing a goal and developing a method or
strategy to achieve that goal. For example, CEO Mark Parker announced that Nike
aims to increase sales by more than 40
percent in five years, from $19 billion
to $27 billion, by growing its retail
After reading the next three sections, and apparel business. To do that, Nike
you should be able to has reduced the number of styles it of-
1. Discuss the benefits and pitfalls of planning. fers, the types of materials it uses, and
2. Describe how to make a plan that works. the number of vendors it works with,
so it can focus production, sales, and
3. Discuss how companies can use plans at all management
marketing efforts on top-selling items
levels, from top to bottom.
such as T-shirts, track jackets, and its
Pro line of performance gear. Nike will
168
 Chapter 5 Planning and Decision Making

my
© david pearson/Ala

spend $500 million to $600 million to open 300 more Nike-branded retail stores—
ranging from all-inclusive stores that offer the entire Nike line to sports-specific
stores specializing in running, soccer, or action sports, to brand-specific stores for
Converse. It will also grow its “shops in shops,” that is, Nike-specific retail sections
that it operates in Foot Locker, Dick’s Sporting Goods, and Finish Line.3

1 Benefits and Pitfalls of Planning

Are you one of those naturally organized people who always makes a daily to-do list,
writes everything down so you won’t forget, and never misses a dead-
line because you keep track of everything with your handy time-man-
agement notebook, iPhone, or PC? Or are you one of those flexible, Exhibit 5.1
creative, go-with-the-flow people who dislikes planning and organiz- Benefits of Planning
ing because it restricts your freedom, energy, and performance? Some
people are natural planners. They love it and can see only its benefits.
Others dislike planning and can see only its disadvantages. It turns
out that both views have real value.
Planning has advantages and disadvantages. Let’s learn about 1.1
the benefits and 1.2 the pitfalls of planning.

1.1 Benefits of Planning

Planning offers several important benefits: intensified effort, persis-
tence, direction, and creation of task strategies.4 First, as shown in
Exhibit 5.1, managers and employees put forth greater effort when
following a plan. Take two workers; instruct one to “do your best”
to increase production, and instruct the other to achieve a 2 percent © Cengage Learning 2013

169
Part 2 Planning

increase in production each month. Research shows that the one with the specific
plan will work harder.5
Second, planning leads to persistence, that is, working hard for long periods.
In fact, planning encourages persistence even when there may be little chance of
short-term success.6 McDonald’s founder Ray Kroc, a keen believer in the power
of persistence, had this quotation from President Calvin Coolidge hung in all of his
executives’ offices: “Nothing in the world can take the place of persistence. Talent
will not; nothing is more common than unsuccessful men with talent. Genius will
not; unrewarded genius is almost a proverb. Education will not; the world is full of
educated derelicts. Persistence and determination alone are omnipotent.”7
The third benefit of planning is direction. Plans encourage managers and employ-
ees to direct their persistent efforts toward activities that help accomplish their goals
and away from activities that don’t.8 For example, a large insurance company wanted
to improve the performance evaluation feedback its managers gave employees. To
help the managers improve, company trainers taught them 43 effective performance
feedback behaviors, such as, “I will give my subordinate a clear understanding of
the results I expect him or her to achieve” and “During the performance appraisal
interview, I will be very supportive, stressing good points before discussing needed
improvement.” During the training, managers were instructed to choose just 12 be-
haviors (out of the 43) on which they wanted to make the most improvement. When
subordinates rated their managers on the 43 behaviors, it became clear that no matter
which 12 behaviors different managers chose to concentrate on, they improved only
on those 12 behaviors. Thus, plans direct behavior toward activities that lead to goal
accomplishment and away from those that don’t.
The fourth benefit of planning is that it encourages the development of task
strategies. In other words, planning not only encourages people to work hard for ex-
tended periods and to engage in behaviors directly related to goal accomplishment,
it also encourages them to think of better ways to do their jobs. Finally, perhaps the
most compelling benefit of planning is that it has been proved to work for both com-
panies and individuals. On average, companies with plans have larger profits and
grow much faster than companies that don’t.9 The same holds true for individual
managers and employees: There is no better way to improve the performance of the
people who work in a company than to have them set goals and develop strategies
for achieving those goals.

Exhibit 5.2 1.2 Pitfalls of Planning

Pitfalls of Planning
Despite the significant benefits associated with planning, it is not a
cure-all. Plans won’t fix all organizational problems. In fact, many
management authors and consultants believe that planning can harm
companies in several ways.10 As shown in Exhibit 5.2, the first pitfall of
planning is that it can impede change and prevent or slow needed ad-
aptation. Sometimes companies become so committed to achieving the
goals set forth in their plans, or on following the strategies and tactics
spelled out in them, that they fail to see that their plans aren’t working
or that their goals need to change. When it came to producing envi-
ronmentally sound cars, General Motors missed its initial opportunity
because its culture was “wedded to big cars and horsepower.” Whereas
Toyota formed its “green group” in the mid-1990s—which led to the
development of the Prius, its popular electric hybrid—GM killed its
electric car program, which produced the EV-1, to focus on selling
© Cengage Learning 2013 highly profitable SUVs (sport utility vehicles). GM restarted work on
170
 Chapter 5 Planning and Decision Making

hybrid cars in 2006. But, because of GM’s late start, the new Chevy Volt, a battery-
powered car that combines the use of off-peak electricity for overnight recharging of
the batteries with daytime recharging by a small gas engine, faces stiff competition
from other electric or plug-in hybrid vehicles, such as the Nissan Leaf, the Toyota
Rav4 EV, the Mini-E from Mini Cooper, electric versions of the Ford Transit Connect
and Focus, as well as offerings from the start-up companies Fisker and Tesla.11
The second pitfall is that planning can create a false sense of certainty. Planners
sometimes feel that they know exactly what the future holds for their competitors,
their suppliers, and their companies. However, all plans are based on assumptions:
“The price of gasoline will increase by 4 percent per year”; “Exports will continue to
rise.” For plans to work, the assumptions on which they are based must hold true. If
the assumptions turn out to be false, then the plans based on them are likely to fail.
The third potential pitfall of planning is the detachment of planners. In theory,
strategic planners and top-level managers are supposed to focus on the big picture
and not concern themselves with the details of implementation (i.e., carrying out
the plan). According to management professor Henry Mintzberg, detachment leads
planners to plan for things they don’t understand.12 Plans are meant to be guidelines
for action, not abstract theories. Consequently, planners need to be familiar with the
daily details of their businesses if they are to produce plans that can work.
Andrew Cosslett, CEO of InterContinental Hotels in London, describes one of
his earliest experiences working as a sales representative for Wall’s Ice Cream, a sub-
sidiary of Unilever, which is based in London. Cosslett’s supervisors passed to him a
sales plan crafted by upper management that involved making sales calls on roughly
600 shops. Speaking to the detachment of planners, Coslett says, “The biggest thing
I remember from those days … was how much of what comes out of corporate of-
fices is of absolutely no purpose, and how far removed some people are from the
front line. I was out there expected to sell this ice cream in the middle of winter in
Liverpool. It was pretty tough, and I was in there trying to sell these two-pound ice
cream cakes because head office said that’s what we had to sell.”13
If you doubt that the details are important to good execution of a plan, imagine
that you’re about to have coronary bypass surgery to replace four clogged arteries.
You can have either an experienced surgeon or a first-year medical intern perform
the procedure. The intern is a fully qualified M.D. who clearly understands the the-
ory and the plan behind bypass surgery but has never performed such an operation.
As you lie on the operating table, who is the last person you’d like to see as the anes-
thesia kicks in: the first-year intern who knows the plan but has never done a bypass
or the experienced surgeon who has followed the plan hundreds of times? Planning
works better when the people developing the plan are not detached from the process
of executing the plan.

Benefits and Pitfalls of Planning Planning involves choosing a goal and developing a
method to achieve that goal. Planning is one of the best ways to improve organizational
and individual performance. It encourages people to work harder (intensified effort), work
hard for extended periods (persistence), engage in behaviors directly related to goal ac-
complishment (directed behavior), and think of better ways to do their jobs (task strate-
gies). Most importantly, companies that plan have larger profits and faster growth than
companies that don’t plan. However, planning also has three potential pitfalls. Companies
Review 1
that are overly committed to their plans may be slow to adapt to changes in their environ-
ment. Planning is based on assumptions about the future, and when those assumptions
are wrong, the plans are likely to fail. Finally, planning can fail when planners are detached
from the implementation of plans.

171
Part 2 Planning

2 How to Make a Plan That Works

Planning is a double-edged sword. If done right, planning brings about tremendous
increases in individual and organizational performance. If planning is done wrong,
however, it can have just the opposite effect and harm individual and organizational
performance.
In this section, you will learn how to make a plan that works. As depicted in
Exhibit 5.3, planning consists of 2.1 setting goals, 2.2 developing commitment to
the goals, 2.3 developing effective action plans, 2.4 tracking progress toward goal
achievement, and 2.5 maintaining flexibility in planning.

2.1 Setting Goals

SMART goals goals that are Specific,
Measurable, Attainable, Realistic, and
Timely.
Exhibit 5.3 How to Make a Plan That Works
The first step in planning is to set goals. To direct behavior and increase effort, goals
need to be specific and challenging.14 For example, deciding to “increase sales this year”
won’t direct and energize workers as much as deciding to “increase North American
sales by 4 percent in the next six months.” Likewise, deciding to “drop a few pounds”
won’t motivate you as much as deciding to “lose 15 pounds.” Specific, challenging goals
provide a target for which to aim and a standard against which to measure success.
One way of writing effective goals for yourself, your job, or your company is
to use the SMART guidelines. SMART goals are Specific, Measurable, Attainable,
Realistic, and Timely.15 Let’s take a look at Nissan’s zero-emissions program, which
led to the electric car Leaf, to see how it might measure up to the SMART guidelines
for goals.
First, is the goal Specific? Yes, because “zero emissions” tells us that Nissan isn’t
just looking to reduce emissions but to eliminate them. And “all-electric” rules out
gas-electric hybrids like those produced by competitors. In addition to being spe-
cific, the goal is also Measurable because Nissan has put a number on the emis-
sions—namely zero. Whether the goal is Attainable or not depends on whether the
all-electric car performs as expected. Nissan has been researching lithium-ion bat-
tery technology for almost 20 years and claims to have developed a battery that can
power a car up to 100 miles and recharge in just eight hours. Current trends in gov-
ernment regulation and consumer preferences toward more environmentally friendly
vehicles and increasing gasoline prices suggests that an all-electric car is Realistic
from a business standpoint, but that can’t be determined until the Leaf is available
to consumers. Finally, the goal is Timely because Nissan’s goal was to roll out the
Leaf in Japan and the United States
in 2010, which it achieved, and then
to the rest of the world by 2012.16

2.2 Developing
Commitment to Goals
Just because a company sets a goal
doesn’t mean that people will try to
accomplish it. If workers don’t care
about a goal, that goal won’t encour-
age them to work harder or smarter.
Thus, the second step in planning is
© Cengage Learning 2013 to develop commitment to goals.17
172
 Chapter 5 Planning and Decision Making

Goal commitment is the determination to achieve a goal. Commitment to achieve

a goal is not automatic. Managers and workers must choose to commit themselves
to a goal. Edwin Locke, professor emeritus of management at the University of
Maryland and the foremost expert on how, why, and when goals work, tells a story
about an overweight friend who lost 75 pounds. Locke says, “I asked him how he
did it, knowing how hard it was for most people to lose so much weight.” His friend
responded, “Actually, it was quite simple. I simply decided that I really wanted to do
it.”18 Put another way, goal commitment is really wanting to achieve a goal.
So how can managers bring about goal commitment? The most popular approach
is to set goals participatively. Rather than assigning goals to workers (“Johnson, you’ve
got till Tuesday of next week to redesign the flux capacitor so it gives us 10 percent
more output”), managers and employees choose goals together. The goals are more
likely to be realistic and attainable if employees participate in setting them. Another
technique for gaining commitment to a goal is to make the goal public. For example,
college students who publicly communicated their semester grade goals (“This semes-
ter, I’m shooting for a 3.5”) to significant others (usually a parent or sibling) were
much more committed to achieving their grades than those who did not. More im-
portant, those students earned grades that were nearly a half-grade higher than the
grades of students who did not tell others about their grade goals. So, one way to
increase commitment to goals is to go public by having individuals or work units tell
others about their goals. Still another way to increase goal commitment is to obtain
top management’s support. Top management can show support for a plan or program
by providing funds, speaking publicly about the plan, or participating in the plan itself.

2.3 Developing Effective Action Plans

The third step in planning is to develop effective action plans. An action plan lists
the specific steps (how), people (who), resources (what), and time period (when)
for accomplishing a goal. Coming out of bankruptcy, corporate reorganization, and
a government bailout, Chrysler presented a detailed plan for returning to profit-
ability. First, it established a time period (when) by presenting an outline of what
the company would do over the next five years. Second, it clearly identified who is
behind the company’s new strategic plan. CEO Sergio Machionne spearheaded a
“painful and difficult” process of assessing Chrysler’s strengths and weakness, where
“no stone [was] unturned.” Third, Chrysler’s plan explained how it would return
to profitability by detailing a thorough makeover of its core brands Jeep, Chrysler,
and Dodge. Under this plan, some older models will be redesigned and repackaged,
whereas other models that have not sold well will be eliminated (such as the Jeep
Commander and Chrysler Sebring). As for the resources (what), Chrysler’s plan calls
for extensive collaboration and borrowing from Italian automaker Fiat (which has a
20 percent stake in Chrysler). Not only will Chrysler sell the Fiat 500, a subcompact
city car that has been extremely popular in Europe, but it will also borrow Fiat’s
technological and design innovations to offer fuel-efficient, stylish vehicles that will
attract a new segment of U.S. consumers.19
goal commitment the determination
to achieve a goal.

action plan the specific steps, people,

2.4 Tracking Progress and resources needed to accomplish
a goal.
The fourth step in planning is to track progress toward goal achievement. There are proximal goals short-term goals or
two accepted methods of tracking progress. The first is to set proximal goals and subgoals.
distal goals. Proximal goals are short-term goals or subgoals, whereas distal goals distal goals long-term or primary
are long-term or primary goals.20 The idea behind setting proximal goals is that goals.

173
Part 2 Planning

euters/Landov
© REBECCA COOK/R

Sergio Machionne spearheaded a

“painful and difficult” process of assess-
ing Chrysler’s strengths and weakness,
where “no stone [was] unturned.”

achieving them may be more motivating and rewarding than waiting to reach far-
off distal goals. In a research study, Massachusetts Institute of Technology students
were given a complex proofreading assignment. They were paid 10 cents for each
error they found but were penalized $1 a day for turning in their work late. One
group of students was given a single deadline—a distal goal—and told to turn in all
of their work three weeks from the start of the study. A second group of students
was given weekly deadlines—proximal goals—and told to turn in one-third of their
work each week. A third group of students was allowed to set their own dead-
lines; they set their own proximal goals. The single-deadline students (those with no
proximal goals, just a distal goal) were the worst performers: They turned in their
work 12 days late and corrected only 70 errors. The students who were assigned
weekly goals (proximal goals) were the best performers: They turned in their work
only a half-day late and corrected 136 errors. Next best were the students who set
their own proximal goals: They turned in their work 6.5 days late and corrected
104 errors.21 The lesson for managers is clear. If you want people to do a better
job of tracking the quality and timeliness of their work, use proximal goals to set
multiple deadlines.22
The second method of tracking progress is to gather and provide performance
feedback. Regular, frequent performance feedback allows workers and managers to
track their progress toward goal achievement and make adjustments in effort, direc-
tion, and strategies.23 Exhibit 5.4 shows the impact of feedback on safety behavior at
a large bakery company with a worker safety record that was two and a half times
worse than the industry average. During the baseline period, workers in the wrap-
ping department, who measure and mix ingredients, roll the bread dough, and put
it into baking pans, performed their jobs safely about 70 percent of the time (see 1
in Exhibit 5.4). The baseline safety record for workers in the makeup department,
who bag and seal baked bread and assemble, pack, and tape cardboard cartons for
shipping, was somewhat better at 78 percent (see 2). The company then gave work-
ers 30 minutes of safety training, set a goal of 90 percent safe behavior, and then
provided daily feedback (such as a chart similar to that in Exhibit 5.4). Performance
improved dramatically. During the intervention period, safely performed behaviors
rose to an average of 95.8 percent for wrapping workers (see 3) and 99.3 percent
174
 Chapter 5 Planning and Decision Making

Exhibit 5.4 Effects of Goal Setting, Training, and Feedback on Safe Behavior in a
Bread Factory

Source: From “A Behavioral Approach to Occupational Safety: Pinpointing and Reinforcing Safe Performance in a Food Manu-
facturing Plant,” J. Komaki. K. D. Barwick, & L. R. Scott, Journal of Applied Psychology, 1978, vol. 63 (1978): 464–445. Copyright ©
1978 by the American Psychological Association.

for workers in the makeup department (see 4), and never fell below 83 percent.
Thus, the combination of training, a challenging goal, and feedback led to a dra-
matic increase in performance. The importance of feedback alone can be seen in
the reversal stage, when the company quit posting daily feedback on safe behavior.
Without daily feedback, the percentage of safely performed behavior returned to
baseline levels—70.8 percent for the wrapping department (see 5) and 72.3 percent
for the makeup department (see 6). For planning to be effective, workers need both
a specific, challenging goal and regular feedback to track their progress. Indeed, ad-
ditional research indicates that the effectiveness of goal setting can be doubled by
the addition of feedback.24

2.5 Maintaining Flexibility

Because action plans are sometimes poorly conceived and goals sometimes turn out
not to be achievable, the last step in developing an effective plan is to maintain flex-
ibility. One method of maintaining flexibility while planning is to adopt an options-
based approach.25 The goal of options-based planning is to keep options open by
making small, simultaneous investments in many alternative plans. Then, when one options-based planning maintaining
planning flexibility by making small,
or a few of these plans emerge as likely winners, you invest even more in these plans simultaneous investments in many
while discontinuing or reducing investment in the others. alternative plans.

175
Part 2 Planning
© mmaxer/Shutterstock.com
slack resources a cushion of extra
resources that can be used with
options-based planning to adapt to
unanticipated change, problems, or
opportunities.
learning-based planning learning
better ways of achieving goals by con-
tinually testing, changing, and improv-
ing plans and strategies.
176
In part, options-based planning is the opposite of traditional
planning. Whereas the purpose of an action plan is to commit
people and resources to a particular course of action, the
purpose of options-based planning is to leave
those commitments open by maintaining
slack resources, that is, a cushion
of resources, such as extra time,
people, money, or production
capacity, that can be used to
address and adapt to unan-
ticipated changes, problems, or
opportunities.26 Holding options open
gives you choices. And choices, com-
bined with slack resources, give you flex-
ibility. For example, in the summer of 2010,
still facing uncertainties surrounding the eco-
nomic recovery, U.S. companies held $1.84 trillion in
cash reserves, up 26 percent from a year earlier. Why did
companies have so much cash on hand, much more than they needed to do busi-
ness? Because when credit markets dried up at the beginning of the recession, most
companies could not get the loans they needed to run their businesses. So why
keep so much cash on hand? Maintaining substantial cash positions helped those
companies keep their options open. And having options, combined with slack re-
sources (i.e., that extra cash), equals flexibility.27
Cash has piled up at Hooker Furniture Corp., based in Martinsville, Virginia. The
company has seen increasing demand for the upholstered furniture it makes in the
United States, which it has found usually leads demand for the other furniture it
imports from China. Hooker is being cautious nonetheless. At the end of the most
recent quarter, it had $38.7 million in cash and other highly liquid assets on its bal-
ance sheet, up from $26.2 million a year earlier. “We’re a fairly conservative com-
pany, and keeping our powder dry makes sense to us,” said Hooker Chief Financial
Officer E. Larry Ryder. Mr. Ryder says he sees the cash as a sort of insurance fund
to make sure he can buy the raw materials and other inventory he will need to meet
demand if business picks up.28
Another method of maintaining flexibility while planning is to take a learning-
based approach. Traditional planning assumes that initial action plans are correct
and will lead to success. By contrast, learning-based planning assumes that action
plans need to be continually tested, changed, and improved as companies learn bet-
ter ways of achieving goals.29 At 76 million people, baby boomers, born between
1946 and 1964, represent the largest and wealthiest demographic in business history.
But with the first boomers now turning 65, companies that have not traditionally
targeted elderly consumers have to test, change, and improve their products and
services to adapt to older customers. But with boomers, those changes come with
one critical caveat: Don’t suggest those changes have anything to do with aging!
Ken Romanzi, chief operating officer at Ocean Spray Cranberries, Inc., which has
prospered by selling to health-conscious boomers, says, “We don’t do anything to
remind boomers that they are getting older.” So what adjustments have companies
made as they learned about aging boomers’ preferences? Kimberly-Clark spent two
years redesigning its Depend products, making them look more like gender-specific
underwear than adult diapers. Mark Cammarota, who manages the Depends brand,
says, “Past generations were more accepting that they had a condition, and this was
the product that they have to wear. The boomers don’t have that attitude. They
demand and expect more.” Likewise, Arm & Hammer learned that older customers
 Chapter 5 Planning and Decision Making

struggled to read the lettering on its cat-litter packaging, so it increased the font size
by 20 percent and made sure there were bright contrasts between the lettering and
the background colors.30

How to Make a Plan That Works There are five steps to making a plan that works:
(1) Set SMART goals, or goals that are Specific, Measurable, Attainable, Realistic, and
Timely. (2) Develop commitment to the goals from the people who contribute to goal
achievement. Managers can increase workers’ goal commitment by encouraging worker
participation in goal setting, making goals public, and getting top management to show
support for workers’ goals. (3) Develop action plans for goal accomplishment. (4) Track Review 2
progress toward goal achievement by setting both proximal and distal goals and by
providing workers with regular performance feedback. (5) Maintain flexibility. Keeping
options open through options-based planning and seeking continuous improvement
through learning-based planning help organizations maintain flexibility as they plan.

3 Planning from Top to Bottom

Planning works best when the goals and action plans at the bottom and middle of
the organization support the goals and action plans at the top of the organization.
In other words, planning works best when everybody pulls in the same direction.
Exhibit 5.5 illustrates this planning continuity, beginning at the top with a clear
definition of the company purpose and ending at the bottom with the execution of
operational plans.
Let’s see how 3.1 top managers create the organization’s purpose statement and
strategic objective, 3.2 middle managers develop tactical plans and use manage-
ment by objectives to motivate employee efforts toward the overall purpose and
strategic objective, and 3.3 first-level managers use operational, single-use, and
standing plans to implement the tactical plans.

Exhibit 5.5 Planning from Top to Bottom

© Cengage Learning 2013

177
Part 2 Planning
Exhibit 5.6 Time Lines for Strategic, Tactical, and
Operational Plans
© Cengage Learning 2013
strategic plans overall company plans
that clarify how the company will serve
customers and position itself against
competitors over the next two to five
years.
purpose statement a statement of
a company’s purpose or reason for
existing.
strategic objective a more specific
goal that unifies company-wide efforts,
stretches and challenges the organiza-
tion, and possesses a finish line and a
time frame.
178
3.1 Starting at the Top
As shown in Exhibit 5.6, top management is
responsible for developing long-term strategic
plans that make clear how the company will
serve customers and position itself against
competitors in the next two to five years. Zap-
pos, the online shoe retailer recently purchased
by Amazon, is working on a five-year plan to
expand beyond shoes into other markets, par-
ticularly beauty care. Zappos’ goal is to grow
its beauty section from $1 million in sales last
year to $75 million in five years.31 (The stra-
tegic planning and management process is ex-
amined in its entirety in Chapter 6.) Strategic
planning begins with the creation of an organi-
zational purpose.
A purpose statement, which is often re-
ferred to as an organizational mission or
vision, is a statement of a company’s purpose or reason for existing.32 Purpose
statements should be brief—no more than two sentences. They should also be en-
during, inspirational, clear, and consistent with widely shared company beliefs and
values. An excellent example of a well-crafted purpose statement is that of Avon,
the cosmetics company, shown in Exhibit 5.7. It guides everyone in the organiza-
tion and provides a focal point for the delivery of beauty products and services to
the customer, women around the world. The purpose is the same whether Avon is
selling lipstick to women in India, shampoo packets to women in the Amazon, or
jewelry to women in the United States. Despite these regional differences in spe-
cific strategy, the overall goal—understanding the needs of women globally—does
not change. Furthermore, Avon’s purpose is clear, inspirational, and consistent with
Avon’s company values and the principles that guide the company, also shown in
Exhibit 5.7. Other examples of organizational purposes that have been particularly
effective include Walt Disney Company’s “to make people happy” and Schlage Lock
Company’s “to make the world more secure.”33
The strategic objective, which flows from the purpose, is a more specific goal
that unifies company-wide efforts, stretches and challenges the organization, and
possesses a finish line and a time frame.34 For example, in 1961, President John
F. Kennedy established a strategic objective for NASA with this simple statement:
“Achieving the goal, before this decade is out, of landing a man on the moon and
returning him safely to earth.”35 NASA achieved this strategic objective on July 20,
1969, when astronaut Neil Armstrong walked on the moon. Once the strategic ob-
jective has been accomplished, a new one should be chosen. However, the new stra-
tegic objective must grow out of the organization’s purpose, which does not change
significantly over time. Consider, for example, NASA’s hopes to accomplish its latest
strategic goal, or what it calls its “exploration systems mission directorate,” between
Exhibit 5.7 Avon’s Vision and Values
The Avon Vision To be the company that best understands and satisfies the prod-
uct, service and self-fulfillment needs of women—globally.
The Five Values of Avon TRUST, RESPECT, BELIEF, HUMILITY, INTEGRITY.
Source: avoncompany.com/aboutavon/history/values.html.
 Chapter 5 Planning and Decision Making

Clean Hands = No Regret?

Your management team recently had to make the difficult choice of cutting 10 per-
cent of the workforce. It was a hard decision, but it would help prevent the perma-
nent closure of the company. Many of the managers, however, are feeling pretty
guilty. What to do? Maybe they should wash their hands. Recent research shows that

© iStockphoto.com/Kirsty Pargeter
the act of washing hands might help people feel less regret about decisions. In one
study, people were given a choice of two jars of jam. One group was allowed to wash
their hands with an antiseptic wipe, whereas the other group was only allowed to
look at the wipe. Although the group that did not wipe their hands rated the jam
they chose 24 percent higher than what they did not choose, the group that did wipe
their hands preferred their choice by only a statistically insignificant amount.36

2015 and 2020. NASA’s strategic goal is to “return to the moon, where we will build
a sustainable long term human presence.”37 NASA further explains its strategic goal
by saying, “As the space shuttle approaches retirement and the International Space
Station nears completion, NASA is building the next fleet of vehicles to bring astro-
nauts back to the moon, and possibly to Mars and beyond.” tactical plans plans created and
implemented by middle managers that
specify how the company will use re-
3.2 Bending in the Middle sources, budgets, and people over the
next six months to two years to accom-
plish specific goals within its mission.
Middle management is responsible for developing and carrying out tactical plans to
accomplish the organization’s strategic objective. Tactical plans specify how a com-
pany will use resources, budgets, and people to accomplish specific goals related to
its strategic objective for the next five years. Whereas strategic plans and objectives
are used to focus com-
pany efforts over the
next two to five years,
tactical plans and objec-
tives are used to direct
behavior, efforts, and
attention over the next
six months to two years.
Like nearly every other
newspaper, USA Today has
experienced severe losses
over the past few years.
With subscriptions down
by 14 percent, nearly dou-
ble the industry-wide aver-
age, it lost its status as the
nation’s number one news-
Alamy

paper to The Wall Street

© Mark Richardson/

Journal. Gannett, its parent

company, also posted losses
of $1.34 billion. To return
179
Part 2 Planning
management by objectives (MBO)
a four-step process in which manag-
ers and employees discuss and select
goals, develop tactical plans, and meet
regularly to review progress toward
goal accomplishment.
operational plans day-to-day plans,
developed and implemented by lower-
level managers, for producing or deliv-
ering the organization’s products and
services over a 30-day to six-month
period.
single-use plans plans that cover
unique, one-time-only events.
standing plans plans used repeatedly
to handle frequently recurring events.
policies a standing plan that indi-
cates the general course of action that
should be taken in response to a par-
ticular event or situation.
180
to profitability, USA Today announced that it would de-emphasize print media and
focus on delivering digital content to computers and mobile devices. As part of this
shift, the newspaper announced a tactical plan to eliminate 9 percent of its staff, spin
off the sports division into its own division, and reorganize the newsroom from its
traditional four content sections, News, Sports, Money, and Leisure, to Your Life,
Travel, Breaking News, Investigative, and National.38
Management by objectives is a management technique often used to develop and
carry out tactical plans. Management by objectives (MBO) is a four-step process in
which managers and their employees (1) discuss possible goals; (2) collectively se-
lect goals that are challenging, attainable, and consistent with the company’s overall
goals; (3) jointly develop tactical plans that lead to the accomplishment of tactical
goals and objectives; and (4) meet regularly to review progress toward accomplish-
ment of those goals. At Kindermusik International, a music education publisher, all
50 employees attend weekly one-hour meetings to review the company’s weekly
goals and financial results. Half-day review sessions are held each quarter to review
results against quarterly and annual goals and to discuss how to cut costs and in-
crease revenues. Because they regularly review and discuss goal progress, employees
were sensitive to reducing costs, so they proposed replacing the company’s five-day
sales convention, which costs about $50,000, with a series of year-round virtual
meetings with sales managers, sales representatives, and customers. CEO Michael
Dougherty said, “If you’d asked me, I would have said, ‘We’ve always done the con-
vention.’ But the folks who are closer to the event and closer to the customers know
that there were other and better ways to achieve the same goal.”39
3.3 Finishing at the Bottom
Lower-level managers are responsible for developing and carrying out operational
plans, which are the day-to-day plans for producing or delivering the organization’s
products and services. Operational plans direct the behavior, efforts, and priorities
of operative employees for periods ranging from 30 days to six months. There are
three kinds of operational plans: single-use plans, standing plans, and budgets.
Single-use plans deal with unique, one-time-only events. Just eight days after
John Sheptor became CEO of Imperial Sugar, one of the company’s factories in
Georgia exploded, killing 14 employees and injuring many more. To deal with the
catastrophe, Sheptor quickly put together a plan for identifying missing and in-
jured workers, and establishing a command center to communicate with employees’
families, the media, and local government officials.40
Unlike single-use plans that are created, carried out once, and then never used
again, standing plans save managers time because once the plans are created, they
can be used repeatedly to handle frequently recurring events. If you encounter a
problem that you’ve seen before, someone in your company has probably written a
standing plan that explains how to address it. Using this plan, rather than reinvent-
ing the wheel, will save you time. There are three kinds of standing plans: policies,
procedures, and rules and regulations.
Policies indicate the general course of action that company managers should take
in response to a particular event or situation. A well-written policy will also specify
why the policy exists and what outcome the policy is intended to produce. All compa-
nies have travel policies with expense guidelines on how much employees can spend
on airline tickets (coach, rather than business class or first class), hotel rooms, cars,
or meals. Many companies require employees to book their travel using company-
provided travel websites that automatically enforce those guidelines. New travel soft-
ware, however, can generate automated emails to employees that encourage them to

© iStockphoto.com/Hans Martens
Management by Objectives
F
or years, both managers and management re-
searchers have wondered how much of an
effect planning has on organizational perfor-
mance, or indeed if it has any effect at all. Although
proponents argued that planning encourages work-
ers to work hard, persist in their efforts, engage in
behaviors directly related to goal accomplishment,
and develop better strategies for achieving goals,
opponents argued that planning impedes organiza-
tional change and adaptation, creates the illusion of
managerial control, and artificially separates thinkers
and doers.
Now, however, the results from 70 different orga-
nizations strongly support the effectiveness of man-
agement by objectives (i.e., short-term planning).
Management by Objectives (MBO)
Management by objectives is a process in which
managers and subordinates at all levels in a com-
pany sit down together to jointly set goals, share
information, and discuss strategies that could lead
to goal achievement, and then regularly meet to re-
view progress toward accomplishing those goals.
Thus, MBO is based on goals, participation, and
feedback. On average, companies that effectively use
MBO outproduce those that don’t use MBO by an
incredible 44.6 percent. And in companies where top
management is committed to MBO—that is, where
objective setting begins at the top—the average in-
crease in performance is an even more astounding
56.5 percent. By contrast, when top management
does not participate in or support MBO, the average
increase in productivity is only 6.1 percent. In all,
there is a 97 percent chance that companies that use
Chapter 5 Planning and Decision Making
MBO will outperform those that don’t! Thus, MBO
can make a very big difference to the companies that
use it.41
When done right, MBO is an extremely effective
method of tactical planning. Still, MBO is not with-
out disadvantages.42 Some MBO programs involve ex-
cessive paperwork, requiring managers to file annual
statements of plans and objectives, plus quarterly or
semiannual written reviews assessing goal progress.
Today, however, electronic and web-based manage-
ment systems and software make it easier for man-
agers and employees to set goals, link them to the
organization’s strategic direction, and continuously
track and evaluate their progress.43
Another difficulty is that managers are frequently
reluctant to give employees feedback about their
performance. A third disadvantage is that managers
and employees sometimes have difficulty agreeing on
goals. And when employees are forced to accept goals
that they don’t want, goal commitment and employee
effort suffer. Last, because MBO focuses on quanti-
tative, easily measured goals, employees may neglect
important but unmeasured parts of their jobs. In other
words, if your job performance is judged only by
whether you reduce costs by 3 percent or raise rev-
enues by 5 percent, then you are unlikely to give high
© Cengage Learning 2013
priority to the unmeasured but still important parts of
your job, such as mentoring new employees or sharing
knowledge and skills with coworkers.
181
Part 2 Planning

purchase their airline tickets early relative to their travel dates. Typically, the earlier
the purchase, the lower the cost. At American Honda, this early purchase travel policy
is reinforced by travel expense tracking software that sends emails to employees and
their bosses pointing out that a $1,000 ticket purchased by the employee could have
been purchased for $800 a week earlier. Charles Franklin, Honda’s corporate travel
manager, says the policy matters, because with 40,000 annual trips made by Ameri-
can Honda employees, $100 less per trip would save the company $4 million a year.44
Procedures are more specific than policies because they indicate the series of
steps that should be taken in response to a particular event. A manufacturer’s proce-
dure for handling defective products might include the following steps:

» Step 1: Rejected material is locked in a secure area with “reject” documentation

attached.
» Step 2: Material Review Board (MRB) identifies the defect and how far outside
the standard the rejected products are.
» Step 3: MRB determines the disposition of the defective product as either
scrap or rework.
» Step 4: Scrap is either discarded or recycled, and rework is sent back through
the production line to be fixed.
procedures a standing plan that indi-
cates the specific steps that should be
» Step 5: If delays in delivery will result, MRB member notifies customer.45
taken in response to a particular event.

rules and regulations standing plans

that describe how a particular action
Rules and regulations are even more specific than procedures because they specify
should be performed, or what must what must happen or not happen. They describe precisely how a particular action
happen or not happen in response to a should be performed. For instance, many companies have rules and regulations for-
particular event.
bidding managers from writing job reference letters for employees who have worked
budgeting quantitative planning at their firms, because a negative reference may prompt a former employee to sue for
through which managers decide how defamation of character.46
to allocate available money to best
accomplish company goals. After single-use plans and standing plans, budgets are the third kind of opera-
tional plan. Budgeting is quantitative planning because it forces managers to decide
how to allocate available money to best
Exhibit 5.8 2009 U.S. Federal Government Budget Outlays accomplish company goals. According
to Jan King, author of Business Plans to
Game Plans, “Money sends a clear mes-
sage about your priorities. Budgets act
as a language for communicating your
goals to others.” Exhibit 5.8 shows the
operating budget outlays for the U.S.
federal government. Together, social pro-
grams (Social Security and income secu-
rity, or welfare) and health-care programs
(Medicare and health) account for nearly
60 percent of the federal budget. Budget-
ing is a critical management task, one that
most managers could do better. For more
detailed information about budgeting, see
Essential Managers:Managing Budgets
by Stephen Brookson, or Budgeting Ba-
sics & Beyond: A Complete Step-by-Step
Guide for Nonfinancial Managers by Jae
Source: “Table B-89. Federal Receipts and Outlays, by Major Category, and Surplus or Deficit, Fis-
cal Years 1940–2009,” 2009 Economic Report of the President: 2009 Report Spreadsheet Tables, K. Shim and Joel G. Siegel. Both books are
accessed March 5, 2011, from www.gpoaccess.gov/eop/2009/B80.xls. written for budget beginners.
182