This article throws light upon the eight main steps involved in the process of strategic planning. The steps are: 1. Objective Formulation 2. Analyse the Impact of Environment 3. Analyse Resource Position of the Firm 4. Establish Alternative Strategies 5. Evaluate Alternative Strategies 6. Choice of a Strategy 7. Implement the Strategy 8. Measurement and Control of Strategy.
Step # 1. Objective Formulation:
Strategies are goal-oriented. The overall purpose or mission of the organisation must be clearly stated. Mission explains the reason why business is in existence. It identifies the scope of products/services. The goals can be economic or social and may relate to size of the organisation, goods or services or simply the technology or the way an organisation operates its business.
Missions justify existence of the organisation in terms of purpose (objectives), markets, products/services, consumers etc.; relationship between organisation’s internal and external environment, its culture, values, ethics and beliefs. Missions formulate objectives and objectives help to formulate strategies.
Step # 2. Analyse the Impact of Environment:
Environmental analysis is the “systematic assessment of information about the firm’s external environment during the strategic planning process to identify strategic opportunities for the company as well as major threats, problems, or other possible impediments.” Managers scan the environment, pick relevant information and use it for strategy formulation.
A successful strategy aligns with the environment. Strategies are made to integrate the organisation with its environment. Managers examine both general and specific environmental factors to see what changes are occurring. External factors which indirectly affect strategic planning are technological, social, political, and legal and those which directly influence are competitors, suppliers, government and customers.
Whether these factors promote or restrain business activities is analysed in framing strategies. Complete information collected from various sources like government agencies, banks, customers, journals, bulletins, suppliers, other business associations etc., may not be required for strategy formulation. Information is screened and only relevant information is analysed to formulate strategies.
This information may be related to production (plant location, layout, inventory management repairs and maintenance etc.), marketing (market share, consumer needs, promotion mix, product mix etc.), finance (debt-equity ratio, dividend policy etc.) or human resource (manpower planning, recruitment and selection procedures, training and development etc.).
Environmental analysis helps to:
a. prepare strategies to convert threats into opportunities
b. create environmental threat and opportunity profile (ETOP) which analyses the environmental factors and assesses their impact on the organisation.
Step # 3. Analyse Resource Position of the Firm:
After analysing the external environment, firms evaluate their internal resource position to identify their strengths and weaknesses in relation to environmental threats and opportunities. Knowing environmental threats and opportunities is not enough unless the organisations know their strengths that can overcome the threats and exploit the opportunities.
Organisational weaknesses, if any, have to be overcome to take benefit of environmental opportunities. Resources being limited, organisational strengths and weaknesses should be analysed to use the resources in areas where they can be optimally utilised.
Matching of strengths and weaknesses (internal environment) with threats and opportunities (external environment) is known as SWOT analysis. It helps in generating strategies and answer the basic question of strategic planning—what we are and what we want to be or where we are and where we want to go?
The following steps are identified by Hofer and Schendel to analyse resource position of the organisation:
(a) Develop a profile of the organisation’s principal resources and skills in three broad areas: financial; physical, organisational and human; and technological.
(b) Determine the key success requirement of the product/market segments in which the organisation competes or might compete.
(c) Compare resource profile with key success requirements to determine the major strengths on which effective strategy can be based and major weaknesses to be overcome.
(d) Compare organisation’s strengths and weaknesses with those of competitors to identify which resources and skills are needed to have competitive advantage in the marketplace.
Analysing the organisation (corporate appraisal) helps in setting priorities over areas where organisations need to pay more attention. These areas could be operations/marketing/hum an resource/finance etc.
Step # 4. Establish Alternative Strategies:
Managers carry out gap analysis to develop alternative strategies, i.e., analyse the present strategies and the objectives formulated. “It is the difference between the objectives established in the goal formulation process and the results likely to be achieved if the existing strategy is continued.”
It reveals gap between the present state and future aspirations of the organisation. If existing strategies can help in reaching the desired objectives, new strategies need not be formulated but if there is a gap, managers develop strategies to attain the objectives.
The following strategies can be made:
(a) Strategy to concentrate:
Companies want to specialise in the existing line of products, capture bigger market share and become market specialists in that product line.
(b) Strategy to diversify:
Companies want to enter new markets to increase the share of market.
(c) Strategy to enter international markets:
Besides increasing share in the national markets, firms want to expand their business in other countries.
(d) Strategy to enter into joint ventures:
Firms enjoy the benefits of synergy by collectively exploiting the resources and enlarging their area of operation.
(e) Liquidation strategy:
It means to drop the existing product if it is not profitable.
(f) Retrenchment strategy:
It means dropping some of the resources (human and non-human) to make best use of the remaining ones. Surplus resources are shed off in this strategy. It results in optimum use of resources. The list of strategies is not exhaustive. New strategic options may be considered by the firms depending upon the situation.
Step # 5. Evaluate Alternative Strategies:
Different strategic options are evaluated on the basis of their competitive advantages in terms of:
(a) Risk:
Will the strategy be able to achieve the objectives?
(b) Time:
Is it being adopted and implemented at the right time?
(c) Target:
Does it target at matching internal strengths and weaknesses of the organisation with its external environment?
Four criteria for evaluating strategies are identified by Richard R Rumelt:
(a) Is the strategy consistent with broad objectives of the company?
(b) Does the strategy focus organisational resources on critical success factors in the product/market area for which it is intended to be formulated?
(c) Does it maximise company’s internal strengths and minimise its weaknesses?
(d) Is the strategy realistic? Will it be able to produce the desired results? i.e., it is a workable strategy or not?
Various quantitative techniques such as ratio analysis, break-even analysis, linear programming, networking etc. are used to evaluate strategies.
Step # 6. Choice of a Strategy:
After evaluating strategies in terms of risks and returns (ability to achieve the goals), they are ranked in order of priority and the strategy best suited to achieve the goals is chosen. The chosen strategy should be directed to maximise long-term goals of the organisation.
Step # 7. Implement the Strategy:
After selection, the strategy is put into action and practiced. It becomes a guide for the organisation and members to direct their efforts in a unified direction. Implementation requires designing the suitable organisation structure, developing a sound system of communication, motivation and control, allocating authority responsibility, resources etc.
Step # 8. Measurement and Control of Strategy:
Organisational performance is measured at periodic intervals to assess whether strategic objectives are being achieved or not.
A formal strategic control system is designed which answers questions such as:
(a) Is the strategy being implemented as planned?
(b) Are the critical assumptions on the basis of which it was selected still valid?
(c) Is the strategy achieving the intended results?
If the results are similar to objectives, the strategies become the basis for future action. However, if the objectives are not achieved, reasons are found for the same and suitable actions are taken to overcome the problem.
The reasons for the gap (actual and desired performance) are analysed and if there seems to be some problem with the strategy itself, the entire process of strategy formulation is started again and new strategy is framed to achieve the objective. If the problem lies in any of the intervening steps (evaluation, choice, implementation etc.), rectification is done at the relevant stage to achieve the intended objective.