Strategic Planning: Definition, Steps, and Management

Definition of Strategy

• A strategy is a long-term plan of action to achieve a goal.
• It's also a plan to address an opportunity or solve a problem.
• A business needs a strategy to achieve its vision and mission.

Steps in Developing a Strategy

• Application of SWOT analysis/PESTLE/Porter's Five Forces/environmental scanning of the business environments
• Formulating strategies to meet objectives and develop measurable strategic goals
• Implementing strategies using action plans
• Evaluating strategies by comparing expected versus actual performance to determine reasons for deviations

The Strategic Management Process

• Establish a clear vision, mission statement, and measurable/realistic objectives.
• Identify opportunities/weaknesses/strengths/threats via environmental scanning/situational analysis.
• SWOT analysis/Porter's Five Forces model/PESTLE analysis are environmental scanning tools
• Formulate alternative strategies to respond to challenges, also involving different types of business strategies.
• Develop action plans including tasks, deadlines and resource procurement.
• Implement chosen strategies, communicating to stakeholders, organizing resources, and motivating staff
• Continuously evaluate/monitor/measure strategies and take corrective action.

SWOT Analysis Explained

• Strengths cover advantages, unique resources, skilled employees, strong customer base, high-quality products, sufficient resources, and core competencies
• Weaknesses include high costs, employee turnover, weak brand, high debt, market perceptions, factors causing sales loss, and competitors' advantages
• Opportunities relate to market growth, new technology, changing habits, income levels, government incentives, and online growth
• Threats encompass corporate tax, rising pay, competition, fuel prices, aging population, strict laws, currency fluctuations, and changing technology

Dave Digital Sound (DDS) SWOT Analysis Example

• DDS specializes in radios and car sound systems, employing qualified sound engineers
• The business lacks sufficient capital for large event sound systems and is in a high crime area
• Businesses in the same industry are failing due to ineffective marketing
• SWOT analysis notes strengths in qualified engineers and radio/car sound specialization
• Weakness is insufficient capital for large events
• Opportunity is the closure of competitors due to marketing issues
• Threat is location in a high-crime area

Porter's Five Forces Model

• This tool is used to analyze the business' position in the market via research
• Do not focus on recommendations

Power of Suppliers

• Businesses must assess how much suppliers can influence prices
• The more powerful the suppliers, the less control the business has
• Fewer suppliers may mean they are more powerful due to limited choices
• The business should identify the power its suppliers have regarding product quality, service reliability, and delivery speed

Power of Buyers

• Buyers purchasing in bulk can negotiate for lower prices
• A business dealing with few powerful buyers means those buyers can dictate terms
• If goods can be obtained elsewhere, buyers are more able to determine the prices and terms of sale
• Businesses must assess how easy it is for customers to drive prices down, based on buyer numbers, importance, and switching costs

Power of Competitors/Competitive Rivalry

• Competitive rivalry relates to the number and power of competitors in the market
• Unique products or services give greater power to competitors
• Many competitors in the same market results in businesses having very little power
• Competitor profiles should be drawn up to determine strengths of the business and competitors

Threat of Substitution/Substitutes

• Substitute products or services meet the same consumer needs but are different
• Easy substitution weakens a business's market power
• Substitutes may cause complete loss of market share
• Unique products are not threatened by substitutes

Threat/Barriers of New Entrants to the Market

• New entrants are businesses selling similar products in the existing market for the first time
• Power is dependent on how easy it is for new businesses to enter the market
• New competitors entering the market can happen quickly if it requires little time/money
• Few suppliers but many buyers may mean an easy entry to the market
• High profits attract potential competitors
• Low barriers to entry mean it is easy for new businesses to enter the market/industry

PESTLE Analysis

• This lists challenges and recommends appropriate actions to remedy problems.

Political Factors

• Government policies may affect businesses and recommend research into them
• Consumer rights organizations may prevent businesses from selling products not meeting legal requirements, therefore it is important to network and lobby with such organizations.
• Trade agreements may prevent some businesses from importing some medicine/products, therefore you should only trade with countries with favorable agreements

Economic Factors

• Inflation or Interest rates may impact a business negatively, and recommend that you decrease profit margins rather than increasing product prices
• Loans being expensive due to high interest rates, borrow money from financial institutions when interest rates are favorable
• Fluctuations in foreign currency restricting imports, consider exchange rates with other countries

Social Factors

• Customers may not be able to afford products due to low income levels so, sell substitute/generic products at lower prices
• Businesses may struggle due to not being conversant in the local language so, learn local languages/Hire employees who are well conversant with the local customers

Technological Factors

• May not keep up / be aware of the latest technology so, implement continuous research on new technology
• Employees may be unskilled to operate / maintain new equipment so, train existing / hire new employees to use new equipment
• Businesses may not be able to afford new technology, compare prices, and select suitable suppliers for new equipment at reasonable prices
• May not be able to cater for online trading, so businesses must be geared for it

Legal Factors

• Businesses should be wary of certain acts, so comply with all relevant legislation that may impact businesses
• Legal requirements for operating businesses may be time-consuming so, comply with legal requirements
• High legal costs may be involved in obtaining a license/trade so, budget for high legal establishment costs

Environmental Factors

• Mark's/Patent's may prevent small establishments so, the business must know the legalities of business contracts so that they comply with all the requirements.
• Chemicals / Ingredients in business products may be harmful to customers so, chemicals / ingredients should be clearly indicated on labels packaging to inform customers of side effects
• Measures for disposing of business waste may be expensive, implement cost-effective measures to dispose of medical waste
• Packaging of some products may not be environmentally friendly/recyclable so, implement recycling measures

Types of Business Strategies

Integration Strategies

• These combine businesses with distributors or suppliers

Forward Integration

• When a business combines with or takes over its distributors and expands business activities to control product distribution directly

Backward Integration

• When a business combines with or takes over its suppliers to decrease dependency

Horizontal Integration

• When a business takes control of or incorporates other businesses in the same industry/which produce/sell the same goods/services
• The aim is to reduce the threat of competition /substitute products/services.

Intensive Strategies

• These focus on market share and growth

Market Penetration

• Selling new products at a low price in an existing market until prices increase

Market Development

• Selling existing products in new markets

Product Development

• Introducing new products to existing markets and modify existing ones

Advantages of Intensive Strategies

• Decrease in vulnerability to competitors
• Growth in profitability
• Improve business image through service delivery
• More control over prices
• Loyal customers
• Influence customer by decreasing prices
• Regular sales
• Eliminate competition
• Focus on market-researched products

Diversification Strategies

• Diversification strategies add new products or services

Concentric Diversification

• Add new products or services related to existing ones in order to appeal to new customers

Horizontal Diversification

• Add unrelated products or services that appeal to existing customers

Conglomerate Diversification

• Add unrelated products or services to attract new customer groups

Advantages of Diversification Strategies

• Increase in sales and growth
• A balance created during economic fluctuations
• Able to sell additional products to additional/existing customers and new markets
• Business is likely to gain more technological capabilities through product modification
• Produce more output using limited inputs
• Improved brand
• Reduces reliance on one product

Defensive Strategies

• Aim to protect a company from threats

Divestiture/Divestment

• Selling or disposing of unprofitable assets or divisions
• Selling product lines with slow growth potential or unproductive assets to reduce debt
• Used to withdraw its investment in another business

Retrenchment

• Terminating employment contracts due to operational reasons which lead to potential redundancy with less product lines and closure of particular departments

Liquidation

• Selling all assets to pay creditors due to lack of cash flow.
• Sell entire business to pay off all liabilities
• Creditors apply for forced liquidation

Steps in Evaluating a Strategy

• Examine the underlying basis of a strategy
• Compare the expected results with the actual performance attained in strategic
• Look forward and backwards into the implementation process
• Take corrective action to deal with deviations
• Set specific dates for control and follow up
• Draw a table that contains the advantages and disadvantages of a strategy
• To ensure the success of the chosen strategy select desired outcomes and consider the impact on the internal and external environment