Strategic Planning as a Basis of the Strategic Management Process
Strategic planning is a part of a strategic management process. Strategic planning is a process of determining organization's strategies by analyzing strategic positions and identifying its internal and external factors, which can lead to achievement, stabilization and improvement of its competitive advantages. The result of a strategic planning is a strategic plan. Strategic plans are plans that apply to the entire organization, that establish the organization's overall objectives, and that seek to position the organization in terms of its environment. Strategic planning encompasses seven steps. Let's look at them.
In order to develop their strategy, organizational members must first identify the organization's current mission, objectives, and strategies (step 1). Every organization has a mission statement that defines its purpose and answers the question, "What business or businesses are we in?" Defining the organization's mission forces management to identify the scope of its products or services carefully.
Determining the nature of one's business is as important for not-for-profit organizations as it is for business firms. Hospitals, government agencies, and colleges must also identify their missions. For example, is a college training students for the professions, training students for particular jobs, or providing students with a well-rounded, liberal education? Answers to questions such as these clarify the organization's current purpose. Once its mission has been identified, the organization can begin to look outside the company to ensure that its strategy aligns well with the environment.
Management of every organization needs to analyze its environment (step 2). In the Netherlands, by law, proprietary information is public. But organizations in other countries must obtain that information on their own. That means that these organizations need to find out, for instance, what their competition is up to, what pending legislation might affect them, what their customers desire, and what the supply of labor in locations where they operate is like. By analyzing the external environment, managers are in a better position to define the available strategies that best align with their environment.
After analyzing and learning about the environment, management needs to evaluate what it has learned in terms of opportunities that the organization can exploit and threats that the organization faces (step 3). In a very simplistic way, opportunities are positive external environmental factors, and threats are negative ones.
Keep in mind, however, that the same environment can present opportunities to one organization and pose threats to another in the same or a similar industry because of their different resources or different focus. Take communications, for example. Telecommuting technologies have enabled organizations that sell computer modems, fax machines, and the like to prosper. But organizations such as the U.S. Postal Service and even Federal Express, whose business it is to get messages from one person to another, have been adversely affected by this environmental change.
Next, in step 4, we move from looking outside the organization to looking inside. That is, we are evaluating the organization's internal resources. What skills and abilities do the organization's employees have? What is the organization's cash flow? Has it been successful at developing new and innovative products? How do customers perceive the image of the organization and the quality of its products or services?
This fourth step forces management to recognize that every organization, no matter how large and powerful, is constrained in some way by its resources and the skills it has available. An automobile manufacturer, such as Ferrari, cannot start making minivans simply because its management sees opportunities in that market. Ferrari does not have the resources to successfully compete against the likes of DaimlerChrysler, Ford, Toyota, and Nissan. On the other hand, Renault and a Peugeot-Fiat partnership can, and they may begin expanding their European markets by selling minivans in North America.
The analysis in step 4 should lead to a clear assessment of the organization's internal resources - such as capital, worker skills, patents, and the like. It should also indicate organizational departmental abilities such as training and development, marketing, accounting, human resources, research and development, and management information systems. Internal resources or things that the organization does well are its strengths. On the other hand, those resources that an organization lacks or activities that the firm does not do well are its weaknesses. Identifying strengths and weaknesses is the 5th step of the strategic planning process.
A merging of the externalities (steps 2 and 3) with the internalities (steps 4 and 5) results in an assessment of the organization's opportunities. This merging is frequently called SWOT analysis because it brings together the organization's Strengths, Weaknesses, Opportunities, and Threats in order to identify a strategic niche that the organization can exploit. Having completed the SWOT analysis, the organization reassesses its mission and objectives (step 6). For example, as the demand for film continues to rise worldwide, managers at Kodak have developed plans to begin selling "yellow boxes of film" in such countries as Russia, India, and Brazil, where many of the "people . . . have yet to take their first picture." Although risk is associated with this venture, company executives feel that they have to exploit this strategic niche and take advantage of an opportunity in the external environment.
In light of the SWOT analysis and identification of the organization's opportunities, management reevaluates its mission and objectives. Are they realistic? Do they need modification? If changes are needed in the organization's overall direction, this is where they are likely to originate. On the other hand, if no changes are necessary, management is ready to begin the actual formulation of strategies.
Strategies need to be set for all levels in the organization (step 7). Management needs to develop and evaluate alternative strategies and then select a set that is compatible at each level and will allow the organization to best capitalize on its resources and the opportunities available in the environment. For most organizations, four primary strategies are available. Frequently called the grand strategies, they are growth, stability, retrenchment, and combination strategies.
The growth strategy If management believes that bigger is better, then it may choose a growth strategy. A growth strategy is one in which an organization attempts to increase the level of the organization's operations. Growth can take the form of more sales revenues, more employees, or more market share. Many "growth" organizations achieve this objective through direct expansion, new product development, quality improvement, or by diversifying - merging with or acquiring other firms. Growth through direct expansion involves increasing company size, revenues, operations, or workforce. This effort is internally focused and does not involve other firms. For example, Dunkin' Donuts is pursuing a growth strategy when it expands. As opposed to purchasing other "donut" chains, Dunkin' Donuts expands by opening restaurants in new locations or by franchising to entrepreneurs who are willing to accept and do business the "Dunkin'" way. Growth, too, can also come from creating businesses within the organization. When Northwest Airlines decided to create and supply its own in-flight meals - as opposed to contracting with an external vendor - the airline was exhibiting a growth strategy by expanding its operations to include food distribution. And when IKEA, the Swedish furniture outlet expanded its offerings to include furniture for children, it, too, was focusing on a growth strategy. Companies may also grow by merging with other companies or acquiring similar firms. A merger occurs when two companies - usually of similar size - combine their resources to form a new company. For example, when the Lockheed and Martin-Marietta Corporations merged to form Lockheed-Martin, they did so to compete more effectively in the aerospace industry. Organizations can also acquire another firm. An acquisition, which is similar to a merger, usually happens when a larger company buys a smaller one - for a set amount of money or stocks, or both - and incorporates the acquired company's operations into its own. Examples include Samsung Electronic's acquisition of Array, Harris Microwave Semiconductors, Lux, Integrative Telecom Technologies, and AST Research, and Seagram Company's acquisition of MCA (a film, television, and recording company). These acquisitions demonstrate a growth strategy whereby companies expand through diversification.
The stability strategy A stability strategy is best known for what it is not. That is, the stability strategy is characterized by an absence of significant changes. This means that an organization continues to serve its same market and customers while maintaining its market share. When is a stability strategy most appropriate? It is most appropriate when several conditions exist: a stable and unchanging environment, satisfactory organizational performance, a presence of valuable strengths and absence of critical weaknesses, and nonsignificant opportunities and threats.
The retrenchment strategy Before the 1980s, very few companies in the world ever had to consider anything but how to grow or maintain what they currently had. But, because of technological advancements, global competition, and other environmental changes, mergers and acquisitions growth and stability strategies may no longer be viable for some companies. Instead, organizations have had to pursue a retrenchment strategy. This strategy is characteristic of an organization that is reducing its size or selling off less profitable product lines.
The combination strategy A combination strategy is the simultaneous pursuit of two or more strategies described above. That is, one part of the organization may be pursuing a growth strategy while another is retrenching. The selection of a grand strategy sets the stage for the entire organization. Subsequently, each unit within the organization has to translate this strategy into a set of strategies that will give the organization a competitive advantage. And as a conclusion, in the end of this chapter, I'd like to say that strategic planning is the basis of the strategic management process. And today in our boundaryless competitive uncertain world it is unreal to do successful business without strategic planning.
Source: Fundamentals of Management. Stephen P. Robbins, David A. DeCenzo.