Strategic Planning, Nature, Process & Importance
Strategic planning means planning for making and implementing strategies to achieve organisational goals. It starts by asking oneself simple questions like : What are we doing, should we continue to do it or change our product line or the way of working, what is the impact of social, political, technological and other environmental factors on our operations, are we prepared to accept these changes etc.
Strategic planning helps in knowing where we are and where we want to go so that environmental threats and opportunities can be exploited, given the strengths and weaknesses of the organisation. Strategic planning is “a thorough self-examination regarding the goals and means of their accomplishment so that the enterprise is given both direction and cohesion.”
It is “a process through which managers formulate and implement strategies geared to optimising strategic goal achievement, given available environmental and internal conditions.” Strategic planning is planning for long periods of time for effective and efficient attainment of organisational goals. Strategic planning is based on extensive environmental scanning. It is a projection into environmental threats and opportunities and an effort to match them with organisational strengths and weaknesses.
Strategic planning is done to comprehend, anticipate and absorb environmental vagaries. It is a continuous process. Every time business organisations want to increase the growth rate or change their operations, desire for better management information system, co-ordinate activities of different departments, remove complacency from organisations; they make strategic plans.
Nature of Strategic Planning:
The following are the salient features of strategic planning:
- Process of questioning:
It answers questions like where we are and where we want to go, what we are and what we want to be.
- Time horizon:
It aims at long-term planning, keeping in view the environmental opportunities. It helps organisations analyse their strengths and weaknesses and adapt to the environment. Managers should be farsighted to make strategic planning meaningful.
- Pervasive process:
It is done for all organisations, at all levels; nevertheless, it involves top executives more than middle or lower-level managers since top executives envision the future through scientific techniques of forecasting.
- Focus of attention:
It focuses organisation’s strengths and resources on important and high-priority activities rather than routine and day-to-day activities. It reallocates resources from non-priority to priority sectors.
- Continuous process:
Strategic planning is a continuous process that enables organisations to adapt to the changing, dynamic environment.
It coordinates organisation’s internal environment with the external environment, financial resources with non-financial resources and short-term plans with long- term plans.
Importance of Strategic Planning:
Strategic planning offers the following benefits:
- Financial benefits:
Firms that make strategic plans have good sales, low costs, high EPS (earnings per share) and high profits. Firms have financial benefits if they make strategic plans. Companies like Reliance, Infosys, Tata, Wipro, Deloitte, etc. are the giants who report good financial results as a result of sound strategic planning.
- Guide to organisational activities:
Strategic planning guides members towards organisational goals. It unifies organisational activities and efforts towards the long-term goals. It guides members to become what they want to become and do what they want to do. It focuses on specific goals making it clear for members to know the direction towards which they have to move. Earning profits is less meaningful than earning a growth rate of 10% per year.
Paying high dividends is less meaningful than paying dividends at the rate of 40%. Meeting society’s needs is less meaningful than providing free education to school children of a specific community. Allocation of resources and attempts to meet the goals is facilitated through clear specifications in strategic planning. It makes the objectives operational and provides right direction to organisational activities.
- Competitive advantage:
In the world of globalisation, firms which have competitive advantage (capacity to deal with competitive forces) have better sales and financial performance. This is possible if they foresee the future. Future can be predicted through strategic planning. It enables managers to anticipate problems before they arise and solve them before they become worse.
- Minimise risk:
Strategic planning provides information to assess risk and frame strategies to minimise risk and invest in safe business opportunities. Chances of making mistakes and choosing wrong objectives and strategies, thus, get reduced.
Risk is inherent in every business and failure to anticipate risk through strategic planning is almost sure to lead the business to failure unless otherwise proved by chance. Lack of strategy, framing wrong strategies or ineffective implementation of strategy cannot be afforded by business enterprises operating in the dynamic, changing and risky environment.
- Beneficial for companies with long gestation gap:
The time gap between investment decisions and income generation from those investments is called gestation period. During this period, changes in technological or political forces can affect implementation of decisions and plans may, therefore, fail. Strategic planning discounts future and enables managers to face the threats and opportunities. Huge capital investments in projects is followed by expected financial returns.
- Promotes motivation and innovation:
Strategic planning involves managers at top levels. They are not only committed to objectives and strategies but also think of new ideas for implementation of strategies. This promotes motivation and innovation. It also provides motivation to people at lower levels when they know their efforts are contributing towards organisational goals.
Satisfied workforce is the strength of the organisation. It saves huge costs on reducing absenteeism, labour turnover, role conflicts etc. It promotes discipline in the organisation and enhances human resource effectiveness and also organisational effectiveness.
- Optimum utilisation of resources:
Strategic planning makes best use of resources to achieve maximum output. Resources are scarce and strategic planning helps in their use in the areas where they are required most.
General Robert E. Wood remarks, “Business is like war in one respect. If its grand strategy is correct, any number of tactical errors can be made and yet the enterprise proves successful.” Effective allocation of resources, scientific thinking, effective organisation structure, coordination and integration of functional activities and effective system of control, all contribute to successful strategic planning.
1. Objective Formulation:
Strategies are goal-oriented. The overall purpose or mission of the organisation must be clearly stated. Mission explains the reason why business is in existence. It identifies the scope of products/services. The goals can be economic or social and may relate to size of the organisation, goods or services or simply the technology or the way an organisation operates its business.
Missions justify existence of the organisation in terms of purpose (objectives), markets, products/services, consumers etc.; relationship between organisation’s internal and external environment, its culture, values, ethics and beliefs. Missions formulate objectives and objectives help to formulate strategies.
2. Analyse the Impact of Environment:
Environmental analysis is the “systematic assessment of information about the firm’s external environment during the strategic planning process to identify strategic opportunities for the company as well as major threats, problems, or other possible impediments.” Managers scan the environment, pick relevant information and use it for strategy formulation.
A successful strategy aligns with the environment. Strategies are made to integrate the organisation with its environment. Managers examine both general and specific environmental factors to see what changes are occurring. External factors which indirectly affect strategic planning are technological, social, political, and legal and those which directly influence are competitors, suppliers, government and customers.
Whether these factors promote or restrain business activities is analysed in framing strategies. Complete information collected from various sources like government agencies, banks, customers, journals, bulletins, suppliers, other business associations etc., may not be required for strategy formulation. Information is screened and only relevant information is analysed to formulate strategies.
This information may be related to production (plant location, layout, inventory management repairs and maintenance etc.), marketing (market share, consumer needs, promotion mix, product mix etc.), finance (debt-equity ratio, dividend policy etc.) or human resource (manpower planning, recruitment and selection procedures, training and development etc.).
Environmental analysis helps to:
- prepare strategies to convert threats into opportunities
- create environmental threat and opportunity profile (ETOP) which analyses the environmental factors and assesses their impact on the organisation.
3. Analyse Resource Position of the Firm:
After analysing the external environment, firms evaluate their internal resource position to identify their strengths and weaknesses in relation to environmental threats and opportunities. Knowing environmental threats and opportunities is not enough unless the organisations know their strengths that can overcome the threats and exploit the opportunities.
Organisational weaknesses, if any, have to be overcome to take benefit of environmental opportunities. Resources being limited, organisational strengths and weaknesses should be analysed to use the resources in areas where they can be optimally utilised.
Matching of strengths and weaknesses (internal environment) with threats and opportunities (external environment) is known as SWOT analysis. It helps in generating strategies and answer the basic question of strategic planning—what we are and what we want to be or where we are and where we want to go?
The following steps are identified by Hofer and Schendel to analyse resource position of the organisation:
(a) Develop a profile of the organisation’s principal resources and skills in three broad areas: financial; physical, organisational and human; and technological.
(b) Determine the key success requirement of the product/market segments in which the organisation competes or might compete.
(c) Compare resource profile with key success requirements to determine the major strengths on which effective strategy can be based and major weaknesses to be overcome.
(d) Compare organisation’s strengths and weaknesses with those of competitors to identify which resources and skills are needed to have competitive advantage in the marketplace.
Analysing the organisation (corporate appraisal) helps in setting priorities over areas where organisations need to pay more attention. These areas could be operations/marketing/hum an resource/finance etc.
4. Establish Alternative Strategies:
Managers carry out gap analysis to develop alternative strategies, i.e., analyse the present strategies and the objectives formulated. “It is the difference between the objectives established in the goal formulation process and the results likely to be achieved if the existing strategy is continued.”
It reveals gap between the present state and future aspirations of the organisation. If existing strategies can help in reaching the desired objectives, new strategies need not be formulated but if there is a gap, managers develop strategies to attain the objectives.
The following strategies can be made:
(a) Strategy to concentrate:
Companies want to specialise in the existing line of products, capture bigger market share and become market specialists in that product line.
(b) Strategy to diversify:
Companies want to enter new markets to increase the share of market.
(c) Strategy to enter international markets:
Besides increasing share in the national markets, firms want to expand their business in other countries.
(d) Strategy to enter into joint ventures:
Firms enjoy the benefits of synergy by collectively exploiting the resources and enlarging their area of operation.
(e) Liquidation strategy:
It means to drop the existing product if it is not profitable.
(f) Retrenchment strategy:
It means dropping some of the resources (human and non-human) to make best use of the remaining ones. Surplus resources are shed off in this strategy. It results in optimum use of resources. The list of strategies is not exhaustive. New strategic options may be considered by the firms depending upon the situation.
5. Evaluate Alternative Strategies:
Different strategic options are evaluated on the basis of their competitive advantages in terms of:
Will the strategy be able to achieve the objectives?
Is it being adopted and implemented at the right time?
Does it target at matching internal strengths and weaknesses of the organisation with its external environment?
Four criteria for evaluating strategies are identified by Richard R Rumelt:
(a) Is the strategy consistent with broad objectives of the company?
(b) Does the strategy focus organisational resources on critical success factors in the product/market area for which it is intended to be formulated?
(c) Does it maximise company’s internal strengths and minimise its weaknesses?
(d) Is the strategy realistic? Will it be able to produce the desired results? i.e., it is a workable strategy or not?
Various quantitative techniques such as ratio analysis, break-even analysis, linear programming, networking etc. are used to evaluate strategies.
6. Choice of a Strategy:
After evaluating strategies in terms of risks and returns (ability to achieve the goals), they are ranked in order of priority and the strategy best suited to achieve the goals is chosen. The chosen strategy should be directed to maximise long-term goals of the organisation.
7. Implement the Strategy:
After selection, the strategy is put into action and practiced. It becomes a guide for the organisation and members to direct their efforts in a unified direction. Implementation requires designing the suitable organisation structure, developing a sound system of communication, motivation and control, allocating authority responsibility, resources etc.
8. Measurement and Control of Strategy:
Organisational performance is measured at periodic intervals to assess whether strategic objectives are being achieved or not.
A formal strategic control system is designed which answers questions such as:
(a) Is the strategy being implemented as planned?
(b) Are the critical assumptions on the basis of which it was selected still valid?
(c) Is the strategy achieving the intended results?
If the results are similar to objectives, the strategies become the basis for future action. However, if the objectives are not achieved, reasons are found for the same and suitable actions are taken to overcome the problem.
Limitations of Strategic Planning:
- Lack of knowledge:
Strategic planning requires lot of knowledge, training and experience. Managers should have high conceptual skills and abilities to make strategic plans. If they do not have the knowledge and skill to prepare strategic plans, the desired results will not be achieved. It will also result in huge financial losses for the organisation. This limitation can be overcome by training managers to make strategic plans.
- Interdependence of units:
If business units at different levels (corporate level, business level and functional level) are not coordinated, it can create problems for effective implementation of strategic plans.
- Managerial perception:
In order to avoid developing risky objectives and strategies which they will not be able to achieve, managers may land up framing sub-optimal goals and plans. Sometimes, short-term commitments also defer making long-term strategies.
- Financial considerations:
Strategic planning requires huge amount of time, money and energy. Managers may be constrained by these considerations in making effective strategic plans. These limitations are by and large, conceptual and can be overcome through rational, systematic and scientific planning. Researchers have proved that companies which make strategic plans outperform those which do not do so.