Formal strategic planning with its modern features was first introduced in some commercial companies in the mid-1950s. At that time, the most important companies were mainly those that developed formal strategic planning systems, called long-term planning systems. Since then, formal strategic planning has been refined to the extent that today all major companies in the world have some type of this system, and an increasing number of small companies are following this example.
As a result of this experience, a great wealth of knowledge on this subject has been produced. The purpose of this book is to collect the essence of this knowledge; that is, it tries to discover in a simple and concise language the fundamental concepts, facts, ideas, processes and procedures about strategic planning, which all direct at any level should know.
The idea that every manager should have a basic understanding of both the concept and the practice of formal strategic planning is based on a number of observations made about direction and success in business. Strategic planning is inseparably intertwined with the entire management process; therefore, every manager must understand its nature and performance. Furthermore, with the exception of some companies, whose examples will be covered in this book, any company that does not have some kind of formality in its strategic planning system is exposed to an inevitable disaster. Some directors have very distorted concepts of it and reject the idea of trying to apply it; others are so confused about this topic that they consider it without any benefit,and some more ignore the potentialities of the process both for themselves and for their companies. There are those who have some knowledge, although not enough to be convinced that you should use it. This paper aims to provide all of these people with a clear, concrete, pragmatic and complete reasonable understanding of strategic planning itself, of how to organize its implementation, and how to implement it.
CHAPTER I
EMERGENCE OF STRATEGIC PLANNING
- Planning: General Aspects
Peter Drucker proposes that a manager's performance be judged by the double criteria of effectiveness - the ability to do things "right" - and efficiency - the ability to do them "correctly." Of these two criteria, Drucker suggests that effectiveness is more important, since even the highest possible degree of efficiency cannot compensate for a wrong selection of goals. These two criteria have a parallel with the two aspects of planning: setting the 'right' goals and then choosing the 'right' means to achieve those goals. Both aspects of planning are vital to the administrative process.
B What is Strategy?
The Traditional Approach:
Reflecting on military principles of strategy, The American Heritage dictionary defines strategy as "the science and art of military command applied to the general planning and conduct of large-scale combat operations." The subject of planning remains an important component of most definitions of strategy in the area of management. For example, Alfred Chandler of Harvard defined strategy as "the determination of the goals and basic long-term objectives in a company, together with the adoption of courses of action and the distribution of courses necessary to achieve these purposes." In Chandler's definitionImplicit is the idea that strategy involves rational planning . The organization is described as its goals are chosen, the courses of action (or strategies) that best allow it to meet its goals are identified, and resources are appropriately distributed. Similarly, James B. Quinn of Dartmouth College has defined strategy as “a unified, comprehensive and integrated plan designed to ensure that the core objectives of the business are achieved.
A New Approach:
For all their appeal, strategy-based definitions. For example, the mission of an interprovincial transport company could be to provide the passenger with a comfortable and safe trip as well as reasonable prices and routes to all cities in the country.
To select the goals or objectives of the company it is important to take into account the values of the administrators. These values can be social or ethical, or involve practical matters, such as the size managers would like their organization to be, the type of product or service they would like to produce, or provide, or simply the way they they prefer to operate. The founder or one of the first leaders who promoted the values of the organization generally plays an important role in the creation of those values.
The main goals specify what the organization hopes to achieve in the medium to long term. Most for-profit organizations operate based on a hierarchy of goals at the top of which is maximizing shareholder profit. Secondary goals are objectives that will allow the company to maximize shareholder profit.
A.2 Identification of Current Objectives and Strategy
After defining the organization's mission and translating it into concrete objectives, managers are ready to begin the next stage of the process. This is to identify the current objectives of the organization and its strategy. Sometimes the newly defined mission and objectives will closely resemble what this strategy is founded on. But other times the strategy formulation process causes a substantial change in them, this mainly happens when the organization has not been achieving the key or most important objectives.
Current objectives and strategy may be well defined and clearly communicated throughout the organization. This optimal situation is usually accompanied by a prior formal strategic planning or an informal but explicit formulation by a strong leader of the organization. Too often this step reveals that there is no explicit strategy; managers must then deduct from their ordinary shares what top management is trying to accomplish. Managers of small businesses and nonprofits often face this situation, because they rarely have formal strategic plans.
To determine the current strategy of their organization, many managers ask questions such as: What is our business and what should it be? Who are our clients and who should they be? Where are we headed? What are the main competitive advantages we have? In what areas of competence do we excel?
A.3 Environment Analysis
After defining the organization's goals, objectives and current strategy, we will identify what aspects of the environment will influence us to achieve our objectives.
The purpose of environmental analysis is to discover the ways in which changes in the economic, technological, sociocultural and political / legal environments of an organization will indirectly affect it and the ways in which it will be influenced by competitors, suppliers, customers, government agencies and other factors. This analysis also allows us to discover the opportunities available to the organization and the threats they face.
Michael Porter says, "All planning comes down to knowing your strengths, opportunities, weaknesses, and threats." This means that this is the fundamental and decisive level in the strategic planning process of an organization.
For example, a manufacturer of steel shelves may realize that the usual market for its product has contracted in a recession. However, careful analysis will show that although industrial customers purchase fewer shelves, consumers are likely to buy more as steel shelves cost less than wooden ones. In response to such a situation, the company may make its line of products more attractive for home use, thereby weathering the recession.
We will classify this step into two types of analysis:
- External Analysis Internal Analysis
A.3.1 External Analysis
Its objective is to identify strategic opportunities and threats in the organization's operating environment. Threats and opportunities are largely beyond the control of any one organization; hence the term "external."
At this stage, three interrelated environments must be examined: the immediate, or industry (where the organization operates), the national environment, and the broader macroenvironment.
Analyzing the immediate environment involves an evaluation of the organization's industry competitive structure, which includes the competitive position of the central organization and its main competitors, as well as the stage of industrial development. Because markets today are global, examining this environment also means evaluating the impact of globalization on competition within an industry.
Studying the national environment requires evaluating whether the national context within which a company operates facilitates the achievement of a competitive advantage in the world market. This would involve analyzing economic, social, cultural, demographic, environmental, political, legal, governmental, technological and competitive trends and events that could significantly benefit or harm the organization in the future. If not, then the company could consider moving a significant part of its operations to countries where the national context facilitates the achievement of a competitive advantage.
Analyzing the macroenvironment consists of examining international, technological factors such as the computer revolution, the increase in competition from foreign companies.
A basic postulate of strategic management is that companies must formulate strategies that allow them to take advantage of external opportunities and avoid or reduce the repercussions of external threats. Therefore, detecting, monitoring and evaluating external opportunities and threats is essential to success.
A.3.2 Internal Analysis
The internal analysis allows you to accurately determine the strengths and weaknesses of the organization. Such analysis includes the identification of the quantity and quality of resources available to the organization. They are the activities that the organization can control and that performs very well or very poorly, these include the activities of general management, marketing, finance and accounting, production and operations, research and development and computerized information system of a business.
Internal factors can be determined in a number of ways, including measuring performance and comparing to prior periods and industry averages. In addition, various types of surveys can be conducted to scrutinize internal factors such as employee morale, production efficiency, advertising effectiveness, and customer loyalty.
The process of identifying and evaluating the strengths and weaknesses of the organization in the functional areas of a business is a vital activity of strategic management. Organizations struggle to pursue strategies that harness strengths and strengthen internal weaknesses. In this stage, it is observed how companies achieve a competitive advantage, in addition to analyzing the role of distinctive skills, resources and capabilities in the formation and maintenance of a firm's competitive advantage.
A.4 Strategic Decision Making
This implies the generation of a series of strategic alternatives, given the internal strengths and weaknesses of the company together with its external opportunities and threats.
Comparing f TRENGTHS, or pportunities, d ebilidades and to menazas usually referred to as analysis FODA. The purpose of the strategic alternatives, generated by a SWOT analysis, must be based on the strengths of a company in order to exploit opportunities, counter threats and correct weaknesses.
In conclusion this requires identifying, evaluating and selecting optional strategic approaches. These strategic options concern:
A.4.1 Identification of Strategic Alternatives
In any given case, there are probably several options for closing a performance gap. New markets can be entered, key products can be redesigned to improve quality or reduce cost, new investments can be undertaken, or existing ones can be terminated.
If only a minor change in current strategy is required, the logical options may be few. But if a major shift in strategic focus is required, more options will have to be identified and more care will be needed later to avoid combining incompatible options into a new strategic focus.
A.4.2 Evaluation of Strategic Options
Richard P. Rumelt has described four criteria for evaluating strategic options: (1) the strategy and its component parts must have consistent goals, policies, and objectives, (2) it must focus resources and efforts on the critical aspects discovered during the development process. formulation of strategies and must distinguish them from unimportant aspects, (3) it must deal with its solvable problems, taking into account the resources and capacities of the organization, and (4) finally, the strategy must be capable of producing the expected results (that is, it should be promising for real work). When evaluating options it is also important to focus on a particular product or service and those competitors who are direct rivals in offering it.A strategy that does not provide or exploit a particular advantage of the organization over its rivals must be rejected.
A.4.3 Selection of Strategic Alternatives
When choosing from the available possibilities, administrators should select the ones that best match the capabilities of their organization. Good strategic plans build on the current strengths of the organization. New capabilities can be achieved only through investing in human resources, equipment, or both, and they cannot be obtained quickly. Therefore, it is seldom wise to undertake a strategic plan that requires resources or capacities that are weak or nonexistent. Rather, the recognized strengths of the company should be fully exploited.
B. Implementation of the Strategy
To implement the strategy, the company must establish annual objectives, devise policies, motivate employees and allocate resources, in such a way that they allow to execute the formulated strategies.
Strategy implementation is often said to be the active stage of strategic management.
We will then divide the topic of strategic implementation into 4 main components:
- Design of an organizational structure Design of control systems Adequacy of strategy, structure and controls Management of conflict, policies and change
B.1 Design of an Organizational Structure
To make a strategy work, regardless of whether it is attempted or emergent, the organization needs to adopt the correct structure. Designing a structure involves assigning task responsibilities and decision-making authority within an organization. Issues covered include how best to divide an organization into subunits, how to distribute authority among the different hierarchical levels of an organization, and how to achieve integration between subunits. The options analyzed question whether an organization should function with a high or flat structure, the degree of centralization or decentralization of authority in decision-making, the maximum point to divide the organization into semi-autonomous subunits (that is,divisions or departments) and the different mechanisms available to integrate these subunits.
B.2 Control system design
In addition to selecting a structure, a company must also establish appropriate organizational control systems. It must decide how to best assess performance and control subunit actions. The options range from market and production controls to bureaucratic and control alternatives through organizational culture. An organization also needs to decide what kind of compensation and incentive systems to put in place for its employees.
B.3 Adequacy of strategy, structure and controls
If the company wants to be successful, it must achieve a fit between its strategy, structure and controls. Because different strategies and environments place different demands on an organization, they demand different responses and structural control systems. For example, a cost leadership strategy requires an organization to keep it simple (in a way that reduces costs) that controls emphasize productive efficiency. On the other hand, a company's product differentiation strategy due to its unique technological characteristics generates the need to integrate activities around its technological core and to establish control systems that reward technical creativity.
B.4 Managing conflict, policies and change
Although in theory the strategic management process is characterized by rational decision making, in practice organizational policy plays a key role. Politics is endemic to organizations. Different subgroups (departments or divisions) within an organization have their own agendas and typically, these conflicts. Therefore, departments can compete with each other for a greater share of the organization's finite resources. Such conflicts can be resolved through the relative distribution of power among subunits or through a rational assessment of relative necessity. Similarly, individual managers often engage in arguments with each other about the correct policy decisions.The struggles for power and the formation of coalitions constitute the major consequences of these conflicts and are, in fact, part of the strategic management. Strategic change tends to highlight such struggles, since by definition any modification causes the alteration of the distribution of power within an organization.
C. Evaluation of the Strategy
Once the strategy is implemented, managers should definitely know when a certain strategy is not working well; for this it is necessary to monitor its execution. At this level the next phase of strategy implementation and formulation is provided. This serves either to reaffirm existing corporate goals and strategies or to suggest changes. For example, when implemented, a strategic objective may be too optimistic, and therefore more conservative objectives are set the next time.
Controllers often play an important role in the design of strategic control systems. Here are the two most important questions in strategic control: (1) Is the strategy being carried out as planned? (2) are they achieving the desired results?
The three fundamental activities to evaluate strategies are (1) Review of the internal and external factors that are the basis of the present strategies, (2) Measurement of performance and (3) Application of corrective actions.
Strategies need to be evaluated because success today does not guarantee success tomorrow. Success always creates new and different problems, that is, complacent organizations fall into decline.
CHAPTER V
STRATEGY
The concept of strategy can be defined from at least two perspectives: (1) from the perspective of what an organization intends to do and (2 = from the perspective of what an organization ultimately does.
In the first perspective, the strategy is "the general program to define and achieve the objectives of the organization and implement its mission." In this definition, the term "program" implies an active, rational, and well-defined role that managers play in formulating the organization's strategy.
In the second perspective, strategy is "the pattern of the organization's responses to its environment over time." By this definition, every organization has a strategy (not necessarily effective) even if it has never been explicitly formulated. This vision of strategy is applicable to organizations whose administrators are reactive.
- The Types of Strategies
There are different types of strategies, this time we are going to present a variety grouped as follows:
- Integration Strategies, Intensive Strategies, Diversification Strategies; and Defensive Strategies
A.1 Integration Strategies
These include forward integration, backward integration, and horizontal integration, which are known collectively as strategies for vertical integration. Strategies for vertical integration allow the company to control distributors, suppliers, and competitors.
A.1.1 Forward integration
It involves increasing control over distributors or retailers. One company that is betting a large part of its future on forward integration is Coca-Cola. Coca-Cola continues to buy domestic and foreign bottlers, most recently the second largest US bottling company, Johnson Coca-Cola Bottling of Chattanooga, for $ 450 million. Johnson is responsible for about 11% of all bottled and canned Coca-Cola soft drinks in the US. Coca-Cola has managed to improve the production and distribution efficiency of the acquired bottlers.
An effective way to apply forward integration is to franchise. Businesses can expand quickly through franchising because the costs and opportunities are spread across many people.
A.1.2 Backward integration
Manufacturers and retailers alike buy the materials they need from suppliers. Backward integration is a strategy to increase control over a company's suppliers or to acquire the domain. The strategy can be very convenient when the company's current suppliers are unreliable, expensive, or do not meet the needs of the company.
More and more consumers are buying products based on environmental considerations, such as packaging recycling. So some companies are using backward integration to gain more control over packaging suppliers.
A.1.3 Horizontal integration
It refers to the strategy of trying to acquire dominance or a greater number of shares from a company's competitors. Today one of the most notable trends in strategic management is that it increasingly uses horizontal integration as a strategy for growth. Mergers, acquisitions and takeovers of competitors increase economies of scale and improve the transfer of resources and skills. This was the main reason why Renault recently acquired Volvo, to become the third largest car manufacturer in Europe, after Volkswagen and Volvo.
A.2 Intensive Strategies
Market penetration, market development, and product development are known as "intensive strategies," because they require intense effort to improve the competitive position of the company with existing products.
A.2.1 Market Penetration
It aims to increase the market share that corresponds to the products or services present, in current markets, through a greater effort for commercialization. This strategy is often used alone or also in combination with others. Market penetration includes increasing the number of sellers, increasing advertising spend, offering many sales promotions with items, or strengthening advertising activities. Procter & Gamble is an example of the case, as it has spent a lot on advertising to increase the share of Venezia, its best positioned perfume in the market. Its advertising campaign comprises full-page advertisements, with scent strips, in luxurious magazines.
A.2.2 Market Development
To develop the market requires introducing current products and services in other geographic areas. The climate for the development of international markets is increasingly favorable. Many industries will have great difficulty in maintaining a competitive advantage if they do not conquer others. An example would be the case of Pepsi when it invested 500 million dollars in Poland to compete against Coca-Cola, which has gained a 35% market share in Eastern Europe.
Expansion into world markets does not guarantee success because sometimes you lose control of quality and customer service.
A.2.3 Product Development
The product development strategy aims to increase sales by modifying or improving products or services. As a general rule, product development requires a large expenditure for research and development. For example, companies in the toothpaste industry are constantly investing large amounts of money for product development. Thus we can find in the market a variety of brands and with different characteristics; as in the flavors, colors, smells, benefits (whiter, with calcium, etc.) and sizes.
A.3 Diversification Strategies
There are three general types of diversification strategies: concentric, horizontal, and conglomerate. Generally speaking, diversification strategies are losing their popularity as organizations have more and more trouble managing diverse business activities. At present, diversification is in retreat. Michael Porter says, "The managers found they couldn't handle the beast." Hence companies are selling off or shutting down less profitable visions in order to focus on nuclear business.
Peters and Waterman advise companies to "stick to the plot" and not ramble too far away from the core competencies of the company. However, diversification is still a suitable and successful strategy in some cases.
A.3.1 Concentric Diversification
The addition of new but related products or services is known as concentric diversification. An example of this strategy is the entry of Telefónica, a telephone company, to provide cable television and internet service.
A.3.2 Horizontal Diversification
Adding new, unrelated products or services to existing customers is called horizontal diversification. This strategy is not as risky as conglomerate diversification because a company must know its current customers well. An example is the acquisition of Columbia Pictures Entertainment Company by Sony Corporation. This purchase totaled $ 3.4 billion and represents Japan's largest acquisition of the US entertainment industry.
A.3.3 Diversification in conglomerate
It is the sum of new, unrelated products or services. Some companies diversify as a conglomerate, based, in part, on the profits they expect to make from dismantling the acquired companies and selling the divisions piecemeal.
General Electric is an example of a very diversified company. General Electric manufactures locomotives, spotlights, power plants, and refrigerators.
A.4 Defensive Strategies
In addition to integrative, intensive, and diversifying strategies, organizations can turn to joint venture, shrinkage, divestment, or liquidation.
A.4.1 The Shared Risk Company (joint venture)
The joint venture is a very popular strategy that occurs when two or more companies form a partnership or temporary consortium, in order to take advantage of an opportunity. The strategy can only be considered defensive, because the company is not covering the project alone. Often two or more sponsoring companies form an independent organization, but share the capital stock of the new entity. Joint ventures and cooperative contracts are increasingly used because they allow companies to improve their communications and networks, globalize their operations and reduce their risks. For example, Canon supplies photocopies to Kodak, General Motors, and Toyota assemble cars. For the collaboration between competitors to be successful, the two companies must bring something distinctive,for example, technology, distribution, basic research or production capacity.
A.4.2 Shrinkage
It occurs when an organization regroups by reducing costs and assets in order to reverse the decline in sales and profits. Shrinkage, sometimes called a reorganization or turnaround strategy, is designed with a view to strengthening the organization's core distinctive competence. During the downturn, strategists work with limited resources and come under pressure from shareholders, employees, and the media. Shrinkage can mean the sale of land and buildings in order to raise the money needed, the elimination of product lines, the closing of fringe businesses, the closing of obsolete factories, the automation of processes, the reduction of employees and the institution of systems for the control of expenses. In some cases,bankruptcy can be an effective type of strategy to shrink.
A.4.3 Divestment
Divestment involves selling a division or part of an organization. An example is Ryder System, a truck rental company, which dives itself of its aeronautical business.
A.4.4 Settlement
It involves selling a company's assets, in parts, at their tangible value.
CONCLUSION
Strategic planning allows the organization to take an active, rather than reactive, part in shaping its future, that is, the organization can undertake and influence activities and, therefore, can control its destiny. Small entrepreneurs, CEOs, presidents, and managers of many for-profit and non-profit organizations have recognized and realized the benefits of managing their strategies.
The strategic planning process is more important than the resulting documents, because thanks to their participation in the process, both managers and workers commit to providing their support to the organization.
While making good strategic decisions is one of the greatest responsibilities of the owner or CEO of an organization, both employees and managers must be involved in formulating, implementing, and evaluating strategies. Participation is key to getting commitment to the changes that are required.
BIBLIOGRAPHY
- STONER, James and FREEMAN, Edward. ADMINISTRATION. Mexico, Prentice Hall Hispanoamericana SA 1992DAVID, Fred. CONCEPT OF STRATEGIC MANAGEMENT. Pearson Education JONES, Gareth and HILL, Charles. STRATEGIC MANAGEMENT. McGraw Hill, Third Edition
DAVID, Fred R.: CONCEPTS OF STRATEGIC MANAGEMENT, Pearson Education p. 9
STONER, James and FREEMAN, Edward: ADMINISTRACIÓN, Mexico Prentice Hall Hispanoamericana, SA Page 201
DAVID, Fred R.: CONCEPTS OF STRATEGIC MANAGEMENT, Pearson Education p. 10
HILL, Charles and JONES, Gareth: STRATEGIC MANAGEMENT, AN INTEGRATED APPROACH, Mc Graw Hill Third Edition, Page 12
DAVID, Fred R.: CONCEPTS OF STRATEGIC MANAGEMENT, Pearson Education p. 5
STONER, James and FREEMAN, Edward: ADMINISTRACIÓN, Mexico Prentice Hall Hispanoamericana, SA Page 206
Ibidem p. 206
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