Strategic planning is the process of deciding on the goals of the organization, on changes in these goals, on the resources used to attain these seals, and on the policies that are to govern the acquisition, use and disposition of these resources.
The word strategy is used here in its usual sense of deciding on how to combine and employ resources. Thus strategic planning is a process having to with the formulation of long-range, strategic, policy-type plans that change the character or direction of the organization. In an industrial company, this includes planning that affects the goals of the company, policies of all types (including policies as to management control and other processes); the acquisition and disposition of major facilities, divisions, or subsidiaries, the markets to be served and distribution channels for serving them; the organization-structure (as distinguished from individual personnel actions); research and development of new product lines (as distinguished from modifications in existing products and product changes within existing product lines); sources of new permanent capital, dividend policy, and so on. Strategic Planning decisions affect the physical, financial, and organizational framework within which operations are carried on.
Strategic Planning Process
The traditional concept of the strategic planning process is one that is rational and deterministic, and orchestrated by senior managers. There are several steps in strategic planning process.
- The first step is to establish objectives, the results expected, what is to be done and where the primary emphasis is to be placed.
- The second step is to establish planning premises, i.e. assumptions about the anticipated environment. These premises can be classified as external and internal, qualitative and quantitative and controllable, non controllable. External premises can be classified into: general environment, (economic, technological, political, social and ethical conditions); the product market; and the factor market, (location of factory, labor, and materials etc). Internal premises include capital investment, sales forecast and organization structure. Some premises can be quantified while others may be qualitative. Some premises are controllable, such as expansion into a new market, adoption of a research program or a new site for the headquarters. Non-controllable premises include population growth, price levels, tax rates, business cycles etc. The semi controllable premises are the firm’s assumptions about its share of the market, labor turnover, labor efficiency, and the company’s pricing policy.
- The third step in planning is to identify alternative courses of action.
- The fourth step is to evaluate them by weighing the various factors in the light of premises and goals.
- The fifth step is adopting the plan.
- The final step is to give meaning to plans by putting in numbers and preparing budgets.
Approaches to Strategic Planning
The three broad approaches to strategic planning can be summarized as follows:
- Rational planning involves identifying and understanding gaps between previously established goals and past performance, identifying the resources needed to close these gaps, distributing those resources and monitoring their use in moving the organization closer towards its goals. This approach assumes the environment is predictable and the organization can be effectively controlled. Clearly, such an approach is not advisable if the business environment is complex and unpredictable.
- Incrementalism means moving from one strategy to the next, depending on the unfolding of events beyond the control of managers. Incrementalism assumes that managers cannot forecast or enforce the developments essential to developing a pre-ordained strategy and therefore must continually adjust. Future developments are likely to be random so that there is little scope to learn from past experiences. Thus, in contrast to rational planning which emphasizes intended strategies, incrementalism is based on emergent strategies.
- Organizational learning also emphasizes the need for making continuous adjustments. However, these adjustments need not be random. Rather, managers must keep making incremental adjustments to rational plans as they attempt to move the organization toward its goals. Though they may be unable to foresee the future, managers must not allow their organization to drift aimlessly. The role of top management is to encourage all employees to continuously challenge the status quo, generate ideas for improving the status quo, conduct experiments to see which of these ideas are most fruitful and then try to disseminate knowledge gained from these experiments throughout the organization.
Need for Strategic Planning
Strategic planning is long term planning and is carried on at the top level of management. It is concerned with deciding the goals of the organization. Management, after analyzing its own strengths and weaknesses and on the basis of the threats it faces and the opportunities, available to it, directions of the enterprise. Strategic planning has become a crucial exercise for the top management of enterprises because of the greater turbulence in environments in which such enterprises operate. Decisions to expand or dissatisfy quite often emerge from the exercise of strategic thinking companies when large turnover and operating in diverse fields usually have a separate department which is involved in the process of evaluating the changes in environment and its implication for the enterprise. It is also involved in the valuation of new opportunities. Since organization continuously interact with their environment and since only the top management can take decisions, which have far-reaching long-term implications on the organization, the top management continuously, scans the environment for possible opportunities, Thus only few individuals are involved in this process. At times, strategic decisions require secrecy and are not communicated till the decisions are actually taken. Most of the data for strategic planning is derived from the external environment, e.g., industry demand, estimates of investments in new facilities and new plants. There is also a high degree of uncertainty associated with the projections made over a long period of time and therefore strategic planning has to recognize this fact.
Short Case Study: Strategic Planning at Microsoft
At first glance, formal strategic planning may seem to be incompatible with the unpredictable changes and the free-wheeling cultures of high-technology firms. But Microsoft, a dominant high-tech organization, has had a formal planning process in place since 1994, when CEO Bill Gates hired Bob Herbold to head the operations staff. Herbold’s planning system looked at strategies for extending and maintaining the company’s established products, such as MS Windows, as well as strategies for speeding, developing, and easing adoption of its newer products, such as MSN and X-Box. The plan looks at goal and financial information from each of Microsoft’s divisions for three years into the future, and is updated annually. The planning process includes functional and top managers. The resulting strategic plans are used to determine resource allocation within the firm, as well as for strategic control and monitoring. Microsoft managers realize the need for flexibility as industry conditions change, but the formal plan provides a foundation for action that enables, rather than hinders, creativity and flexibility.
Hint: This short case study provides an example of how a large, diversified firm, with many products in many different stages of development, competing in a rapidly changing environment, has a powerful need for formal strategic planning. In fact, such firms’ need for formal planning is perhaps greater than smaller, less diversified firms or firms in industries that change slowly.