Strategic planning models

1 What is ‘strategy’?

There is no single agreed definition of strategy, but the various definitions in the literature share a family resemblance:

• A widely used definition (based on Johnson, Scholes and Whittington) describes strategy as the long-term direction and scope of an organisation, which achieves advantage in a changing environment by configuring its resources and competences, with the aim of fulfilling stakeholder expectations.

• An older classic (based on Chandler) defines strategy as the determination of the basic long-term goals of an enterprise, the adoption of courses of action and the allocation of resources necessary to carry out those goals.

• Mintzberg pointed out that strategy is not only a plan (an intended course of action) but also a pattern — the consistency of behaviour an organisation actually displays over time, whether or not it was planned. This distinction between intended and realised strategy runs through this chapter.

From these definitions we can pick out the essential features and characteristics of strategy:

• Long term — strategy looks years ahead, not months.

• Whole organisation — it deals with the organisation in aggregate, at a high level, rather than in departmental detail.

• Direction and scope — what the organisation will do, and just as importantly what it will not do.

• Matching — it matches the organisation’s resources, competences and activities to its changing environment (its ecosystem).

• Stakeholders — it must satisfy, or at least not fatally antagonise, the people and groups the organisation depends on.

• Uncertainty — it is made with incomplete information about an unpredictable future, so it involves judgement and risk.

• Resource commitment — strategic decisions commit substantial resources and are hard to reverse.

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2 What is a ‘strategic plan’?

The term ‘strategic plan’ typically refers to a long-range plan (at least three years, and often five or longer), usually affecting the whole of the organisation. It should address questions such as what the organisation will be doing, and what it will look like in terms of size, structure, IT and products in, say, five years’ time. Some organisations use the alternative names ‘long-range plan’ or ‘corporate plan’.

3 Levels of strategy

Strategy is made at three levels, and different leaders are responsible for each:

A strategic business unit (SBU) is a part of the organisation for which there is a distinct external market for goods or services — for example, a hotel chain owned by an airline group. Each SBU needs its own business strategy because it faces its own market and competitors.

The three levels must be consistent: functional strategies deliver the business strategy, and business strategies deliver the corporate strategy. Note that things like ‘digital strategy’ and ‘HR strategy’ are functional strategies in this hierarchy — although digital matters have become so pervasive that they now influence all three levels, as the final chapters of these notes explain.

4 Types of strategy: intended and emergent

The syllabus also distinguishes types of strategy: intended strategy (what the organisation planned to do) and emergent strategy (what took shape along the way, in response to events). The rational model below describes how intended strategy is produced; the sections that follow explain why realised strategy is usually a mixture of both.

5 The rational model

The rational model is the classic, formal approach to producing an intended strategy. It is called ‘rational’ because it works logically through stages: gather information, analyse it, generate and evaluate options, choose, implement, and control. The whole process can be summarised in one diagram:

5.1 Position

The rational model first investigates the position of the organisation. Establishing position means carrying out an internal appraisal, an external appraisal, and an appraisal of stakeholders — the various parties affected by the organisation and what they want from it. This stage is information gathering.

The external elements are the organisation’s ecosystem: the collection of players (suppliers, customers, competitors, governments, regulators, and the wider economy) among which the organisation operates. Parts of the ecosystem affect each other, and organisations have to adapt continually if they are to thrive. For example, a university makes a discovery; suppliers whose components can use the discovery are affected, the company itself is affected, customers might benefit, competitors must react to maintain their market position, and governments might impose new controls and standards. Chapter 4 examines the ecosystem in detail.

5.2 Choice

Once the current position has been established, the organisation can set objectives. Objectives must take into account what the economy is doing, what competitors are doing, and what the organisation’s resources will allow. The objectives are what you want to achieve; the strategic options are how you might go about achieving it. For example, if the objective is to increase profits by 20%, one option might be to take over another company; another might be to expand abroad; a third might be to subcontract much of the production activity.

Once the options have been set out and examined, one can be chosen. The choice will often be a compromise — for example, between higher risk with higher return and lower risk with lower return. A powerful method of choosing is to test each option’s suitability, acceptability and feasibility; this is covered fully in Chapter 10.

5.3 Implementation

The third stage is the action stage: strategic implementation. Everything up to this point has been investigation and high-level planning. Too often organisations feel that is enough — but without implementation, strategic analysis is a waste of time and effort. Implementation is hard, sustained work. Strategic plans are high-level documents with horizons of five years or so, but implementation is a matter of detail: the plan has to be broken down by department and by year. Often these smaller parts can be run as discrete projects, with objectives and constraints communicated through budgets given to each department or cost centre.

5.4 Control

If every department met its budget, the strategic plan would be realised. It rarely is. There are inherent difficulties in planning, and the environment will almost certainly change, so what had been a good plan will need modifying. This is where strategic control comes in — and it asks two questions:

• Is the plan still right? The plan must be continually reviewed to see whether it remains relevant as circumstances change.

• Are we on track? Even if the plan is still right, performance must be monitored to make sure the organisation is going to deliver it.

6 Rarely linear

The diagram and narrative above present strategic planning as a linear process: analysis, then choice, then action. In reality the process loops back on itself:

Once you begin implementing a strategy you inevitably discover more information — costs are higher than expected, a rival responds, a better idea appears — and this may send you back to review your analysis and make different choices. The three stages are inevitably linked and inform one another.

7 Rarely unchanging

Strategies should never be set in stone. No one can gather all the relevant facts or make perfect predictions, and random local, national and world events will intervene and upset a carefully thought-out strategy. Mintzberg summarised what actually happens:

The terminology is as follows:

• Intended strategy — the original plan.

• Unrealised strategy — the parts of the plan that are abandoned, either because the environment changes or because the resources to carry them out are not there.

• Deliberate strategy — what you intended to do and actually did.

• Emergent strategy — strategies that take shape as time passes and new opportunities or threats have to be dealt with. This is the most important term in the diagram.

• Realised strategy — the result: some strategies planned from the start, minus those abandoned, plus those that emerged over the planning horizon.

The fact that the realised strategy is rarely the same as the intended strategy does not mean the planning process was at fault. It simply reflects the obvious point that the future is not perfectly predictable.

8 Logical incrementalism

Not everyone agrees that the five-year rational plan is the right approach. Advocates of logical incrementalism argue that strategy should develop as a series of small, logical extensions of past policies. Their reasoning:

• It is very unusual for strategic managers to be able to evaluate all options carefully — doing so would be extremely difficult and time-consuming. If all options and outcomes have not been evaluated, it is dangerous to embark on, and perhaps get locked into, a long-range strategic plan.

• Managers cannot know all the relevant facts. This is bounded rationality: decisions are made rationally, but only within the limits of the information available. There are ‘known unknowns’, such as competitors’ plans — you know the plans exist but not what they are. And there are ‘unknown unknowns’: random events no one can predict. The tsunami that flooded the Fukushima nuclear power station led some countries to abandon nuclear power entirely — no five-year plan saw that coming.

On this view, claiming to plan five years ahead is a kind of arrogance; it is better to make small, logical adjustments as time goes by, learning from each step before taking the next.

9 Freewheeling opportunism

The ultimate anti-planning stance is that of the freewheeling opportunist. Followers of this approach simply do not like planning — just as some holiday-makers want every night booked in advance while others find that sort of detail suffocating. Freewheeling opportunists are often entrepreneurs: they start businesses enthusiastically, but tend to lose interest once the business matures and needs careful day-to-day administration.

Their justification is that planning restricts the development of the organisation: better to stay flexible and grab good opportunities as they arise. They can make decisions very quickly — but they may not have investigated the facts fully or thought through the implications, and many entrepreneurs launch into ventures they might have avoided with more careful thought. On the other hand, they deserve a salute: these are the people who take chances, and who are often responsible for new and unexpected businesses that grow quickly and successfully.

10 The advantages of strategic planning

• Long-term objectives. Planning establishes long-term objectives and how they can be achieved. Most people like to know what is expected of them, and well-communicated objectives can be very motivating.

• Co-ordination. Without planning, production, sales and distribution could each be working to different volumes. A coherent plan aligns them — and gives people the satisfaction of believing there is a rational mind behind the organisation.

• Patience for long-term projects. Many developments — building a factory, entering a new country — involve years of cost before any profit. If people concentrate only on short-term objectives, long-term projects never survive. A long-term plan sustains them.

• Proactive management. Management need not be passive. A proposed law might be open to lobbying; unfavourable market perceptions might be changed by clever marketing. If you do not look into the future you can only ever react; looking ahead gives you the chance to shape events.

• The organisation is forced to look ahead. Not every development will be anticipated, but making some effort to look ahead is better than stumbling forward with your eyes closed, being constantly surprised.

11 Potential disadvantages of strategic planning

The potential disadvantages are not really faults of planning itself, but of how the planning process is carried out — most of them amount to ‘too much’:

• Paralysis by analysis. Too much time spent planning and not enough on action. Nobody makes profits out of planning; profits come only from doing. Some people postpone decisions (and the risk that comes with them) by forever wanting more information and more planning.

• Unwillingness to adapt. Some people stick to a plan no matter what. No plan stays appropriate over a five-year horizon; people must be prepared to abandon parts that become inappropriate and to take on new opportunities. Retaining the capacity to be flexible should itself be part of the plan.

• Cost. Planning consumes real time and money. Ten people sitting in a planning meeting for a day represents two person-weeks of effort; that sort of resource use soon becomes material.

Remember: planning is a means to an end, not an end in itself.

12 The strategy process and this paper

The rational model gives E3 its shape. The syllabus organises the strategy process like this, and these notes follow the same route:

13 Test your knowledge

Two short exercises close the chapter in the online notes: ten flashcards on the terms and frameworks above, and ten practice questions with worked feedback on every option. Work through the cards first, then the questions.