Abstract
Experts and discipline intelligentsias continue to fill this field with views and ideologies some garnered from experience or newly developed or old recycled models. Unfortunately, no matter how well drafted the desired course in company operations is, it is subject to the business environment. The type of market, economic system and industry in which a firm plies, all play a crucial role in the formulation of a strategic plan. However, due to the high cost involved in formulation and implementation of strategic plans, it is becoming more necessary in the practical field to restrict planning in the short run due to the high rate of change in the business environment that necessitates constant change in plans.
Introduction
Strategic planning is a business concept and term that enjoys wide coverage and little understanding (Romwell 2004. He says that strategic planning is a continuous process that starts with the initial strategic business plan and goes on as long as the business is present. On the other hand he says that a strategic plan will only work if there is strategic management in the business. Macharais differentiates strategic management and strategic planning by saying that strategic planning is the foundation of strategic management. How is this? According to the Merriman-Webster’s online dictionary planning is “a proposed or intended course of action, or a formulated scheme setting out stages of procedure”. The oxford dictionary offers a relatively similar definition as “formulated or organized method by which a thing is to be done”. Strategy is on the other hand defined as the art and science of devising and employing plans to achieve goals and objectives.
Therefore, strategic planning is simply the art and science of using a proposed or intended course of action in a procedural manner to achieve defined goals and objectives. When the objectives are to be achieved in a period of usually less than five years, they area termed as short term while if they are set at more than five years, they are labeled as long term. Johnson & Scholes (2002) draw us to the importance of a strategic plan in business by saying that it is the heart and soul of any scheme, actions and moves in the marketplace that managers should take in order to improve the business financial performance, strengthen its long term competitive position, and gain a competitive edge over rivals. This can be thus doe in the long run or the short run though modern business academics and experts are challenging the applicability of long term strategic planning.
The declaration by Tom Peters that long term strategic planning is not realistic in the modern business environment contrasts a long held view that strategic planning and in this case for long term goals is the key to business success. Failure to plan according to de Gues (2002) is planning to fail. But does Tom Peters’ assertion that long term strategic planning in business in modern times only exists in theory hold? A closer look at the essentials of long term strategic planning and the modern business environments holds the key to this answer. Grant (2005, pg 18) says that “the evolution of business strategy has been driven more by the practical needs of business than by the development of theory”. As such, this paper will set to prove that long range strategic planning only remain in theory and its not suited in the modern contemporary business management.
Long Term Planning in Business
According to Stefano, (2006) long term planning in business is one of the most challenging responsibilities faced by the modern business executives. She says that the main obscurity amid this ideology in business planning is the attempt to foresee and predict market and industry trends that will take place several years to come. This is contrary to what Johnson & Scholes (2002) say of strategic planning as a continuous process. In their assertion of this, the authors say that changing market conditions and forces manipulate companies in making their decisions in order to remain relevant in business and so as to stand against competition in the market place. Selson (n.d.) advices that a strategic plan “has to be kept up to date reflecting changes in the PEST analysis and taking into account competitors strategies and tactics as they become known.”
A strategic plan therefore has to be updated in order to comply with changing market environment. But how does the business environment impact a company? Johnson & Scholes (2002) say there are two ways of looking at the environment and deducing how much influence the aspect ha on the company’s strategy. He divides business environment as internal and external while Selson (n.d.) categorizes the business environment into two broad groups as industry and remote environment though the difference is only in vocabulary.
Strategic planning and External Business Environment
Having an ample knowledge of both the internal and external environment surrounding a business does not only equip an entrepreneur with adequate strategies to propel his/her business forward but it also enables him to operate even in the most competitive environment thus gaining a competitive advantage which makes the business successful (Worthington, & Britton, 2003).
The external environment of a business or company is basically determined by the type of industry in which the business operates in though there are major elements that cut across all businesses and industries. They all play a crucial role in determining how relevant a strategic plan is as they keep on changing. According to Macharsi they will mostly have a general impact on the strategic business plan through actual planning, organizing, power, staffing and rewarding of employees and other stakeholders. Ronnma says that in most cases changes in the external environment will either present new opportunities for the business to explore or new challenges for the company to cope with.
Elements of the External Business Environment
Government Regulation and policy
The government influences the type of decision made by the company through three main channels as listed by Brooks & Weatherston (1994):
- Traditional Industry Regulation: Different governments have established different regulatory bodies and authorities to oversee the smooth and fair running of certain industries. In the UK for example the Ofcom is responsible for overseeing media content from the press, media houses and from marketers.
- New Regulation: Creation of new policies by the government through respective government legislative bodies may create new regulatory bodies to oversee the implementation of such findings of the new regulation. One of the best examples is the creation of bodies to oversee new environmental; requirement regulating the amount of for instance emissions a company can release into the environment. In the Us such bodies are CPSC, OSHA, EEOC
- Markets and Competition – Anti-Trust: Increased competition a many players enter the market has called for regulation to ensure fair competition. The establishment of bodies to oversee such is made at national, international and regional levels such as the EU.
Energy and the Physical Environment
In the era of going green many businesses are finding it hard to comply with new regulations. In the short run many of the environmental oriented regulations are hard to comply with as they demand a change in business processes and are expensive to implement. On the other hand Readings (2004) notes that a good environmental policy ensures a good corporate image and cultivates customer loyalty.
Labor and Human Resources
Labor Movement
Collective bargaining in labor poses a serious threat to company executives and many CEO’s secretly despise them (Readings, 2004). They are responsible for lobbying for increased wages and better working conditions which are costly to implement and their timing might be not complementary with the company’s planning.
Diversity
This is most relevant in cases where previously domestic companies decide to go international and are faced with a diverse workforce throwing an imbalance to the organizational culture of the company.
Immigration Policy
National or regional government’s affects long range planning for companies through formulation of polices guiding on labor movement.
Technology
Research and development, technology, information, technological alteration and competitiveness, civilization and ethics in technology, technology indicators and labour all impact on the company’s decision in planning. For instance some technologies have eliminated manual labor in labor intensive industries thus an imbalance in the company’s long term strategy.
Welfare and the Provision of Public Services
- Public Service Provision – Roads, Sewer, Water, etc..
- Welfare – Welfare Reform
- Social Security
Economic trends
Inflation, unemployment, fiscal and monetary policy, currency, the GDP and other macro-economic factors affect a company’s long term strategic planning in their own way.
Regional and national politics
Political instability is the most significant factor in this category. National and regional wars interrupt with the normal function of businesses whereby businesses have no active role to play in ending the interruption. Political or economic association of a country limits or broadens the market of a company. For example a country may impose a trading barrier with another country thus denying an international company part of its market share.
International Events
Global developments such as globalization determine how companies carry pout their strategic planning both in the long term and in the short term. Global economic cycles such as petroleum and energy crises impact on strategic planning.
A number of business management tools have been drafted to help managers and firms identify and address some of the above issues in their environment. Common tools are PEST, SWOT, STEEP, SWOTT etc. their aim is to help managers identify specific areas of the environment relevant to their operation and formulation of strategy.
Economic systems
There are three major economic systems as identified by Kew and Stredwick (2006) that have varying influences on businesses in strategic planning. These are command economy, market economy and mixed economy.
Command economy
According to Ericsson (2005) “A command economy is one in which the coordination of economic activity, so essential to the viability and functioning of a complex social economy, is undertaken through administrative means -commands, directives, targets and regulations- rather than by a market mechanism.”
Command economies are usually created according to Ericsson (2005) to achieve certain objectives such as maximum resource mobilization, not necessarily in an economically effective way towards imperative and over-riding national objectives dictated by the administration in power, revolutions based on the socio-economic system in a collectivist direction founded on ideological tenets and power-political imperatives (e.g. communism, socialism, Marxism etc), or to simply exercise price controls in the market. In such a market therefore, flexibility of a company in making long term strategic planning and decisions is compromised.
Market economy
This is the most conducive economic system for business performance according to Kew and Stredwick (2005). The authors says that in this type of economy there are no central planners and that producers and consumers in their millions make the planning through their individual decisions by creating demand and supply and hence the law of demand and supply remains as the central policy.
Mixed economy
This is the most popular and common system. While many economies profess to be market systems, they contain one or more aspects of a command economy hence earning the name of mixed economy. Simply put, a mixed economy contains the elements of a market and command economy. While the law of demand applies in majority of the markets, a command economy is manifested through:
- Legal frameworks such as contract law, company law etc.
- Government ownership of strategic companies such as the BBC by the UK government and Amtrak by the US federal government.
- State regulation on economic activity through fiscal and monetary polices.
- Taxation and other forms of levies used in redistribution of income.
- Provision of free social amenities by the government such as education, healthcare, social benefits schemes etc.
Market structures
Kew and Stredwick (2005) propose market structures as determining factors in the formulation of long range strategic planning. There are three contemporary market structures as mentioned by the authors. These are:
- perfect competition
- monopolistic competition
- monopoly
- Oligopoly
Perfect competition
The perfect competition market is the best market to operate in and offers the most stability and life for long range business planning. This is because the market is governed by the law of demand and supply both in the product and money market. As such, it is most common in a market economy. The same way that a market economic system is rare in practical sense, the same way is this type of market. In such a market firms can easily plan in the long term to lower costs of production by influencing the cost of labor and other factors of production. However, this market structure is disadvantageous as severe competition will lead to the most minimal prices in factors of production and the most efficient and cheapest means of production. Failure to do this will keep many firms out of business as it would be hard to achieve 100% efficiency in the production to keep costs at the minimum (Kew & Stredwick, 2005). Therefore, in such a structure firms will make and develop their future strategies as guided by expected minimum prices of factors of productions. Again this structure wipes out the value of research and development as a source of competitive advantage for firms as it assumes perfect knowledge in the marketplace. Unfortunately, this market structure as said earlier only exists in theory and hence brings us back to what Tom Peters says that long range strategic planning is only applicable in theory. This is supported by the false assumptions of 100% efficiency in production and perfect knowledge in the market.
Monopolistic competition
Market structures earn their name in consideration of a single industry or type of products but not the whole market (Grant, 2005). Therefore, in the case of monopolistic competition, its existence in supported by product differentiation by firms. Competition arises from the fact that firms have some degree of flexibility in setting their prices as they deem it to correspond with level of quality expectation from the market and the target market perception i.e. either premium or economy. With such a slight level of power, firms are price makers in one way or another in their own right (Kew & Stredwick, 2005). As such they can carry out some short term strategies whose transformation into long term is not assured such as opting to be profit intensive by slightly increasing prices and accepting reduced sales. However, this is only possible where the firm’s products have a wide loyal following that is willing to pay for the higher price for a higher perceived quality. Kew and Stredwick (2005) reminds us that the difference in the product is not necessarily real but a perception by the market.
Monopoly
In a monopolistic market, a firm is assured of controlling the market fully except for the influence of the type of economic system in that market. In such a market, a firm owns the only means of production in that industry and there is no competition at all. However, competition is presented in form of substitutes. Kew and Stredwick (2005) give the example of the UK’s post office monopolizing the mail delivery market. Unfortunately, it faces competition from other methods of communication that act as substitutes to mail such as calls fax, emails etc. in general monopolistic markets lead to inefficiency due to lack of competition and price controls. Due to the ability of firms in the monopoly market to control and fix prices, you find that they are more capable of making long term strategic planning in a free market as the level of interference from the government that would affect the market forces is very minimal.
Oligopoly
This is a market where there are few producers and many buyers. The UK government labels them as complex monopolies as the players may be between two to twelve. Activities of one firm are influenced by the activities of the others. As such their formulation of strategies is also dependent on the strategies used by the players in such a market. Grant (2005) says that oglipolistic markets are further complicated by the formation of cartels by the players in order to control the market as a single unit. In such a case, they tend to align their long range and short range strategic goals and objectives and hence the planning also. This is most apparent in the global petroleum market. OPEC members unanimously set their prices and structure production of oil in order to influence prices. Fortunately, differences in government policy have averted the creation of an effective cartel that would completely influence the market regardless of market forces. The failure by the members to create a fully efficient cartel allows for the market forces to play their role in setting the prices in the market. For instance, the recent oil crisis that saw very high prices was melt down by market forces in part as high prices had led to substitution of oil and hence a decline in demand.
Oligopolistic markets in the UK exist in the tobacco, motor vehicle and pharmaceutical industries among several other minor ones. The same way as in a monopoly, the dominance and power of firms in such markets is not a result of their strategic planning but because of their ability to maintain high barriers of market entry such as strong brand names, high cost of initial capital outlay or natural causes like in the case of oil (Brooks et al, 2004).
The relationship between such a market and the making of strategic plans is determined by the paths that the firms decide to take according to Kew and Stredwick (2005 pg 17). They outline possible relationships for firms in an oglipolistic market as: collusion, price wars and non price competition. In a collusion case, the firms form cartels as discussed earlier while in the case of price wars, players attempt to drive competition out of business through low pricing. On the other case of non price competition, war against competition is waged through fierce marketing, promotions, quality and product differentiation. It is collusion that the idea of long range planning remains most relevant.
The internal environment
Also refereed to as the microeconomic environment, it constitutes of several variables which Nieuwenhuizen, Bodenhorst and Rossouw (2008) identify as mission statement and goals and objectives of the firm, business functions (concept) and production factors. This identification by these authors appears to be shallow compared to what Worthington & Britton (2003) consider to constitute the business microenvironment. He says it constitutes the mission and vision statements, company values, organizational culture, management, core capabilities and competences and company resources. Core capabilities of a firm are considered to be critical pillars of strength for a firm that if well utilized offer the company sustainable competitive advantage.
Of all the elements of this environment, the management plays a crucial role as it directs all other elements in the internal and in one way or another also in the external environment. This is enabled though adoption of environment management models such as complexity and dynamism. The ability of the management to utilize such models determines how effective and how relevant the strategic plan is Nieuwenhuizen et al (2008). Gain the management guides and dictates the adoption of various management ideologies that impact on how the firm will interact and respond to its environment. Unfortunately, this does not determine the longevity of the resultant strategic plan.
Criticism of long range planning
Firms realize that a change in strategy is triggered by changing market conditions. Their ability to ensure a status quo if it favors them is an elusive goal and just a theory for many. Unfortunately, firms, according to Gallos & Heifetz (2004, pg 9) make the mistake of embracing obsolete and outdated strategic plans in fear of change and the cost of drafting and implementing a new strategic plan for the long term. “One of the most frequent mistakes that over-managed and under-led corporations make is to embrace long-term planning for their lack of direction and inability to adapt to an increasingly competitive dynamic business environment” (Gallos & Heifetz, 2004, pg 9). The authors note that successful corporations abhor long term planning as a contradiction of their terms. In the modern contemporary business environment, the unexpected is “expected” by the intelligent. And as such, they realize the cost and time wasted in making long-range plans that are bound to change with every -very frequent- unexpected change in the diverse business environment. Gallos and Heifetz (2004, pg 9) say that formulation of clear strategic plans, as a crucial element in business leadership and management, will guide the company in realizing its objectives and goals as expressed in the short term strategic plan and goes a long way in achieving the dream of the firm as expressed in the vision statement.
Conclusion
The shift in management from a science to an art has seen more belief and trust being bestowed on actual success in business than assumed success. As a result this may discredit some theoretical teachings in management. While Tom Peters basis his arguments about the failure of long term strategic planning from his business outfits, there might be an argument that it is his firms’ wrong strategic planning that he uses to judge a whole body of knowledge. On the other hand, other real companies have expressed the challenge posed by an ever changing business environment both in the industry and in the market. This is in support of Tom Peters views and therefore it is evident his observations are true.
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