The Important Role Of Strategic Planning
Strategic plans are important to any organization for all other plans, budgets, programs, and organizational objectives are guided by the strategic plan. Nowhere else do so few key decisions have such a great impact on the success or failure of a firm. This blog post discusses the research and analyses required to produce a good strategic plan including the business profile; the mission statement; the situational analysis; the compilation of the SWOT analysis; selection of strategy; and the tactical plans necessary for success.
A well-cited, Harvard Business Review article highlights the common pitfalls of strategic planning (Neilson, et al, 2011). These include reliance on mistaken assumptions, short term bias, and inappropriate emphasis on planning rather than execution. To minimize these shortcomings, a research-based, data-driven approach is recommended. The approach uses a novel process for turning the SWOT analysis into logical choices of strategies.
Why Make a Strategic Plan?
Strategic plans are not necessary for having a successful business. Many businesses operate without one and many entrepreneurs find financial success through seizing the opportunities that arise at the moment. However, most new businesses fail, and most entrepreneurs do too. In fact, according to data reported by business founders in Forbes, 90% of start-up businesses fail in the first year and 50% of all businesses fail within five years. Strategic planning, however, greatly improves the chances of business success (Burke, A. et al, 2010).
The more one can understand a business’s environment, its industry, the firm’s capabilities, and how to align employees’ activities to changing conditions, the more likely the chance of business success (Porter, 1991). Crafting the proper strategy becomes the act of aligning a company’s activities with its environment.
Think of it this way. A business must have a product or service that a sizeable number of customers will purchase. To endure, that business must have an advantage over its competitors. This could be from a patent or a trade secret. It could also be the result of a cheaper process, a superior design, or brand strength. Strategy is choosing the way the business will compete to exploit its advantage (see Figure 1). There are multitudes of tried and true choices of strategy and new innovations in strategy that emerge every year. How do we find and choose the right one?
The Elements of Strategy
The first step is to disregard common strategic planning practices such as getting senior managers into a conference room and brainstorming ideas. Study after study concludes that this routine is fraught with biases. Often, the business owner, CEO , or a dominant personality sways the group with opinion rather than data. Instead of basing a strategy on mistaken assumptions, planners are encouraged to conduct thoughtful research to create an accurate external situational analysis. This includes identifying and understanding global trends such as changes in political, economic, social, technological, and environments factors. This is followed by conducting a market analysis (such as a Porter’s Five Scorecard), an industry analysis (utilizing data from research sources such as IBIS World, the US Census.gov, etc.) and competitive benchmarking.
Once the external environment is known, the next step is to conduct an internal situational analysis. Many practitioners utilize a procedure first described by Jay Barney (1991) that “tests” the resources of a firm to see if any may serve as a source of competitive advantage. For a firm to have a resource that provides sustained competitive advantage, the resource must have FOUR attributes:
1. The resource must be valuable; can be used to exploit opportunities or neutralize threats.
2. It must be rare among the firm's competitors.
3. It must not be easily duplicated.
4. There can be no equivalent substitutes that are valuable but are not rare.
Once both the external analysis and internal analysis are complete, strategic planners are free to compile a Strengths, Weaknesses, Opportunities, and Threats (SWOT) analysis that summarizes the standing of the firm in its environment. Strengths represent resources that may serve as sources of competitive advantage. Opportunities are current conditions (positive environmental trends, competitor’s weaknesses, underserved markets, etc.) that the business might exploit. Weaknesses are negative trends or the lack of resources that could prevent a firm from competing, and threats are risks that may undermine the organization’s ability to sustain itself.
Having compiled the SWOT analysis, the task remains of choosing a path for choosing the firm’s strategy. Logically, an approach that uses a strength to exploit an opportunity would be a strong, offensive strategy. If no strengths exist, an alternative approach would be to address any weakness the firm has; and, by correcting it, taking advantage of an opportunity. Lastly, using a strength (or a corrected weakness) to mitigate a threat, could be a worthwhile, defensive strategy.
Tackling the choice of which SWOT situation to address is difficult without a rudimentary understanding of typical strategies. Broadly speaking, there are three generic strategies: lowest cost, differentiation, or customer focus. Lowest cost strategy is self-explanatory: the firm provides the lowest priced product available to the customer. Differentiation refers to differences in the product provided. It might be the best value or highest luxury version of the product or any combination of the best value/luxury. It is a combination of features designed to appeal to a customer segment that is adequate to sustain the business. Customer focus is the term used when attributes other than the product itself are employed to appeal to a specific customer segment (i.e. – fast shipping).
Under these three broad categories of strategy are numerous grand (or specific) strategies (see Table 1).
The “art” of strategic planning occurs when planners consider the possibilities revealed by the SWOT analysis and understand the possible choices of strategy available to exploit and advantage (or minimize a threat). Take for example a SWOT analysis that looks like the one below:
How to Use It
Different people will perceive things differently, but a group consensus typically occurs when planners note a strength of available cash and industry consolation and infer that this firm should consider acquiring a competitor (a horizontal acquisition strategy). In addition, this choice of strategy might help to mitigate the threat of being targeted by other firms for acquisition (the larger size would make it more difficult). If the acquired company has better brand recognition, the acquiring firm could perhaps take advantage of utilizing the better brand on their existing products (a product development and/or market development strategy). This idea of acquiring a competitor could also help the firm deal with the current weakness of a narrow product line by expanding their product scope as well as eliminating one of many small competitors. To thoroughly investigate the strategic choices, a planning team should consider all combinations of the SWOT analysis and all grand strategy possibilities and select the best fit among them.
To avoid the common pitfall of good planning followed by poor execution, planners should turn strategies into actionable goals and programs over an appropriate future period. If acquiring a competitor (horizontal acquisition) is the strategy, how will it be realized? What is the goal for le this strategy? Who will be charged for accomplishing it? What is the timetable? Without goals, programs, and responsible parties, strategic plans become wish lists and sit on the shelf until the next planning cycle.
Lastly, strategic plans and actionable goals must be converted to budgets and tactics and communicated well to the entire organization. To accomplish this, it is recommended that strategic plans be summarized and captured into one-page posters (The One Page Strategic Plan by Wright, Fowler, & Moss; 2016) and located throughout the facility to keep all employees attuned to the goals of the organization.
Strategic planning is not easy but strategic plans are important. By following the process outlined in this article, planners can be assured of a non-biased, research-based focus that should overcome many of the pitfalls of traditional planning. Please contact the author for additional information.
Dr. Edward Wright