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Formal Strategic Planning is the process that involves an organisation in the defining of its strategy or direction and making the decisions on how its resources should be allocated in order to achieve this strategy.
Formal strategic planning is affected by the macro-environment and this is the highest level layer in the framework, this consists of a wide range of environmental factors that impact to some extent on almost all organisations. The PESTEL framework can be used to identify how future trends in the Political, Economic, Social, Technological, Environment and Legal environments might affect an organisation. Pestel analysis provides the broad date from which key drivers to change can be identified. By using these key drivers organisations can envision scenarios for the future. Scenarios can be used to help organisations decide if change needs to happen depending on the different ways in which the business environment may change.
It is important for managers to analyse these factors in the present and how they are likely to change in the future. By analysing these, managers will be able to draw out implications for the organisation.
Pestel factors are sometimes linked together i.e. technological factors can impact on economic factors. It is necessary to identify the "key drivers of change" these are environmental factors that are likely to have a high impact on the success or failure of the strategy. Key drivers vary by industry i.e. Primark may be concerned by social changes that can change customer tastes and behaviours.
The critical issues are the implications that are drawn from the understanding in guiding strategic decisions and choices. The next stage is drawn from the environmental analysis specifically strategic opportunities and threats for the organisation.
Having the ability to identify these opportunities and threats is extremely valuable when thinking about strategic choices for the future. Opportunities and threats form one half of the SWOT analysis that shapes a company's formulation.
The use of SWOT analysis can help summarise the key issues from the business environment and the strategic capability of an organisation that are most likely to impact on strategy development. Once the key issues have been identified an organisation can then assess if it is capable to deal with the changes taking place within the business environment. If the strategic capability is to be understood the business must remember that it is not absolute but relative to its competitors. SWOT analysis is only useful if it is comparative, that is it examines strengths, weaknesses, opportunities and threats. SWOT analysis should help focus discussion on the future choices and to what extent an organisation is capable of supporting these strategies. SWOT analysis should not be used a substitute for more in-depth analysis.
In responding strategically to the environment the goal is to reduce identified threats and take advantages of the best opportunities.
Peter Drucker, discussing the importance of business policy and strategic planning in his book the practice of management says "we cannot be content with plans for a future that we can foresee. We must prepare for all possible and a good many impossible contingencies. We must have a workable solution for anything that may come up." http://www.alagse.com/strategy/s1.php
By taking advantage of the "strategic gap "(which is an opportunity in the competitive environment that has not been fully exploited by competitors) organisations can manage threats and opportunities.
Core competencies are a set of linked business processes that deliver superior value to the customer, when these are combined they create strategic value and can lead to competitive advantage. By using Porter's five forces analysis which is a framework for organisations to analyse industry and business strategy, they can draw upon the five forces that determine the competitive intensity and therefore attractiveness of a market. Three of Porter's five forces refer to competition from external sources and the other two are internal threats.
This analysis is just one part of the complete Porter strategic model the others include the value chain (VC) and the generic strategies.
According to Porter (2008) the job of a strategist is too understand and cope with competition; however managers define competition too narrowly as if it has occurred only among today direct competitors. Competition goes beyond profits to include competitive forces such as customers, suppliers, potential entrants and substitute products; the extended rivalry that results from all five forces defines an industry's structure and shapes the nature of competition within an industry. For example - Apple are good at technology and innovation therefore they can take the opportunities that give them competitive advantage and makes them leaders compared to Samsung or Nokia.
Porter's says there are 5 forces that shape the competition:
Threat of new entrants
Bargaining power of customers - powerful customers usually bargain for better services which involve cost and investment
Bargaining power of suppliers - may determine the cost of raw materials and other inputs effecting profitability
Rivalry among competitors - competition influences the pricing and other costs like advertising etc.
Threats from substitutes - where-ever substantial investments in R&D is taking place, the threat of substitutes is large. It also affects profitability.
Competitive advantage is the heart of strategy and for the strategy to succeed the organisation should have relevant competitive advantage.
We can see an example of this with Toshiba who operate in electrical goods, through a flexible manufacturing system it manufactures different products / varieties of some products on the same assembly lines. At Ohme it assembles nine varieties of computers on the same line and on the adjacent line it assembles 20 varieties of lap top computers.
It is able to switch from one product / variety to another instantly at low cost and makes profits on low volume runs too. This flexibility of Toshiba to respond quickly and easily to the fast changing market demand is definitely one of its competitive advantages. Whereas its competitors make profits only through long volume runs of a particular model.
However, there are a lot of companies who are choosing not to invest due to the recession; however Lidl and Aldi are taking advantage of supplying cheaper products giving them competitive advantage over say Waitrose.
Benefits of Strategic Planning
Effective strategic planning can positively improve the performance of an organisation and give them the ability to serve more clients, access additional resources or enhance the quality of service/product. It can also offer solutions to major organisational issues or challenges and gives stakeholders of the organisation an opportunity to develop harmonic solutions to long-term issues/challenges that have been affecting the organisation. Furthermore it allows for forward thinking, allowing an organisation the opportunity to pause and revisit the mission and create long-term vision. It allows clear future direction allowing stakeholders to look to the future, plan and respond to changes.
One of the major drawbacks of formal strategic planning is the uncertain dynamic environment, things change constantly and everything becomes shorter. The recession at the present time is making everything unpredictable and this is not good for strategic planning.
According to Mintzberg 1994 "strategic planning should be used to devise and implement the competitiveness of each business unit".
Scientific management was pioneered by Fredrick Taylor and involved separating thinking from doing and thus creating a new function staffed by specialists. Planning systems were expected to produce the best strategies as well as step by step instructions on how to achieve this, but this never worked well. According to Mintzberg strategic planning is not strategic thinking, the most successful strategies are visions, not plans.
When an organisation can differentiate between planning and strategic thinking they can then get back to what the strategy making process should be. Once a manger has the ability to learn from all sources around him, including personal experiences and market research and can integrate this into a vision of the direction that the business can then pursue.
Mintzberg suggests that strategic planning is a misconception and rests upon three unsound arguments: - that prediction is possible, that's strategists can be detached from the subjects of their strategies, and that the strategy-making process can be formalised.
Strategic thinkers can apply lessons learned from Mintzberg (1994) three inherent fallacies of traditional planning:
The Fallacy of Prediction is the assumption that we can actually control events through a formalised process that involves people engaged in creative or even routine work and can manage to stay on the predicted course. You need more than hard facts you need the personal touch. People are not objective, they are complex.
The Fallacy of Detachment is the assumption we can separate the planning from the doing, if the system does the thinking, then strategies must be detached from the tactics. Formulation from implementation, thinkers from doers. One objective is to make sure senior managers receive relevant information without having to immense themselves in the details. One fact is innovation has never been institutionalised and systems have never been able to reproduce the synthesis created by the entrepreneur or the ordinary strategist and probably never will.
The Fallacy of Formulisation suggests that "systems could certainly process more information, at least hard information". However they could never internalise it, comprehend it, and put it all together. Such control is more a dream that a reality. Reality tells us that anomalies, the fickle behaviour of humans and the limitations of analysis play a huge factor in the organisational outcomes and to disregard them is risky and could lead to incomplete planning.
What are the limitations of strategic planning when things are changing rapidly?
The limitations of formal strategic planning can be seen if the future is uncertain and the expectations divert from the plan.
There could also be internal resistance to formal strategic planning due to factors including:
Information flows, decision making and power relationships could be unsettled
Current operating problems may drive out long-term planning efforts
There are risks and fears of failure
New demands will be placed on managers and staff
Conflicts with the organisation are exposed
Planning is expensive - in time and money
Planning is difficult and hard work
The completed plan limits choices and activities for the organisation in the future
Nicholas O'Regan, Abby Ghobadian, (2002) "Formal strategic planning: The key to effective business process management?", Business Process Management Journal, Vol. 8 Iss: 5, pp.416 - 429