The Importance of Strategic Planning in Companies

For success in any growing business organisation, it is necessary to know where the firm is going and have a realistic vision for the future. Strategic planning gives the organization to have a road map and a direction to evolve over time in response to changing circumstances. It can be goal-based, scenario based, issue based or organic-based. The most common planning method used in most organisations is the goal-based strategic planning which revolves around the overall goal of the firm. The issues concerned with the strategic decision and planning are The overall scope of the organisation- which defines the purpose, vision and mission of the company. Positioning the organisation How to gain advantage over the competitors. Configuration of resources and competences. Values of stakeholders. Every successful organisation has a strategic plan that enables them to be on a winning streak. For example, the German automobile giant BMW had its unique strategy unveiled in the year 2007 which focussed on capital-efficiency targets, growth targets, expanding natural hedging, aggressive financial targets, increasing production and the possible establishment of a fourth brand. The notable thing perhaps is that the plan is till the year 2020 where it looks forward to reach its sales target of 1.8 million cars and SUVs by 2012 and more than 2 million by 2020. (www.autoobserver.com, Mitchelle Kerbs.) Such strategic planning helps the organisation to focus on their targets and channelling towards the plan. However developing strategic plan depends on the culture, leadership, complexity and scope of the organisation and differs widely based upon the market in which they want to compete and activities they are associated with.

STRATEGY AT DIFFERENT LEVELS:

There are three levels at which the strategic planning is made. Corporate level- It is the top level strategic planning which is done by the top management. The overall scope of the organisation remains the main concern here. The company should identify the type of business it should involve and the market which they compete. This level is most suitable for large companies with wide geographical locations and rich in product diversity. Decision making, at any point, heavily relies on the corporate level strategic planning. Taking the case of BMW, it found out that the market was strong in United Stated of America and hence decided to launch a plant at Spartanburg, South Carolina, which was a bold move. It was the first manufacturing plant outside Germany and it turned out to be one of the major success factors for the organization because today most of the BMW cars manufactured run on American soil. Such kind of decisions is taken by the top level management which falls under corporate level planning. Business level- It focuses mainly on the products at different markets. Since an organisation can have diverse products, the strategy has to be planned in a proper manner which would create ideas to gain advantage over the rivals. Organisational level- It is concerned with the component part of an organisation. In order to achieve the overall task and travel by the strategic plan, it is necessary that the output is good at the operational level.

STAKEHOLDERS:

Anyone who is interested in an organisation becomes its stakeholders. It includes customers, suppliers, intermediaries, competitors, financiers and the government. Customers: Customers are the backbone of any industry and it is important for an organisation to see if they keep their customers happy and satisfied. Suppliers: Suppliers are those who give the manufacturers the basic raw materials needed to manufacture the products. Most of time suppliers are the main reason for the success of an organisation in the market. Intermediaries: Intermediaries are those who come between producers and the consumers. In most cases the consumer may not get the products directly from the producers. Competitors: They are an organisation's rivals in the market. The company needs to monitor their competitors and their actions in order to keep pace with the competition that they provide. Government: The government of the nation in which the organisation operate might come up with laws and policies and thereby affection the business of the organisation. Financiers: They are the company's shareholders and it is always important for the organisation to keep them satisfied because they provide the money for the firm to operate.

STRATEGIC ANALYSIS:

Strategic analysis is nothing but knowing what is happening outside the company and understanding how it is going to affect your organisation. It is important to think of how the organisation is going to face the future. Various strategic analysis tools are PEST analysis, SWOT analysis, Scenario planning, the five forces and etc.

PESTEL ANALYSIS:

PESTEL analysis is one of the most popular tool which stands for Political, Economical, Social, Technological, Environmental and Legal environment. Any business running actively is affected by all these factors. Let us see what these factors are and how they play their part in strategic planning. Political: Political arena is one of the major factors affecting the business of the organisation. Any business in the UK is affected by three types of government- local government such as Borough and County councils, Central government (the UK government) and the European government. Issues that are concerned with the political environment are How stable is the government? A stable government is the best suitable for any business organisation to grow. Most of the developed countries have a stable government which makes the business to grow economically. What is the type of government? Is it dictatorship, monarchy, democratic etc. Are the policies of government on marketing ethics, employment laws and economy advantageous for the organisation? How are the trading agreements of government such as EU, ASEAN going to affect your business?

Political factors affecting other factors:

All the other factors are interlinked with the political environment in some way or the other. Any decisions taken by the government such as changes in the monetary and fiscal policy might affect the economy of the nation. Any newly introduced policy such as free medical and education funding for children would encourage people to have babies and an organisation which manufactures baby products will get benefited from such series of actions. Restrictions on excessive fuel emissions might force factories to adopt new technologies to mitigate it. For example, when the US came up with new policy about fuel efficiency requirement of cars in 2008, the Canadian carmakers who had a good market in America, struggled to restructure the engines of their motor vehicles. Microsoft Corp. in 2005 had to exports a different version of windows to Europe (windows which is stripped of 'mediaplayer') because it had issues with the European Union regulatory methods (Toronto Star, Jan2005). Hence the political environment plays a vital role in challenging the growth and existence of an organisation. Economical: Economical factors deals with the issues of tax, inflation rate, exchange rate, rises in living standards and the overall economic growth of the nation. When expanding a business, in a foreign nation especially, the organisation should analyse the trends and events in those environments to predict their business in future. Any change in the economy of the nation may cause drastic effects on the business. Taking the times of recession, let us see how it affects the business of an organisation. Ian Worthington et al (2003) noted that at the time of recession, the demand for the products decline rapidly. This would cause unemployment followed by fall in the economy of the nation. This would reduce the orders, workforce and then the output. Taxes are an important concept in economical environment. Government usually increase tax charges to increase the economy of the nation. One might question how it is going to affect the business of an organisation. If the income tax is increased, people receive less money in their pocket and that would affect their spending habits. By increasing the value added tax, people would have enough money in their pockets but the products are going to be too expensive for them to afford. So there would be less demand of products. Organisations usually adopt techniques like cost cutting to adapt to the economical changes in the nation. For example, increase in living standards lead to more people travel by car and there was considerable change in train usage by Londoners, especially by the commuters. Hence The Transport for London had to face this challenge in order to improve their business. This led to the technological improvement of the rail services and expanding it widely to attract commuters to use it. Socio cultural and demographic: People living in different places have different tastes and lifestyle. It is important for an organisation to understand the social changes that occur in the environment in order to make sure their products meet the needs of the people. The tastes, requirements, lifestyle, income are some of the socio-cultural factors that might act as threats or opportunities for an organisation. (Thompson R, 2002). For example, people's increasing concern for healthier lifestyle may provide an opportunity for gyms and health clubs whereas the same might be a threat for butchery shops. The organisations must deal with such challenges in a suitable manner by adapting to the local people's culture and desires. Adrian Palmer and Bob Hartley (2009) say an individual learns norms of behaviour from a number of sources The dominant cultural values of the society in which they live. The social class to which they belong. Important reference groups, in particular the family. Technological: There has been considerable change in the technology in the last decade. The introduction of information technology and outsourcing has revolutionised the development of many organisations. Tele-marketing which would have been a joke decades ago is one of the popular techniques used in the marketing organisations. Advances in information technology are creating new products and marking old products more profitable to produce through things like computer-aided design (CAD). The effects they are having on the different functions carried out by businesses are- administration, communication, production, storage and distribution, electronic funds transfer at point of sale, the internet. (Worthington, I and Brighton, C. 2006) The organisations should watch out for the new technologies to manufacture their products well advanced when compared to their competitors. For example, BMW looks forward to adapt new car techniques and technology to face fuel emission problems. The German group has developed a fuel-saving technology that should make its cars 20 per cent more fuel efficient than those made by its competitors. It is also involved in hydrogen technology and has launched a hybrid petrol and electric car on November, 2009 (https://www.bmwblog.com/2007/11/09/bmw-to-create-eco-friendly-fourth-brand/comment-page-1/, 'BMW to create eco-friendly fourth brand').

PORTER'S FIVE FORCES MODEL:

Porter's (1985) model helps managers identify the factors that affect the intensity of competition within a particular industry. The model illustrates the relationship between different players and potential players in the industry. (Palmer A, Hartley B, 2002). The five forces are threat of entrants, power of suppliers, power of buyers, threat of substitutes and the intensity of rivalry. Threat of entrants: When the barriers to the entry are weak, it will attract new entrants much easier. When it becomes hard for outsider because of the economical conditions, barrier for entering into the market exists (Porter, 1980b; Sanderson, 1998). A new entrant may be a totally new organisation or a firm that already exists but in a different geographical location. The competition will be higher when there are many entrants in the market and it could change some of the major determinants such as market price and customer loyalty. If the new entrant has got a good brand loyalty for customers, it is trouble for the existing organisations. Source: www.themanager.org/models/p5f.htm/ For example, companies like Sony Corporation has so much brand loyalty to the customers that any kind of market they enter with an idea of launching new products would attract customers. Alternatively, new entrants may be from a different industry altogether. Yamaha Corporation, a Japanese musical instruments maker started making automobiles challenging the other dominant automobile makers in the Asian market. Power of suppliers: When the suppliers are less, the demand for raw materials become more and the suppliers tend to have more power. Recklies (2001) noted that the bargaining power of suppliers will be high when it becomes expensive to switch between the suppliers, when the market is dominated by few large suppliers than a fragmented source of supply, the suppliers customer is fragmented, there are not substitutes for that particular input and the buying industry has a higher profitability than the supplier industry. In such situations, the buying industry often faces a high pressure on margins from their suppliers. The relationship to powerful suppliers can potentially reduce strategic options for the organization. Power of buyers: When the demand is less and supply is more the buyers tend to have more power. This creates pressure on the organisations that will have to provide competitive market prices to sell the products. If the products has substitutes and can be easily replaced the power of buyers will be more. The other reasons are when the products can be manufactured by the customers themselves or when the size of the customers is very less. The grocery stores in the UK like TESCO and Sainsbury's faces the challenge of buyer power since there are very few and large such stores in the market. Threat of substitutes: The traditional products in the market are under threat when there are more advanced products to replace them. For example, computers are the substitutes for typewriters which will get more attention since it is advanced. Substitutes may also rise when the price of the substitutes are cheaper and comes with a better quality. When the internet boomed, mail boxes and fax machines were replaced with a computer and a printer which could do the job much easier. The organisations will have to face the challenge that substitutes bring along and should either modify their products to suit the growing needs of the customers or adapt to the new technology. Intensity of rivalry: Competition arises when the rival companies offer the same product as the others in a cheaper price and better quality. Competition may also occur when there are more entrants. However rival organisations should not be confused with substitutes. Substitutes do not focus on the same products and consumer groups. For example, an emerging shopping mall will be a rival to an existing strong shopping mall but online retailing organisations such as amazon.com are the substitutes, where it becomes easy for people since it provides various shopping options at one touch. Johnson et al (2006) say that the factors directly affecting the degree of competitive rivalry is a sector are- competitor balance, industry growth rate, high fixed costs, high exit barriers, low differentiation.

STRATEGIC CHOICE AND IMPLEMENTATION:

A strategy which is chosen has to be able to face all the challenges faced by the organisation due to the factors described in detail. Strategies are at different levels and the decisions have to be made at all these levels when it comes to choosing the right strategy. Johnson et al (2006) postulates that the executives at these levels will be facing situations where they have to pick from the options which not only meets the requirements of the customers but also satisfies the organisations' stakeholders. For example, managers at a commercial bank should go for a strategy that not only ensures they meet the needs of the clients but the one that also meets expectations of the organisation's stakeholders. The strategy at corporate level should be drafted in such a way that it adds value to the various business units operating in the organisation. This applies not only to the large multinational companies but also to the smaller level business. Consider an investment company which deals with various sectors such as banking, mortgage and hedge funds. There are various sections the firm will have to deal with and the way each segment in the organisation function in order to achieve overall success is different from each other. The existence of harmony between these different segments results in a synergy. Synergy is produced when these different processes in the organisation are in support of each other and their combined effect becomes larger than their outcomes when operated separately. The corporate level strategy should make sure this synergy is attained. Implementation of strategy should be done in a proper way to ensure the plan is followed in the way it is intended to be. All the employees in the organisation and the middle management have to take part seriously in order to render the plan into action.

CONCLUSION:

Thus it is discussed how an organisation is affected by the external and internal factors and how the strategic plan becomes advantageous when it meets the expectations of stakeholders. The strategy is successfully analysed using Porters five forces model and PESTEL model and the ways to face the challenges provided by the changing environment are discussed. Finally, it is apparent from the research that when the strategy is analysed, formulated, chosen and implemented productively, the success of the organisation is certain.

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