Formal research indicates that companies with a strategic plan perform better and generate better results than those who do not. Per the ASPA (American Society for Public Administration), “There is a direct and positive relationship between strategic planning and performance… It is concluded that strategic planning is a beneficial activity for all firms.” But you need not look to research studies to come to that conclusion. Companies like Dell, Southwest Airlines, IKEA, Cisco, Starbucks, and Proctor & Gamble have all excelled in the marketplace, and returned better than average profits as a result of their robust strategic planning programs.
What is a strategic plan?
A strategic plan is a formal blueprint that defines where the company wants to go, and how it intends to get there. There are four parts to the plan:
- Part I provides an external perspective of the marketplace in which the company competes, and gives an internal analysis of the company’s strengths and weaknesses. The external analysis includes factors like: the size of the market, the growth rate, regulatory issues, competitors, suppliers, industry trends, opportunities, and threats. The internal analysis provides an overview of all the factors that make the company a strong competitor, as well as things that still need some work. To the extent possible, all information should reflect a five-year history in order to depict how each factor is trending. Part I analyzes the framework within which the company operates, and reveals opportunities, as well as risks. Executives often gain unexpected insights from the information garnered from this effort.
- Part II articulates the mission and vision of the company, along with its goals and business strategy. The business strategy defines how the company intends to position itself within the industry to create superior value in the eyes of the customer, while creating a sustainable advantage relative to the competition. In other words, the business strategy establishes how your company intends to win in the marketplace. The process of creating a business strategy is usually completed through a series of meetings with the executive team, where the group analyzes the output from Part I, and brainstorms how to pursue opportunities, how to apply company strengths, and exploit weaknesses in the marketplace. This is best accomplished with some type of a facilitator, so that all team members can participate equally. A facilitator can keep the process focused and provide real-world company strategies to inspire ideas. The creation process often occurs over several months, because as the strategy develops, it is necessary to research underlying assumptions and projections to insure reasonableness and practicality. Inevitably, the strategy will have some impact on various parts of the organization, so it is also important to seek out input from functional leaders.
- Part III outlines what needs to happen within the organization to achieve the business goals and execute the business strategy. It should provide details about the sub-goals, strategies, and tasks of each functional area necessary to achieve the company goals.
- Part IV is a complete financial analysis of the strategic plan and includes the budget for the coming year. It is critical that the budget reflects all the strategic plan’s investments, resources, and performance assumptions, so the financial impact can be understood. This also ensures that progress can be reported as part of the normal monthly financial review process.
What are the benefits of a strategic plan?
The single most important benefit of a strategic plan is that it provides a clear blueprint of where the company is going and how it intends to get there. It is a robust and realistic plan because it is built on the foundation of the external industry analysis, as well as an understanding of the strengths and weaknesses of the organization.
The strategic plan provides a laser focus for everyone in the organization. Everyone understands the goals, and their role in achieving them. This creates engagement and a sense of ownership.
Another benefit is that the plan creates alignment within the organization. The interdependent processes critical to the success of the strategy become obvious. For example, if a company has decided on a “low cost” strategy, it will need to make tough decisions to ensure that every product produced is affordable or the strategy will fail.
Related: Why Hire a Management Consultant
The impact of a strategic plan
One of the best ways to appreciate the value of a strategic plan is to review real-life examples. Again, the goal of a strategic plan is to figure out how to do things differently than the competition, while providing great value to the customer and being very difficult to replicate.
In 1984, Michael Dell started providing component upgrades for PCs while working out of his dorm room at the University of Texas. The success of his work led him to believe that there was a demand for PCs with more features and better performance than those currently found at retail stores. So, he developed his own PC from components he sourced. He also created a direct-to-consumer model, selling them through advertisements and mail-order catalogs. At the time, he was competing against industry giants, IBM and HP, who sold their product through retailers, wholesalers, and distributors. It turned out that selling customizable PCs, direct, was extremely popular. The business model Dell created could not be easily duplicated by IBM or HP because their manufacturing processes were setup for mass production of standard configurations of computers, and their distribution model would not allow them to sell direct. At one point, Dell was the number one selling PC computer manufacturer in the world. It all started with a business strategy and a plan.
There are many elements of a business model that a company can use to differentiate themselves, such as: product design, market research, channel effectiveness, distribution methodologies, quality, packaging, branding, promotion and advertising, supply chain, customer service, even relationships with regulators or influencers. The key is to build your strategy around core competencies and other key business model elements in a way that creates a strong value proposition, and makes it difficult to replicate.
A great example of this is Southwest Airlines. The company created a low-cost business strategy, but did things differently than any other airline. They focused on short-haul, point-to-point routes between midsize cities using secondary airports. They only used one model of aircraft, which lowered capital and operating costs, and made it easier to have quick gate turnarounds. They invented a new plane loading process. They used their own reservation system and were one of the first to use automatic ticketing machines. All these factors and more, combined to create organizational alignment, and make the low-cost strategy effective, and difficult for other airlines to duplicate. Some may say this is all obvious stuff. But no other carrier, current or past, has successfully replicated this strategy, even though it is well understood. And at one point it made Southwest the most profitable airline in the U.S.
What is the verdict?
It is well worth the effort for your organization to take the time to develop a coherent and coordinated strategy to win in the marketplace, and then develop a plan to make the strategy a reality. I have countless stories about companies who have developed a strategic plan, and they are better for it. In most cases, the results have translated to significant improvements in operating profits and growth rates. And in all cases, management has expressed that they have better control of their business. Even for the companies who feel like they didn’t achieve what they hoped, they universally expressed that the process was extremely valuable in helping them better understand their business and the competitive environment.
Ultimately, the verdict is that you don’t need a strategic plan to survive, but you would most likely benefit from having one. If you do not have one, hope that your competitors do not.