Strategic Planning Business Forecasting Scenario Planning

Strategic Planning: Strategic planning is the determination of the basic long-term goals and objectives of an organization and adoption of courses of action and the allocation of resources necessary to achieve these goals. There are several steps in strategic planning. The first step is to establish objectives, the results expected, what is to be done and where the primary emphasis is to be placed. The second step is to establish planning premises, i.e. assumptions about the anticipated environment. These premises can be classified as external and internal, qualitative and quantitative and controllable, non controllable. External premises can be classified into: general environment, (economic, technological, political, social and ethical conditions); the product market; and the factor market, (location of factory, labor, and materials etc). Internal premises include capital investment, sales forecast and organization structure. Some premises can be quantified while others may be qualitative. Some premises are controllable, such as expansion into a new market, adoption of a research program or a new site for the headquarters. Non-controllable premises include population growth, price levels, tax rates, business cycles etc. The semi controllable premises are the firm's assumptions about its share of the market, labor turnover, labor efficiency, and the company's pricing policy. The third step in planning is to identify alternative courses of action. The fourth step is to evaluate them by weighing the various factors in the light of premises and goals. The fifth step is adopting the plan. The final step is to give meaning to plans by putting in numbers and preparing budgets. Henry Mintzberg has identified ten schools of strategic planning50: The Design School: Aims at creating a fit between internal strengths and weaknesses and external threats and opportunities.

 The Planning School: Strategic planning is viewed as an intellectual, formal exercise using various techniques. The Positioning School: The company selects its strategic position after thoroughly analyzing the industry.
49 See Mintzberg, Henry. The Rise and Fall of Strategic Planning: Reconceiving Roles for Planning, Plans, Planners Simon & Schuster, 1993 and Mintzberg, Henry. The fall and rise of strategic planning Harvard Business Review, January-February 1994, pp 107-114.
50 Strategy Safari: A Guided Tour through The Wilds of Strategic Management by Henry Mintzberg, Joseph Lampel, and Bruce Ahlstrand, Free Press, 2005.

103
Entrepreneurial School: The focus here shifts to the chief executive who largely relies on intuition to formulate strategy. The emphasis moves away from precise designs, plans or positions to vague visions or broad perspectives. Cognitive School: The focus here is on cognition and cognitive biases. Learning School: Strategies evolve as the organization learns more about the environment and the business. Power School: Strategy making is rooted in power. Cultural School: Views strategy formulation as a process rooted in culture. Environment School: The focus here is on coping with the environment. Configuration School: Integrates the claims of other schools. The three broad approaches to strategic planning can be summarized as follows: Rational planning involves identifying and understanding gaps between previously established goals and past performance, identifying the resources needed to close these gaps, distributing those resources and monitoring their use in moving the organization closer towards its goals. This approach assumes the environment is predictable and the organization can be effectively controlled. Clearly, such an approach is not advisable if the business environment is complex and unpredictable. Incrementalism means moving from one strategy to the next, depending on the unfolding of events beyond the control of managers. Incrementalism assumes that managers cannot forecast or enforce the developments essential to developing a pre-ordained strategy and therefore must continually adjust. Future developments are likely to be random so that there is little scope to learn from past experiences. Thus, in contrast to rational planning which emphasizes intended strategies, incrementalism is based on emergent strategies.

Organizational learning also emphasizes the need for making continuous adjustments. However, these adjustments need not be random. Rather, managers must keep making incremental adjustments to rational plans as they attempt to move the organization toward its goals. Though they may be unable to foresee the future, managers must not allow their organization to drift aimlessly. The role of top management is to encourage all employees to continuously challenge the status quo, generate ideas for improving the status quo, conduct experiments to see which of these ideas are most fruitful and then try to disseminate knowledge gained from these experiments throughout the organization.

Business Forecasting: Business forecasting is an integral part of strategic planning.

Various types of forecasts are used by companies depending on the situation: Economic Forecasts are published by governmental agencies and private economic forecasting firms. A business can use these forecasts as a starting point. Financial Forecasts include forecasts of financial variables such as the amount of external financing needed, earnings and cash flows. Sales Forecasts project future sales for the company's goods or services for a certain period. Technological Forecasts estimate the rate of technological progress. Qualitative forecasting approaches are based on judgment and opinion. These include Expert opinions, Delphi and Consumer surveys. Quantitative approaches either crunch historical data (time series analyses) or associative data (causal forecasts). Time series methods include Moving averages, Exponential smoothing and Trend analysis. Causal forecasts include Simple regression, Multiple regression and Econometric modeling. Quantitative models work well in a relatively stable environment. In a highly volatile business environment, the qualitative approach based on human intuition and judgment is more useful than number crunching. The choice of a specific forecasting technique will depend on various factors like: the cost of developing the forecasting model, the relationships being forecasted, time horizon, degree of accuracy desired data availability

Scenario Planning: Scenario planning enables firms to plan for the future by
visualizing different ways in which the external environment may evolve in the future. The construction of a number of scenarios, each describing a possible future state, can help organizations deal with uncertainty more effectively. Scenario building stimulates creative thinking and helps identify major opportunities and threats in the future by taking into account various political, social, economic and technological factors. By contemplating a range of possible futures, better informed decisions can be taken and linkages between apparently unrelated factors identified. Scenarios allow discussions to be more uninhibited, help challenge established views and enable new ideas to be tested. Seeing reality from different perspectives reduces the risk of increasing commitment to failing strategies. Formal scenario planning emerged during the Second World War, when it was used as a part of military strategy as countries prepared themselves for different contingencies. Since then, the use of scenario planning has become increasingly popular. One company which has used scenario planning very effectively is Royal Dutch Shell. The basic premise behind scenario planning is that reacting in ad hoc fashion to external events is not desirable. Understanding long-term trends enables companies to prepare for different future scenarios. It also helps a company to identify the scenarios for which its strengths and competencies are particularly suited. At the same time, by identifying the scenarios for which it is least prepared, the company can invest in building the required competencies. In extreme cases, it can even divest businesses, which do not look promising in the long run.