The Importance of Strategy & Planning (AQA A Level Business): Revision Note

The purpose and value of strategy and planning

• A business's long-term success depends on more than reacting to day-to-day problems

  • It needs a clear sense of direction

• Strategy and planning shape the major decisions a business makes, from what markets to compete in, to how it allocates its finance, people and operations resources

• Effective strategic planning also gives a business a way to judge whether it is actually succeeding, by comparing performance data against the targets it set

What is strategy and planning?

• Strategy is a long-term plan of action designed to achieve a business's overall aims and objectives, usually set several years ahead

  • Strategic decisions are usually made by senior managers or directors

  • They affect the whole business and are difficult to change once resources have been committed

• Planning is the process of translating that strategy into practical steps, deciding what resources, timescales and responsibilities are needed to deliver it

  • Strategy sets the destination, whilst planning sets out the route for getting there

The value of strategy and planning

• It provides direction and consistency

  • A clear strategy means marketing, finance, HR and operations decisions all point towards the same long-term goals

  • Rather than each functional area working independently and potentially in conflict

Example

Netflix's strategic shift from posting DVDs to streaming meant every function, and technology investment, content licensing, marketing and pricing, was refocused around the same long-term direction, rather than treating streaming as a side project

• It improves the allocation of scarce resources

  • Finance, staff and management time are limited, so a strategic plan ensures they are directed towards activities that support long-term objectives

  • Instead of being spread thinly across short-term priorities

• It helps the business anticipate and manage risk

  • Planning ahead allows a business to identify likely threats, such as a new competitor or an economic downturn, and prepare a response in advance

  • Rather than being forced into a rushed and poorly thought-through reaction

Example

Kodak's failure to plan strategically for the shift to digital photography, despite developing early digital camera technology itself, is an example of the cost of poor long-term planning

The business filed for bankruptcy in 2012 having been a market leader for decades

• It sets a benchmark for measuring performance

  • Objectives created during the planning process give managers a clear standard to measure actual performance against

  • This makes it possible to judge whether the business, or an individual manager, is succeeding

• It reassures stakeholders

  • Investors, lenders and employees are more likely to commit their money or effort to a business if they can see a clear and credible long-term strategy

Example

Unilever's long-term Compass strategy reassures investors, employees and customers that short-term profit decisions will not undermine the business's reputation

Assessing business performance across functional areas

• Before setting or reviewing a strategy, a business needs an accurate picture of how it is currently performing, which means looking beyond one function in isolation

  • Marketing data

    • Market share, sales growth, customer satisfaction scores and brand awareness show how the business is performing relative to competitors and customers

  • Finance data

    • Profitability ratios, liquidity ratios, gearing and cash flow show whether the business has the financial strength to fund its chosen strategy

  • HR data

    • Employee turnover, absenteeism and employee productivity show whether the business has the people and culture needed to deliver the strategy

  • Operations data

    • Capacity utilisation, unit costs and quality or the defect rate show whether the business can produce efficiently enough to support its strategic aims

• Using data from all four areas together gives a rounded assessment, as strong performance in one area can mask serious weaknesses in another

  • E.g. A business could report rising sales, a strong marketing and finance indicator, while suffering high employee turnover that threatens its ability to maintain quality and deliver that growth in future - looking at sales data alone would miss this risk entirely

Quantitative and qualitative analysis in strategic decisions

• Quantitative analysis uses numerical data, such as sales figures, financial ratios or market research statistics

  • It can be used to identify patterns, measure change over time and compare performance objectively

  • It has the benefits of being measurable, comparable over time and easier to justify to stakeholders such as banks and shareholders

  • However, numbers alone do not explain why something is happening and can be presented selectively to support a particular argument

• Qualitative analysis uses non-numerical information, such as customer opinions, employee feedback or press coverage

  • It can be used to understand the reasons and attitudes behind the numbers

  • Its strength is that it reveals motivations, emerging problems and stakeholder attitudes that numbers alone would miss

  • However, it is more subjective, harder to measure or compare directly and is easier to dismiss if not backed by hard data

• Sound strategic decisions normally combine both types of analysis

  • Quantitative data identifies what is happening and at what scale

  • Qualitative data helps explain why, and what is likely to happen next

• Analysis affects decisions at two levels

  • Strategic decisions rely on combined data to justify a major, hard-to-reverse commitment of resources

    • E.g. Whether to enter a new international market

  • Functional decisions use the same type of data on a smaller, more reversible scale to keep performance aligned with the overall strategy

    • E.g. A marketing team adjusting a pricing strategy or an operations team reallocating staff shifts