Posted: June 13th, 2021
Planning is the management function that involves setting goals and deciding how to best achieve them. Setting goals and developing plans helps the organization to move in a focused direction while operating in an efficient and effective manner. Long-range planning essentially is the same as strategic planning; both processes evaluate where the organization is and where it hopes to be at some future point.
Strategic planning forms the basis for securing prospective business opportunities and generally enables business organizations to pursue specific market performance targets over definite periods of time. In an article, “Seagate to Buy Samsung’s Hard-Disk Unit amid Demand Slump,” Jun Yang estimated that the “tablets computer industry is projected to generate sales of up to $49 billion by 2015.” As such, these predictions of booming market demand for tablet computers will guide leading electronics
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manufacturers such as Apple Inc., Research in Motion, IBM, Nokia, and HP to launch strategic plans for optimizing the projected market opportunities.
Industry trends are very important factors to consider in the strategic planning process because the success of any formulated strategies will be determined by the continuous transformations of a particular industry. Industry trends are dictated by competitor activities and the accompanying consumer reactions. The automobile industry, for example, is characterized by the introduction of new models every year. GM and Toyota have particularly been consistent in effecting regular upgrades of their automobile models in production strategies that are centered on continuous quality improvement.
The restaurant industry is a good example of industries that are driven by competitor trends and consumer behavior. In India, for example, the general trends in the restaurant industry revolve around tailoring the vegetarian menu to suit the needs of the largest population segments. Many restaurant chains in India such as McDonalds, KFC, and Domino’s Pizza run separate lines for nonvegetarian offerings to avoid offending the proportion of the country’s strict vegetarian population.
In the United States, the revolving door concept (also known as quick-service restaurants) that involves customers leaving immediately after purchasing their desired foodstuffs or snacks is the dominant trend over the dine-in concept. In its 2010 press release “Breakfast Accounts for Nearly 60% of U.S. Restaurant Industry Traffic Growth over the Past Five Years, and Continues to be a Bright Spot,” NPD Group revealed that quick-service restaurants accounted for 9.6 billion of the 12 billion breakfast meals that were served between March 2009 and March 2010.
LONG-RANGE PLANNING AND STRATEGIC MANAGEMENT
Since the purpose of strategic management is the development of effective long-range plans, the concepts often are used interchangeably. The traditional process models of strategic management involve planning organizational missions; assessing relationships between the organization and its environment; and identifying, evaluating, and implementing strategic alternatives that enable the organization to fulfill its mission.
One product of the long-range planning process is the development of corporate-level strategies. Corporate strategies represent the organization’s long-term direction. Issues addressed as part of corporate strategic planning include questions of diversification, acquisition, divestment, and formulation of business ventures. Corporate strategies deal with plans for the entire organization and change relatively infrequently, with most remaining in place for five or more years.
Long-range plans usually are less specific than other types of plans, making it more difficult to evaluate the progress of their fulfillment. Since corporate plans may involve developing a research-intensive new product or moving into an international market, which may take years to complete, measuring their success is rarely easy. Traditional measures of profitability and sales may not be practical in evaluating such plans.
Top management and the board of directors are the primary decision makers in long-range planning. Top management often is the only level of management with the information needed to assess organization-wide strengths and weaknesses. In addition, top management typically is alone in having the authority to allocate resources toward moving the organization in new and innovative directions.
CORPORATE GRAND STRATEGIES
Corporate strategies can be classified into three groups or types. Collectively known as grand strategies, these involve efforts to expand business operations (growth strategies), maintain the status quo (stability strategies), or decrease the scope of business operations (retrenchment strategies).
Growth Strategies. Growth strategies are designed to expand an organization’s performance, usually as measured by sales, profits, product mix, or market coverage. Typical growth strategies involve one or more of the following:
1. Concentration strategy, in which the firm attempts to achieve greater market penetration by becoming very efficient at servicing its market with a limited product line.
2. Vertical integration strategy, in which the firm attempts to expand the scope of its current operations by undertaking business activities formerly performed by one of its suppliers (backward integration) or by undertaking business activities performed by a business in its distribution channel.
3. Diversification strategy, in which the firm moves into different markets or adds different products to its mix. If the products or markets are related to its existing operations, the strategy is called concentric diversification. If the expansion is in products and markets unrelated to the existing business, the diversification is called conglomerate.
Stability Strategies. When firms are satisfied with their current rate of growth and profits, they may decide to employ a stability strategy. This strategy basically extends existing advertising, production, and other strategies. Such strategies typically are found in small businesses in
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relatively stable environments. The business owners often are making a comfortable income operating a business that they know, and see no need to make the psychological and financial investment that would be required to undertake a growth strategy.
Retrenchment Strategies. Retrenchment strategies involve a reduction in the scope of a corporation’s activities. The variables to be considered in such a strategy primarily involve the degree of reduction. Retrenchment strategies can be subdivided into the following:
1. Turnaround strategy, in which firms undertake a temporary reduction in operations to make the business stronger and more viable in the future. These moves are popularly called downsizing or rightsizing. The hope is that a temporary belt tightening will allow the firm to pursue a growth strategy at some future point.
2. Divestment, in which a firm elects to spin off, shut down, or sell a portion of its business. This strategy would commonly be used with a business unit identified as a dog by the BCG Model. Typically, a poor performing unit is sold to another company and the money is reinvested in a business with greater potential.
3. Liquidation strategy, which is the most extreme form of retrenchment. Liquidation involves the selling or closing of the entire business operation, usually when there is no future for the business. Employees are released, buildings and equipment are sold, and customers no longer have access to the product. This generally is viewed as a strategy of last resort, and is one that most managers work hard to avoid.
The purpose of an organization is its role as defined by those who maintain authority over it. How the organization elects to fulfill this role constitutes its plan. Mission statements differentiate the organization from other organizations providing similar goods or services. Objectives are the intermediate goals or targets to be completed as the organization fulfills its mission. Plans outline how a firm intends to achieve its mission. Policies provide guidelines or parameters within which decisions are made so that decisions are integrated with other decisions and activities.
STRATEGIC PLANNING FAILURE
Of course, not all strategies work. In his landmark study The Icarus Paradox: How Exceptional Companies Bring About Their Own Downfall, Danny Miller offered a perspective as to why strategies often fail. He found that the victories and strengths of companies can often be the cause of their future strategic failure. Miller delineated four major causes of strategic failure: leadership traps, monolithic cultures and skills, power and politics, and structural memories. All of these causes emerge while an organization is experiencing success, especially in its strategic initiatives.
Leadership Traps. Success can be a trap in and of itself. Miller found that consistent success tends to reinforce leaders’ worldviews and ties them rigidly to the strategies and processes that brought about past successes. This causes, in turn, these same leaders to become:
· Prone to excess and neglect
· Prone to shape strategies based on preferences rather than what data, changing business circumstances, customers, and technological shifts dictate
· Conceited—true believers in the adulation heaped upon them by the press, subordinates, shareholders, and other admirers
· Obstinate—prone to resent challenges to their way of thinking
· Isolated from the reality of the marketplace
The impact of those tendencies on strategy making is very negative. Strategy developed from ego, preconceptions of what causes success, stubbornness, and old, worn conceptual models is not a formula for success.
Monolithic Cultures and Skills. Miller found that another reason for strategic failure in organizations that have been successful is that these organizations tend to rely on “star” departments and the culture that builds up around them. When certain functions take precedence over others in an imbalanced manner, other business functions are seen as less important, and perhaps even unimportant, to the success of the organization. Over time, the evolution of organizational cultures in successful companies usually becomes monolithic, intolerant, and focused on a single goal or very limited goals. Additionally, the star department attracts the best and the brightest managers away from other departments, so that the organization has an imbalance of managerial talent throughout the organization. Conversely, talented managers in departments outside the star department usually join companies that can appreciate their skills. Over time, managerial talent is diluted (except within the star department) and becomes imbalanced throughout the organization. The star departments have more power, and people in these departments are able to use their power to play politics and gain even more resources and success.
Power and Politics. As managers in the star departments increase their power, they become less inclined to adjust the way they have always conducted business. Programs, policies, and practices that in the past have proven
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successful and given these managers such high status are loyally adhered to, and the ability to make organizational adjustments becomes limited. The ultimate consequence of this type of power build-up in a company is that past strategies are perpetuated, often without a careful evaluation of their current effectiveness.
Structural Memories. Past successful strategies engender policies, routines, systems, and programs in a company, and the institutionalization of these processes creates a powerful organizational culture. Miller notes that “the more established and successful the strategy, the more deeply imbedded it will be in such programs, and the more it will be implemented routinely, automatically, and unquestioningly. Managers will rely on ingrained habits and reflex actions rather than deliberating and reflecting on new problems.” In these situations, the past fashions how one sees the present and is a powerful force for continually choosing the same, or similar, strategic courses of action, both within the organization and outside the organization.
DISRUPTIVE TECHNOLOGIES AS A CAUSE OF STRATEGIC FAILURE
Clayton M. Christensen, in his book The Innovator’s Dilemma reported research findings that suggest that even when companies do follow sound management practices they still are exposed to events and problems that can cause strategic failure. The innovator’s dilemma is that “the logical, competent decisions of management that are critical to the success of their companies are also the reasons why they lose their positions of leadership.” He contends that good management involves sustaining the success of products and processes, and that companies are generally good at this. However, such companies can be blindsided by the emergence of disruptive technologies. These disruptive technologies are products or processes that appear in the marketplace, but that look harmless to the successful company.
In the short term, they do not seem to pose much of threat, and thus they are ignored. However, over time, disruptive technologies can become a powerful force, and when they do, successful companies are not organized or prepared to respond to what essentially is a new competitor in the market. Examples of disruptive technologies are the small, off-road motorcycles that were introduced by Japanese manufacturers into the United States. Over time, they threatened the product lines of Harley-Davidson and BMW. Health maintenance organizations (HMOs) strategically hurt traditional health insurers, and transistors killed the vacuum tube industry.
Successful companies fail to see the threat of disruptive technologies because they are essentially caught in the routine of maintaining the status quo, that is, their current success. To spot future disruptive technologies and plan to combat them, a company would need to pursue the following strategies: (1) invest resources in the scanning for, and development of, disruptive technologies; (2) be willing to enter into the market when a potentially disruptive technology emerges; (3) be adept at developing new ways of analyzing emerging markets; and (4) be aware that improving its product, and increasing its price, creates vacuums at the lower price range for emerging technologies to enter. The goal is to be able to both sustain successful products and processes, yet at the same time be able to see, evaluate, and develop disruptive technologies.
Strategic planning often fails for a variety of reasons such as:
1. Failure of merging organizations to understand either or both complementary competencies and synergies as well as areas that are not complementary and synergistic
2. Failure to understand the culture of the organization
3. Failure to adequately execute the strategic plans
4. Failure to function as a team at the executive level or other levels
5. Failure to develop values and culture to support the plans
6. Failure to expeditiously do what is needed to be done
7. Failure to trust and support each other at the various levels of the organization
8. Failure to prevent ethical and legal problems
Remedies for Strategic Planning Failures. Strategic planning failures can be remedied through the adoption of numerous measures that shield the organization’s plans from any form of compromising eventualities. It is important to estimate the implications of the prevailing economic conditions in the business environment before introducing new long-term plans. The organization should also demonstrate clear approaches to be adopted by the organization to guarantee returns on the long-term investments. Emphasis should be placed on the sufficient understanding of the key factors that motivate the strategic planning process so as to craft long-term plans with clear implementation objectives. The management should also define appropriate risk mitigation measures for securing long-term investments. Harnessing strong leadership, challenging competitor dominance, and learning from past failures are the other effective remedies for strategic planning failure.
Harness Strong Leadership. Strong leadership is one of the foremost ingredients of strategic planning success. This is because strong leadership seals gaps that breed
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unaccountability and insufficient commitment to the organization’s overall strategic plans. Strong leadership enhances clearly structured and synergistic relationships among the different stakeholders of the organization, especially during periods of difficulties.
Challenging Competitor Dominance. Challenging the dominant competitor can be accomplished by crafting strategies that seek to gain greater control of the market share. The adoption of market strategies such as product differentiation is a way of challenging the dominant competitor in the exploitation of scarce opportunities. The business organization should consistently stimulate market competition by developing unique products that appeal to different market segments, particularly in market environments that are already dominated by other industry players.
In 2004, Domino’s Pizza, for example, carved a unique market niche in India’s restaurant industry, a market dominated by McDonald’s for many years, by introducing and cementing its hold on the online order and delivery of meals. Domino’s has since assumed the market leadership position in the online order and delivery business segment with a 65 percent market share as of 2010. In February 2011, KFC followed suit by introducing a new menu in India that was dubbed “Streetwise” and that was targeted at the youthful student population. This move was based on price undercuts for a particular market segment and was crafted to challenge McDonald’s market dominance that has largely been boosted by product differentiation, market segmentation, and low-cost pricing.
STRATEGIC PLANNING TOOLS
There are a variety of perspectives, models, and approaches used in strategic planning. The development and implementation of these different tools depend on a large number of factors, such as size of the organization, nature and complexity of the organization’s environment, and the organization’s leadership and culture.
SWOT ANALYSIS MATRIX
One of the most widely used strategic planning tools is a SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis. In one form or another, most companies use SWOT analysis as a basic guide for strategic planning. The worth of a SWOT analysis is often dependent on the insight of the management that conducts it. If managers or consultants are able to provide objective, relevant information for the analysis, the results are extremely useful for the company.
A SWOT analysis involves a company’s assessment of its internal position by identifying the company’s
Classification of Strengths and Weaknesses
strengths and weaknesses. In addition, the company must determine its external position by defining its opportunities and threats.
Strengths represent those skills in which a company exceeds and the key assets of the firm. Examples of strengths are a core group of highly skilled employees, cutting-edge technology, and high-quality products. Weak-nesses are those areas in which a firm does not perform well; examples include continued conflict between functional areas, high production costs, and a poor financial position.
Opportunities are those current or future circumstances in the environment that might provide favorable conditions for the firm. Examples of opportunities include an increase in the market population, a decrease in competition, and legislation that is favorable to the industry. Threats are those current or future circumstances in the environment which might provide unfavorable conditions for the firm. Examples of threats include increased supplier costs, a competitor’s new product-development process, and legislation unfavorable to the industry.
Careful determination and classification of a company’s strengths, weaknesses, opportunities, and threats provides an excellent way for a company to analyze its current and future situation. It is not necessary for a company to take advantage of all opportunities or to develop methods to deal with all threats. Additionally, a company need not strengthen all of its weaknesses or be too smug about all its strengths. All of these factors should be evaluated in the context of each other in order to provide the company with the most useful planning information.
PORTER’S GENERIC COMPETITIVE STRATEGIES
Michael Porter suggested a method of categorizing the various types of competitive strategies. He identified three generic competitive strategies: overall lower cost, differentiation, and market niche. These strategies are generic because they can be applied to any size or form of business. Overall lower cost refers to companies that can develop, manufacture, and distribute products more efficiently than their competitors. Differentiation refers to companies that
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Porter’s Generic Competition
are able to provide superior products based on some factor other than low cost. Differentiation can be based on customer service, product quality, unique style, and so on. Competitive scope defines the breadth of a company’s target market. A company can have a broad (mass market) competitive scope or a narrow (niche market) competitive scope. The combination of broad scope and narrow scope with a low-cost strategy and differentiation results in the following generic competitive strategies: cost leadership, cost focus, differentiation, and focused differentiation.
The implementation of these strategies requires different organizational arrangements and control processes. Larger firms with greater access to resources typically select a cost leadership or a differentiation strategy, whereas smaller firms often compete on a focus basis.
None of these competitive strategies is guaranteed to achieve success, and some companies that have successfully implemented one of Porter’s generic strategies have found that they could not sustain the strategy. Several risks associated with these strategies are based on evolved market conditions (such as buyer perceptions and competitor practices).
Some researchers argue that both cost-leadership and differentiation strategies can be simultaneously achieved. The principal condition for this situation is superior quality, which may lead to increased customer commitment on the one hand and minimized quality costs (through learning effects, economies of scale, etc.) on the other.
PORTER’S FIVE FORCES MODEL
Before a company enters a market or market segment, the competitive nature of the market or segment is evaluated. Porter suggests that five forces collectively determine the intensity of competition in an industry: threat of potential entrants, threat of potential substitutes, bargaining power of suppliers, bargaining power of buyers, and rivalry of existing firms in the industry. By using the model shown in the following figure, a firm can identify the existence and importance of the five competitive forces, as well as the effect of each force on the firm’s success.
Five Forces Model
The threat of new entrants deals with the ease or difficulty with which new companies can enter an industry. When a new company enters an industry, the competitive climate changes; there is new capacity, more competition for market share, and the addition of new resources. Entry barriers and exit barriers affect the entrance of new companies into a marketplace. If entry barriers (capital requirements, economies of scale, product differentiation, switching costs, access to distribution channels, cost of promotion and advertising, etc.) are high, a company is less likely to enter a market. The same holds true for exit barriers.
The threat of substitutes affects competition in an industry by placing an artificial ceiling on the prices companies within an industry can charge. A substitute product is one that can satisfy consumer needs also targeted by another product; for example, lemonade can be substituted for a soft drink. Generally, competitive pressures arising from substitute products increase as the relative price of substitute products declines and as consumer’s switching costs decrease.
The bargaining power of buyers is affected by the concentration and number of consumers, the differentiation of products, the potential switching costs, and the potential of buyers to integrate backwards. If buyers have strong bargaining power in the exchange relationship, competition can be affected in several ways. Powerful buyers can bargain for lower prices, better product distribution, and higher-quality products, as well as other factors that can create greater competition among companies.
Similarly, the bargaining power of suppliers affects the intensity of competition in an industry, especially when there are a large number of suppliers, limited substitute raw materials, or increased switching costs. The bargaining power of suppliers is important to industry competition because suppliers can also affect the quality of exchange relationships. Competition may become more intense as powerful suppliers raise prices, reduce services, or reduce the quality of goods or services.
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Competition is also affected by the rivalry among existing firms, which is usually considered as the most powerful of the five competitive forces. In most industries, business organizations are mutually dependent. A competitive move by one firm can be expected to have a noticeable effect on its competitors, and thus, may cause retaliation or counter-efforts (e.g., lowering prices, enhancing quality, adding features, providing services, extending warranties, and increasing advertising).
The nature of competition is often affected by a variety of factors, such as the size and number of competitors, demand changes for the industry’s products, the specificity of assets within the industry, the presence of strong exit barriers, and the variety of competitors.
Several researchers have proposed a sixth force that should be added to Porter’s list in order to include a variety of stakeholder groups from the task environment that wield influence over industry activities. These groups include governments, local communities, creditors, trade associations, special interest groups, and shareholders.
STRATEGIC ENTERPRISE MANAGEMENT
Strategic enterprise management (SEM) is one other important tool that is applied in the integration of the organization’s financial and operational goals to the overall strategic plans. An organization must establish mechanisms for gradual transitioning from the prevailing management activities to future plans by linking strategic planning to the operational objectives. This encourages logical adaptation to anticipated changes in management processes and effectively seals any likely loopholes that may lead to strategic failure.
Whirlpool, for example, recorded dismal performance in the Chinese market because it failed to establish a nexus for cascading and linking its operational activities (such as production quantities and distribution) to its long-term objective of implementing comprehensive channels of distribution in the country. The application of the SEM tool to establish clear links between operations and strategy, however, should not be misinterpreted as focusing on strategies. Operations should be considered only on the basis of supporting the transition toward the achievement of the organization’s core strategy.
STRATEGIC PLANNING IN THE 2010S
The dominant theme for organizations in the twenty-first century has been strategic planning with regard to organizational innovation and enhancement of flexibility and responsiveness. New alliances mean cooperative strategies, complexity, changes in commitments of corporate social responsibility, and so forth. Strategic planning requires new models of leadership, less formal structures, and more commitment to self-direction. Also, past strategic failures relating to ethical problems require renewed commitments to ethical standards. Strategic management has evolved from the 1950s, when its theme was budgetary planning and control, to the twenty-first century, in which its theme is strategic and organizational innovation.
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