Every business executive is familiar with the need for strategic planning. Less familiar, though, is the critical management skill that the strategic plan is designed to support – strategic management. In simple terms, strategic management is the ability to think and act for the long term benefit of the firm, rather than reacting to the immediate threats and needs of business.
Michael Porter, the long-time dean of the Harvard School of Business Administration, outlined a theory of strategic management in the Harvard Business Review in 1996. The major points of which include the creation of a unique and sustainable position for the company, management decisions oriented toward building strength for the position, and fitting together the elements of positioning so that they support one another.
Porter’s argument is that by focusing too much on operational efficiencies -- total quality management, benchmarking, time-based competition, outsourcing, partnering, reengineering, and change management, for example – companies often are unable to reach their profitability goals. This is true of accounting and tax firms as well as their clients.
Business managers driving the strategic management movement have expanded on Porter’s initial work, outlining a five-step process necessary to build a strategic platform for success and profitability:
- Building efficiencies in the workflow and processes of the firm will help to build profitability by reducing the waste in the allocation of resources. But these reductions are seldom sustainable – sooner or later, the company will need to expand its use of resources to respond to changing market conditions. While waste reduction is crucial to the bottom line, the more important management task is the creation of a vision for the company, usually expressed in a set of long-term goals to guide the company and its operations. Positioning, though, involves more than just the vision. It must be unique to the company, it must specify the processes needed to achieve the goals expressed in the vision; and it must allocate the resources – including staff – needed to achieve the goals.
- This involves the collections of data needed to identify the firm’s Strengths, Weaknesses, Opportunities and Threats (SWOT). In addition, this data collection includes a listing of external and internal factors affecting the firm. Internal factors include such variables as:
- The strength of the firm’s leadership
- The quality of the staff
- Available financial resources
- Available physical resources, such as locations and equipment
- Intellectual property, including copyrights, trademarks and patents
- Existing processes and workflow
External factors were expressed by Michael Porter in his doctrine of Five Forces in 1979, and outlines the environmental and competitive factors that will affect a firm’s ability to become and remain profitable:
- The level of competition in the marketplace, including number, size and capabilities
- Bargaining power of suppliers, such as hardware and software vendors
- Bargaining power of customers – alternatives available to them, difficulty in switching to another firm, etc.
- Threat of new entrants into the market
- Threat of substitute products in the market
- Strategic Planning. Armed with a vision, a set of objectives, and an analysis of the internal and external forces affecting the firm’s future, it is possible to create a strategic plan. While there are many guide and templates to development of a strategic plan, there are no hard rules. It may be as little as one page or as long as 25 (though neither of these is recommended). In addition to being a summary of the work done on the vision and analysis steps, the strategic plan should establish the tactics that will be used to achieve the goals and objectives of the firm several years in the future. It will also include a list of the resources that will be needed to implement these tactics, and how success will be measured as the strategic plan is evaluated in future years.
- With the plan completed and approved, it is time to take steps to assure effective implementation. It is at this point that the firm needs to ensure that the resources needed for implementation are available, and that the workflow and management structure support the strategic plan. The roadmap for implementation can be taken from the tactics outlined in the strategic plan. The strategy should flow into long-term goals for the firm. Each goal should bring about a set of objectives, and each objective should be implemented through a set of tactics. The objectives, tactics and their resources can be split out of the strategic plan each year to form the basis of an annual operating plan that can drive implementation.
- The evaluation step should be taken at regular intervals in order to assess sustained profitability, make adjustments, reassess internal and external factors, and assure that the firm’s performance matches the expectations set forth in the vision and goals from the first step. Any major mismatches will require that the strategic planning process be visited to put the firm back on track.
The value of understanding these marketing concepts may be lost on managers whose core area of competence is nor oriented toward strategic management and marketing. But the lessons of the five-step process can be summarized this way:
- Long-term profitability cannot be sustained solely by efficiency in day-to-day processes.
- Long-term profitability cannot be sustained solely by control of costs alone.
- External factors affecting the company include not only the level of competition, but the actions of vendors, customers, and new entrants in the marketplace, as well as legislation and policies at the federal, state, and local levels.
- The path to profitability requires creation of a unique and sustainable position for the firm. All of the resources and processes of the firm must be focused on supporting this position.
- Success is based on both internal and external factors, both of which must be considered.
Source: Porter, Michael E. "What is Strategy?" Harvard Business Review 74, no. 6 (November-December 1996): 64-74