Application of the decomposition scheme to strategic planning process in a diversified firm

Abstract

In this thesis we applied the mathematical decomposition scheme to the strategic planning process in a diversified firm with a decentralized structure. Not only the optimal allocation of resources on which capacity expansions are reflected among subunits but also strategic planning decision process is emphasized. Corporate activities are treated as linear and the model explicitly distinguishes the hierarchical structure and corresponding strategic roles. Strategic planning processes are categorized into three stages : initial strategic direction setting stage, strategic programming consolidation stage, and budgeting stage. Once projects are made following the strategic directions determined at stage one, division managers coordinate projects with division activities. This constitutes stage 2 process. The division information on profit and necessary corporate resources consists a proposal which is to be sent to the corporate headquarter. At stage 3, corporate manager selects the best proposal among received so far from each division, while considering capacity expansion. Stage 2 and stage 3 are combined to form a cycle, and the cycle terminates in a finite number of iterations. In each iteration, stage 2 and 3 are repeated with the updated transfer price to make the corporate objective value increase monotonically. We found that if headquarter defines only functional nature of division project, each division``s marginal profit of a resource is equal to the transfer price of that resource. And if headquarter confines not only project nature but also resource commitment in each division, they may not be equal. The model complements other strategic optimization models in the sense that we tried to incorporate division autonomy and depict real strategic planning process. Hence the model can be a basis in building a decision support system for the strategic planning of a decentralized structured firm.