© Lumiere Consulting 2007

 

Outline of Strategic Planning Process

 

Part 1:  Strategy Formulation

 

  A strategic plan is not an easy plan to write because strategic planning, while straight-forward in concept, is difficult to apply in practice.  The primary problem is obtaining enough information to accurately complete part.  In reality, a strategic planner must use “best guess” for some of the information needed.  Of course, the more sensitive and important the information is to the overall success of the strategic plan, the more effort must be made in securing adequate and accurate information.

 The Purpose Of A Strategic Plan

 The purpose is simple - Identify those prudent approaches and actions that develop for the company a sustainable, competitive advantage in the selected marketplace.

 

 

Description of Situation

 

This section is a two paragraph section.  Paragraph 1 should provide a brief history of the company highlighting those historical facts that relate to the current problem or situation.  Paragraph 2 should describe the problem or current situation that needs to be addressed and why.

 

 

Mission Statement

 

The mission statement can be brief or lengthy.  It must, however, provide an overall “flavor” for the personality of the company.  It should guide managers, planners, and other company employees in making decisions consistent with the company directions.

 

 

Analysis of External Environment

 

Remote Environment

 

The six remote environmental factors - political, legal, social, economic, technological, and environmental - need to be evaluated.  The key to this evaluation is determining those conditions existing within each factor that will impact the marketplace/industry within which your company operates and “how, why, and to what extent” these conditions impact.  Be on the lookout for conditions (driving forces) that are not currently impacting your marketplace/industry but that, given certain circumstances, could greatly change the remote environment.  The time horizon should be at least 3 to five years or more in the future.  Always relate the analysis to your situation.

 

Industry Environment

 

The Five Forces Driving Industry Competition model is an excellent way to begin to analyze the industry environment  This should be followed by a look at industry boundaries, industry structure, and if possible, a competitive analysis.

 

Five Forces Driving Industry Competition

 

The strongest competitive force or forces determine the profitability of an industry and so are of greatest importance in strategy formulation.  Different forces take on prominence, of course, in shaping competition in each industry.  Every industry has an underlying structure, or set of fundamental economic and technical characteristics, that gives rise to these competitive forces.

 

As an industry matures, its growth rate changes, resulting in decreasing profits and (often) a shakeout.  An acquisition can introduce a very different personality to an industry.  While a company must live with many of these factors - because they are built into the industry economics - it may have some latitude in improving matters through strategic shifts.  A focus on selling efforts in the fastest-growing segments of the industry or on market areas with the lowest fixed costs can reduce the impact of industry rivalry.  If it is feasible, a company can try to avoid confrontation with competitors having high exit barriers, and, thus, can sidestep involvement in bitter price cutting.

 

The competitive forces are:  Power of Buyers, Power of Suppliers, Threat of New Entrants, Availability of Substitutes, and Rivalry Among Competitors.

 

A.        Threat of Entry

1.      Economies of Scale

2.      Product Differentiation

3.      Capital Requirements

4.      Cost Disadvantages Independent of Size

5.      Access to Distribution Channels

6.      Government Policy

 

 

B.         Powerful Suppliers:  Suppliers are powerful if:

1.      It is dominated by a few companies and is more concentrated than to the industry it sells.

2.      Its product is unique or at least differentiated, or if it has built-up switching costs.  Switching costs are fixed costs that buyers face in changing suppliers.

3.      It is not obligated to contend with other products for sale to the industry.

4.      It poses a credible threat of integrating forward into the industry’s business.

5.      The industry is not an important customer of the supplier group.

 

 

C.        Powerful Buyers:  Buyers are powerful if:

 

1.      It is concentrated or purchases in large volumes.

2.      The products it purchases from the industry are standard or undifferentiated.

3.      The products it purchases from the industry form a component of its product and represents a significant fraction of its cost.  Buyers are then liable to shop for price and purchase selectively.

4.      It earns low profits, which create great incentive to lower its purchasing costs.

5.      The industry’s product is unimportant to the quality of the buyers’ products or services.

6.      The industry’s product does not save the buyer money.

7.      The buyers pose a credible threat of integrating backward to make the industry’s product.

 

 

D.  Substitute Products:  Substitute products are products that are functionally and economically interchangeable with the industry’s product.

 

This places a ceiling on the prices it can charge, substitute products or services limit the potential of an industry.  Unless it can upgrade the quality of the product or differentiate it somehow (as via marketing), the industry will suffer in earnings and possibly in growth.

 

Substitutes not only limit profits in normal times but also reduce the bonanza an industry can reap in boom times.  Substitute products that deserve the most attention strategically are those that (a) are subject to trends improving their price-performance trade-off with the industry’s product or (b) are produced by industries earning high profits.  Substitutes often come rapidly into play if some development increases competition in their industries and causes price reduction or performance improvement.

 

 

E.   Jockeying for Position - Rivalry Among Competitors:  Rivalry is high in industry that has:

 

1.      Competitors are numerous or roughly equal in size and power.

2.      Industry growth is slow, precipitating fights for market share that involve expansion-minded members.

3.      The product or service lacks differentiation, or switching costs, which lock in buyers and protect one combatant from raids from its customers by another.

4.      Fixed costs are high or the product is perishable, creating strong temptation to cut prices.

5.      Capacity normally is augmented in large increments.

6.      Exit barriers are high.

7.      The rivals are diverse in strategies, origins, and “personalities.”

 

 

 

Industry Boundaries

 

An industry is a collection of firms that offer similar products and services.  By “similar products,” we mean products that customers perceive to be substitutes for one another.

 

Why is the question of industry boundaries important?  First, it helps executives determine the arena in which their firm is competing

 

Second, a definition of industry boundaries focuses attention on the firm’s competitors.  Defining boundaries enables the firm to identify its competitors and producers of substitute products.  This is critical to the firm’s design of its competitive strategy.

 

Third, a definition of industry boundaries helps executives determine key success factors.  Defining industry boundaries enable executives to ask these questions:  Do we have the skills it takes to succeed here?  If not, what must we do to develop these skills?

 

Fourth, and finally, a definition of industry boundaries gives executives another basis on which to evaluate their firm’s goals.

 

In summary, to realistically define their industry, executives need to examine five issues:

 

1.      Which part of the industry corresponds to our firm’s goals?

2.      What are the key ingredients of success in that part of the industry?

3.      Does our firm have the skills needed to compete in that part of the industry?  If not, can we build these skills?

4.      Will the skills enable us to seize emerging opportunities and deal with future threats?

5.      Is our definition of the industry flexible enough to allow necessary adjustments to our business concept as the industry grows?

 

Industry Structure

 

Defining an industry’s boundaries is incomplete without an understanding of its structural attributes.  Structural attributes are the enduring characteristics that give an industry its distinctive character.  These characteristics are: (1) level of concentration, (2) economies of scale, (3) product differentiation, and (4) barriers to entry.

 

 

Competitive Analysis

 

Competitive analysis usually has these objectives:  (1) to identify current and potential competitors, (2) to identify potential moves by competitors, and (3) to help the firm devise effective competitive strategies.

 

 

You can define competitors by:

 

1.      How do other firms define the scope of their market?  The more similar the definitions of firms, the more likely the firms will view each other as competitors.

2.      How similar are the benefits the customers derive from the products and services.  The more similar the benefits of the products or services, the higher the level of substitutability between them.  High substitutability levels force firms to compete fiercely for customers.

3.      How committed are the other firms to the industry?  High commitment translates to a highly competitive industry.

 

 

Operating Environment

 

The operating environment, also called the competitive or task environment, comprises factors in the competitive situation that affect a firm’s success in acquiring needed resources or in profitably marketing its goods or services.  Among the most important of these factors are the firm’s competitive position, the composition of its customers, its reputation among suppliers and creditors, and its capability to attract capable employees.

 

Competitive Position

 

Development of competitor profiles enables a firm to more accurately forecast both its short- and long-term growth and profit potentials.  Although the exact criteria used in constructing a competitor’s profile are largely determined by situational factors, the following criteria are often included:

 

1.      Market share

2.      Breadth of product line

3.      Effectiveness of sales distribution

4.      Proprietary and key-account advantages

5.      Price competitiveness

6.      Advertising and promotion effectiveness

7.      Location and age of facility

8.      Capacity and productivity

 

9.      Experience

10.  Raw material costs

11.  Financial position

12.  Relative product quality

13.  R&D advantages - position

14.  Caliber of personnel

15.  General image

 

Customer Profiles

 

Perhaps the most vulnerable result of analyzing the operating environment is the understanding of a firm’s customers.  Developing a profile of a firm’s present and prospective customers improves the ability of its managers to plan strategic operations, to anticipate changes in the size of markets, and to reallocate resources so as to support forecast shifts in demand patterns.  Some typical customer characteristics are:

 

1.      Geographic

2.      Demographic

3.      Psychographic

4.      Buyer behavior

 

 

Suppliers

 

Dependable relationships between a firm and its suppliers are essential to a firm’s long-term survival and growth.  With regard to its competitive position with its suppliers, the firm should address the following questions:

 

1.      Are the suppliers’ prices competitive?  Do the suppliers offer attractive quantity discounts?

2.      How costly are their shipping charges?  Are the suppliers competitive in terms of production standards?

3.      Are the suppliers competitive in terms of deficiency rates?  Are the suppliers’ abilities, reputations, and services competitive?

4.      Are the suppliers reciprocally dependent on the firm?

 

 

Creditors

 

With regard to its competitive position with its creditors, among the most important questions that the firm should address are the following:

 

1.      Do the creditors fairly value and willingly accept the firm’s stock as collateral?

2.      Do the creditors perceive the firm as having an acceptable record of past payments?

3.      Does the firm have a strong working capital position?  Is there little or no leverage?

4.      Are the creditors’ loan terms compatible with the firm’s profitability projections?

5.      Are the creditors’ able to extend the necessary lines of credit?

 

 

 

Human Resources:  Nature of the Labor Market

 

A firm’s ability to attract and hold capable employees is essential to its success.  A firm’s access is primarily affected by three factors:

 

1.      Reputation as an employer

2.      Local employment rates

3.      The ready availability of people with the needed skills

 

 

Analysis of Internal Environment

 

 

For a strategy to be successful, the strategy must place realistic requirements on the firm’s internal capabilities.  In other words, the firm’s pursuit of market opportunities must be based not only on the existence of such opportunities, but also on the firm’s key internal strengths.

 

SWOT Analysis

 

SWOT is an acronym for the internal Strengths and Weaknesses of a firm and the environmental external Opportunities and Threats facing the firm.  SWOT analysis is a systematic identification of these factors and of the strategy that represents the best match between them.

 

 

Opportunities

 

An opportunity is a major favorable situation in a firm’s environment.  Key trends are one source of opportunities.  Opportunities also may exist at the interfaces with other “players” within the firm’s environment, e.g. suppliers, creditors, distributors, etc.

 

 

Threats

 

A threat is a major unfavorable situation in a firm’s environment.  Threats are key impediments to the firm’s current or desired position.  Examples of typical threats are:  entrance of new competitors, slow market growth, increased bargaining power of key buyers or suppliers, technological changes, and new or revised regulations.

 

 

Strengths

 

A strength is a resource, skill, or other advantage relative to competitors and the needs of the markets a firm services or expects to service.  It is a distinctive competence when it gives the firm a comparative advantage in the marketplace.

 

 

Weaknesses

 

A weakness is a limitation or deficiency in resources, skills, and capabilities that seriously impedes a firm’s effective performance relative to its markets that it services or expects to service.

 

Major Issues

 

Once the SWOT analysis is done, those opportunities / threats and strengths / weaknesses will highlight areas of concern for the firm.  Those concerns which carry major importance become issues that must be addressed in the strategic plan.  The major issues focus on what the firm must do to overcome weaknesses, minimize a threat, or react to a major competitive force in the industry/marketplace.  For example, if the threats analysis reveals an impending technological advance that could severely affect the firm’s competitive position, then a major issue is to determine how to minimize or neutralize this threat.  If customer service is a key success factor within the marketplace, then a “value-chain” analysis could reveal weaknesses in providing an adequate level of service.  Thus, improving the delivery of customer service could become a major issue.

 

The importance of major issues is that they frequently become associated directly with a long-term objective or goal.  Any successful strategy must satisfactorily resolve all the major issues.

 

Key Success Factors

 

Key Success Factors are the major determinants of financial and competitive success in a particular industry.  Key success factors highlight the specific outcomes crucial to success in the marketplace and the competencies and capabilities with the most meaning on profitability.  Knowledge and successfully meeting the KSFs can spell the difference between profit and loss and ultimately, between competitive success and failure.  A key success factor can be a skill or talent, a competitive capability, or a condition a company must achieve.  It can relate to technology, manufacturing, distribution, marketing, or organizational resources.

 

KSFs can serve as the cornerstones for building a firm’s strategy.  Firms frequently win competitive advantage by concentrating on being distinctively better than rivals in one or more of the industry’s KSFs.  Only rarely does an industry have more than three or four key success factors at any one time, and even among these three or four, one or two usually outrank the other in importance.

 

 

Competitive Forces

 

The SWOT analysis will highlight competitive situations that are opportunities or threats.  Additionally, the Five Forces Driving An Industry analysis will also highlight those competitive forces that are most important within the industry and marketplace.

 

The competitive forces discussion focuses specifically on how these threats, opportunities, and situations highlighted by the forces driving an industry affect the firm.  These forces will shape the strategic choices, especially when compared to the SWOT analysis results.  For example, if buyers are powerful and are demanding high levels of customer service, this becomes a major competitive force that the firm must address.  If this is a weakness of the firm, then the discussion should address how the firm can resolve this issue.

 

 

Generic Strategies

 

The generic strategy is the core idea about which the grand strategy (ies) and long-term objectives are based.  There are three generic strategies:

 

1.      Striving for overall low-cost leadership in the industry.

2.      Striving to create and market unique products for varied customers through differentiation.

3.      Striving to have special appeal to one or more groups of consumer or industrial buyers, focusing on their cost or differentiation concerns.

 

 

 

 

 

 

 

Risks of Cost Leadership	Risks of Differentiation	Risks of focus
Cost leadership is not sustained: ·    Competitors imitate. ·    Technology changes. ·    Other bases for cost leadership erode.                 ·    Cost focuses achieve even lower cost in segments.	Differentiation is not sustained: · Competitors imitate. · Bases for differentiation becomes less important to buyers.                 ·    Differentiation focuses achieve even greater differentiation in segments.	Focus strategy is imitated: ·     The target segment becomes structurally unattractive.          Structure erodes.          Demand disappears. ·     Broadly targeted competitors overwhelm the segment:          The segment’s          differences from other          segments narrows.          The advantages of a        broad line increases.   ·     New focuses segment the industry.

 

 

Grand Strategies

 

Grand strategies, often called master or business strategies, provide basic direction for strategic actions.  They are the basis of coordinated and sustained efforts directed toward achieving long-term objectives.  There are fourteen principal grand strategies:

 

1.      Concentrated growth

2.      Market development

3.      Product development

4.      Innovation

5.      Horizontal integration

6.      Vertical integration

7.      Concentric diversification

 

8.      Conglomerate diversification

9.      Turnaround

10.  Divestiture

11.  Liquidation

12.  Joint venture

13.  Strategic alliances

14.  Consortia

 

Any of these strategies could serve as the basis for achieving the major long-term objectives of a single firm.  These strategies when combined with one of the three generic strategies - overall cost leadership, differentiation, and focus - establishes the firms basic strategic direction.

 

Long-Term Objectives

 

At first glance, the Strategic Management Model (page 2.), which provides the framework for the study in the text, seems to suggest that strategic choice decision making leads to the sequential selection of long-term objectives and grand strategies.  In fact, however, strategic choice is the simultaneous selection of long-range objectives and grand strategies.  When strategic planners study the opportunities, they try to determine which are most likely to result in achieving various long-range objectives.  Almost simultaneously, they try to forecast whether an available grand strategy can take advantage of preferred opportunities so the tentative objectives can be met.  In essence, then, three distinct but highly interdependent choices are being made at one time.

 

Long-term objectives are then defined as the results a firm seeks to achieve over a specified period, typically 5 years.  Seven common long-term objectives are:

 

1.      Profitability

2.      Productivity

3.      Competitive position

4.      Employee development

 

5.      Employee relations

6.      Technological leadership

7.      Public responsibility