And welcome back.
In this lesson,
we'll discuss the connection of budgeting and strategy.
As we have discussed before,
you record your plans in a budget,
and you use it as a tool to guide
implementation and help you track the development of your plans.
Later on, you will learn from what
happens and react or re-plan whenever you feel appropriate.
But let's now talk about formal strategic planning systems and how
they can be used as a management tool to guide day-to-day activities.
A strategic plan should be an operational tool,
analytical design to back up decision-making,
use of objectivity and most importantly,
be dynamic and provide guidance for decisions.
Great leaders and renowned entrepreneurs were known to be excellent strategists.
It's said that Henry Ford created
defective strategic plan of his business based on his amazing intuition.
Nevertheless, formal strategic planning systems become really
important in a more complex and ever-changing environment.
The main goal of strategic planning is to elaborate
a set of actions that will be implemented in the short-term.
But, what is a good plan?
A good plan should provide quick reactions to the opportunities and threats
identified in the internal and external analysis and how to create a plan.
Let's have a look at the planning cycle.
The corporate strategic plan in light blue is
the CEO's plan in which corporate and financial policies,
goals, guidelines, acquisitions, divestitures and related matters are set.
The business strategic plan in dark blue is the next step.
You should prepare stand-alone plans for each business unit providing direction,
priorities, goals, alternatives and some financial data.
The operational plan in red uses the output of
the strategic plan to define actions and a time frame for the budgeting process.
It is a guideline for all the businesses within the company.
The next step is the preparation of the business budget in yellow
where you will determine all the financial aspects of the operational plan.
Individual business budgets will then be consolidated in the corporate budget in gray.
External analysis is not a step of the planning cycle but rather
a continuous source of data and forecast for each step.
It provides industry trends,
information about the availability of resources and
cost factors that are fundamental for the success of the whole planning cycle.
As the company's management advance through the cycle,
the level of detail becomes greater and greater.
Albert Fried describes the strategic planning process as a dynamic cycle with six steps.
The first step is called situation analysis in
which the business is broken down into segments,
external analysis is integrated and critical issues facing the business are defined.
The second is business description in which
the elements that have the highest payoff potential are identified,
and the concept of the business is developed.
Then, in the third step,
alternative approach for moving the business in the proposed direction are developed.
The operational plan is the fourth step in which action programs and a timetable are set.
Measurement is the fifth step in the cycle,
when criteria to measure effectiveness of
actions and a monitoring system are established.
The last step feedback is based on the data obtained in the fifth step.
This last steps is critical to making
the entire strategic planning process an effective management tool.
You should continuously adjust your plan according to feedback results.
Type of modifications will vary according to the extent of the variance identified.
Adjustments in the timetable or in the sequence of actions may be required
when you find minor differences and this should take you back to the operational plan.
On the other hand,
major differences should trigger
a modification of the assumptions in which you based your situation analysis,
and they completely change the business direction.
Situation analysis or environmental assessment
could be broken-down in three interrelated parts.
The first one is describing the environment.
The second is positioning the business,
and the third is defining the opportunities,
threats and critical issues.
Let's start talking about how the environment can be described.
In order to describe the environment,
you should use forecasts,
identify key success factors and segment the business.
Companies may rely on internal staff to prepare forecasts of both the economy and
the specific industries or using a variety of
external providers which could include: consulting firms,
financial institutions, universities,
government agencies and industry associations among others.
To identify key success factors,
you could compare winners and losers in a given industry and
identify the attributes that both successful and unsuccessful companies have in common.
Those are the key success factors.
The business segment selection should be based on the use of the smallest segment
possible and that the segment should contain all the direct competitors.
Well, let's have a break now.
When you are back, we'll start business positioning discussions. Hope to see you soon.