Often managers and entrepreneurs become overwhelmed with the daily tasks and lose the ultimate goals from their sight. That is why preparation and constant review of a strategic plan are highly significant. A strategic plan is only an element of the whole planning process – it serves as the foundation for a business plan and provides a framework for an operational program.
Strategic planning is applicable for for-profit as well as non-profit organizations; in fact, many successful companies already take advantage of the strategic plan. Profit margins in many industries have been significantly reduced and there any numerous possibilities and alternatives of actions– as a result, it is becoming very hard for a company to succeed without a good strategic plan.
The history of strategic planning began in the army. Such terms as objectives, mission, strengths, and weaknesses came to the business environment from the battlefields. The primary goal of strategic planning was and remains to gain competitive advantage. Business managers took some knowledge from military strategists, which was refined during the centuries. Both business and the army strategists try to use their strengths to exploit competitors’ weaknesses.
The term and concept of strategic planning came to the business world in the 1950s and was very popular during 1960s and 1970s. Many managers believed that strategic planning is the answer to all their problems. However, not all planning models turned out to be successful and strategic planning was cast aside during the 1980s. However, the 1990s saw the revival of strategic planning, and it is still widely practiced in the modern business world.
Definition of Strategic Planning
Strategic planning is sometimes used as a synonym of strategic management and can be defined as “the art and science of formulating, implementing, and evaluating cross-functional decisions that enable an organization to achieve its objectives” (David, 2007). Strategic planning combines management, marketing, finance, accounting, R&D, production/operation and IT perspectives to bring a company to success.
Sometimes terms strategic management and strategic planning is used interchangeably, however, in many scientific texts strategic management refers to strategy formulation, implementation, and evaluation, while strategic planning refers only to strategy formulation.
Strategy formulation or strategic planning involves:
- developing a vision and mission
- identifying business’s external opportunities and threats
- determining internal strengths and weaknesses
- establishing long-term objectives
- generating alternative strategies
- choosing particular strategies to pursue.
During an internal analysis, managers assess the organization’s resources (assets) and capabilities (how work is done). The primary value-creating skills and abilities are the organization’s core competencies. Any activities the organization does well or any unique resources it has are its strengths. Activities the organization doesn’t do well or resources it needs but doesn’t have are its weaknesses. During an external analysis, managers assess the specific and general environments to determine opportunities (positive trends) and threats (negative trends).
The strategic plan deals with issues, as, for example, which market to enter, which SBU to dissolve, how to allocate available resources, which new product to launch and whether to merge or form a joint venture. Strategic plan contains the strategies, which are considered to bring the most benefit from resource allocation. Strategies determine long-term competitive advantages of a firm. The three major types of corporate strategy are growth, stability, and renewal. A growth strategy is used when an organization wants to grow its business and does so by expanding the number of products offered or markets served. The types of growth strategies include concentration, vertical integration (backward and forward), horizontal integration, and diversification (related and unrelated). A stability strategy is when an organization stays as it is; that is, it makes no significant change in what it is doing. Renewal strategies address organizational weaknesses that are leading to performance declines. The two types of renewal strategies are retrenchment and turnaround.
A strategic plan should be extended- or medium-term, visionary, conceptual and directional, while an operational plan is usually short-term, tactical, specific, implementable and measurable. A good strategic plan is realistic and achievable and provides a reasonable basis for benchmarking and performance monitoring. Strategic methods apply to the entire organization while operational plans specify how the overall goals are going to be achieved. A strategy is designed to explain the business to outsiders, inform stakeholders and motivate employees.
Strategic planning is a dynamic and continuous process. For example, change in economic environment can result in a significant opportunity or threat and require change is strategies. A strategic plan is not a formula for success. Nevertheless, it can save a company from failure. For those students who need business research paper writing help on this topic – read more here.
Formal strategic planning has three characteristics:
- specific goals cover a defined period of years,
- these goals are written and shared with organizational members, and
- concrete action plans exist for achieving these goals.
Informal planning is general and lacks continuity. Also, nothing is written down, and there is little or no sharing of goals. Strategic planning provides direction, reduces uncertainty, minimizes waste and redundancy, and establishes the goals or standards used in controlling.
Benefits of Strategic Planning
Companies that have many divisions or compete in complex, fast-paced business environment tend to use more formal strategic planning. The strategic plan enables a company to be proactive rather than reactive and create its future rather than go with a flow. Companies that use strategic planning can create favorable opportunities rather than only respond to events on the market. The strategic plan provides direction, reduces uncertainty, minimizes waste and redundancy, and sets standards for controlling.
The most obvious benefit of strategic planning is helping companies to come up with better strategies through a more systematic and organized approach to decision making. However, empirical studies show that the main benefit of strategic planning is not decisions and the plan itself, but rather the process of its preparation and communication, which is the key to successful strategic management. Dialogs, brainstorming, the interaction between different departments are all parts of the planning process and are extremely important. By participating in planning, employees become more committed to a company and more clearly understand its goals. Consequently, the way a strategic plan is prepared in an organization is fundamental. It can sound surprising, but the understanding of employees and managers and their commitment may be the most important benefits of strategic planning. When employees understand what a firm is doing and why, when they can see a broader picture, they might feel as more important parts of an organization, become more committed and motivated to work harder. (Langley, 1988)
When managers and employees understand and support company’s mission, objectives, and strategies, they often become more creative and initiative. As a result, strategic planning empowers employees. “Empowerment is the act of strengthening employees’ sense of effectiveness by encouraging them to participate in decision making and to exercise initiative and imagination, and rewarding them for doing so.” (David, 2007)
In the last years, many organizations come to understand the importance strategic planning decentralization and involve employees and lower level management in the process. For example, in 2005, when Robert Iger was appointed new CEO of Walt Disney Co., he eliminated central strategic-planning department and gave this responsibility to the business divisions. Unlike the previous CEO, Robert Iger understood the importance of involving employees in the process of strategic planning. He understood that communication within a company about strategic planning is more important than the document itself, especially if it is done by top-managers alone. People who will execute strategies have to understand them and participate in their creation. (Reimann, 1988)
UPS, Sears, IBM, Hewlett-Packard and money other big corporations engage in strategic planning. UPS has created a new strategic-planning department. As they explain, the company is investing significant amounts of money in technology, and they cannot afford to find out five years later that it was a wrong direction. (Byrne, 1996)
Strategic planning is important not only for big corporations but small firms as well. Even if strategic planning is conducted informally by one person instead of several departments, even if it evolved from daily operations, it still can increase firm’s growth. According to the experts, lack of strategic planning knowledge is a big disadvantage for small entrepreneurs. Small companies often do not have enough capital, expertise and available information to do strategic planning. However, as research shows, small companies that engage in strategic management perform better than those that do no strategic management. (David, 2007)
Studies show that companies engaging in strategic planning are more successful and profitable than those that do no strategic planning. Moreover, firms using a systematic approach to planning, perform better in sales, profitability, and productivity. If that alone is not enough, organizations with strategic planning activities show better long-term financial results compared with the average within an industry. Researchers have shown that the external environment is usually the reason why companies don’t achieve high levels of performance even when planning and the planning/performance relationship seems to be influenced by the planning time frame. (David, 2007)
Often successful companies make informed decisions considering short- and long-term outcomes, while poorly-performing firms tend to make decisions not based on long-term predictions and blame uncontrollable external factors for their bad performance. According to Dun & Bradstreet, more than 100,000 companies fail in the Unites States each year. Of course, there are many other factors except for not getting involved in strategic planning that leads to the bankruptcies and liquidations, but taking advantage of strategic management can definitely (David, 2007)
Some nonfinancial benefits of strategic planning, such as empowerment of employees, for example, have been already mentioned above. Employees’ participation in the formulation of strategies leads to their reduced resistance to change and higher productivity. It makes employees see strategies and changes not as threats, but rather as opportunities, or at least more favorably. Engagement is strategic planning leads to better understanding of external threats and strategies of competitors. Strategic planning process stimulates communication between departments and interaction between managers. In addition to that, strategic management brings higher discipline to a company. The process of strategic planning allows to determine priorities and explore opportunities.
Why Firms Do No Strategic Planning
Despite the above-mentioned benefits, some companies choose not to do strategic planning. Some managers think that this approach is too costly. Some people are just lazy and do not want to add additional workload. When a company is successful, its owners or managers might choose not to intervene and let the business go the way it does. Some managers feel too confident and prefer to rely on their own experience as opposed to the formal plan. Other might have previous bad experiences with planning or think it is a waste of time because preparation indeed requires quite a lot of time. Some companies do not reward success and strictly punish failures. In such organizations, employees would prefer not to take the initiative out of fear to fail and be punished. It is also possible that people choose to avoid strategic management because they think that it might bring undesired changes and they will not be able to adapt quickly to a new environment. Managers may also see a new plan as a threat to their position and status. From the above-mentioned reasons, we see that many people avoid strategic planning because of personal, sometimes even egoistic reasons.
Strategic planning is not a key for success; it also does not solve all the problems a company may face. Strategic planning does not provide ready-to-use formulas, but rather a framework for decision making and problem-solving. Developing a strategic plan is a complicated process, and each company embarking on such mission should be aware of possible pitfalls and try to avoid them.
Here are some possible pitfalls of strategic planning, that each company should be aware of:
- Doing strategic planning only a formality
- Creating a unique planning team, rather than involving all managers in the process
- Not comparing actual performance with a plan
- Creating strategic plan, but not communicating it to employees
- Not letting most important employees participate in all stages of planning
- Leaving no room for creativity and flexibility
- Letting top managers make many intuitive decisions that contradict the plan
- Failing to create appropriate environment for planning and change.
Criticisms of Strategic Planning
Despite the above-mentioned benefits, there is also criticism of strategic planning:
- planning may create rigidity;
- plans cannot be developed for a dynamic environment;
- formal plans cannot replace intuition and creativity;
- planning focuses managers’ attention on today’s competition, not tomorrow’s;formal planning
- reinforces success, which may lead to failure; and
- just planning is not enough.
These criticisms are valid if planning is rigid and inflexible, however, smart managers always leave room for improvement and constant update of the plan. Managers can effectively plan in today’s dynamic environment using plans that are specific but flexible. Strategic flexibility—that is, the ability to recognize major external environmental changes, too quickly commit resources, and to recognize when a strategic decision is not working—is important because managers often face highly uncertain and changing environments. Strategic management as a whole is based on the belief that companies should constantly monitor the external and internal environment to spot important trends to make changes if necessary. For example, Internet, e-commerce, terrorism, the aging population are all the trends, which might require changes in company’s strategic plan. “In today’s business environment, more than in any preceding era, the only constant changes. Successful organizations effectively manage change, continuously adapting their bureaucracies, strategies, systems, products, and cultures to survive the shocks and prosper from the forces that decimate the competition.” (Waterman, 1987)
It is essential for managers to understand that planning is an ongoing process and plans need to change when conditions require it. It is also essential to delegate responsibility for establishing goals and developing plans to lower organizational levels, those people who will be in charge of implementing the strategies. Just planning is obviously not enough – as a part of the strategic management process, the plan has to be performed and performance evaluated and compared with the program.
Strategic planning is vital for several reasons. First, it makes a difference in how well organizations perform – there are studies that prove that strategic planning is positively correlated with company’s overall financial performance. Second, it is crucial for helping managers cope with continually changing situations – strategic plans can be flexible and leave room for adjustment. Third, strategic planning helps coordinate diverse divisions, departments, functions, and work activities, and keeps all employees focused on achieving an organization’s goals. Finally, planning is important because it creates a framework for many of the decisions that managers make.
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Byrne, J. (1996). Strategic planning – it’s back. Business Week, August 26, p.46.
David, F.R. (1988). How companies define their mission. Long Range Planning 22(3), p.40.
David, F.R. (2007). Strategic management: concepts and cases. 11th ed. Upper Saddle River: Prentice Hall.
Langley, A. (1988). The roles of formal strategic planning. Long Range Planning 21(3), p.40.
Reimann, B. (1988). Getting value from strategic planning. Planning Review 16(3), p. 42.
Waterman, R. Jr. (1987). The renewal factor: How the best get and keep the competitive edge. New York: Bantam.