Strategic planning process within business units
Markets are diverse, and strategies need to be tailored to individual markets. In this respect, a company is often divided into business units according to its different products in order to develop and follow a specific strategy. Consequently, these are called strategic business units (SBUs) and they are based on three characteristics (Kotler & Keller, 2009). An SBU:
- is a single business (product), or a collection of related businesses (products), that can be planned separately from the rest of the company
- has its own defined market (with customers, competitors etc.)
- has a manager responsible for strategic planning and profit performance.
Once a company has defined its SBUs, management has to decide how the budget needs to be allocated. Each SBU must therefore be assessed according to its value, which is based on potential growth opportunities.
A review of opportunities for improving existing businesses can be performed within the framework of Ansoff's product-market expansion grid. Based on current products and markets, a company must assess whether it could gain a higher market share (better market penetration) or needs to explore new markets (market development) for its current products. New markets may be new customer segments or international markets, for example. The second consideration focuses on new products and whether they can be offered in the existing markets (product development) and/or should be offered to new markets. When approaching markets in other countries especially, a certain degree of product adjustment is required to suit the local context (language, legal issues etc.).
An ideal strategic planning process within a business unit is presented below. It consists of several steps and is based on the business mission (derived from a wider company or corporate mission).
A successful business activity is built on the company's core competences. The SWOT analysis is a popular concept to conduct an overall evaluation of a company's strengths (S), weaknesses (W) - the internal environment - and opportunities (O) and threats (T) - the external environment. Based on contrasting the company's strengths and weaknesses with market opportunities and (potential) threats, it gives recommendations for actions in the resulting cells.
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Goal and strategy formulation
Goals are set to define what is important to achieve. Within an organization there is a series of goals of different kinds and on different levels. The goals that concern the most important company relations, or the company as a whole, are strategic goals and they are usually developed over several years.
Examples of (generic) goals: maximize sales revenue; maximize market share; maximize market value of the company's products (in their segments); maximize brand loyalty.
All companies have ways of working to achieve a particular goal. Sometimes, this goal arises from the company's historical operations; sometimes it is a goal that someone has decided upon and directs the company.
When conducting management by objectives, there are four relevant criteria:
- Objectives must be arranged hierarchically, from the most to the least important.
- Objectives should be quantitative whenever possible.
- Goals should be realistic.
- Objectives must be consistent (for example, sales and profit cannot be maximized simultaneously).
The next step is to form a strategy that will provide methods of achieving particular goals. A strategy is a framework for action; it channels all programmes and activities according to the defined goals, often in the form of a plan. A well-developed strategy works as both a guide and an aid for the distribution of resources, identification of needs, changes in the organization etc. At this level you define the company's basic orientation and create guidelines for implementing what you want to do.
The content of a strategy is also decided by its relationship with its environment. Competitive strategies are influenced by factors such as current competition, access to different markets, trade barriers, power relations, legal and institutional standards and laws etc. The dynamic nature of the company environment requires strategies to be reviewed continuously to see whether they remain appropriate for achieving specific goals.
In summary, a strategy describes how the organization will act on a general level in order to handle these factors and to achieve its long-term goals. As you can see, there is a causal relationship between goals and strategies. Put simply, one could also say that every company should focus on strategic planning, because 'failing to plan means planning to fail'.
Another perspective is given by comparing your company with your most important competitors. In principle, there are three basic strategies to follow:
- Cost leadership - 'being cheaper than ...'
- Differentiation - 'being different from ...'
- Concentration/focus - 'being narrower/more specialized than ...'.
The core difference lies between having cost superiority and one of the other two strategies. Concentration is built on the same basic elements as differentiation, but focuses on specific niche markets or segments as compared to a whole industry. Thus, the company's products target only a small number of segments within a few sectors or markets.
Programme formulation and implementation
Strategies only work if they are implemented appropriately. Practicable programmes must be therefore formulated. If the strategy is to attain technological leadership for the development of specific products, then programmes must be devised to strengthen research and development (R&D), production, and processing units in the company. Similar requirements apply to marketing programmes in which the effectiveness of its tools (product, price, place, promotion) needs to be evaluated and adjusted if necessary.
Programmes can be related to several elements. One example is provided by Peters and Waterman (former employees at McKinsey & Company) who distinguished between a company's 'hardware' elements (the 'bones': strategy, (organizational) structure, and (information and communication) systems), and 'software' elements (the 'blood': (leadership) style, skills (competencies), staff, and shared values (culture)).
Feedback and control
This final aspect emphasizes the need for constant evaluation of the company's strategic fit with the market and further environmental dynamics.