The strategic planning process, part 2

http://www.accaglobal.com/en/student/acca-qual-student-journey/qual-resource/accaqualification/p3/technical-articles/the-strategic-planning-process .html The second of two articles that focus on applying your !nowledge of management and strategy to a scenario situation. "art # considered the comple$ities of strategic planning and how they can be bro!en down into three main areas. "art 2 adopts a similar simplification approach to the issues of strategic choice and strategic implementation One of the main problems faced by students on Paper P3 is application of knowledge. Early on in their preparation most students feel comfortable with all that is discussed in Paper P3 and many develop a false sense of security preferring to concentrate on what seems to be an overwhelming amount of information for Papers P2, P4 or P . !t is only when students enter the revision phase do they realise that you need to do much more than "ust learn the notes in order to pass the e#am. $he main skill that a student needs to develop is an ability to apply the ac%uired knowledge in a scenario situation. $he following provides an insight into how to apply your knowledge effectively. !n the previous article we established how the comple#ities of strategic planning could be broken down into three main areas& '. (trategic analysis 2. (trategic choice 3. (trategic implementation $he previous article comprehensively e#plained strategic analysis by breaking it down into three %uestions& )here do we want to go* +$hink stakeholder constraints, )hat constraints e#ist on our resources* +$hink -s, )hat are the key threats from the e#ternal environment* +$hink PE($E. and five forces, !n this article we are going to try to adopt a similar simplification approach to the issues of strategic choice and strategic implementation. %trategic choice /ohnson and (choles break down the issue of strategic choice into three distinct subheadings, which are& On what basis do we decide to compete* )hich direction should we choose* 0ow are we going to achieve the chosen direction* &n what basis do we decide to compete' 1 useful framework to use here is Porter2s generic strategies. -ichael Porter stated that a firm that is wishing to obtain competitive advantage over its rivals is faced with two choices&

Choice 1& !s the company seeking to compete by achieving lower costs than its rivals achieve and by charging similar prices for the products and services that it offers, thereby achieving advantage via superior profitability* Or3 !s the company wishing to differentiate itself and the customer is prepared to pay a premium price for the added value which the customer perceives in the product, and thereby en"oys greater margin than the undifferentiated product. Choice 2& )hat is the scope of the area in which the company wishes to obtain competitive advantage* !s it industry4wide or is it restricted to a specific niche* $he answers to these two choices leave the organisation faced with three generic strategies, which are defined as& '. cost leadership 2. differentiation 3. focus. #. (ost leadership (et out to be the lowest cost producer in an industry. 5y producing at the lowest possible cost the manufacturer can compete on price with every other producer in the industry and earn the highest unit profits. !n order to achieve cost leadership some of the following need to be in place& (eek to set up production facilities for mass production as these will facilitate the economies of scale advantages to be achieved. !nvest in the latest technology 6 improved %uality less labour needed. (eek to obtain favourable access to sources of raw materials. .ook to develop product designs that facilitate automation. -inimise overhead costs by e#ploiting bargaining power. 7oncentrate on productivity ob"ectives and constantly seek to improve efficiency and economy 6 for e#ample, 855, value chain analysis. One should also be aware of the drawbacks of such a strategy, such as the need to continually keep up to date with potential changes in technology or consumer tastes. 2. )ifferentiation 1 firm differentiates itself from its competitors when it provides something uni%ue that is valuable to buyers. 9ifferentiation occurs when the differentiated product is able to obtain a price premium in the market that is above the cost incurred to create the differentiation. 1s a conse%uence of differentiation being about uni%ueness, it is not really possible to give an e#haustive list detailing how a firm may differentiate itself. $o truly differentiate yourself we must understand the product or service offered and the customer to whom you are selling it. *ays of achie+ing differentiation ,mage differentiation -arketing is used to feign differentiation where it otherwise does not e#ist 6 ie an image is created for the product. $his can also include cosmetic differences to a product that does not enhance its performance in any serious way 6 for e#ample, perfume 6 colour, si:e, packaging. %upport differentiation

-ore substantial, but still has no effect on the product itself, is to differentiate on the basis of something that goes alongside the product, some basis of support. $his may have to do with selling 6 for e#ample, ;< finance, 244hour delivery. -uality differentiation $his means the features of the product that make it better 6 not fundamentally different, but "ust better. $he product will perform with& greater initial reliability greater long4term durability superior performance. )esign differentiation 9ifferentiate on the basis of design and offer the customer something that is truly different as it breaks away from the dominant design if there is one 6 for e#ample, 1pple2s i-ac computer. .eward of a differentiation strategy 7onsumers are likely to pay a higher price for the goods because of the added value created by the differentiation. 3. /ocus 1 focus strategy is based on fragmenting the market and focusing on particular market niche. $he firm will not market its products industry4wide but will concentrate on a particular type of buyer or geographical area. Cost focus& $his involves selecting a particular niche in the market and focusing on providing products for that niche. 5y concentrating on a limited range of products or a small geographical area, the costs can be kept low. Differentiation focus& (elect a particular niche and concentrate on competing in that niche on the basis of differentiation 6 for e#ample, lu#ury goods. $his can be summarised in the following diagram&

)e stated that the alternative directions available to a business could be described in general terms as follows& '. 2. 3. 4. =. . 9o nothing )ithdrawal -arket penetration Product development -arket development 9iversification

)o nothing $his involves following the current strategy while events around change and can often prove to be a successful short4term strategy. 5asically, if an organisation is e#posed to some form of competitive threat, its short4term ob"ective is to not react and, hence, get involved in what could be an e#pensive decision.

%ell out/withdraw from the mar!et $his may be followed so as to ma#imise the return on a business that may be at the top of its cycle and, hence, will be in line with the goal of ma#imisation of cash flows. )ithdrawal from a business sector may be chosen to give the business more focus 6 for e#ample, >ichard 5ranson2s decision to sell his original business ?irgin >ecords to concentrate on the airlines business. 0ar!et penetration $his involves increasing the market share in the current market with the current product. -arket share can be enhanced by such techni%ues as improved %uality, productivity or increased marketing activity. "roduct de+elopment $his involves introducing a new product into the current market. $he product change is often the result of changes and modifications to an e#isting successful product 6 for e#ample, -ars ice cream. $his is an alternative to the present product and builds on present knowledge and skills. 0ar!et de+elopment !n this case the organisation keeps its tried and tested products but aims to apply them to different market segments. $his strategy maintains the security of the present product while enabling e#tra revenue to be generated from new segments 6 for e#ample, -c9onald2s and its geographic market development. )i+ersification $his is the most risky of the product market strategies as it involves the introduction of a totally new product in a new market. 9iversification can either be related or unrelated. .elated di+ersification $his involves development of the product and market but still remaining within the broad confines of the industry. $here are three main types. '. 5ackward. 1 development into the business that inputs into the present business 6 for e#ample, move up the supply chain into raw material inputs. 2. @orward. 1 development into activities concerned with a company2s outputs also called downstream integration 6 for e#ample, move down the supply chain into distribution activities. 3. 0ori:ontal. -ovement into activities that are competitive with e#isting activities 6 for e#ample, to benefit access to market or technology. 1nrelated di+ersification $his involves movement into industries that bear little relationship to the present one and is often the result of a profit motive. 1nsoff represented the last four choices in his productAmarket matri#. 2nsoff3s product mar!et matri$

4ow' $he final problem that must be overcome is to decide how the chosen strategic option should be undertaken. $he options available are& internal development e#ternal developmentAac%uisition "oint development. ,nternal de+elopment .easons Often undertaken to maintain the present e%uilibrium within the company as it is much less disruptive than an ac%uisition. 1nother reason may be that there is not sufficient finance available for an ac%uisition or that the government may prevent ac%uisitionAmerger through legislation. 2cquisitions !f there is sufficient finance available an ac%uisition will provide a very %uick way of providing access to new productAmarket areas and the new organisation will have economies of scale advantages. 5oint de+elopment 1 formal agreement between two or more organisations to undertake a new venture together 6 for e#ample, 1irbus +spreading of cost,. 0ethods of joint de+elopment Consortia. $wo or more firms working together to share the costs and benefits of a business opportunity. Joint venture. 1 separate business entity whose shares are owned by two or more business entities. Strategic alliance. 1 long4term agreement to share knowledge, technology or business opportunities. Franchising. $he purchase of the right to e#ploit a business brand in return for a capital sum and a share of profits or turnover. $he franchiser also usually provides marketing and technical support to the purchaser of the franchise. Licensing. $he right to e#ploit an invention or resource in return for a share of proceeds. 9iffers from franchise because there will be little central support.

$o summarise, we can use @igure '. Once all the alternative options have been generated we need to evaluate their appropriateness before making a choice. 1 useful framework to apply when considering the appropriateness of an option is& suitability feasibility acceptability %uitability (uitability identifies the e#tent to which the proposed strategy enhances the situation identified in the strategic analysis. $he following %uestions need to be addressed about the strategic options& 9oes it close the planning gap* 9oes it address threats and weaknesses* 9oes it build on identified strengths and e#ploit opportunities* 9oes it fit in with the organisation2s mission* )ill the portfolio remain balanced*

/easibility $he issue of feasibility evaluates whether the chosen strategy can be implemented successfully. $he resources the organisation has at its disposal will obviously determine this. $o save time, simply think about the -s. 2cceptability $he final issue to address is whether the selected strategy will meet the e#pectations of the key stakeholders in the firm and typical issues to be looked at would include the level of risk and return resulting from the option. >emember that in the e#am it is unlikely that you are going to get a %uestion that asks you to regurgitate the information on strategic choice in the way in which ! have "ust e#plained to you. Buestions will normally touch on some part of the process we have described and if you have an in4 depth understanding of everything that we have covered you will be able to construct much more comprehensive arguments in the e#am. )e will show this in a previous e#am %uestion later. %trategic implementation $he area of strategic implementation covers many areas from pro"ect management to structure. 0owever, as with strategic analysis and strategic choice, it is possible to simplify the issues in to a number of key sub4headings& >esource management. Organisational structure. -anagement of change. .esource management $his will ensure that the -s are working for you in the best way possible. 5udgets and other performance management tools are likely to be used here. &rganisational structure $his will deal with issues regarding the levels of centralisation and decentralisation, together with structural form and style of management.

0anagement of change $he scope, speed and style of the changes need to be carefully reviewed in order to obtain full commitment to them. 1 useful model of change to remember is Curt .ewins2 three4step model, which involved& unfree:e change refree:e. 1nfree6e @or the change to take place the e#isting e%uilibrium must be broken down before a new one can be adopted. (hange $his is the second stage, mainly concerned with identifying what the new, desirable behaviour or norm should be, communicating it and encouraging individuals and groups to Down2 the new attitude or behaviour. $o be successful, one should consider the adoption of the following management styles to improve the acceptance of the change& Participation with employees affected by the change, so that they feel more of a sense of ownership. Education and communication of the new ways, so that they fully understand what is going on and are not in a situation where they are afraid of the unknown and therefore show resistance. Eegotiation may also be appropriate if there are large group stakeholders such as a trade union. .efree6e $his is the final stage, implying consolidation or reinforcement of the new behaviour. Positive reinforcement +praise, reward, etc, or negative reinforcement +sanctions applied to those who deviate from the new behaviour, may be used. Fou should also look at the 7hange Caleidoscope and 7ultural )eb $herefore to summarise what we have "ust said& %trategic choice On what basis do we decide to compete* +Porter2s generic strategies., )hich direction should we choose* +1nsoff2s product market matri#, do nothing, withdraw., 0ow are we going to achieve the chosen direction* +!nternal e#ternal "oint venture., %trategic implementation >esource management + -s, Organisational structure +centralisation, decentralisation, specific structural form, -anagement of change +unfree:e, change, refree:e, .et us see how we can e#pect to get %uestioned in this area in the e#am. -uestion # %ample 2((2 e$am /erome Gulsand is the owner and chief e#ecutive of a chain of 2; sports e%uipment shops, (portak. $hese shops are clustered in the south of the country. $he company is privately owned by the family and the freeholds of these shops, which the company owns and which are on prime retail sites, account for the ma"ority of the assets of (portak. $he company sells a wide range of sports e%uipment such as

golf clubs, tennis, skiing e%uipment, soccer and other sports e%uipment. >ecently it has e#panded its range to include certain types of designer sports clothing. $he company was founded by /erome2s father a %uarter of a century earlier when he opened his first small shop. Over the ne#t 2= years the company grew steadily. 1 ma"or reason for this successful development lay with the philosophy of /erome2s father who delegated much of the decision4making to the individual shop managers. 0e believed that this gave the local managers a higher degree of motivation. !t also allowed them to respond to local demand conditions as stock ordering was carried out by each shop and was not organised at the head office. $he managers were also permitted to develop local marketing activities, using sales promotions and publicity as they felt appropriate. $hese shop managers were remunerated partly by a basic salary and partly by a sales4related performance bonus, which could be up to 4;< of their basic salary. $hese methods of operation were satisfactory while the company was operating in a steady growth environment. 0owever, by late 2;;H there was evidence that (portak2s overall position within the market was weakening. (ales had stabilised but, even more importantly, competition was growing from a number of discount traders who were prepared to operate on low profit margins but with larger volumes. !t was at this time that /erome took over the company from his father. /erome was impatient with the lack of growth. 5y nature he was an entrepreneur who sought growth. 0e was not sure that the steady organic growth was appropriate to these conditions. 0is father2s policy had been to open a store each year, funding this growth out of current earnings. /erome saw that the market was becoming so competitive that even small and specialist markets were proving to be vulnerable. 0e believed that only the big, nationwide retail chains would survive and that the smaller si:ed groups would be taken over by the larger chains of sports goods retailers who were more profitable and had greater capability to raise finance. 0e decided that a Ddash for growth2 was re%uired if the company was to achieve the critical si:e to survive in the market place. !t had been suggested to him that the franchising of the (portak brand name would be a reasonable and relatively risk4free method of e#pansion. Growth, using other people2s money, has its advantages, but it did not appeal to /erome. 0e wanted a more Dhands4on2 approach. 1t about this time another chain of '= sports shops became available for purchase. $his group was in a distinctly separate area of the country 6 about '=; miles from (portak2s current area of operations. 1s the overall sports e%uipment and sportswear market was still growing, the price being asked for this ac%uisition was rather high. 0owever, /erome was convinced that this was too good an opportunity to miss. 0e believed that (portak needed this e#pansion so as to take advantage of the profitable sales still available in this sector. 0owever, for an ac%uisition of this si:e, it was obvious that the growth could not be funded internally. /erome assumed that he might use the freeholds of the properties (portak owned as securities for the finance the company needed to borrow. 5efore approaching the bank /erome discussed this issue with his accountant and offered the following ideas for his proposed e#pansion. !n anticipating this proposed e#pansion and the need to manage an enlarged group, /erome believes that it is time for a strong and centralising leader. >ecognising that the current system of product ordering is delegated to individual store managers, he proposes to provide a centralised purchasing function based upon a warehouse owned and controlled by (portak. !ndividual shop managers will be permitted to decide upon their stock range, but they will have to order from the central warehouse set up by (portak. /erome has also decided to tackle the problem of marketing and, in particular, promotion. $he decentralised approach adopted by his father has not brought about the development of a well4known image and, therefore, the brand of (portak needs to be strengthened. Inder /erome2s plan it is proposed to allocate a substantial budget 6 '=< of sales 6 to spend on press advertising and on public relations,

and this level of commitment will continue for the foreseeable future. (ports personalities will be paid to appear in all stores, which will have to be re4e%uipped. 5y a competent use of merchandising it is hoped that these stores will increasingly be recognised as centres for influencing the fashion of both sports e%uipment and clothing. $he shop managers will also be encouraged to stock more e#pensive lines of products where the margins will be higher and, in addition, they will be e#pected to hold much more stock. 1 criticism of the stores when /erome2s father was in charge was that they were often short of stock. -ost customers were unwilling to wait for the product to be ordered and they therefore bought from competitors2 shops. /erome recognised that during this period of change (portak might lose a number of its key shop managers. $hese people have en"oyed substantial autonomy, and although they will still have some freedom on the stock range that they offer, they might increasingly see their freedom to act as managers being eroded. !n appreciating that these shop managers provide much goodwill and their loss would be damaging to the company, /erome is proposing to increase their sales4related bonuses as an inducement to stay. /erome fully understands that the costs incurred in the proposed ac%uisition involve more than the purchase of the new shops. (tore modernisation programmes for all the shops, as well as upgrading stock with a wider and more sophisticated range of products, will also re%uire funding. @orecasts of immediate future sales appear to be attractive. /erome anticipates that sales per store will rise by about J< over the ne#t year. 0e believes that this growth in sales, accompanied by his more aggressive approach to retailing, will enable his bold e#pansion plans for (portak to be achieved. 1bove all, /erome wishes to see his company, (portak, become a national company, no longer having to operate as a regional retailer does. !n $able ' is a summary of the figures that have been prepared by /erome2s accountant for discussion. Part of the data has been obtained from trade association statistics as well as government forecasts. .equirements +a, /erome Gulsand2s father was a great believer in the decentralisation of both operations and decision making. $o what e#tent has this process harmed or benefited (portak* Provide e#amples to "ustify your arguments. +'; marks, +b, Evaluate the key features that you consider to be important and would e#pect to see in the business plan that /erome Gulsand would have to present to his bank to support his application for financial assistance. +'= marks, +c, 1cting in the position of /erome Gulsand2s accountant, and using the financial data provided and the intentions developed by /erome, assess the viability of the strategy that has been proposed by him. +'= marks, +d, 9iscuss whether a franchise operation would have been a better option for e#pansion than an ac%uisition. +'; marks, Table # 2 7 2ctual 8m 3;.;; '=.;; '=.;; 2 9 :udget 8m 2K.=; '4.H= '4.H= 2 ; /orecast 8m =J.J; 2=.2J 33.=2 2 # /orecast 8m =H.K 24.K2 33.;4

(ales of revenue 7osts of sales Gross margin

2 7 2ctual 8m E#penses '2.;; Operating profit 3.;; !nterest paid ;.;; Proft after interest 3.;; @i#ed assets '=.;; 7urrent assets .;; 7urrent liabilities 3.H= E%uity 24.H= 9ebt ;.;; Gross margin =;< >eturn of sales ';< 1ctivity ratio '.2' >eturn on net assets '2.2 >OE '2.2 !ndustry sales '2= +2;;; ';;,

2 9 :udget 8m '2.=; 2.2= ;.;; 2.2= '=.;; =.K; 3. K 24.=K ;.;; =;< H. 2< '.2; K.'= K.'= '3=

2 ; /orecast 8m 2K.=; 4.;2 2.=; '.=2 34.;; K.J; H.3= 2 .'= 2=.;; =H< .J3< '.'= H.J= =.J; '4;

2 # /orecast 8m 2K.H= 3.2K 2.=; ;.HK 34.;; K. H.2= 2=.K' 2=.;; =H< =. H< '.'4 .4 3.;4 '3J

Part +a, e#amines your knowledge of the implementation stage by asking a specific %uestion on structure and whether you believe decentralisation has had any detrimental effect on (portak. !f you were to brainstorm the main issues regarding centralisation and decentrali:ation, and then see which apply in the conte#t of the case, a comprehensive answer would be able to be obtained. Part +b, would be best answered by mi#ing common sense with the key issues from strategic analysis, strategic choice and strategic implementation. 7ommon sense would tell you that the business plan should include an overview of (portak2s business. -ore detailed information should be provided on the organisation2s resources + -s,, together with an overview of the business environment in which it e#ists +use PE($E. and five forces for inspiration,. 1 clear description of the basis on which (portak intended to compete should also be included +use Porter2s generic strategies and 1nsoff2s product market matri# for inspiration, together with the likely returns the business is to make from the chosen strategy. Part +c, re%uires you to apply the financial skills you have learned throughout your 1771 studies to give an overview of how viable /erome2s plans are. Part +d, again would have been easily answered if you had approached your studies in the logical way suggested earlier and it specifically dealt with the how* Part of the strategic choice stage. +Ise the internal, e#ternal or "oint venture model for inspiration,. %ummary 0opefully you are now able to overview the strategic planning part of the syllabus in a more systematic and logical way. 1ll you need to remember is the key steps of strategic analysis, choice and implementation. $his should then set off another chain of words in your head, such as& strategic analysis +think -s, think PE($E. and five forces and stakeholder constraints., strategic choice +on what basis do we decide to compete* )hich direction should we choose*

0ow are we going to achieve the chosen direction*, strategic implementation +resource management, organisational structure, management of change., 1ll that is necessary now is to use the framework in an applied way relevant to the %uestion asked. %ean "urcell :2 2(02 is a leading freelance lecturer for "aper "3 and lectures on the 2((2 %tudy %chool and Train the Trainer "rogramme for "aper "3