What is strategic planning and why is it so important?

Strategic planning is the starting point for establishing financial
and operating objectives for a company in support of long-term planning
– typically 5 years but is often extended to 10 years. The strategic
plan addresses where a company wants to be in the future, and what it
will take to get it there. Without this ongoing assessment and vision,
your company will not fully understand the risks and opportunities in
the market place. It will not be able to properly set financial and
operating objectives in the short-term, in support of meeting long-term
objectives. It will not know if there will be sufficient funds
available to support capital investments let alone knowing if any
investments are required. It will not fully understand staffing needs,
IT investment, and infrastructure requirements – many of which take
years to develop. It will not fully understand its competition,
industry and what it will need to do to maintain or increase its market
share and profitability. Put another way, it will not have a concrete,
well thought out plan to present to its shareholders and owners as to
how it will use their invested capital and provide an adequate return
for their money.

The strategic planning process has always been extremely important,
and has become that much more critical with technological advancements,
global competitors, and commodity market volatility, to name a few.
This requires ongoing vision and planning, the ability to manage undue
risks, and to change in response to market conditions and competitors.
The strategic plan should incorporate a range of outcomes and
consequences, to avoid catastrophic events, and to take advantage of
opportunities.

Every company is unique and therefore the process may vary between
firms, however the following is a recommended strategic planning
approach:

• Ownership and market expectations for the company
• Industry and competitive analysis
• Company assessment
• Risk assessment
• SWOT analysis
• Financial modeling (PL, BS, Cash-flow)
• Sensitivity “what if” analysis
• Capital Budgeting, Staffing, and Financing
• Recommendations

Ownership and market expectations for the company

Public and private companies will have ownership groups with future
expectations for its earnings and dividend payments, based on various
criteria including previous financial results, capital structure,
growth opportunities etc. These expectations need to be considered as
part of strategic planning so that the plan itself aligns with
ownership objectives. For instance, if the company is in a mature low
growth market, and ownership was looking for stable returns, there
would be no point in developing a strategic plan that ramped up
investment into high risk areas. If however the ownership group wanted
to encourage higher growth, the investment decisions would likely
change, as would the strategic plan. Note that the term “ownership”
pertains to both private and public companies. In the case of a private
company, there are usually one or more controlling shareholders who are
responsible for strategic decisions, whereas with a public company, the
shares are publicly traded and shareholders are represented by a board
of directors. In both cases the ownership group will set long-term
objectives for the company.

Industry and competitive analysis

Once the ownership expectations are understood, the next step is to
conduct a thorough review of the industry and competitors. Review the
size of the market, in terms of revenue, volume, geography. It is often
necessary to use estimates to quantify this information if it is not
readily available or too expensive to obtain, but it must be done as
accurately as possible. Review the competitors and their positioning
within the market, and determine if the company has a competitive
advantage. A competitive advantage is a significant and (ideally)
long-term benefit to a company over its competition. Establishing and
maintaining a competitive advantage is complex, but a company’s
survival and prosperity depend on its success for doing so. Companies
must continually seek to gain a competitive edge on their competition.
Michael Porter of Harvard University identified 5 critical factors that
determine the attractiveness of an industry; 1) barriers to entry, 2)
threat of substitutes, 3) bargaining power of buyers, 4) bargaining
power of buyers, and 5) rivalry amongst existing competitors. Companies
usually create competitive advantages by adopting a strategy of either
low cost, or product differentiation. Lowest cost and product
differentiation are often considered mutually exclusive, but in my
experience, I have seen situations where a company can achieve both
(albeit they have been done in special circumstances, such as very high
market share). The industry and competitive analysis is a great
opportunity to assess the overall opportunity available to the company.
The end result of this review should enable your company to have a
solid understanding of the “playing field”.

Company assessment

Once the market is understood, the next step is to thoroughly review
the company – its people, processes, capabilities etc. This analysis
will expose any skill level, expertise, culture, technology, financing
or other gaps that would prevent the company from achieving its
objectives. Performing an unbiased review of the company is often a
difficult process – particularly due to management’s involvement with
previous decisions. Also, gathering the inputs for the company’s
assessment is time consuming and time sensitive and as a result, it is
often recommended that an external consultant assist with this process.
In any event, the company review is both quantitative and qualitative,
and should include a competitive benchmarking of its pricing, cost
structure and any other relevant key performance metric.

Risk assessment

What are the risks associated with the industry and company that
could significantly impact its results in the long-run? This should not
be restricted to financial risks, but should include a full array of
risks including government regulation, customers, credit, political,
competitive, supply etc. The company needs to go through this risk
assessment to fully understand the potential variability of earnings –
this paves the way for a range of earnings estimates (example – Base
Case, Best Case and Worst Case).

SWOT analysis

At this point in the analysis, it is helpful to funnel the
information into a “SWOT” analysis (Strengths, Weaknesses,
Opportunities and Threats). This is a grid that summarizes the overall
environment that the company operates in. The benefit of doing the SWOT
analysis is that it captures the upside and downside of the business in
one document.

Financial modeling (PL, Balance Sheet, and Cash-flow)

Financial forecasts are one of the key outputs of the strategic
plan. Excel spreadsheets are recommended for this purpose, as they can
provide customized views tailored to the business. It is important that
the financial models are developed so that all key assumptions such as
volumes, pricing, margins, head-count, investments etc are linked into
pro-forma financial statements. Furthermore, the models should be
designed to support sensitivity analysis – so that the as key
assumptions are changed, the impact flows directly into the pro-forma
financials. It is also very important to understand the
interrelationships between the assumptions. For example, increasing the
number of customers should be linked to the incremental costs such as
customer care, or commission expenses. The P&L is often the item of
highest focus because of the earnings, but the Balance Sheet and
Cash-flow statement are also very important as they indicate capital,
working capital and actual cash flows. Ideally, the projections should
be done on a monthly, quarterly and annual basis, especially in the
near term.

Sensitivity “what if” analysis

As an extension of the financial modeling, it is highly recommended
that the models have the capability to do routine sensitivities on key
variables such as pricing, margins, volume, expenses, financing
expenses etc. The sensitivity analysis will be used to support the
Base, Best and Worst Case scenarios.

Capital Budgeting, Staffing, and Financing

In order to achieve the strategic plan objectives, it will be
necessary to review the extent to which investments are required. The
“investments” could be in the form of land, equipment, staffing, or
other outlays. The analysis should be focused on significant
investments, and be based on realistic and supportable analysis as
required. The financing of these investments is a separate decision.
However, at the end of the day, the rate of return on the investments
must exceed the financing costs (cost of capital – debt, lease costs,
equity etc), otherwise the company will be reducing wealth /
shareholder value. There are several analytical tools that can be used
to support and justify the investment analysis including NPV, IRR,
Pay-back, and others.

Recommendations to management

The strategic review is an iterative process wherein several
versions of the strategic plan will be discussed and reviewed. At some
point however, the company will need to reach a consensus. This is
often difficult, but it is important to finalize the strategic plan so
that the company can present a clear vision and objectives to senior
management and ownership.

To be most effective, the strategic plan document should be in a
report format, with supporting analysis and be officially approved by
ownership. The objectives should be communicated throughout the
organization, so that short-term planning can be aligned. The strategic
plan must be revisited on annual basis, so that the company’s
performance can be measured and adjustments made as required.

Summary

Hopefully you have found this overview of the strategic planning
process helpful. Does your company have sufficient resources,
expertise, and independence to complete a strategic plan? GFS
Consulting would be delighted to provide support.