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Business Planning in Inclement Economic Weather

  • June 01 2002, 1:00am EDT

Few of today's corporate leaders have ever had to steer a company through a serious economic downturn, let alone one as troubled by uncertainty as today's economic climate. Optimizing performance while managing costs and minimizing risk requires a commitment to excellence, a focus on the basics and the ability to exploit technology to aid in the business and decision-making process.

The success of world-class companies is directly attributed to a consistent focus on these issues through good times as well as bad. Data is more prevalent today within an organization, but are organizations truly using this data to draw trends, better manage the planning process and realize the benefits of using this data to drive decision making? The Web has provided an additional source of data that can be used to interact with business partners, understand market trends and better define opportunities to act in a more effective manner to best leverage an organization's capabilities.

Are companies really using these capabilities to take advantage of potential market opportunities or at least minimize the surprises due to current economic conditions? How often have we all viewed, heard or personally experienced one of the following scenarios?

  • An acquisition fails to materially provide the anticipated value and "synergies"; and, as a result, the acquiring company has to take a huge write-down.
  • A new technology acquisition is late and fails to work as planned, resulting in disrupted deliveries, lost customers and lost revenue.
  • Unforeseen financial disclosures, similar to Enron, reduce a company's market value to virtually nothing in a matter of days.
  • A CEO ouster arises from investor dissatisfaction with corporate leadership.
  • Revenues and/or profits slide sharply causing investors to flee.

The fact is that each of these scenarios, and many like them, could have been predicted or at least better managed if the companies had used the data and decision-making tools and technologies available. The current volatile economic conditions are likely to remain with us for the foreseeable future. Highlighted is the fact that decision making and planning are simply not currently core competencies or best practices at most companies. Many companies are currently wedded to a framework that is essentially a financial and deterministic approach to making economic decisions. This would not necessarily be a bad thing in a world where change is slow, incremental and predictable. However, the economy today is dynamic, changing on an unpredictable basis without consistency. In fact, the companies that are best positioned to survive in these economic times are those that treat planning as a continuous exercise in operational decision making and performance management, and make use of the data and tools available to them.
To highlight some of these factors, findings from Hackett Best Practices' 2002 research reveal the following trends:

  • Managers at the best-run companies are 200 percent more likely to obtain business-critical information using Web technologies than those in average companies.
  • Nearly half of all companies treat planning as a strictly fiscal and annual exercise, leaving them unprepared to deal with sudden, non- financial types of risk or catastrophe.
  • One-third of all executives take advantage of electronic decision-support tools that help them extract, filter and model decision considerations.

The alignment of the business planning process to the strategy of the firm is critical in today's economic climate. Probably the paramount challenge facing corporate executives today is to reduce strategic errors caused by lack of timely access to critical information. Quarterly earnings reports are increasingly being focused on the CEO or CFO explaining the outcomes of failed decisions to investors. Profit warnings also exemplify the lack of foresight and inability to deal with risk or change in the current economic climate. Companies need to become positioned to link planning and the overall corporate strategy to ensure a single, shared vision of the business goals across the enterprise and, in turn, communicate this vision and linkage both internally and externally.
If we look across the last five years as demonstrated by Hackett Best Practices data, it is apparent that only 15 percent of today's organizations fully link the planning processes with the business strategy of the organization. That is an increase from 13 percent achieved in 1997. Since 1997, companies have been attempting to significantly, but not fully, link the planning process with the overall strategy ­– 38 percent in 1997 increased to 55 percent today. This increase should enable these companies to better deal with the dynamic business and economic climate.

However, it is not just the linkage between strategy and planning processes that needs to be measured, but the frequency and processes used by companies to plan. If the processes are not timely or are poorly integrated, the companies will still not be positioned to succeed. In fact, nearly half of all companies treat the planning process as a financial and annual tool instead of a continuous decision-support activity. The consequence of this is a one-dimensional, point- in-time process that cannot be tied to market trends or changing market climates. While organizations are better aligning the planning process to the corporate strategy, they are only doing this once a year and have no mechanism or ability to evaluate continually changing risk in today's market.

Companies should begin to treat the planning process as aligned to the strategy of the organization but accomplished on an ongoing basis to develop a multidimensional view of the business while evaluating risk through tools such as scenario planning. Through scenario planning, the organization can claim to have a continuous planning focus. Wider adoption of such techniques can assist managers in planning for a variety of outcomes in the face of uncertainty.

What time horizon should a company use for planning purposes? This is a difficult question to answer. However, there is growing recognition of the predictive accuracy, advance-warning and decision-making benefits of the use of rolling forecasts in the planning process. Today, 37 percent of all organizations make use of rolling forecasts while 63 percent focus on the use of the current fiscal year for planning purposes. Using a rolling and continual basis of forecasting can aid an organization in dealing with factors that influence the outcome of changes in the economic marketplace. Coupled with the use of scenario planning or other what-if analysis tools and techniques, an organization can potentially take advantage of market opportunities that would not normally be apparent to those that only look at the planning horizon as the current fiscal year.

Why do organizations continue to use the fiscal year for planning? One can only assume that because financial metrics are used to gauge performance of the executives, these are the metrics that are used to track the organization. If the business integrates planning tools and techniques such as scenario planning and more frequent planning horizons and aligns the plans to the strategy, one could only surmise that most organizations could begin to meet and respond to today's changing business and economic climate more effectively. World-class organizations merge all three critical components to position the company to take advantage of market conditions.

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