The Strategic Planning Process

In today's highly competitive business environment, budget-oriented planning or forecast-

based planning methods are insufficient for a large corporation to survive and prosper. The
firm must engage in strategic planning that clearly defines objectives and assesses both the
internal and external situation to formulate strategy, implement the strategy, evaluate the
progress, and make adjustments as necessary to stay on track

Mission and Objectives

The mission statement describes the company's business vision , including the unchanging
values and purpose of the firm and forward-looking visionary goals that guide the pursuit of
future opportunities. Guided by the business vision, the firm's leaders can define measurable
financial and strategic objectives. Financial objectives involve measures such as sales targets
and earnings growth. Strategic objectives are related to the firm's business position, and may
include measures such as market share and reputation.
 Environmental Scan

The environmental scan includes the following components:

Internal analysis of the firm

Analysis of the firm's industry (task environment)
External macroenvironment ( PEST analysis)

The internal analysis can identify the firm's strengths and weaknesses and the external
analysis reveals opportunities and threats. A profile of the strengths, weaknesses,
opportunities, and threats is generated by means of a SWOT analysis An industry analysis
can be performed using a framework developed by Michael Porter known as Porter's five
forces. This framework evaluates entry barriers, suppliers, customers, substitute products, and
industry rivalry.

Strategy Formulation

Given the information from the environmental scan, the firm should match its strengths to the
opportunities that it has identified, while addressing its weakness and external threats.

To attain superior profitability, the firm seeks to develop a competitive advantage over its
rivals. A competitive advantage can be based on cost or differentiation. Michael Porter
identified three industry-independent generic strategies from which the firm can choose.

Strategy Implementation

The selected strategy is implemented by means of programs, budgets, and procedures.

Implementation involves organization of the firm's resources and motivation of the staff to
achieve objectives. The way in which the strategy is implemented can have a significant
impact on whether it will be successful. In a large company, those who implement the
strategy likely will be different people from those who formulated it. For this reason, care
must be taken to communicate the strategy and the reasoning behind it. Otherwise, the
implementation might not succeed if the strategy is misunderstood or if lower-level managers
resist its implementation because they do not understand why the particular strategy was
selected.
 Evaluation & Control

The implementation of the strategy must be monitored and adjustments made as

needed. Evaluation and control consists of the following steps:

1. Define parameters to be measured

2. Define target values for those parameters
3. Perform measurements.
4. Compare measured results to the pre-defined standard
5. Make necessary changes

Strategic Analysis

The process of conducting research on the business environemnt within whicb an organizaron
operated and on the organizaron itself, in order to formulare stratergy

It is used to take advantage of the pathe of least resistance to achieve your goal

Tools are PEST, SWOT analysis and Micheal Porters five forces model

a) PEST Analysis

PEST is an acronym for Political, Economic, Social and Technological. This analysis is
used to assess these four external factors in relation to your business situation.

Political Here government regulations and legal factors are assessed in terms of
their ability to affect the business environment and trade markets. The main issues
addressed in this section include political stability, tax guidelines, trade regulations,
safety regulations, and employment laws.

Economic Through this factor, businesses examine the economic issues that are
bound to have an impact on the company. This would include factors like inflation,
interest rates, economic growth, the unemployment rate and policies, and the business
cycle followed in the country.

Social With the social factor, a business can analyze the socio-economic
environment of its market via elements like customer demographics, cultural
limitations, lifestyle attitude, and education. With these, a business can understand
how consumer needs are shaped and what brings them to the market for a purchase.
 Technological How technology can either positively or negatively impact the
introduction of a product or service into a marketplace is assessed here. These factors
include technological advancements, lifecycle of technologies, the role of the Internet,
and the spending on technology research by the government.

b) SWOT analysis

A study undertaken by an organization to identify its internal strengths and weaknesses, as

well as its external opportunities and threats. A SWOT analysis guides you to identify the
positives and negatives inside your organization (Strength & Weakness) and outside of it, in
the external environment (Opportunity & Threat). Developing a full awareness of your
situation can help with both strategic planning and decision -making.

STRENGTHS

Characteristics of the business or a team that give it an advantage over others in the industry.

Positive tangible and intangible attributes, internal to an organization.

Beneficial aspects of the organization or the capabilities of an organization, which includes

human competencies, process capabilities, financial resources, products and services,
customer goodwill and brand loyalty.

Examples - Abundant financial resources, Well-known brand name, Economies of scale,

Lower costs [raw materials or processes], Superior management talent, Better marketing
skills, Good distribution skills, Committed employees.
 OPPORTUNITIES

Chances to make greater profits in the environment - External attractive factors that represent
the reason for an organization to exist & develop.

Arise when an organization can take benefit of conditions in its environment to plan and
execute strategies that enable it to become more profitable.

Organization should be careful and recognize the opportunities and grasp them whenever
they arise. Opportunities may arise from market, competition, industry/government and
technology.

Examples - Rapid market growth, Rival firms are complacent, Changing customer
needs/tastes, New uses for product discovered, Economic boom, Government deregulation,
Sales decline for a substitute product .

WEAKNESSES

Characteristics that place the firm at a disadvantage relative to others.

Detract the organization from its ability to attain the core goal and influence its growth.

Weaknesses are the factors which do not meet the standards we feel they should meet.
However, weaknesses are controllable. They must be minimized and eliminated.

Examples - Limited financial resources, Weak spending on R & D, Very narrow product line,
Limited distribution, Higher costs, Out-of-date products / technology, Weak market image,
Poor marketing skills, Limited management skills, Under-trained employees.

THREATS

External elements in the environment that could cause trouble for the business - External
factors, beyond an organizations control, which could place the organizations mission or
operation at risk.

Arise when conditions in external environment jeopardize the reliability and profitability of
the organizations business.

Compound the vulnerability when they relate to the weaknesses. Threats are uncontrollable.
When a threat comes, the stability and survival can be at stake.

Examples - Entry of foreign competitors, Introduction of new substitute products, Product life
cycle in decline, Changing customer needs/tastes, Rival firms adopt new strategies, Increased
government regulation, Economic downturn.
 c) Michael Porters five forces model

The tool was created by Harvard Business School professor Michael Porter, to analyze an
industry's attractiveness and likely profitability

He identified five forces that make up the competitive environment, and which can erode
your profitability. These are:

Competitive Rivalry: This looks at the number and strength of your competitors. How
many rivals do you have? Who are they, and how does the quality of their products and
services compare with yours?

Where rivalry is intense, companies can attract customers with aggressive price cuts and
high-impact marketing campaigns. Also, in markets with lots of rivals, your suppliers and
buyers can go elsewhere if they feel that they're not getting a good deal from you.

On the other hand, where competitive rivalry is minimal, and no one else is doing what you
do, then you'll likely have tremendous strength and healthy profits.

Supplier Power: This is determined by how easy it is for your suppliers to increase
their prices. How many potential suppliers do you have? How unique is the product or service
that they provide, and how expensive would it be to switch from one supplier to another?

The more you have to choose from, the easier it will be to switch to a cheaper alternative. But
the fewer suppliers there are, and the more you need their help, the stronger their position and
their ability to charge you more. That can impact your profit.
 Buyer Power: Here, you ask yourself how easy it is for buyers to drive your prices
down. How many buyers are there, and how big are their orders? How much would it cost
them to switch from your products and services to those of a rival? Are your buyers strong
enough to dictate terms to you?

When you deal with only a few savvy customers, they have more power, but your power
increases if you have many customers.

Threat of Substitution: This refers to the likelihood of your customers finding a

different way of doing what you do. For example, if you supply a unique software product
that automates an important process, people may substitute it by doing the process manually
or by outsourcing it. A substitution that is easy and cheap to make can weaken your position
and threaten your profitability.

Threat of New Entry: Your position can be affected by people's ability to enter your
market. So, think about how easily this could be done. How easy is it to get a foothold in your
industry or market? How much would it cost, and how tightly is your sector regulated?

Portfolio alignment

The project portfolio is the strategic plans execution framework. It calls for cross-functional
efforts that provide all-inclusive view to the participating areas, and helps them better
understand the strategic goals and how their contributions will move the organization to the
next level. This instills a sense of ownership among the participants.

Strategically aligning the project portfolio allows an organization to establish an execution

approach that will allow it to improve existing processes and optimize the selection and
sequence of initiatives.

Leaders should screen, filter, and select programs and projects based on the organizational
strategy and for those selected, they should define:

Roles and responsibilities: Who will be involved, as well as each persons level of
involvement and authority

Stakeholders: Who will be impacted by the initiatives and their level of influence in the
organization

Resources: What resources could be assigned to programs and projects, and their current
capacity and capabilities to support the selected initiatives

Funding: What funds will be available to implement the selected programs and projects

Risks: What internal and external risks would affect the strategic plan and therefore the
portfolio of projects, and what risks will be accepted or mitigated
Benefits Realization: What benefits will be produced by each program and how those will be
harvested

To achieve that alignment, the following groups must support the initiative:

Executive Group: This group will provide the strategic and portfolio governance guidelines.

Project Group: This group will handle portfolio management, focusing on delivering value to
the business.

Operations Group: This group will ensure the organization can sustainably achieve its
strategic goals.

Portfolio alignment helps an organization achieve its goals by:

i. Adopting highly similar project to insure against failure.

ii. Including a complement of projects with different sizes, risks and time frames.
iii. Decreasing the variety of projects to leverage specialization.
iv. Providing detailed project management methodologies

Methods of selecting Project:

One of the biggest decisions that any organization would have to make is related to the
projects they would undertake. Once a proposal has been received, there are numerous factors
that need to be considered before an organization decides to take it up. The most feasible
option needs to be chosen, keeping in mind the goals and requirements of the organization.
How is it then that you decide whether a project is viable? How do you decide if the project
at hand is worth approving? This is where project selection methods come in use. Choosing a
project using the right method is therefore of utmost importance. This is what will ultimately
define the way the project is to be carried out. But the question then arises as to how you
would go about finding the right methodology for your particular organization. At this
instance, you would need careful guidance in the project selection criteria, as a small mistake
could be detrimental to your project as a whole, and in the long run, the organization as well.

1. Benefit Measurement Methods

This technique is widely used in the selection of projects, which is based on the present value
of estimated cash inflow and outflow. Here you calculate the cost and benefits, and then
compare them with other projects to make a decision.

Before we move to benefit measurement techniques, we have to understand one important

concept: Discounted Cash Flows.
 Discounted Cash Flow

We all know that the worth of money received today is more than the money received in the
future. For example, the value 10,000 after 10 years will not be same as today; its worth will
be far lower than the current value of 10,000.

Therefore while calculating the cost invested and return on investment, we have to consider
the concept of discounted cash flow.

Benefit/Cost Ratio

Cost/Benefit Ratio, as the name suggests, is the ratio between the Present Value of Inflow or
the cost invested in a project to the Present Value of Outflow, which is the value of return
from the project. Projects that have a higher Benefit Cost Ratio or lower Cost Benefit Ratio
are generally chosen over others.

Economic Model

EVA, or Economic Value Added, is the performance metric that calculates the worth-creation
of the organization while defining the return on capital. It is also defined as the net profit after
the deduction of taxes and capital expenditure.

If there are several projects assigned to a project manager, the project that has the highest
Economic Value Added is picked. The EVA is always expressed in numerical terms and not
as a percentage.

Scoring Model

The scoring model is an objective technique: the project selection committee lists relevant
criteria, weighs them according to their importance and their priorities, then adds the
weighted values. Once the scoring of these projects is completed, the project with the highest
score is chosen.

Payback Period

Payback Period is the ratio of the total cash to the average per period cash. It is the time
necessary to recover the cost invested in the project. The Payback Period is a basic project
selection method. As the name suggests, the payback period takes into consideration the
payback period of an investment. It is the time frame that is required for the return on an
investment to repay the original cost that was invested.

Net Present Value

Net Present Value is the difference between the projects current value of cash inflow and the
current value of cash outflow. The NPV must always be positive. When picking a project,
one with a higher NPV is preferred. The advantage of considering the NPV over the Payback
Period is that it takes into consideration the future value of money. However, there are
limitations of the NPV, too:

There isnt any generally accepted method of deriving the discount value used for the
present value calculation.
The NPV does not provide any picture of profit or loss that the organization can make
by embarking on a certain project.

Internal Rate Of Return (IRR)

The Internal Rate of Return is the interest rate at which the Net Present Value is zero
attained when the present value of outflow is equal to the present value of inflow. Internal
Rate of Return is defined as the annualized effective compounded return rate or the
discount rate that makes the net present value of all cash flows (both positive and negative)
from a particular investment equal to zero. The IRR is used to select the project with the best
profitability; when picking a project, the one with the higher IRR is chosen.

Opportunity Cost

Opportunity Cost is the cost that is given up when selecting another project. During project
selection, the project that has the lower opportunity cost is chosen.

2. Constrained Optimization Methods

This model is also known as the Mathematical Model of project selection, which is used for
large projects requiring complex mathematical calculations.

The following is the list of techniques used in the Mathematical Model of project selection:

Linear Programming
Non-linear Programming
Integer Programming
Dynamic Programming

A detailed discussion of these topics is out of the scope of the PMP Certification exam. For
the exam, all you need to know is that these are the Mathematical Model techniques and are
used in project selection.