The Strategic Planning Process

In the 1970's, many large firms adopted a formalized top-down strategic planning model.
Under this model, strategic planning became a deliberate process in which top executives
periodically would formulate the firm's strategy, then communicate it down the organization
for implementation. The following is a flowchart model of this process:

The Strategic Planning Process

Mission
|
V
Objectives
|
V
Situation Analysis
|
V
Strategy Formulation
|
V
Implementation
|
V
Control

This process is most applicable to strategic management at the business unit level of the
organization. For large corporations, strategy at the corporate level is more concerned with
managing a portfolio of businesses. For example, corporate level strategy involves decisions
about which business units to grow, resource allocation among the business units, taking
advantage of synergies among the business units, and mergers and acquisitions. In the
process outlined here, "company" or "firm" will be used to denote a single-business firm or a
single business unit of a diversified firm.

Mission

A company's mission is its reason for being. The mission often is expressed in the form of a
mission statement, which conveys a sense of purpose to employees and projects a company
image to customers. In the strategy formulation process, the mission statement sets the mood
of where the company should go.

Objectives
Objectives are concrete goals that the organization seeks to reach, for example, an earnings
growth target. The objectives should be challenging but achievable. They also should be
measurable so that the company can monitor its progress and make corrections as needed.

Situation Analysis

Once the firm has specified its objectives, it begins with its current situation to devise a
strategic plan to reach those objectives. Changes in the external environment often present
new opportunities and new ways to reach the objectives. An environmental scan is performed
to identify the available opportunities. The firm also must know its own capabilities and
limitations in order to select the opportunities that it can pursue with a higher probability of
success. The situation analysis therefore involves an analysis of both the external and internal
environment.

The external environment has two aspects: the macro-environment that affects all firms and a
micro-environment that affects only the firms in a particular industry. The macro-
environmental analysis includes political, economic, social, and technological factors and
sometimes is referred to as a PEST analysis.

An important aspect of the micro-environmental analysis is the industry in which the firm
operates or is considering operating. Michael Porter devised a five forces framework that is
useful for industry analysis. Porter's 5 forces include barriers to entry, customers, suppliers,
substitute products, and rivalry among competing firms.

The internal analysis considers the situation within the firm itself, such as:

• Company culture
• Company image
• Organizational structure
• Key staff
• Access to natural resources
• Position on the experience curve
• Operational efficiency
• Operational capacity
• Brand awareness
• Market share
• Financial resources
• Exclusive contracts
• Patents and trade secrets

A situation analysis can generate a large amount of information, much of which is not
particularly relevant to strategy formulation. To make the information more manageable, it
sometimes is useful to categorize the internal factors of the firm as strengths and weaknesses,
and the external environmental factors as opportunities and threats. Such an analysis often is
referred to as a SWOT analysis.

Strategy Formulation

Once a clear picture of the firm and its environment is in hand, specific strategic alternatives
can be developed. While different firms have different alternatives depending on their
situation, there also exist generic strategies that can be applied across a wide range of firms.
Michael Porter identified cost leadership, differentiation, and focus as three generic strategies
that may be considered when defining strategic alternatives. Porter advised against
implementing a combination of these strategies for a given product; rather, he argued that
only one of the generic strategy alternatives should be pursued.

Implementation

The strategy likely will be expressed in high-level conceptual terms and priorities. For
effective implementation, it needs to be translated into more detailed policies that can be
understood at the functional level of the organization. The expression of the strategy in terms
of functional policies also serves to highlight any practical issues that might not have been
visible at a higher level. The strategy should be translated into specific policies for functional
areas such as:

• Marketing
• Research and development
• Procurement
• Production
• Human resources
• Information systems

In addition to developing functional policies, the implementation phase involves identifying

the required resources and putting into place the necessary organizational changes.

Control

Once implemented, the results of the strategy need to be measured and evaluated, with
changes made as required to keep the plan on track. Control systems should be developed and
implemented to facilitate this monitoring. Standards of performance are set, the actual
performance measured, and appropriate action taken to ensure success.

Dynamic and Continuous Process

The strategic management process is dynamic and continuous. A change in one component
can necessitate a change in the entire strategy. As such, the process must be repeated
frequently in order to adapt the strategy to environmental changes. Throughout the process
the firm may need to cycle back to a previous stage and make adjustments.

Drawbacks of this Process

The strategic planning process outlined above is only one approach to strategic management.
It is best suited for stable environments. A drawback of this top-down approach is that it may
not be responsive enough for rapidly changing competitive environments. In times of change,
some of the more successful strategies emerge informally from lower levels of the
organization, where managers are closer to customers on a day-to-day basis.

Another drawback is that this strategic planning model assumes fairly accurate forecasting
and does not take into account unexpected events. In an uncertain world, long-term forecasts
cannot be relied upon with a high level of confidence. In this respect, many firms have turned
to scenario planning as a tool for dealing with multiple contingencies.

The Strategic Planning Process

In today's highly competitive business environment, budget-oriented planning or
forecast-based planning methods are insufficient for a large corporation to survive
and prosper. The firm must engage in strategic planning that clearly defines
objectives and assesses both the internal and external situation to formulate
strategy, implement the strategy, evaluate the progress, and make adjustments as
necessary to stay on track.

A simplified view of the strategic planning process is shown by the following diagram:

The Strategic Planning Process

Mission &
Objectives

Environmental
Scanning

Strategy
Formulation

Strategy
Implementation

Evaluation
& Control

Mission and Objectives

The mission statement describes the company's business vision, including the
unchanging values and purpose of the firm and forward-looking visionary goals that
guide the pursuit of future opportunities.

Guided by the business vision, the firm's leaders can define measurable financial
and strategic objectives. Financial objectives involve measures such as sales targets
and earnings growth. Strategic objectives are related to the firm's business position,
and may include measures such as market share and reputation.

Environmental Scan

The environmental scan includes the following components:

• Internal analysis of the firm

• Analysis of the firm's industry (task environment)
• External macroenvironment (PEST analysis)

The internal analysis can identify the firm's strengths and weaknesses and the
external analysis reveals opportunities and threats. A profile of the strengths,
weaknesses, opportunities, and threats is generated by means of a SWOT analysis

An industry analysis can be performed using a framework developed by Michael

Porter known as Porter's five forces. This framework evaluates entry barriers,
suppliers, customers, substitute products, and industry rivalry.

Strategy Formulation

Given the information from the environmental scan, the firm should match its
strengths to the opportunities that it has identified, while addressing its weaknesses
and external threats.

To attain superior profitability, the firm seeks to develop a competitive advantage

over its rivals. A competitive advantage can be based on cost or differentiation.
Michael Porter identified three industry-independent generic strategies from which
the firm can choose.

Strategy Implementation

The selected strategy is implemented by means of programs, budgets, and

procedures. Implementation involves organization of the firm's resources and
motivation of the staff to achieve objectives.

The way in which the strategy is implemented can have a significant impact on
whether it will be successful. In a large company, those who implement the strategy
likely will be different people from those who formulated it. For this reason, care must
be taken to communicate the strategy and the reasoning behind it. Otherwise, the
implementation might not succeed if the strategy is misunderstood or if lower-level
managers resist its implementation because they do not understand why the
particular strategy was selected.
Evaluation & Control

The implementation of the strategy must be monitored and adjustments made as

needed.

Evaluation and control consists of the following steps:

1. Define parameters to be measured

2. Define target values for those parameters
3. Perform measurements
4. Compare measured results to the pre-defined standard
5. Make necessary changes