The Strategic Planning Process
In the 1970’s, as competition amongst firms grew, many of the major firms began to adopt formal approaches to strategic planning, to enable them to better understand their offerings and react to those of their competitors. As part of this model, they developed specific methods for formulating the firm’s strategy and communicating and implementing it throughout the firm. Whilst this approach tended to vary across different firms, it increasingly grew to encompass the same fundamental components and process:
Mission à Objectives > Situation Analysis > Strategy Formulation > Implementation
This process is generally used to manage the operational strategy of a firm or, for large firms, the strategy of each strategic business unit, or SBU. In contrast, when considering how a large firm as a whole develops its corporate strategy, this level of strategy tends to be based on which aspects of the firm to develop; how to allocate resources and develop synergies amongst the SBUs; and any mergers or acquisitions to make. However, once these strategic decisions have been made, each SBU will still be able to undertake a strategic planning process as discussed above.
The mission is generally set at the highest levels of a company, and is designed to explain, in a simple sentence or two, why the company exists and what it does. Previously, the mission statement was used to inform investors and creditors about the firm. However, with the rising importance of employees and customers to a business, modern mission statements now attempt to convey purpose and belonging to employees, as well as promoting an ethical and customer friendly image to consumers. For example, the Starbucks mission statement as of early 2009 is:
“To inspire and nurture the human spirit— one person, one cup, and one neighbourhood at a time”
This is obviously a far cry from the economic purpose of the business: to sell as much coffee and tea as possible to make as much profit as possible. As such, it is clear that mission statement has a strong role in determining the strategic direction of the company and the key aspects it needs to concentrate on.
The objectives are specific goals which the organisation will pursue as part of its overall mission. This could be to meet a certain growth in profit or revenue or, in the case of the Starbucks mission statement above, the company could aim to serve more customers or establish branches in more neighbourhoods. Objectives are generally set according to the principles of SMART, which states that good objectives need to be Specific, Measurable, Achievable, Realistic and Time Bound. This means a company’s objectives should be well defined; able to be measured either quantitatively or qualitatively; the company should know roughly how it will achieve them; they should be realistic given current resources and market conditions; and there should be a key timeline for reaching the objective. The same system can also be used to set personal or employee objectives.
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Once the SMART objectives have been set, the firm needs to understand how its current situation enables it to reach those objectives, and any potential obstacles in the way. In particular, the external market environment will tend to offer both opportunities to reach objectives, as well as obstacles to achieving them. As a result, a key aspect of situation analysis is an audit of the external environment. In addition to this, a firm needs to understand how its own capabilities compare to those in the market, and hence how the firm can exploit opportunities and overcome obstacles. This requires an internal audit of the firm.
In general, firms will look to use a framework or model to carry out both of these internal audits. Once of the most widely used models is the SWOT framework, which focuses on the Strengths and Weaknesses of the firm, together with the Opportunities and Threats in the market. This allows the firm to pursue the opportunities that are best aligned to its strengths, whilst avoiding any threats and ensuring that the company’s weaknesses do not affect its performance. Whilst this is a quick and useful model for analysing a situation, it does not provide specific guidance on how to analyse both the external and internal. As such, other models are often used to provide more in depth analysis of these two aspects of the situation.
When analysing the external environment, it is important to note that there are two major aspects to the environment. The first is the macro-environment of a specific country or region, which will affect the entire economy of that area and all firms in it. The second is the micro-environment, which operates within a single industry or market. Analysing the macro-environment is usually done by a PESTEL analysis, which examines the key political, economic, social, technological, ecological and legal factors within a country or region. Analysing the micro-environment is often done using Michael Porter’s Five Forces model, which focuses on the key five forces in an industry. These are customers; suppliers; the potential for market entrants; the existence of substitute products; and the degree of competitive rivalry amongst firms in the market.
The internal analysis does not have a specific well recognised and accepted model; however the resource based view of the firm, which developed from Ronald Coase’s work on transaction costs in a firm. The resource based model of the firm argues that a firm’s competitive advantage arises solely from the resources it controls and how it uses these resources. As such, a firm possessing certain resources will be strong in the areas where their resources are most effective, however weak in areas where it is lacking in resources. Resources can include access to natural resources; employee experience and skills; brand strength; financial resources; patents and trade secrets; preferential contracts; relationships with suppliers; valuable properties and assets; and existing market share. However, it is important to note that this list is not exhaustive. In general, a resource is anything a firm can use to generate value and profits.
Once a firm has built up a clear picture of its environment and its own resources and capabilities, the firm can look to formulate a specific strategy to achieve its objectives. The particular strategy used by any one firm will depend on its specific resources and situation, however management theorists have defined certain generic strategies which will apply to a wide range of firms. Michael Porter defined the main generic strategies as being cost leadership; product or brand differentiation; and segmentation, or market niche focus. In addition, Michael Treacy and Fred Wiersema described three generic value disciplines, which are akin to generic strategies. These are operational excellence, product leadership and customer intimacy. Both Porter and Treacy and Wiersma stated that companies should not attempt to use a combination of these strategies, but rather they should focus on only one and pursue it to the best of their abilities.
Whilst a strategy will tend to be formulated on quite a high level, particularly if it follows a generic strategy of value discipline, it can only be effectively implemented if it can be expressed in more detailed policies and communications that are directed at employees throughout the organisation. This is because a strategic change can only succeed if it has the support of the employees who have to deal with the customers, suppliers and organisational resources that the strategy is targeted at. In addition, expressing the strategy at a lower organisational level also helps ensure that the strategy is viable and addresses any practical issues which may arise. In particular, a strategy needs to be implemented in the marketing, R&D, procurement, HR, production and IT departments in order to be successful. As part of this, the implementation must also identify any resources and capabilities required to support the new strategy, and any organisational change which will have to take place.
As part of implementation, the strategy also needs to be controlled and altered to ensure it is being implemented correctly and successfully. This needs evaluation and feedback procedures as well as control systems to monitor the important aspects of the strategy.
Limitations of the formal strategic planning process
One of the main issues encountered in strategic planning is the dynamic nature of the situation and of the strategy itself. In particular, changing one component in a strategy can have a knock on effect on other aspects of the strategy, which can necessitate constant revisions and tactical adjustments. Unfortunately, the formal strategic planning process is a top down process, which means that any strategic changes need to come from senior management. This can mean that the process of cycling through the strategy to refine it can be slow and cumbersome, making a firm less reactive.
As a result of this, the formal strategic planning process tends to be only suitable in relatively stable environments. In competitive and dynamic markets and environments, firms need to be more flexible, and allow strategies to emerge naturally from the organisation and its managers. One example of this is Honda’s success in selling cheap and small motorcycles in America. Honda’s formal strategy was to sell large motorcycles but, when customers saw their staff driving to visit dealers on the smaller more manoeuvrable motorcycles, they saw them as being more practical and desirable. As a result, Honda quickly began importing and selling these motorcycles, in the process building up a substantial and profitable market niche with very little formal strategic planning, instead they simply responded to customer demands.