The steps in the strategic planning process are shown in the following illustration.
Step 1. Mission and Goals:
The mission statement defines the organization’s business, states its vision and goals and articulates its main philosophical values. The mission statement must be clearly stated and clearly understood by all.
All efforts of the organization are to be directed towards the accomplishment of the mission. The mission of a company may be high quality product at low cost. The mission of another company may be high quality at high cost to have and keep a quality oriented image like Rolls-Royce and Mercedes automobiles. For example, the Ford Motor Company’s mission is “…………. to improve continually our products and services to meet our customers’ needs, allowing us to prosper as a business and to provide a reasonable return for our stockholders, the owners of our business.”
The Company’s six guiding principles for pursuing its mission are: 1) quality comes first; 2) customers are the focus of everything we do; 3) continuous improvement is essential to our success; 4) employment involvement is our way of life; 5) dealers and suppliers are our partners; and 6) integrity is never compromised”.
The written mission statements serve as reference points for managerial decision making and can be modified over time to reflect the dynamics of the environment or revised management philosophy.
Step 2. Analyzing External Environment:
We discussed various types of external environmental elements that affect the organization in chapter 3. Analyzing the environment is a critical component of the strategy process because proper alignment with the environment is necessary for organisational success. Some companies do well partly because their external environment is extremely attractive.
Others do poorly because the external environment is hostile. For example, Wang Labs, a word processing system company, founded is 1951 with its own software and hardware, provided a good substitute for typewriters.
There was a close fit between Wang’s strategy and customer demands. However, in the late 1980s, the environment became highly competitive with personal computers and a variety of world processing software and Wang Labs was unable to cope with it. The result was failure of the company.
Accordingly, for a company to succeed either its strategy must fit the environment around it or it must be able to reshape the external environment to its advantage through its choice of strategy.
Step 3. Analyzing Strengths and Weaknesses within the Organization:
The third step in the strategic planning process involves the assessment of the company’s strengths and weaknesses in order to take advantage of the opportunities offered and to cope with the threats posed by the external environment.
An internal analysis of strengths and. weaknesses will identify the unique skills and resources that give an organization a competitive advantage. Unique competitive advantage is a combination of superior efficiency, superior quality, superior innovation and superior customer responsiveness.
For example, IBM’s unique competitive advantage lies in its vast financial resources, fine product quality and reliable customer service. Similarly, Black and Decker, a high quality tool making company, bought General Electric’s small appliances division – which made coffeemakers, toasters and the like — renamed them and capitalized on Black & Decker’s reputation for quality and durability.
An understanding of the organization’s culture is a crucial part of understanding its strengths and weaknesses. The content of a culture has a major effect on the content of the strategy. In a strong culture, for example, all employees are aware of the strengths and weaknesses of the organization as well as its distinct competitive advantage and work together, within the set values, to face the threats and opportunities from the external environment. Cultural values influence managerial preferences for certain strategies.
In a risk-aversive culture, for instance, management is highly conservative, less innovative and is more likely to favour strategies that are defensive and react to changes in the environment rather than try to anticipate these changes and adopt a proactive approach.
Step 4. Strategic Analysis:
Once we become aware of the threats and opportunities in the external environment and the strengths and weaknesses in the internal environment of the organization, a comprehensive analysis of these elements assists in providing a realistic understanding of the organization in relationship to its environment. This comprehensive analysis is known as SWOT analysis (Strengths, Weaknesses, Opportunities, and Threats). This analysis would assist in the development of strategies that take maximum advantage of strengths and opportunities while minimizing the negative effects of weaknesses and threats.
The SWOT analysis takes into consideration the following major issues:
i. Distinctive competence
ii. Manufacturing efficiency
iii. Skilled work force
iv. Adequate financial resources.’
v. Superior image and reputation
vi. Economies of scale
vii. Superior technology
viii. Insulation from strong competitive pressures.
a. No clear strategic direction
b. Outdated facilities
c. Lack of innovation
d. Poor research and development programs.
e. Lack of management depth and skills.
f. Inability to raise capital
g. Weaker distribution network
h. Obsolete technology
i. Low employee morale
j. Poor track record in implementing strategy.
k. Too narrow a product line
l. Poor market image
m. Higher overall unit costs relative to competition.
a. Strong economy
b. Possible new markets
c. Emerging technologies
d. Vertical integration.
e. Complacency among competing organizations.
f. Expansion of product line to meet broader range of customer needs.
g. Falling trade barriers in attractive foreign markets.
a. Entry of lower cost foreign competitors.
b. Rising sales of substitute products.
c. Shortage of resources.
d. Changing buyer needs and tastes.
e. Recession in economy
f. Costly new regulatory requirements
g. Adverse shifts in trade policies of foreign governments
h. Adverse demographic changes.
SWOT analysis is a useful strategic planning tool and is based on the assumption that if the managers carefully review internal strengths and weaknesses and external threats and opportunities, a useful strategy for ensuring organizational success can be formulated.
Since competition is a major external environmental threat to any organization, Maichael E. Porter has suggested analysis of competitive environment in a given industry in terms of five major forces. The forces are rivalry, bargaining power of customers, bargaining power of suppliers, threat of new entrants and threat of substitute products and services.
“Rivalry” involves such tactics by the competitors as price competition, promotional innovation, superior customer service, extended warranties on products and so on.
The “bargaining power of customers” is the extent to which the customers are able to force prices down by playing competitors against each other. The greater the bargaining powers of customers, the lower the profit potential in the industry.
The “bargaining power of suppliers” is the extent to which the suppliers can exert influence in our industry by threatening to raise their prices or reduce the quality of their goods and services.
Suppliers are powerful when there are only a few of them and when their products or services are critical to the buyer’s business. For example, the supply of diamonds and their prices are controlled by very few suppliers.
The “threat of new entrants” is the extent to which the market is open to new entrants in the same business. New entrants bring added capacity and additional resources. This results in price competition, thus lowering the profit potential for related businesses. New entries are easy in an industry where the incumbent competitors have not constructed high barriers to new entrants.
High barriers exist when large capital investments are required to start the business, when economies of scale would make it difficult for new entrants to compete and when established businesses have created brand loyalty by differentiating their products or services.
Finally, the “threat of substitute products or services” is the extent to which substitutes are offered by other industries for an established product line. For example, artificial sweeteners can be substituted for sugar. Substitutes take away the market share of an established product thus reducing the profit potential for such a product.
Understanding the forces that determine competitiveness within an industry helps in developing strategies that keep a business competitive or above competition.
Step 5. Developing Specific Strategies:
In discussing development of a strategy, it is useful to distinguish three levels of strategy, namely, corporate level, business-unit level and functional level.