FREE ESSAY ON STRATEGIC PLANNING

STRATEGIC PLANNING

MANAGEMENT ACCOUNTING ESSAY 1998/99
The development of a strategic plan is essential to the achievement of organisational
goals. Discuss.
The development of a strategic plan is an essential part of strategic management
accounting. If carried out to its full credibility the organisation will achieve its
goals. It is important to note that the strategic plan is set for long term planning, as
much as 3-5 years.
It has been established that a strategic plan requires the specification of objectives
distinguished between three key elements, forming a hierarchy: the mission of an
organisation, corporate objectives and unit objectives. These objectives are the first
stage of the strategic plan, before the organisation has to ask, and answer, three simple
but vital questions;
1) Where are we now?
2) Where do we want to be? (long term)
3) How are we going to get there?
This is where we bring analysis such as SWOT analysis, the Boston matrix, the value chain
and the Ansoff matrix into the plan.
Corporate objectives relate to the organisation as a whole. They are expressed in
financial terms, such as desired profit or sales levels, return on capital employed
(ROCE), rates of growth or market share, and are normally measurable in some way.
Formulated by members of the board, or directors to be handed down to senior management.
United Biscuits corporate objectives in their annual report of 1985 were;
'The most important objective remains the achievement of a minimum return of 20% on
average capital employees, with a target return of 25%'.2
Unit objectives relate to the specific objectives of individual units within the
organisation, such as a division or one company within a holding company. The unit
objectives for costain group plc in their annual report of 1986 were;
'In the UK costain Homes is budgeted to sell 2'500 homes in 1987, - a figure that will
put it among the top ten house builders'.3
Before the corporate and unit objectives are incorporated one must start with the
mission, and the basic concepts which involve vision statement, mission statement, goals
and objectives. The first thing is to establish the long-term strategic aims of the
organisation, otherwise known as corporate planning. A vision statement would be drawn up
first and is simply a vague sentence expressing the positive effect it will have on
society and is often used to say how the 'world will become a better place due to the
existence of the proposal(s). This is often linked with the mission statement, and some
companies may even omit the vision and focus only on the mission. 
This emphasis more on the specific role that the organisation plans. It describes in very
general terms the broad purpose and reason for its existence, the nature of the
business(es) it is in, and the customers it seeks to serve and satisfy over the long run.
The mission statement for international company 'Virgin' is very simple, very brief but
informative as to what they wanted to put across, and is simply;
'The directors aim to develop virgin into the leading British international media and
entertainment group'.4
Equally important are the goals and objectives. Firstly the organisational goals, the
aims that the company strives to incorporate and achieve. These are a more detailed
breakdown of what the mission states. They will be defined for different groups of
shareholders. As one would expect, organisational goals are established for shorter time
frames and are of unquantified sources. Goals can be a little ambiguous, they can be
expressed in simple terms, for example, to make a profit, or in a wider area, to increase
productivity. Therefore such goals can be taken for granted and so tell us little about
the emphasis placed on the various activities of the organisation in meeting those goals.
On the other hand one can say how vitally important they are. They provide a basis for
planning and management control, guidelines for decision making and justification for the
actions taken. The goals that the company set out in their report will be different to
that received by the individuals, groups or departments of that same company. The goals
will help to develop commitment of these people and so focuses attention on purposeful
behaviour providing a basis for motivation and rewards.
Fig 1:
FORMAL GOALS 
Personal goals of managers
INFORMAL Perceived goals of officially stated
GOALS the organisation organisation goals
Personal goals of other members
of the organisation
the reason and purpose
of the organisation
Figure 1 shows the different types of informal goals that lead to the overall formal
goals of the organisation.
Inter-linked with the organisational goals are the objectives. These can be interpreted
as being the same as goals, but they do differ. The goals are the basis for the
objectives and are quantified roles of the organisation. They set out more specifically
the goals, the aims to be achieved and the desired end-results. As with the goals, the
objectives too will be broken down into different sections within the company. The
corporate objectives also need to be broken down into compatible and functional
objectives, so as all departments can contribute their part in maintaining the overall
specifications.
Large companies would have to subdivide the organisation as a whole to make there
corporate mission more appropriate. This can be achieved by splitting into functional
areas or geographical areas, where the managers are made responsible for all of the
functions carried out within their region. The most logical and relevant divisions for
strategic planning purposes are called 'strategic planning units' - (Sub's).
Sub's are normally defined as being divisions of an organisation where the managers have
control over their own resources and discretion over the deployment of these resources
within specified boundaries, - their own mission statement and set of goals. The role of
corporate strategic planning in this case is to define the overall corporate values and
guiding business principles and to set out the limits of the business, which can be
undertaken by the subsidiary units. Here we recall the three simple but vital questions
mentioned earlier; Where are we now? Where do we want to be? How do we get there? To help
us we start to incorporate analysis and other useful techniques.
We start with the SWOT analysis, otherwise termed 'WOTS UP', which focuses on the
strengths, weaknesses, opportunities and threats of the organisation. By taking into
account the constraints and opportunities, one can take a look at previous performance,
competitors and the rest of the industry, in relation to the holders own company, and
then of course one can do SWOT analysis;
Fig 2:
INTERNAL STRENGTHS WEAKNESSES
EXTERNAL OPPURTUNITY THREATS
The strengths and weaknesses refer to the internal aspects of the organisation, comparing
to the competition and the market place, - what the company is relatively good and bad at
doing. The opportunity and threats relate to the external environment factors and the
inter-relationship they have.
Strengths are those positive aspects or competencies, which provide a significant, market
advantage, where the organisation can build upon. This is simply to tell the present
market position, size, structure, managerial expertise, physical or financial resources,
staffing and skill, image and reputation and lastly the situation (for channel ports and
motorways).
Weaknesses are obviously the negative aspects in the present competencies or resources of
the organisation. Its image or reputation limiting its effectiveness which need to be
corrected to minimise the effects. Certain examples of weaknesses could be operating
within a particular narrow market, limited accommodation or outdated equipment, high
proportion of fixed costs, high level of customer complaints, poor marketing skills or a
shortage of key managerial staff.
Opportunities are favourable conditions and usually arise from the nature of changes in
the external environment. Although the organisation needs to be responsive to the
changes, it also has to be sensitive to the problems of business strategy. The changes
being, new markets, technology advances, improved economic factors or failure of
competitors. The opportunities offer the organisation the potential to develop existing
products, facilities or services.
Threats, the last in the SWOT analysis matrix. These are the opposite to opportunities,
referring to unfavourable situations arising from external environment developments that
are likely to endanger the operations and effectiveness of the organisation. One would
include changes in legislation, the introduction of a radically new product by
competitors, changing social conditions and the actions of pressure groups. The
organisation has to be responsive to changes that have already occurred, and therefore
plan for anticipated significant changes in the environment, being well prepared for such
demands.
One has to consider four fundamental issues that are addressed with SWOT analysis.
Firstly, financial performance - allowing one to asses the current performance. Secondly,
competitiveness - here it is vital to consider the non-financial factors which allow a
company to resist competitive pressure, applying it successfully to others. Market input
is next, and lastly external environment - these last two aim to highlight external
factors, for example, potential constraints, via analysis of the external environment.
This must take into account all relevant external environment factors.
Once the organisation has completed the SWOT analysis, the question of where they to be
in 3-5 years arises. To help with answering this the 'Boston Consulting Group' (BCG)
portfolio matrix will be introduced. This matrix identifies greater strengths and
weaknesses by producing, again, four different types of businesses (or products), Dogs,
Question marks (or Wild cats), Stars and Cash cows, and is shown in the following Boston
Square;
Fig 3:
Market growth and cash input High STAR ?
Low FUNDS
CASH
COW DOG
High Low
Market share
and cash generation
The Boston square is based on a product life cycle and the coincidence of high market
share with high profitability;
Fig 4: Product Life Cycle:
question star cash dog
mark cow 
The product life cycle assumes that the cost a unit drops as the volume of units produced
increases as a result of improvements in the production process and economies of scale. A
typical product developed from concept to market acceptance, through a period of high
demand and eventual market decline. Of course not all products follow the same cycle,
some never reach the market, and others have a different time scale at each stage of the
cycle. Converting the four stages of the product into matrix form produces the above
Boston square, giving four different characteristics, specifically chosen.
The stars are those products with the best profit and potential, requiring hefty
investment to become established products, which generate cash with minimum investment.
The question marks, otherwise known as wild cats, are those products requiring a high
investment for little return. Market growth is high whilst market share is low, initially
funded by income from cash cows. The dogs are those obsolescent products which no longer
merit further investment as the market share has been eroded by new developments or
fashions.
The whole idea of the Boston square model is to highlight that the strategic management
of a product, or even a whole industry, needs to focus beyond internal factors to
consider market pressures. It also stresses the need to re-invest income to provide long
term sources of revenue. It is essential that four strategies emerge from this matrix.
Firstly, to 'build' - increase market share, turning question marks into stars. Secondly,
'hold' - preserve market share, ensuring cash cows remain cash cows. Thirdly, 'harvest'-
increase short-term cash flow by using cash cows to fund other business products. Lastly
to 'divest' - eliminate those businesses whose use of resources is inefficient.
It is also possible to use a different type of analysis, namely 'Porters' five-part
model, of the existing competitive position. The five parts are established as 1) buyer
power, 2) supplier power, 3) entry opportunity, 4) substitute possibilities, 5)
competitor rivalry. These five factors determine how attractive an area of business will
be to a company.
Fig 5:
Porters five factors affecting current level of competition can also be successfully
related to his later technique - the value chain, which comes under our third question -
How are we going to get there?
The value chain looks at the total value added by the industry and by the particular
organisation within that industry. The objective of the value chain analysis is to
highlight the objectives which contribute most significantly to the total value added and
to develop strategies to improve on, or defend the current share of that value added
which is gained by the organisation.
Fig 6: The value chain:
Suppliers Organisation Customers
Strategy and administration 
Research
and 
development
Design Production Marketing Distribution Customer
service 
According to this concept every firm is a collection of activities that are performed to
design, produce, market, deliver and support its product.
Another development by porter in 1980, is that 'competitive strategy splits successful
strategies into three broad categories;
Fig 7: Porters model of generic strategies:
STRATEGIC ADVANTAGE
Low cost position Uniqueness perceived
by customers
STRATEGIC
TARGETS Industry
niche Overall cost
Leadership Differentiation
Particular
segment
only Focus 
To be successful across its chosen industry the organisation must either be able to
supply the product from the lowest cost case in the industry or be able to command a
higher price in the market by differentiating its product. It may not be positive to
sustain either of these strategies across the whole industry and so it adopts its third
strategic category by 'focusing' on particular segments of the industry where it can
command a sustainable competitive advantage.
The last part of the corporate planning is the Ansoff product/market matrix. Competitive
strategies should be the most precise level of strategic planning since they relate to
actions regarding products and markets which are to be implemented to achieve the most
specific objectives of the organisation. The organisation here could acquire or develop
new products to sell its existing customers, mapped out in the Ansoff matrix.
Fig 8: Ansoff matrix:
PRODUCTS
Existing New
MARKETS Existing Market
Penetration strategy Product
development
strategy
New Market development
strategy Diversification
The Ansoff matrix indicates the appropriate types of strategies which should be
implemented depending on which box the organisation decides to select as its preferred
method of growth. The fourth alternative that this matrix suggests is new products for
new customers, otherwise described as a diversification strategy or questionable
strategy, because it doesn't build on any obvious existing competitive advantage of the
business. The other three strategies are examined by their relevant strengths and
weaknesses.
From all of the analysis shown, and followed with the full capabilities of management in
achieving what was set out, one would be able to achieve the original organisation goals.
It is possible to see that the development of such a strategic plan, through corporate
planning, is a lenghty but well worthwhile for the company. We should note that strategic
planning and strategic management accounting has become a vital part of a companies
future.