What is Strategic Planning?
Strategic Planning is a systematic process of predicting the long term goals of an organisation and identifying the best approach for achieving it.
Table of Content
Preparing effective marketing strategies requires understanding of the strategic planning process corporate policies, objectives, and business plans.
A strategic plan defines the organisations strategy. The existing situation and possible opportunities need to be analysed to determine the right direction for the organisation. This has to be done along with the firm’s competencies, its competitive advantage, its weaknesses, and the business that they want to be in.
The necessity for planning arises because of the fact that business organizations have to operate, survive and progress in a highly dynamic environment where change is the rule, not the exception. The change may be sudden and extensive, or it may be slow and almost imperceptible.
Change Drivers :The General Shape of Things to Come
Alvin and John Naisbitt and other researchers have identified one hundred different trends that are reshaping the global economy and summarized them down to nine change drivers:
- A maturing population
There will be greater emphasis on sophistication, realism and responsibility in the days ahead. - Society as a diverse mosaic
Racial, ethnic diversity will increase. A multinational and multilingual workforce will emerge. Products and services will be customized to suit individual tastes. Women will enjoy a greater share of executive positions. - Shifting societal roles
The boundaries between public and private sectors will collapse; all sorts of government services will be subcontracted to profit-making firms. - An information-based economy
A dizzying array of information technologies such as computers and computer networks, telecommunication systems, broadcast and entertainment systems, document reproduction systems, satellite communication systems will drive the world.
More accessible information will change traditional patterns of work, giving rise to troubling privacy issues. Robots will be everywhere; at road crossings, shop counters, offices, restaurants and even in the cockpit of an aircraft. Highly developed user interface will allow such robots to talk to human beings and build their knowledge dynamically. - Communications
The demand for information and communication will grow exponentially. Media will converge with greater force, and more versatile communication devices will see the light of the day. Geographical distance would become meaningless and the cost of communication will ape the trend in information technology. - Globalisation
The world is shrinking in all major respects. Now-a-days people, goods, capital and information are moving around the globe as never before. In fact companies like Visual Soft Technologies. Infosys, Hughes Software, Mastek, Satyam Computers earn more than 85 per cent of their revenues from exports only. Over the years, companies like Reliance, Ranbaxy, Moser Baer, Essel Pro Pack, Cipla have become global players. - Emphasis on quality of life
Issues concerning personal health and environmental protection will gain importance so that the public policy and business practices will be reshaped accordingly. Biotechnology will open up a world of endless possibilities to mankind. Diseases that traumatize and kill people today will become a thing of the past. Surgery may be replaced with non-intrusive techniques that don‟t just repair, but grow new cells to heal. This, in turn will have a dramatic impact on the productivity and efficiency of the workforce. - A restructured economy
Global competition and new technologies will force companies to be lean and flexible and more responsive to rapidly changing circumstances. Small firms will be continued to mushroom. The services sector will continue to grow. Whole new industries will emerge, while others will move to low-wage countries (e.g. Software service providers, Call Centre businesses moving to India and other low-wage countries in the late 90s). - A redefinition of home and family
paid outsiders will handle traditional family chores. A diverse collection of households (single-person homes, childless couples, unmarried couples, single parents, dual-income families) may emerge. Thanks to modern information technology, more people will be able to shop, bank and work in their own homes. - Renewed social activism
The phrase,think globally, act locally‟ will assume importance as people tackle tough local issues like drug abuse, homelessness, AIDS, pollution etc. Business leaders may be compelled to respond ethically, creatively and generously to community problems (e.g. Narayan Murthy, Azim Premji, Ratan Tata, Adi Godrej, have already taken the lead in India in this regard).
Non-profit organizations will grow in importance as they supplement over-burdened government agencies in offering social services. The rapid advances in technology, global competition, changing preferences of customers, changing policies of government, have multiplied the problems of managers all over the globe. Most of these changes are thrust on managers and they are forced to adjust their activities (customer service, teamwork, speed, product/service quality, productivity improvement have become the new corporate mantras!) in order to take full advantage of favourable developments or to minimize the adverse effects of unfavourable ones.
Successful managers try to visualize the problems before they turn into emergencies. Successful managers deal with foreseen problems, and unsuccessful manager‟s struggle with unforeseen problems. The difference lies in planning (Terry). Managers charged with the responsibility of achieving definite targets do not wait for the future. They make the future (Drucker).
They introduce original initiatives by removing present difficulties; anticipating future problems; changing the goals to meet internal and external challenges; experimenting with creating ideas; attempting to shape the future and creating a more desirable environment. Planning is the process of deciding in advance what should be accomplished and how it should be realized. It involves selecting objectives and how to achieve them. Strategic planning involves an extended timeframe, the deployment of a large percentage of the resources of an organization, a wide spectrum of activities and a major eventual impact.
Evolution of Strategic Planning
The first three decades of the twentieth century witnessed significant changes in business activity. Firms focused their energies on increasing production of standardized goods to derive the economies of scale. They were more comfortable working with day-to-day operational plans. Whatever came into the market, got readily absorbed? Large volumes, standardized products, everincreasing demand, characterized this era. After the 1930s, firms witnessed increased environmental turbulence.
Competition became intense with the emergence of new players; technological changes were swift and government policies restricted the economic freedom of the firms in most countries. Consumer tastes and preferences changed radically. New products with novel features made headlines and to sustain demand, firms had to promote products heavily and spend significant amounts on market segmentation. They had to commit their resources carefully, assessing various alternatives offered by the external environment from time to time.
The reactive, adhoc responses rarely yielded results, forcing firms to change their orientation (from short-term to long-term) and look beyond the four walls of the organization more closely. The 1950s saw dramatic changes in technology; new products emerged rapidly; competition became cut-throat; multinational corporations began to dominate global markets and governmental policies encouraged free market forces.
The environmental complexities literally compelled the firms to come out with proactive steps by pinning their hopes on roadmaps provided by strategic plans. They had to be lean and flexible so that they could remain solvent and move fast. They had to almost undo existing styles, systems and standards, looking at internal as well as external environments from a strategic perspective (Ramaswamy, p.3-6).
Why Strategic Planning?
No business firm can afford to get ahead without a clear map of where it wants to go and why. Strategic planning provides the roadmap for the firm. It serves as a comprehensive guide; it provides the big picture for all employees of an organization. By defining the mission of the organization in specific terms, it helps managers provide direction and purpose to organizational efforts. The organization is able to function better as a result and becomes more responsive to a dynamic environment.
It helps in identifying opportunities early and exploits the same vigorously. It helps decide where and when to use the available resources in an optimal way. Additionally, it provides a complete and broad base for judging each executive‟s contributions. The resources in the organization are something that an organization owns, controls or has access to on a semi-permanent basisNo business firm can afford to get ahead without a clear map of where it wants to go and why. Strategic planning provides the roadmap for the firm.
It serves as a comprehensive guide; it provides the big picture for all employees of an organization. By defining the mission of the organization in specific terms, it helps managers provide direction and purpose to organizational efforts. The organization is able to function better as a result and becomes more responsive to a dynamic environment. It helps in identifying opportunities early and exploits the same vigorously.
It helps decide where and when to use the available resources in an optimal way. Additionally, it provides a complete and broad base for judging each executive‟s contributions. The resources in the organization are something that an organization owns, controls or has access to on a semi-permanent basis.
Targets are clarified and the means to follow are outlined. As the future unfolds, adequate controls can be established to see whether the right course of action is adopted or not and whether the results are satisfactory or not. Strategic planning also minimizes the chances of mistakes and unpleasant surprises, because goals, strategies are subjected to careful examination.
There are less chances for committing mistakes and decisions arrived at can ultimately stand the test of time. There are stakeholders in strategic planning which are defined as an individual or group with an interest in the organization’s activities and who seeks to influence them.
Stages of Strategic planning process
The strategic planning process is a systematic approach that organizations use to define their strategies, make decisions, and allocate resources to achieve long-term objectives. While specific models and terminologies might vary, the following are the common stages involved in the strategic planning process
- Defining the business
- Defining the mission statement
- Setting up Strategic Business Units (SBUs)
- Environmental scanning
- Strategy formulation
Benefits of Strategic Planning
- It provides the roadmap for the firm; it shows the way for achieving targets.
- It helps the firm utilize its resources in the best possible manner. It allows more effective allocation of time and resources for identifying opportunities.
- The firm can respond to environmental changes in a better way – by exploiting opportunities to its advantage and avoiding costly mistakes in investment decisions.
- It minimizes the chances of mistakes and unpleasant surprises. It seeks to prepare the firm to confront future challenges through certain proactive steps and even shape the future to its advantage. As rightly pointed out by FR David, strategic planning “allows an organization to initiate and influence (rather than just respond to) activities, and thus exert control over its own destiny”.
- It creates a framework for internal communication among personnel. It helps to integrate the behaviour of individuals into a total effort. It provides a basis for the clarification of individual responsibilities. It gives encouragement to forward thinking. It encourages a favourable attitude towards change. It provides a cooperative, integrated and enthusiastic approach for tackling problems and realizing opportunities (Greenley).
Pitfalls
Strategic planning is laborious and time-consuming. There are very few satisfactory short-cuts. Immediate results are rarely obtained. Further, establishing and maintaining a formal system involves many expenses. Sophisticated strategic planning systems are a luxury for a small-scale organization. Again, it should be remembered that trying to reach 100 per cent perfection is an ideal, a pious intention that can never be satisfied through strategic planning.
Many executives, enthralled by strategic planning, tend to overdo the factgathering job. Much time and effort is wasted thus in collecting all sorts of data that is not fully put to fruitful use. Strategic planning, quite often, restricts the organization and executives to the more rational and risk-free options. Managers are wedded to a philosophy of adopting those strategies or objectives that bear the weight of careful scrutiny and detailed analysis. In the process, many attractive opportunities may be lost since they are characterized by a high degree of risk and uncertainty.
Levels of Strategic Planning
Many organizations develop strategies at three different levels: corporate, business and functional.
Corporate-level Strategic Planning
It is the process of defining the overall character and purpose of the organization, the business it will enter and leave and how resources will be distributed among those businesses. Strategy at this level is typically developed by top management (The Board of Directors, CEO etc.). The decisions are broad-based, carry greater risk and affect most parts of the organization (e.g. the type of business that the organization should enter, changes required in growth strategy, acquisition and diversification decisions etc.
Business level Strategic Planning
It is the planning process concerned primarily with how to manage the interests and operations of a particular unit within the organization, commonly known as a strategic business unit (SBU). A strategic business unit is a distinct business with its own set of competitors that can be managed reasonably independently of other businesses within the organization.
Generally, the heads of the respective business units develop business strategies, with the approval of top management. Strategies at this level are aimed at deciding the competitive advantage to build, determining responses to changing market situations, allocating resources within the business unit and coordinating functionallevel strategies developed by functional managers.
Functional-level Strategic Planning
It is the process of determining policies and procedures for (relatively narrow levels of activity) different functions of an enterprise like marketing, finance, personnel etc. These are developed by functional managers and are typically reviewed by business unit heads.
Dimensions of Strategic Decisions
Typically, strategic issues have the following dimensions (Pears and Robinson):
Top Management Involvement
Strategic issues require the CEO to carefully assess the likely impact on various divisions, allocate resources thereafter and oversee the implementation process closely. At every stage, strategic decisions require consistent support and continued blessings from top management.
Allocation of Large doses of Resources
As mentioned above, strategic decisions require commitment of large doses of internal as well as external resources over an extended period.
Effect on Long-term Prosperity of the Firm
Strategic decisions have long-term effects on firms – for better or worse. Once a firm embraces a particular strategy, its image and competitive advantages are invariably linked to that strategy. It gains recognition in certain markets, for certain products with certain technologies.
The firm would seriously jeopardize all its previous gains if it shifts focus from these markets, products or technologies by adopting a radically different strategy. For example, the Rs. 1,000 crore NEPC Group once known for its dominance in wind energy business shifted focus from its core business and ventured into paper, airlines, ago foods, tea, textiles etc. and got wiped out completely from the industrial map of India.
Future-Oriented
Strategic decisions are built around forecasts. The emphasis is on selecting a suitable course of action from the available alternatives and moving ahead with confidence. In a turbulent environment, a firm will succeed only if it takes a proactive stance toward change. For example, visualizing the demand for television content in the late 1990s EktaKapoor of Balaji Telefilms moved ahead of others and came out with stunningly popular television serials. Balaji is now rated as the most popular television content provider and has become the darling of the FIIs in the stock market as well.
Multi-functional or Multi-business Consequences
Strategic decisions have complex implications for most areas of the firm. They impact various strategic business units especially in areas relating to product-mix, customer-mix, organization structure, competitive focus etc.
Focus on External Groups
In order to successfully position a firm in a competitive environment, strategists must look beyond its operations. They must keep in mind how the other stakeholders (competitors, customers, suppliers, creditors, government, and labour) are likely to react to its own strategic moves from time to time.
The Concept of Strategy
Strategy is the overall plan of a firm deploying its resources to establish a favourable position and compete successfully against its rivals. Strategy describes a framework for charting a course of action. It explicates an approach for the company that builds on its strengths and is a good fit with the firm‟s external environment. It is basically intended to help firms achieve competing advantage. Competitive advantages allow a firm to gain an edge over rivals when competing.
Competitive advantage comes from a firm‟s distinctive competence or unique ability here implies, those special capabilities, skills, technologies or resources that enable a firm to distinguish itself from its rivals and create competitive advantage (such as superior quality, design skills, low –cost manufacturing, superior distribution etc.). The term „terrain‟ is highly relevant in explaining the concept of strategy more clearly. From a business sense, terrain refers to markets, segments and products used to win over customers.
The essence of strategy is to match strengths and distinctive competence with terrain in such a way that one‟s own business enjoys a competitive advantage over rivals competing in the same terrain. The basic premise of strategy, as things stand now, is that an adversary can defeat a rival – even a larger, more powerful one – if it can manoeuvre a battle or engagement onto a terrain favourable to its own capabilities. The term „capability‟ refers to the ability or capacity of a bundle of resources deployed by a firm to perform an activity (Pitts and Lie).
Elements of a Strategy
Any coherent strategy (as the above expert opinions reveal) should have four important elements (Saloner et al.):
Goals
A strategy invariably indicates the long-term goals toward which all efforts are directed. For example long-term goals might be to „dominate the market, to be the technology leader or to be the premium quality firm‟. Such enduring goals help employees give their best in a unified manner and enable the firm to specify its competitive position very clearly to its rivals.
A recent advertisement from Maruti Suzuki for example, claims: “we don‟t just sell more cars than No.2. We sell more cars than the entire competition put together”. Maruti‟s commitment to being number one (sales, distribution network, lowest cost producer, highest resale value, one stop solution provider etc.) or two in the markets it serves sends clear signals to its rivals in more than one way. Some firms do not do strategic planning because of laziness. The long term goals have to be set to achieve long term objectives.
Scope
A strategy defines the scope of the firm that is, the kind of products the firm will offer, the markets (geographies, technologies, processes) it will pursue and the broad areas of activity it will undertake. It will, at the same time, throw light on the activities the firm will not undertake.
Competitive Advantage
A strategy also contains a clear statement of what competitive advantages the firm will pursue and sustain. Competitive advantage arises when a firm is able to perform an activity that is distinct or different from that of its rivals. Firms build competitive advantage when they take steps that help them gain an edge over their rivals in attracting buyers. These steps vary, for example, making the highest quality product, offering the best customer service, producing at the lowest cost or focusing resources on a specific segment or niche of the industry.
Logic
This is the most important element of strategy. For example, a firm‟s strategy is to dominate the market for inexpensive detergents by being the low-cost, mass-market product. Here the goal is to dominate the detergent market. The scope is to produce low-cost detergent powder for the Indian mass market. The competitive advantage is the firm‟s low cost. Yet this example does not explain why this strategy will work. Why the firm will get ahead of others by limiting its scope and by being the low cost producer (competitive advantage) in the detergent industry.
The „why‟ is the logic of the strategy? To see how logic is the core of a strategy, consider the following expanded version of a strategy: „our strategy is to dominate the Indian market for inexpensive detergent powder by being the low cost producer selling through mass-market channels. Our low price will generate high volumes. This, in turn, will make us a high volume, low-cost producer. The economies of scale would help us improve our bottom-line even with a low price.
Some Definitions and Views of Strategy
A Chandler: “
The determination of the long-term goals of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out these goals”.
- G Saloneret al
Strategy provides a framework for guiding the choice of actions. It is a broad articulation of the kinds of products the organization will produce, the basis on which its products will compete with those of its competitors, and the types of resources and capabilities the firm must have or develop to implement the strategy successfully. - Mintzberg: “
Strategy represents a fundamental congruence between external opportunity and internal capability”. - T Ansoff: “Strategic decisions are primarily concerned with external rather than internal problems of the firm and specifically with the selection of the product mix the firm will produce and the markets to which it will sell”
- Boston Consulting Group: “
Strategy is a deliberate search for a plan of action that will develop a business‟s competitive advantage and compound it. The objective is to enlarge the scope of your advantage, which can only happen at someone‟s expense” - M Porter
According to Porter the threat to a firm‟s profits come not only from its competitors but also from its suppliers, buyers, potential new entrants etc. So to earn above average returns, a firm should invariably try to establish a superior competitive position as compared to its trials through its strategies. - Resource-based View: An evolving set of strategic management ideas that place great emphasis on the firm‟s ability to distinguish itself by means of investing in hard-to-imitate and specific resources (e.g. technologies, skills, capabilities, assets etc.)
Strategies vs. Tactics
It is useful to draw the distinction between strategies and tactics at this stage. Strategy is a comprehensive plan designed to ensure that the basic objectives of an enterprise are achieved. It includes determination of a specific course of action that is capable of meeting competition as well as fulfilling an enterprise‟s objectives. It is action-based and more specific than objectives.
To achieve clarify, managers now-a-days talk about four types of strategies
Master or grand strategies that cover the entire pattern of an organization‟s objectives, policies and specific resources deployment. Grand strategies are derived from a careful situational analysis of the organization and its environment.
Programme strategies are more specific and are concerned with the deployment of resources to achieve basic organizational objectives. Sub-strategies are more detailed than programme strategies and focus on the attainment of specific objectives.
Tactics are the action plans of specific, step-by-step methods by which strategies are executed. Tactics convert the philosophy of management into practice and force the enterprise to go down to the nuts and bolts of its operations. Tactics are formulated at the supervisory level and their primary focus is on implementing policy decisions taken at the top level.
Past Approaches to Strategy
The Design Approach
In early 60s, Alfred Chandler (1962) proposed that structure follows strategy. Top managers generally formulate strategy after a careful analysis of opportunities in the environment and the strengths and weaknesses in the organization. Managers decide initially what industry the organization will enter, how it will compete, where it will be located, and the kind of organization it will be, who will be the top managers, and who will directly influence the organization structure.
The Analytical Approach
Igor Ansoff (1965), a leading proponent of the analytical approach, tried to weave a fire garment out of the loose threads developed by Harvard researchers. He tried to examine two things basically: (i) whether strategy had a distinct context of its own (ii) whether it can be described in a structured way. Ansoff felt that strategy can be examined from several angles: institutional, corporate, business and functional level.
The Positioning Approach
During the 1970s, the diversification moves of many large companies have failed to deliver the anticipated synergies. The oil crisis, competition from Japanese and European firms compounded the problem further. In place of diversification and growth, firms started putting more emphasis on achieving competitiveness.
Michael Porter around this time proposed that a firm‟s profitability is dependent on five important forces: i.e. supplier power, buyer power, threat from new entrants, threat from substitutes and intensity of rivalry within an industry.
The goal of a competitive strategy for a firm should be to find a position in the industry from which it can best defend itself against these competitive forces or can influence them to its advantage. According to Porter, the analysis of the above five forces should shape the formulation of business strategy.
Current Trends in Business Policy
The four paradigms of business policy throw light on how the discipline has developed over the years. The story does not seem to end here. The approaches and methods of analysing business processes have not yet coalesced into a theory of how to manage the show.
But certain visible trends revealing how strategic issues get resolved can be outlined thus (Christensen et al).
Top Management Prerogative
Business policy puts lot of emphasis on top management functions and responsibilities, such as defining objectives, specifying action plans, providing direction to enterprise activities, ensuring control, balancing the concerns of internal and external groups and ensuring the success of a firm in a changing environment.
General Management Basis
Business policy tries to look at the jungle rather than the trees‟. Instead of examining issues from a functional angle, policy makers tend to view all key issues from a broader perspective – i.e. assessing the overall impact of a decision on the entire business. This, of course, involves choosing a right path, keeping organizational capabilities and environmental pressures in the background.
Resource Focus
Business policy is chiefly concerned with the mobilization of various resources in order to achieve the goals of an enterprise in an effective way in the face of severe competition or adverse circumstances. Also top management functions and responsibilities are prime concern to them.
FAQ
What is Strategic Planning?
Strategic Planning is a systematic process of predicting the long term goals of an organisation and identifying the best approach for achieving it. Preparing effective marketing strategies requires understanding of the strategic planning process corporate policies, objectives, and business plans.
Why Strategic Planning?
No business firm can afford to get ahead without a clear map of where it wants to go and why. Strategic planning provides the roadmap for the firm. It serves as a comprehensive guide; it provides the big picture for all employees of an organization.