ⓘ Strategic planning
Strategic planning is an organizations process of defining its strategy, or direction, and making decisions on allocating its resources to pursue this strategy. It may also extend to control mechanisms for guiding the implementation of the strategy. Strategic planning became prominent in corporations during the 1960s and remains an important aspect of strategic management. It is executed by strategic planners or strategists, who involve many parties and research sources in their analysis of the organization and its relationship to the environment in which it competes.
Strategy has many definitions, but generally involves setting strategic goals, determining actions to achieve the goals, and mobilizing resources to execute the actions. A strategy describes how the ends goals will be achieved by the means resources. The senior leadership of an organization is generally tasked with determining strategy. Strategy can be planned intended or can be observed as a pattern of activity emergent as the organization adapts to its environment or competes.
Strategy includes processes of formulation and implementation; strategic planning helps coordinate both. However, strategic planning is analytical in nature i.e., it involves "finding the dots"; strategy formation itself involves synthesis i.e., "connecting the dots" via strategic thinking. As such, strategic planning occurs around the strategy formation activity.
1.1. Process Overview
Strategic planning is a process and thus has inputs, activities, outputs and outcomes. This process, like all processes, has constraints. It may be formal or informal and is typically iterative, with feedback loops throughout the process. Some elements of the process may be continuous and others may be executed as discrete projects with a definitive start and end during a period. Strategic planning provides inputs for strategic thinking, which guides the actual strategy formation. Typical strategic planning efforts include the evaluation of the organizations mission and strategic issues to strengthen current practices and determine the need for new programming. The end result is the organizations strategy, including a diagnosis of the environment and competitive situation, a guiding policy on what the organization intends to accomplish, and key initiatives or action plans for achieving the guiding policy.
Michael Porter wrote in 1980 that formulation of competitive strategy includes consideration of four key elements:
- Broader societal expectations.
- Personal values of the key implementers i.e., management and the board;
- Industry opportunities and threats; and
- Company strengths and weaknesses;
The first two elements relate to factors internal to the company i.e., the internal environment, while the latter two relate to factors external to the company i.e., the external environment. These elements are considered throughout the strategic planning process.
1.2. Process Inputs
Data is gathered from a variety of sources, such as interviews with key executives, review of publicly available documents on the competition or market, primary research e.g., visiting or observing competitor places of business or comparing prices, industry studies, etc. This may be part of a competitive intelligence program. Inputs are gathered to help support an understanding of the competitive environment and its opportunities and risks. Other inputs include an understanding of the values of key stakeholders, such as the board, shareholders, and senior management. These values may be captured in an organizations vision and mission statements.
1.3. Process Activities
Strategic planning activities include meetings and other communication among the organizations leaders and personnel to develop a common understanding regarding the competitive environment and what the organizations response to that environment its strategy should be. A variety of strategic planning tools described in the section below may be completed as part of strategic planning activities.
The organizations leaders may have a series of questions they want to be answered in formulating the strategy and gathering inputs, such as:
- What is the geographic scope of the organization?
- Which skills and resources should be developed within the organization?
- What differentiates the organization from its competitors in the eyes of customers and other stakeholders?
- What is the organizations business or interest?
- Which products and services should be included or excluded from the portfolio of offerings?
- What is considered "value" to the customer or constituency?
1.4. Process Outputs
The output of strategic planning includes documentation and communication describing the organizations strategy and how it should be implemented, sometimes referred to as the strategic plan. The strategy may include a diagnosis of the competitive situation, a guiding policy for achieving the organizations goals, and specific action plans to be implemented. A strategic plan may cover multiple years and be updated periodically.
The organization may use a variety of methods of measuring and monitoring progress towards the strategic objectives and measures established, such as a balanced scorecard or strategy map. Companies may also plan their financial statements for several years when developing their strategic plan, as part of the goal-setting activity. The term operational budget is often used to describe the expected financial performance of an organization for the upcoming year. Capital budgets very often form the backbone of a strategic plan, especially as it increasingly relates to Information and Communications Technology ICT.
1.5. Process Outcomes
Whilst the planning process produces outputs, as described above, strategy implementation or execution of the strategic plan produces Outcomes. These outcomes will invariably differ from the strategic goals. How close they are to the strategic goals and vision will determine the success or failure of the strategic plan. There will also arise unintended Outcomes, which need to be attended to and understood for strategy development and execution to be a true learning process.
2. Tools and approaches
A variety of analytical tools and techniques are used in strategic planning. These were developed by companies and management consulting firms to help provide a framework for strategic planning. Such tools include:
- Growth-share matrix, which involves portfolio decisions about which businesses to retain or divest; and
- Balanced Scorecards and strategy maps, which creates a systematic framework for measuring and controlling strategy.
- PEST analysis, which covers the remote external environment elements such as political, economic, social and technological PESTLE adds legal/regulatory and ecological/environmental;
- Scenario planning, which was originally used in the military and recently used by large corporations to analyze future scenarios. The flowchart to the right provides a process for classifying a phenomenon as a scenario in the intuitive logics tradition.;
- Responsive Evaluation, which uses a constructivist evaluation approach to identify the outcomes of objectives, which then supports future strategic planning exercises.
- Porter five forces analysis, which addresses industry attractiveness and rivalry through the bargaining power of buyers and suppliers and the threat of substitute products and new market entrants;
- SWOT analysis, which addresses internal strengths and weaknesses relative to the external opportunities and threats;
3. Strategic planning vs. financial planning
Simply extending financial statement projections into the future without consideration of the competitive environment is a form of financial planning or budgeting, not strategic planning. In business, the term "financial plan" is often used to describe the expected financial performance of an organization for future periods. The term "budget" is used for a financial plan for the upcoming year. A "forecast" is typically a combination of actual performance year-to-date plus expected performance for the remainder of the year, so is generally compared against plan or budget and prior performance. The financial plans accompanying a strategic plan may include 3–5 years of projected performance.
McKinsey & Company developed a capability maturity model in the 1970s to describe the sophistication of planning processes, with strategic management ranked the highest. The four stages include:
- Financial planning, which is primarily about annual budgets and a functional focus, with limited regard for the environment;
- Forecast-based planning, which includes multi-year financial plans and more robust capital allocation across business units;
- Strategic management, where widespread strategic thinking occurs and a well-defined strategic framework is used.
- Externally oriented planning, where a thorough situation analysis and competitive assessment is performed;
Categories 3 and 4 are strategic planning, while the first two categories are non-strategic or essentially financial planning. Each stage builds on the previous stages; that is, a stage 4 organization completes activities in all four categories.
For Michael C. Sekora, Project Socrates founder in the Reagan White House, during the cold war the economically challenged Soviet Union was able to keep on western military capabilities by using technology-based planning while the U.S. was slowed by finance-based planning, until the Reagan administration launched the Socrates Project, which should be revived to keep up with China as an emerging superpower.
4.1. Criticism Strategic planning vs. strategic thinking
Strategic planning has been criticized for attempting to systematize strategic thinking and strategy formation, which Henry Mintzberg argues are inherently creative activities involving synthesis or "connecting the dots" which cannot be systematized. Mintzberg argues that strategic planning can help coordinate planning efforts and measure progress on strategic goals, but that it occurs "around" the strategy formation process rather than within it. Further, strategic planning functions remote from the "front lines" or contact with the competitive environment may not be effective at supporting strategy efforts.
4.2. Criticism Evidence on strategic plannings impact
While much criticism surrounds strategic planning, evidence suggests that it does work. In a recent meta-analysis including data from almost 9.000 public and private organizations, strategic planning is found to have a positive impact on organizational performance. Strategic planning is particularly potent in enhancing an organizations capacity to achieve its goals i.e., effectiveness. However, the study argues that just having a plan is not enough. For strategic planning to work, it needs to include some formality, comprehensiveness i.e., producing many strategic options before selecting the course to follow and careful stakeholder management.