4 Strategic planning OBJECTIVES APPROACHES TO STRATEGIC PLANNING

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1 24 4 Strategic planning OBJECTIVES The objective of strategic planning is to achieve a sustainable competitive advantage that will deliver healthy profits. The strategic plan analyses the optimum fit between a business s resources and opportunities and takes into account how a business may, or will, need to adapt to thrive in a changing competitive environment. Strategic planning focuses on the medium- to longer-term future of a business, generally a time horizon of three to five years, or occasionally up to ten years. Gary Hamel and C.K. Prahalad, two business strategists, advocate that strategy involves setting goals that stretch the business, but the strategic planning element of a business plan should focus on the tangible and concrete rather than the aspirational. For a new business, the strategy is the foundation on which the business plan is built. For a business being developed within an existing business, the strategy behind the new business must fit with the overall strategy of the existing business. The marketing strategy will be either implicit in the strategic plan or an explicit subsection of it. Chapter 11 focuses on marketing analysis and strategy. APPROACHES TO STRATEGIC PLANNING All businesses have a strategy, be it implicit or explicit. At its simplest, the strategic plan is a description of what the business is doing and the rationale behind it. In larger businesses, strategic planning has become a formalised process with a department dedicated to that process. In other cases, strategy is part of the marketing function, that is, strategic planning is synonymous with strategic market planning. Some authors distinguish between prescriptive and emergent approaches to strategic planning. The prescriptive approach emphasises the sequential nature of the planning process as shown in Chart 4.1. This implies that analysis and strategy selection are distinct from implementation. The emergent approach is more experimental a strategy is constantly adjusted in the light of operational reality. This implies a more short-term tactical approach to planning. In practice, the difference between the two approaches may simply be the frequency of reviews. Although it would be wrong to follow blindly a prescribed course once it has been set, a flavour of the month supposedly emergent approach to strategy makes organisational life extremely difficult. A business plan should involve a prescriptive approach because it relates to a point in time at which the business plan is made.

2 Planning at strategic business unit level 25 PLANNING AT STRATEGIC BUSINESS UNIT LEVEL Strategic planning is often associated with larger businesses, but start-up businesses and existing small businesses seeking funding must have some form of strategic plan that underpins the business plan. In small businesses, such as a builder or retailer, the owner or owner-manager generally carries out strategic planning. In larger organisations, strategic planning can be carried out at the corporate level and at the strategic business unit (sbu) level. At the corporate level, it is overseen by senior management, for example the board. An sbu is a division or department of a corporation that is sufficiently self-contained to be able to operate independently from the whole business. A business that is organised on the basis of products often has managers responsible for particular products or groups of products. The product managers carry out their own strategic planning within the overall corporate framework. Larger businesses generally adopt a divisional structure and a division can be treated as an sbu. The concept of the sbu has important implications for resource allocation. Resources are limited and should be allocated where they achieve the greatest return on investment. Within corporations, sbus may have to submit strategic plans and business plans as part of the corporate capital allocation process. For example, Whitbread, which operates several companies in the UK leisure market (hotels, eating out, and health and fitness), carries out a formal annual planning process, which includes a strategic plan. The planning process is formalised in the form of a booklet, which the sbus have to complete. THE STRATEGIC REVIEW AND PLANNING PROCESS Chart 4.1 on the next page provides a framework for the strategic review and planning process. The steps involved are dealt with in detail in later chapters. The strategic planning process should kick off with a stakeholder analysis. Following this, the vision, mission and objectives for the business can be established. These concepts are discussed below. Central to the strategic planning process is how to make the most of a business s resources (internal factors) given the environment (external factors). The analysis of internal and external factors allows management to set (or review) objectives and strategy and generate alternative strategic options. Qualitative screening of options and numerical analysis using spreadsheet or other business models are required to select the most appropriate strategy from these options. Once a strategy has been selected it must be implemented. This will involve resource planning and allocation, and in the case of an existing business may require organisational changes. Given the medium- to long-term nature of strategic planning, a business is unlikely to review its strategy more than once a year. Thus a strategic review should normally be an annual process. At the very least, managers should ascertain whether the strategic

3 26 4. STRATEGIC PLANNING Chart 4.1 The strategic review and strategic planning process Stakeholder analysis Vision, mission and objectives Analysis of the firm Environmental analysis Industry and competitor analysis Product/portfolio analysis SWOT analysis Strength Opportunities Weaknesses Threats Generation of strategic options Evaluate and select strategy Implement strategy Monitor and review objectives have been reached. If the objectives have not been reached, a strategic review should be triggered. This should lead to a new round of business planning, for example realigning budgetary and long-term forecasts. Cataclysmic events, such as the collapse of the dotcom bubble, may trigger an urgent review. In such cases, a strategic review can lead to a fundamental reappraisal of the vision, mission and objectives. STAKEHOLDER ANALYSIS Stakeholders are those who can affect (or be affected by) the business. They include shareholders, lenders, customers, suppliers and even society at large. A stakeholder analysis does not have to be a lengthy process, but it should identify the primary and possibly conflicting expectations of different stakeholders and their power

4 Stakeholder analysis 27 and influence. Chart 4.2 provides an example of this. Stakeholders are likely to have conflicting interests, so an order of priority of whose interests matter most must be established and conflicts then resolved through negotiation. Chart 4.2 Stakeholder analysis Stakeholder Expectation and objectives Power and influence Commonality and conflict Shareholders Share price growth, Appoint board Conflict: bargaining with staff dividends Lenders Interest and principal to be Can enforce loan covenants Similar to shareholders, but not in repaid, maintain credit financial crisis ratings, risk averse Directors and Success on CV, salary, share Make most decisions, Some alignment with shareholders managers options, job satisfaction have detailed information if rewards are linked to profits or share price Staff and unions Salary, job security, Customer experience, strike, Conflict: bargaining with job satisfaction staff turnover shareholders Suppliers Long-term orders, payment Pricing, quality Conflict: generally seek high prices Customers Reliable supply of goods Revenue is derived from Seek low prices and/or services customers Community Environment, local impact, Indirect, local planning, Often same as staff local jobs opinion leaders Government Operate legally, tax receipts, Regulation, subsidies, Diverse, balancing jobs taxation, planning VISION, MISSION AND OBJECTIVES New businesses generally start with an entrepreneurial idea, or vision, and must then explain how the vision is to be turned into reality. Businesses should also provide clear objectives against which success can be measured. Existing businesses have established visions, missions and objectives, be they implicit or explicit. A strategic review may lead to a reassessment of these; indeed, its main purpose may be to review the vision in order to improve the performance of a company. The statements of vision, mission and objectives (see Chart 4.3) should be concise, easy to understand and enduring. They should not be bland or meaningless or full of phrases that reflect the latest fad. Normally, the vision statement is one sentence or paragraph, and the mission and objectives statements consist of no more than five bullet points each. Chart 4.3 Vision, mission and objectives Vision Mission Objectives Sets out the purpose (what business the organisation is in) and direction of the business (where it is trying to go). Outlines how the vision is to be translated into reality; that is, what should be done to achieve it. Set specific quantified targets against which the success of the strategy and the business plan can be measured.

5 28 4. STRATEGIC PLANNING The vision, mission and objectives statements provide a summary of what a business is about and should be included in the executive summary of the business plan. They also provide a theme that should be reflected throughout the business plan, helping to ensure that it is consistent and coherent. The vision statement The vision statement defines what business the organisation is in and gives the broad direction in which the organisation is heading. For example, a caterer may state its vision as to become the leading provider of organic lunches to office workers in Boomtown. The mission statement The mission statement explains how the vision is to be achieved. It tells investors, managers, staff and customers what the business is about to do. For example, the caterer may decide to achieve its objective by creating a distribution system that ensures rapid order fulfilment, using only the freshest products and high-quality ingredients, and promoting the company by taking the city block by block. Objectives The business should have a set of objectives against which the success of the strategy can be measured. Objectives should be smart: Specific Measurable Achievable within the stated time frame Relevant in the context of the vision Time bound The caterer, for example, could set the following objectives: Source 95% of ingredients from certified organic producers within six months. Within one year provide 800 meals per day, increasing to 1,200 in two years and 1,500 in three years. The average value per sale should be at least $8. Achieve an operating margin of x% in year one, increasing to y% in year two. Customers and staff should develop a feeling of empathy with the business. Clear quantitative objectives will please financial backers and bankers. They also provide implementation milestones that allow you to assess whether the business plan is on track, and if not, to take remedial action. Financial and non-financial objectives Most of the above objectives are financial, and financial objectives are extremely important. In some cases, companies agree to specific covenants with bondholders or other lenders, for example to reach a particular interest cover ratio (expressed as a multiple of earnings before interest, taxes, depreciation and amortisation or ebitda) within a

6 Vision, mission and objectives 29 defined time frame. In extreme cases, not achieving these targets can wipe out 100% of shareholder value. Objectives do not have to be exclusively financial. The last of the caterer s objectives is not financial and at first appears to be impossible to measure. However, surrogate measures could be used, such as staff turnover and repeat sales, or a staff and customer survey could be carried out. Focusing purely on financial objectives introduces a degree of myopia into business decision-making. The limitation of managing purely by financial measures is explicitly recognised by techniques such as the balanced scorecard, which was developed by Robert Kaplan and David Norton. They describe it as follows: 1 The balanced scorecard retains traditional financial measures. But financial measures tell the story of past events, an adequate story for industrial age companies for which investments in long-term capabilities and customer relationships were not critical for success. These financial measures are inadequate, however, for guiding and evaluating the journey that information age companies must make to create future value through investment in customers, suppliers, employees, processes, technology, and innovation. EXIT STRATEGY The strategic plan focuses on the business itself. However, when a business plan is prepared for the purpose of attracting investors, consideration must be given as to how they can recoup their investment. Venture capitalists, for example, will always look for an exit strategy that realises the maximum value of their investment and returns cash, which can then be invested in new ventures. The value of a business can be realised through: a trade sale selling to a competitor or other firm which may have a strategic interest in the business; a public sale through an initial public offering (ipo) the company will be listed on a suitable stock exchange. The potential exit strategy should be outlined and its credibility demonstrated in terms of the financial projections. Normally, the best prices will be obtained once a business has reached a degree of stability; that is, it has achieved breakeven or is cash flow positive at operating level, or even overall cash flow positive. In some circumstances an earlier sale may be possible. For example, a small biotechnology company may sell out to a larger company immediately after a breakthrough technology has been patented. Depending on investor appetite, early ipos may be possible. The dotcom bubble was characterised by the listing of internet-based businesses that had hardly any revenue and were years away from profitability.

7 30 4. STRATEGIC PLANNING JUDGING A STRATEGIC PLAN Strategic planning is sometimes criticised because it appears to be removed from reality and irrelevant to the day-to-day running of a business. However, good strategic planning is not an academic process but a tool for successful management. Strategic plans must be articulated in words and numbers; measurement is key. It is not necessary to produce huge volumes of prose as a lot can be achieved with bullet points and checklists. Without the benefit of hindsight it is not possible to say whether a strategy will succeed. However, if it lacks certain attributes it will be less likely to succeed. Broadly, any strategy should: be feasible considering internal and external constraints; lead to a long-term competitive advantage; add value for stakeholders; be sustainable in the long term; be adaptable to cope with a changing environment. Reference 1 Kaplan, R.S. and Norton, D.P., The Balanced Scorecard: Translating Strategy into Action, Harvard Business School Press, 1996.

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