Responding to Uncertainty in Strategic Planning

Uncertainty

Management specialists define uncertainty as a state of having limited knowledge such that it is impossible to exactly describe an existing state or future outcomes or to determine which of several possible outcomes will happen. It is still possible, however, to measure uncertainty—by assigning a probability to each possible state or outcome to estimate its likelihood.

In the past, strategic plans have often considered only the “official future,” which was usually a straight-line graph of current trends carried into the future. Often the trend lines were generated by the accounting department and lacked discussions of demographics or qualitative differences in social conditions. These simplistic guesses can be good in some ways, but they fail to consider qualitative social changes that can affect an organization.

Instead of just following trend lines, scenarios focus on the collective impact of many factors. Scenario planning helps to understand how the various strands of a complex tapestry move if one or more threads are pulled. A list of possible causes, like a fault-tree analysis, tends to downplay the impact of isolated factors. When factors are explored together, certain combinations magnify the impact or likelihood of other factors. For instance, an increased trade deficit may trigger an economic recession, which in turn creates unemployment and reduces domestic production.

Example of a fault tree

Example of a fault tree
A fault tree can help outline possible outcomes.

Responding to Uncertainty

Organizations need to cope with issues that are too complex to be fully understood, yet significant decisions need to be made that are based on a limited understanding or limited information. There are several ways of dealing with this.

Be Iterative

The process of developing organizational strategy must be iterative. That is, it should involve toggling back and forth between questions about objectives, implementation planning, and resources. For example, an initial plan for a project may have to be adjusted if the budget changes.

Use Scenario Planning

Scenario planning starts by separating things believed to be known, at least to some degree, from those considered uncertain or unknowable. The first component, knowledge, includes trends, which cast the past forward, recognizing that the world possesses considerable momentum and continuity. The second component, uncertainties, involves indeterminable factors such as future interest rates, outcomes of political elections, rates of innovation, fads in markets, and so on. The art of scenario planning lies in blending the known and the unknown into a limited number of internally consistent views of the future that span a very wide range of possibilities.

Numerous organizations have applied scenario planning to a broad range of issues, from relatively simple, tactical decisions to the complex process of strategic planning and vision building. Scenario planning for business was originally established by Royal Dutch/Shell, which has used scenarios since the early 1970s as part of its process for generating and evaluating strategic options. Shell has been consistently better in its oil forecasts than other major oil companies, and predicted the overcapacity in the tanker business and Europe’s petrochemicals earlier than its competitors.

Accept Uncertainty

It serves little purpose to pretend to anticipate every possible consequence of a corporate decision, every possible constraining or enabling factor, and every possible point of view. What matters for the purposes of strategic management is having a clear view, based on the best available evidence and on defensible assumptions, of what is possible to accomplish within the constraints of a given set of circumstances. As the situation changes, some opportunities for pursuing objectives will disappear and others will arise. Some implementation approaches will become impossible, while others, previously impossible or unimagined, will become viable. Strategic management adds little value, and may do harm, if organizational strategies are designed to be used as detailed and infallible blueprints for managers
Source: Boundless. “Responding to Uncertainty in Strategic Planning.” Boundless Management. Boundless, 08 Dec. 2014. Retrieved 07 Feb. 2015 from https://www.boundless.com/management/textbooks/boundless-management-textbook/strategic-management-12/the-planning-process-91/responding-to-uncertainty-in-strategic-planning-442-8312/

Overview of Inputs to Strategic Planning

Strategy Hierarchy

In most corporations, there are several levels of management. Strategic management is the highest of these levels in the sense that it is the broadest—it applies to all parts of the firm and incorporates the longest time horizon. It gives direction to corporate values, corporate culture, corporate goals, and corporate missions. Under the broad corporate strategy are business-level competitive strategies and functional unit strategies.

  • Corporate strategy refers to the overarching strategy of the diversified firm.
  • Business strategy refers to the aggregated strategies of a single business firm or a strategic business unit (SBU) in a diversified corporation.
  • Functional strategies include marketing strategies, new-product development strategies, human resource strategies, financial strategies, legal strategies, supply-chain strategies, and information-technology management strategies. The emphasis is on short-term and medium-term plans and is limited to the domain of each department’s functional responsibility. Each functional department attempts to do its part to meet overall corporate objectives, so to some extent their strategies are derived from broader corporate strategies.

Many companies feel that a functional organizational structure is not an efficient way to organize activities, so they often re-engineer according to processes or SBUs. A strategic business unit is a semi-autonomous unit that is usually responsible for its own budgeting, new product decisions, hiring decisions, and price setting. An SBU is treated as an internal profit center by corporate headquarters.

Business Plans

A business plan is a formal statement of a set of business goals, the reasons they are attainable, and the plan for reaching them. It may also contain background information about the organization or team attempting to reach those goals.

For example, a business plan for a nonprofit might discuss the fit between the business plan and the organization’s mission. Banks are quite concerned about defaults, so a business plan for a bank loan will build a convincing case for the organization’s ability to repay the loan. Venture capitalists are primarily concerned about initial investment, feasibility, and exit valuation. A business plan for a project requiring equity financing will need to explain why current resources, upcoming growth opportunities, and sustainable competitive advantage will lead to a high exit valuation.

Preparing a business plan draws on a wide range of knowledge from many different business disciplines: finance, human resource management, intellectual-property management, supply-chain management, operations management, and marketing. It can be helpful to view the business plan as a collection of subplans, one for each of the main business disciplines.

Marketing Plans

A marketing plan is a written document that details the actions necessary to achieve one or more marketing objectives. It can be for a product, a service, a brand, or a product line. Marketing plans span between one and five years.

A marketing plan may be part of an overall business plan. Solid strategy is the foundation of a well-written marketing plan, and one way to achieve this is by using a method known as the seven Ps (product, place, price, promotion, physical environment, people, and process). A product-oriented company may use the seven Ps to develop a plan for each of its products. A market-oriented company will concentrate on each market. Each will base its plans on the detailed needs of its customers and on the strategies chosen to satisfy those needs.

The seven Ps

The seven Ps
In marketing, the general process of identifying and approaching a target market is captured through the seven Ps. This concept allows marketers to analyze the various components that are relevant to the needs of a given target market, enabling a rounded marketing plan and a strategic approach to capturing value and fulfilling needs.

Tools for Planning

Often discussed in tools for planning are models that measure the internal and external environments (e.g. Porter’s Five Forces, SWOT, Value Chain, etc.). These models create forward-looking projections based on past and present data; therefore, they are useful only once enough data have been collected. Because of this, tools for planning largely focus on generating enough data to construct valid recommendations. These tools can include:

  • Industry experts: Whether internal employees or external consultants, a few individuals with extensive experience in a given industry are valuable resources in the planning process. These industry experts can move beyond the PESTEL and Porter’s Five Forces frameworks, making intuitive leaps as to the trajectory of the industry.
  • Consultants: Consultants are commonly brought in during strategy formulation and for a variety of other reasons. Most important of these would be providing an objective lens for internal affairs. It is difficult to see the whole house from inside the house, and upper management can utilize an external opinion to ensure they are seeing operations clearly and objectively.
  • Inclusion of stakeholders: Upper management will want as much information as possible from everyone involved. Some examples include consumer surveys on satisfaction, supplier projections for costs over a given time frame, consumer inputs on needs still unfilled, and shareholder views. The inclusion of stakeholders offers a variety of tools, each of which may or may not be a useful input depending on the context of the plan.
Example of a fault tree

Example of a fault tree
A fault tree can help outline possible outcomes.

Source: Boundless. “Overview of Inputs to Strategic Planning.” Boundless Management. Boundless, 08 Dec. 2014. Retrieved 07 Feb. 2015 from https://www.boundless.com/management/textbooks/boundless-management-textbook/strategic-management-12/the-planning-process-91/overview-of-inputs-to-strategic-planning-441-8316/

Benefits of Strategic Planning

The planning process is concerned with defining a company’s goals and determining the resources necessary to achieve those goals. Achieving a vision requires coordinated efforts that adhere to a broader organizational plan. This is enabled through consistent strategies that are supported by staff at all levels. To meet business goals, managers develop business plans not only to reach targets but also to strengthen and change public perception of the company’s brand.

Integrated business plan

Integrated business plan
Example of an integrated business plan.

Benefits of Planning

Since they have achieved defined goals through the planning process, managers and employees can focus and control their efforts and their resources, follow determined plans of action, coordinate activities between divisions, and use time management to meet specific goals. Planning helps to achieve these goals or targets by efficiently and effectively using available time and resources. In short, planning, if executed properly, should lead to the following benefits:

  • Focus: There are a wide variety of activities an organization (or the individuals within the organization) might viably pursue. While there is value in the pursuit of many activities, understanding which ones the organization should focus on to leverage organizational competencies and align with market research requires careful planning and delegation. This is how planning achieves focus.
  • Coordinated action: If department A is reliant on inputs from department B, department A cannot utilize department B’s work without coordination. If department B has too much work and department A too little, there is poor interdepartmental coordination. This is alleviated through detail-oriented planning processes.
  • Control: The control process is based on benchmarks, which is to say that controlling requires a standard of comparison when viewing the actual operational results. Control relies on the planning process to set viable objectives, which can then be worked towards through controlling operations.
  • Time management: Time management underlines the importance of maximizing the use of time to minimize the cost of production. If a full-time employee can accomplish their work within 32 hours, the planning process can find meaningful use for their remaining time. Costs can be lowered and productivity increased by ensuring that each element in the operational process functions according to ideal time constraints.
  • Benefits of the process: Perhaps the most important benefit of developing business and marketing plans is the planning process itself. This typically offers a unique opportunity, a forum, for information-rich and productively focused discussions between the various managers involved. The plan and the discussions that arise from it provide an agreed context for subsequent management activities, even those not described in the plan itself.
Example of a marketing plan

Example of a marketing plan

Source: Boundless. “Benefits of Strategic Planning: Focus, Action, Control, Coordination, and Time Management.” Boundless Management. Boundless, 08 Dec. 2014. Retrieved 07 Feb. 2015 from https://www.boundless.com/management/textbooks/boundless-management-textbook/strategic-management-12/the-planning-process-91/benefits-of-strategic-planning-focus-action-control-coordination-and-time-management-440-1475/

Defining Strategic Planning

Strategic planning is an organization’s process of defining its strategy and making decisions on how to allocate resources to pursue that strategy. To determine the direction of the organization, it is necessary to understand its current position and the possible avenues through which it can pursue a particular course of action. Strategic planning generally deals with at least one of three key questions:

  • What do we do?
  • For whom do we do it?
  • How do we excel?

In many organizations, this is viewed as a process for determining where the organization is going over the next year or, more typically, three to five years, although some extend their vision to 20 years. The last question—how do we excel?—is critical to achieving competitive advantage, and it should be answered clearly and practically in the planning process prior to extensive investment in resources.

Components of a Strategic Plan

Planning is concerned with defining goals for a company’s future direction and determining the resources required to achieve those goals. To meet the goals, managers will develop marketing and operational plans inclusive of key organizational values (vision, mission, culture, etc.).

Common components of a business plan include external and internal analyses, marketing and branding, investments, debt, resource allocation, suppliers, production processes, competition, and research and development. While different business models include different components in their planning, based on unique organizational or industry needs, the central theme is that all aspects of the strategy should be researched and discussed prior to incurring the costs of operations.

Business plan

Business plan
These are some factors to consider when making a business plan.

Planning Process

There are many approaches to strategic planning, but typically one of the following approaches is used.

Situation-Target-Proposal

This method involves the following steps:

  • Situation: Evaluate the current situation and how it came about.
  • Target: Define goals and objectives (sometimes called ideal state).
  • Proposal: Map a possible route to the goals and objectives.

Draw-See-Think-Plan

This method involves addressing the following questions:

  • Draw: What is the ideal state or the desired end state?
  • See: What is today’s situation? What is the gap between today’s situation and the ideal state, and why?
  • Think: What specific actions must be taken to close the gap between today’s situation and the ideal state?
  • Plan: What resources are required to execute these specific actions?

Source: Boundless. “Defining Strategic Planning.” Boundless Management. Boundless, 08 Dec. 2014. Retrieved 07 Feb. 2015 from https://www.boundless.com/management/textbooks/boundless-management-textbook/strategic-management-12/the-planning-process-91/defining-strategic-planning-439-1457/