What is Strategic Planning
...nce, operations, human resources and R&D involve the development and coordination of resources through which business unit level strategies can be executed efficiently and effectively. Functional units of an organization are involved in higher-level strategies by providing input into the business unit level and corporate level strategy, such as providing information on resources and capabilities on which the higher-level strategies can be based. Once the higher-level strategy is developed, functional units translate it into discrete action plans that, each department or division must accomplish for the strategy to succeed. (Hierarchical, 27.02.2004) Functional strategies are goal-directed decisions and actions of the organization's functional units (accounting, finance, production, marketing etc.). They can be seen as the pieces of the puzzle that will become the overall organizational, or corporate, strategy. Between these two types of strategies are the competitive, or business-level, strategies. (Functional, 27.02.2004) Business firms use all three types of strategy simultaneously. A hierarchy of strategy (Appendix 1.) is the grouping of strategy types by level in the organization. Besides these three levels, there also three strategies that goes deeper into the characteristics and methods of a firm’s strategy. These are Porter’s Generic Strategies: Cost Leadership Strategy, Differentiation Strategy and Focus Strategy. 1.2. Porter’s Generic strategies If the primary determination of a company’s profitability is the attractiveness of the industry in which it operates, an important secondary determination is its position within that industry. Even though an industry may have not very big profitability, a company that is optimally positioned can raise superior returns. Optimal positioning is the result of making consistent choices on product, market, individual and specific competencies – choices that reinforce each other. A firm positions it by leveraging its strengths. Michael Porter has argued that a firm’s strengths ultimately fall into one of two headings: cost advantage and differentiation. By applying these strengths in either a broad or narrow scope, three generic strategies result: cost leadership, differentiation and focus. They are called generic strategies because they are not firm or industry dependent. (Porter’s, 28.02.2004) Appendix 2. illustrates Porter’s generic strategies. 1.2.1. Cost Leadership strategy A company that is using cost-leadership strategy is doing everything it can to produce goods or services at a lower cost than their competitors do. The cost leader chooses a low level of product differentiation. Differentiation is expensive; if the company expends resources to make its products unique, then its costs rise. The cost leader does not try to be the industry leader in differentiation; it waits until the customers want a feature or service before providing it. The cost leader also normally ignores the different market segments and positions its product to appeal to the average customer. The reason for this choice is, again, that developing a line of products tailored to the needs of different market segments is an expensive proposition. (Hill and Jones 1998, 59) The risk that cost-leadership strategy carries is that the cost leader, in its purposeful desire to reduce costs, may lose sight of changes in customer’s tastes. This way a company might make decisions that decrease costs but drastically affect demand for the product. 1.2.2. Differentiation strategy Differentiation strategy’s objective is to create a product that is perceived by customers as unique in some important way. A company that pursues a differentiation strategy strives to differentiate itself along as many dimensions as possible. The less it resembles its rivals, the more it is protected from competition and the wider is its market appeal. Generally, a differentiator chooses to segment its market into many niches. Now and then, a firm offers a product designed for each market niche and decides to be a broad differentiator, but a company might choose to serve just those niches in which it has a specific differentiation advantage. A focus on a specific function does not mean, however, that the control of costs is not important for a differentiator. A differentiator does not want to increase costs unnecessarily and tries to keep them somewhere near those of the cost leaders. (Hill and Jones 1998, 59) The main risk with a differentiation strategy is the firm’s long-term ability to keep its perceived uniqueness in customer’s eyes. The main problems are the imitation by competitors and changes in customer tastes – therefore it is hard, in long-term, to keep the position as differentiator. 1.2.3. Focus strategy The third generic competitive strategy differs from the other two mainly because it is directed toward serving the need of a limited customer croup or segment. A focus strategy concentrates on serving a particular market niche, which can be defined geographically, by type of customer, or by segment of product line. Focus strategy is concentrated on a narrow segment and within that segment it attempts to achieve either cost advantage or differentiation. The premise is that the needs of the group (segment) can be better serviced by focusing entirely on it. A firm using a focus loyalty strategy often enjoys a high degree of customer loyalty, and this entrenched loyalty discourages other firms from competing directly. (Porter’s, 28.02.2004) The main risk with focus strategy is that the focuser’s niche can suddenly disappear, because of technological change or changes in consumer’s tastes. Unlike the more generalist differentiator, a focuser cannot move easily to new niches, given its concentration of resources and competency in one or a few niches These generic strategies are not necessarily compatible with one another. There exists a viewpoint that a single generic strategy is not always best, because within the same product or service customers often seek multi-dimensional satisfactions such as a combination of quality, style, convenience and price. In order to choose the right strategy and methods for the company, it is essential to have sufficient information about the market. Therefore, it is important to make a very thorough environmental scanning. 1.3. Environmental scanning “Environmental scanning is the acquiring and use of information about events, trends, and relationships in an organization's external environment, the knowledge of which would assist management in planning the organization's future course of action.” (Choo, 01.03.04). “Organizations scan the environment in order to understand the external forces of change so that they may develop effective responses which secure or improve their position in the future. They scan in order to avoid surprises, identify threats and opportunities, gain competitive advantage, and improve long-term and short-term planning.” (Environmental, 02.03.04) To the extent that an organization's ability to adapt to its outside environment is dependent on knowing and interpreting the external changes that are taking place, environmental scanning constitutes a primary mode of organizational learning. Environmental scanning includes both looking at information (viewing) and looking for information (searching). It could range from a casual conversation at the lunch table or a chance observation of an angry customer, to a formal market research programme or a scenario planning exercise. There are many different ways to learn about organization – more or less complex analysis that can be used (in addition to internal and external environment analysis), for example: Mc Kensay 7-S, McCarthy's 4P's 5P's, SWOT (and TOWS matrix), PEST analysis, Porter’s 5 force, strategic choices- Who? What? How? analysis etc. The author chosen for this project/case as the most appropriate methods to be SWOT analysis and TOWS matrix, Porter’s Five Force analysis and strategic choices – Who? Why? How? These analyses are the most commonly used methods and they give important information about the company. These analyses can be used very widely - for the corporations with simple or more complicated structure. 1.3.1. Internal environment The internal environment of a corporation consists of variables (strengths and weaknesses) that are within the organization and are not usually within the short-run control of top management. These variables form the context in which work is done. They mostly include company’s culture, resources and structure. Therefore, the internal scanning is often referred to as organizational analysis. (Hunger and Wheelen 1997, 6) Organisation’s culture is the collection of beliefs, expectations, norms and values learned and shared by a company’s members and it moves from one generation of workers to another. Organisation’s culture guides how the work should be done, what is allowed and what is not, how to behave and how not to behave – it gives a company a sense of identity. Company’s resources refer to the financial, physical, human, technological and organizational assets of a company that can be divided into tangible resources (land, buildings and equipment) and intangible resources (brand names, reputation, patent and technological or marketing know-how). (Hill and Jones 1998, 107) Company’s structure has three, almost infinite structural forms possible, and certain basic types predominate in modern complex organizations. These three are: simple structure, functional structure and divisional structure. Simple structure has no functional or product categories and is appropriate for a small, entrepreneur-dominated company with one or two product lines that operates in a reasonably small, easily identifiable market niche. Employees tend to be generalists and jack-of-all-trades. Functional structure is appropriate for medium-sized companies with several product lines in one industry. Employees tend to be specialists in the business functions important to that industry, such as manufacturing, marketing, finance, and human resources. Divisional structure is appropriate for a large corporation with many product lines in several related industries. Employees tend to be functional specialists organized according to product/market directions. Management attempts to find some synergy among divisional activities by using committees and horizontal linkages (Hunger and Wheelen 1997, 6). 1.3.2. External environment Most organizations face external contexts that are complex, dynamic and increasingly global. This makes the context increasingly difficult to interpret. To cope with the often incomplete and ambiguous contextual data, and to increase their understanding of the general external context, organizations engage in a process called external environmental analysis. (Bratton and Gold, 02.03.2004) A number of models exist that can help managers in analysing the external environment. Such models provide a framework to identify external opportunities and threats. Opportunities arise when an organization can take advantage of conditions in its external environment to formulate and implement strategies that enable it to improve performance. Threats arise when conditions in the external environment endanger the integrity of the organization’s activities. These variables (opportunities and threats) are not within the short-run control of top management. The remote environment comprises factors that originate beyond, and usually irrespectively of, any single firm’s operating situation: economic, social, political, technological and ecological factors. (Pearce and Robinson 2000, 71) 1.3.3. SWOT analysis and TOWS matrix A scan of the internal and external environment is an important part of strategic planning process. Environmental factors internal to the firm usually can be classified as strengths (S) or weaknesses (W), and those external to the firm can be classified as opportunities (O) or threats (T). Such an analysis of the strategic environment is referred to as the SWOT analysis. The SWOT analysis provides information that is helpful in matching firm’s resources and capabilities to the competitive environment in which it operates. As such, it is instrumental in strategy formulation and selection. As mentioned earlier, SWOT stands for - internal factors: strengths, weaknesses and external factors: opportunities, threats and it is essential to understand what is meant by these terms. SWOT analysis has been a framework of choice among many managers for a long time because of its simplicity and its portrayal of the essence of sound strategy formulation – matching a firm’s opportunities and threats with its strengths and weaknesses. TOWS matrix is a tool for matching these internal and external factors. The matrix consists of four parts: 1. SO strategies – pursue opportunities that are a good for the company’s strengths. 2. WO strategies – overcome weaknesses to pursue opportunities. 3. ST strategies – identify ways that the firm can use its strengths to reduce its vulnerability to external threats. 4. WT strategies – establish a defensive plan to prevent the firm’s weaknesses from making it highly susceptible to external threats. The TOWS matrix helps the company to analyse the different opportunities when facing the threats of internal and external environment. 1.3.4. Porter’s five force The model of the Five Competitive Forces was developed by Michael E. Porter in his book „Competitive Strategy: Techniques for Analyzing Industries and Competitors” in 1980. Since that time it has become an important tool for analyzing organizations’ industry structure in strategic processes. Porter’s model is based on the insight that a corporate strategy should meet the opportunities and threats in the organizations external environment. Especially, competitive strategy should base on an understanding of industry structures and the way they change. Porter has identified five competitive forces (Appendix 3.) that shape every industry and every market. These forces determine the intensity of competition and hence the profitability and attractiveness of an industry. The objective of corporate strategy should be to modify these competitive forces in a way that improves the pos...