Strategic planning is an organization's process of defining its strategy, or direction, and making decisions on allocating its resources to pursue this strategy. It may also extend to control mechanisms for guiding the implementation of the strategy. Strategic planning became prominent in corporations during the 1960s and remains an important aspect of strategic management. It is executed by strategic planners or strategists, who involve many parties and research sources in their analysis of the organization and its relationship to the environment in which it competes.
Strategy has many definitions, but generally involves setting goals, determining actions to achieve the goals, and mobilizing resources to execute the actions. A strategy describes how the ends (goals) will be achieved by the means (resources). The senior leadership of an organization is generally tasked with determining strategy. Strategy can be planned (intended) or can be observed as a pattern of activity (emergent) as the organization adapts to its environment or competes.
Strategy includes processes of formulation and implementation; strategic planning helps coordinate both. However, strategic planning is analytical in nature (i.e., it involves "finding the dots"); strategy formation itself involves synthesis (i.e., "connecting the dots") via strategic thinking. As such, strategic planning occurs around the strategy formation activity.
Strategic planning is a process and thus has inputs, activities, and outputs. It may be formal or informal and is typically iterative, with feedback loops throughout the process. Some elements of the process may be continuous and others may be executed as discrete projects with a definitive start and end during a period. Strategic planning provides inputs for strategic thinking, which guides the actual strategy formation. The end result is the organization's strategy, including a diagnosis of the environment and competitive situation, a guiding policy on what the organization intends to accomplish, and key initiatives or action plans for achieving the guiding policy.
Michael Porter wrote in 1980 that formulation of competitive strategy includes consideration of four key elements:
- Company strengths and weaknesses;
- Personal values of the key implementers (i.e., management and the board);
- Industry opportunities and threats; and
- Broader societal expectations.
The first two elements relate to factors internal to the company (i.e., the internal environment), while the latter two relate to factors external to the company (i.e., the external environment). These elements are considered throughout the strategic planning process.
Data is gathered from a variety of sources, such as interviews with key executives, review of publicly available documents on the competition or market, primary research (e.g., visiting or observing competitor places of business or comparing prices), industry studies, etc. This may be part of a competitive intelligence program. Inputs are gathered to help support an understanding of the competitive environment and its opportunities and risks. Other inputs include an understanding of the values of key stakeholders, such as the board, shareholders, and senior management. These values may be captured in an organization's vision and mission statements.
The essence of formulating competitive strategy is relating a company to its environment.
Strategic planning activities include meetings and other communication among the organization's leaders and personnel to develop a common understanding regarding the competitive environment and what the organization's response to that environment (its strategy) should be. A variety of strategic planning tools (described in the section below) may be completed as part of strategic planning activities.
The organization's leaders may have a series of questions they want answered in formulating the strategy and gathering inputs, such as:
- What is the organization's business or interest?
- What is considered "value" to the customer or constituency?
- Which products and services should be included or excluded from the portfolio of offerings?
- What is the geographic scope of the organization?
- What differentiates the organization from its competitors in the eyes of customers and other stakeholders?
- Which skills and resources should be developed within the organization?
The output of strategic planning includes documentation and communication describing the organization's strategy and how it should be implemented, sometimes referred to as the strategic plan. The strategy may include a diagnosis of the competitive situation, a guiding policy for achieving the organization's goals, and specific action plans to be implemented. A strategic plan may cover multiple years and be updated periodically.
The organization may use a variety of methods of measuring and monitoring progress towards the objectives and measures established, such as a balanced scorecard or strategy map. Companies may also plan their financial statements (i.e., balance sheets, income statements, and cash flows) for several years when developing their strategic plan, as part of the goal setting activity. The term budget is often used to describe the expected financial performance of an organization for the upcoming year.
Tools And Approaches
A variety of analytical tools and techniques are used in strategic planning. These were developed by companies and management consulting firms to help provide a framework for strategic planning. Such tools include:
- PEST analysis, which covers the remote external environment elements such as political, economic, social and technological (PESTLE adds legal/regulatory and ecological/environmental);
- Scenario planning, which was originally used in the military and recently used by large corporations to analyze future scenarios;
- Porter five forces analysis, which addresses industry attractiveness and rivalry through the bargaining power of buyers and suppliers and the threat of substitute products and new market entrants;
- SWOT analysis, which addresses internal strengths and weaknesses relative to the external opportunities and threats;
- Growth-share matrix, which involves portfolio decisions about which businesses to retain or divest; and
- Balanced Scorecards and strategy maps, which creates a systematic framework for measuring and controlling strategy
Strategic Planning Vs. Financial Planning
Simply extending financial statement projections into the future without consideration of the competitive environment is a form of financial planning or budgeting, not strategic planning. In business, the term "financial plan" is often used to describe the expected financial performance of an organization for future periods. The term "budget" is used for a financial plan for the upcoming year. A "forecast" is typically a combination of actual performance year-to-date plus expected performance for the remainder of the year, so is generally compared against plan or budget and prior performance. The financial plans accompanying a strategic plan may include 3-5 years of projected performance.
McKinsey & Company developed a capability maturity model in the 1970s to describe the sophistication of planning processes, with strategic management ranked the highest. The four stages include:
- Financial planning, which is primarily about annual budgets and a functional focus, with limited regard for the environment;
- Forecast-based planning, which includes multi-year financial plans and more robust capital allocation across business units;
- Externally oriented planning, where a thorough situation analysis and competitive assessment is performed;
- Strategic management, where widespread strategic thinking occurs and a well-defined strategic framework is used.
Categories 3 and 4 are strategic planning, while the first two categories are non-strategic or essentially financial planning. Each stage builds on the previous stages; that is, a stage 4 organization completes activities in all four categories.
Strategic Planning Vs. Strategic Thinking
Strategic planning has been criticized for attempting to systematize strategic thinking and strategy formation, which Henry Mintzberg argues are inherently creative activities involving synthesis or "connecting the dots" which cannot be systematized. Mintzberg argues that strategic planning can help coordinate planning efforts and measure progress on strategic goals, but that it occurs "around" the strategy formation process rather than within it. Further, strategic planning functions remote from the "front lines" or contact with the competitive environment (i.e., in business, facing the customer where the effect of competition is most clearly evident) may not be effective at supporting strategy efforts.