Strategic Planning and Ten-Ten Planning
This chapter explains the nature of planning and the importance of analysis in creating differentiated products or services or higher levels of efficiency. Understanding the nature of strategic planning and the types of analysis used during the strategic planning process are important for operation managers.
Planning Concepts
There are two generic planning strategies that a
business can pursue.Michael Porter originally identified three generic
strategies. He noted that a business can also focus on a market that is
not very competitive. Most people consider this to be a special case of
the other two strategies. It can strive to be
efficient, it can differentiate, or both. In other words, a firm can
focus on delivering Midas versions of products, Hermes versions of
products, or both. A firm that employs a strategy of efficiency strives
to be the low-cost producer and compete on the basis of charging less
than the other competitors. In contrast, a firm that is competing on the
basis of product differentiation can charge premium prices. If charging
premium prices yields larger-than-average profits, the market will, of
course, attract attentions. Competitors will enter the market with a
slightly different product, perhaps even a better product, at a lower
price and ultimately drive down the premium prices. The firm will then
have to embark on further cost-cutting initiatives, improve their
product in order to hold on to market share and survive, or do both. The
market is relentless and it demands a two-pronged approach of
developing differentiated products and services and cutting costs.
The
first mantra of the entrepreneur is "differentiate through innovation
or perish" or in simpler terms "differentiate or die". The second mantra
of the entrepreneur is "strive to reduce costs". The first mantra is
accomplished by focusing on Midas versions of products using extravagant
engineering and design. Differentiation is not only the engine driving
business success under monopolistic competition, but it is also
buttressed by attempting to improve costs and product design through
frugal engineering. The second mantra is accomplished by focusing on
Hermes versions of products using frugal engineering.
As noted
earlier, over 99% of the approximately 23 million businesses compete in
markets that are characterized by monopolistic competition. That is
there are many buyers, many sellers, market entry and exit is easy, and
the products are closely related but not identical. There are the two
approaches for differentiating products. The first uses marketing and
advertising to develop a brand. The second approach is to engage in
product development through some sort of research and development
(R&D) process and to develop goods and services with updated
features. Both approaches are necessary parts of the differentiation
process. Marketing and advertising can help illustrate the features and
can sometimes delay encroachment by the competition. But in the long run
(probably less than a year), successful differentiation depends on
product development and R&D.