Business Planning – An essential ingredient for success

Overview
Business planning is all about planning for the future - where you are going. But this can’t be done without also knowing the current situation. The answer to this comes from a PEST and SWOT analysis.

SWOT analyses are undertaken by businesses at the start of planning - to identify organizational strengths, weaknesses, opportunities and threats. They should not be seen as a process in isolation - and it is important that decisions are taken based on the findings. A SWOT starts with an external analysis of the business environment, often called a PEST analysis, and then looks at the organisation’s internal strengths and weaknesses, relative to internal factors such prior performance and also to external factors, which may have been highlighted in the PEST analysis.
The final stage is to combine the analyses to look at opportunities and threats facing the
organisation and to draw up plans to take advantage of the opportunities and to counter the threats.

PEST
A PEST analysis (also sometimes called a STEP or STEEP analysis) looks at the external business environment. PEST stands for Political, Economic, Socio-cultural and Technological. (Technological factors in this case, include ecological aspects - the second E in STEEP). The analysis examines the impact of each of these factors (and their interplay with each other) on the business. The results can then be used to take advantage of opportunities and to make contingency plans for threats.

Political
(When examining political factors, you need to look at any political changes that could effect your
business.)
What laws are being drafted
What global changes ocurring
What employee legislation
Data protection
Health & Safety
Environmental policy
How might political party impact on business

Economic
Factors generally affecting customers preparedness and ability to spend and where)
Interest rates
Exchange rates
International economic stability
Inflation
Debt & Saving
Growth viz recession
Debt viz saving
Stock market volatility
Price of resources
General business confidence
Factors affecting individual industries – Migration of manuf to Asia, Costs of labour in UK

Socio-Cultural
(the elements that build society.
Social factors influence people’s choices and include the beliefs, values and attitudes of society and how these affect spending behaviour.)
Consumer attitudes to product
Role of women
Attitudes to health
Attitudes to age
Office working viz home working

Technological
(Advances in technology can have a major impact on business success - with companies that fail to keep up often going out of business.)
Availability of substitutes
Advances in computers
Internet

For each heading, think of every factor that could possibly have an impact on your business. Think laterally - just because something seems unlikely does not mean that it will not have an influence in the future. Having compiled a list of key factors, think of inter-relationships between factors. For example, the rise of the Internet (technological factors) is likely to influence consumer purchasing (social factors) - while an awareness of prices in other markets through electronic commerce may lead to a narrowing of cross-border price differences (economic).

The final stage in a PEST analysis is to prepare contingency plans to prepare for any threats identified. - If there are factors that lead to business opportunities, then include these in your planning. For example, your target customer group may be growing faster than other sectors. This is an opportunity to increase production to take advantage of more potential customers.

Before you can use the results effectively, you should also develop an understanding of your own companies capabilities. This comes from a SWOT analysis.

SWOT Analysis
A SWOT analysis builds on the results of the PEST analysis, which looks at the company’s external environment. Its purpose is to identify company strengths and weaknesses so that strengths can be maintained or increased and weaknesses corrected. A further purpose is to identify opportunities and threats resulting from external factors - especially those that have an impact on the company’s strengths and weaknesses. Company strengths and weaknesses need to be identified in all aspects of the business
•relative to the rest of the market (i.e. compared to competitors)
•relative to previous performance or expected performance
•relative to customer demand (for example all companies in an industry may fail to satisfy a particular customer need. This is a weakness - and the first company to match this customer need will have a strength relative to the other companies in the industry.

It is also important to realise that opportunities arise out of weaknesses. Correcting a weakness presents a marketing opportunity. Similarly, failing to maintain a strength is a threat to the company. A preliminary approach for carrying out a SWOT analysis is to list perceived company strengths, weaknesses, opportunities and threats under each of these headings. Ensure that no weaknesses cancel out company strengths and potential threats to the company strengths or opportunities that could arise out of correcting weaknesses. On the above list, highlight key areas of concern or areas that require action. These become the focus for future planning.

A further approach is to list key aspects in a table - and score them out of 5, where 5 is a major strength and 1 a major weakness. Scoring can be based on the following factors - - relative to the overall industry - relative to major competitors or the next largest competitor - relative to expected performance - relative to previous performance. An item that won on all 4 categories would be a major strength and vice versa for weaknesses. Areas where the company has better performance than competitors, but where performance is below expectations would receive a higher score than where performance has improved but still is weaker than competitors.

Criteria listed in Table 2, represent some of the criteria which should be considered.

This scheme allows the company to identify where it is strongest against competitors – the company’s competitive advantage - and against previous and expected performance. Finally after compiling the list, management should start to consider whether action is needed regarding each identified item. A way forward here is to rank each item on importance to the company. Low performance (i.e. a score of 1 or 2) and high importance should be the major priority. Similarly, high performance (4 or 5 score) and high importance indicates areas where performance needs to be maintained. Conversely, low importance and low performance can be given a lower priority, while low importance items that are viewed as strengths can be ignored. It is better to spend time and money improving or maintaining areas that matter to the company than worrying about perceived strengths that do not add anything worthwhile to the company. This can be summarised as:

1. Low priority - monitor for changes. Focus on only if finances and time allow.
2. Medium priority - focus on after the high priority items have been looked at, or if finances allow.
3. High priority - main focus. Ensure adequate finances to address issues.


Table 2 – Criteria for SWOT Analysis
Marketing Criteria
• Market share and market segments addressed
• Competitive Structure
• Customer base (quality, size, loyalty, etc.)
• Demand forecasts
• Product range and quality
• Services provided
• Distribution capabilities and costs
• Sales effectiveness
• Promotional effectiveness
• Image and reputation
• Pricing options
• Speed to market
• Customer service
• R&D and Innovations / new products
• Marketing skills and experience
• International / export market capabilities

Operational / Manufacturing Criteria
•Production / Manufacturing facilities (age, quality, speed...)
•Economies of scale
•Skills (Employee, technical, etc.)
•Product failure rate
•Flexibility
•Costs
•Supply / raw material availability

Human Resource Criteria
•Employee skills, motivation, dedication and experience
•Employee satisfaction
•Employee costs
•Work environment
•Staff turnover rate
•Management and Organisational Aspects
•Management skills and experience
•Leadership and team skills
•Ability to respond to market change
•Flexibility and adaptability

Financial Criteria
•Cost of capital
•Profitability / Return on investment
•Financial Stability
•Sales / Employee
•Cash availability

The results of this analysis can thus feed into a organizations business plan.