A new approach to corporate planning is needed.
The recession and volatile markets have unveiled shortcomings in traditional corporate management planning processes. Not only is the planning process mundane and time-consuming, it's virtually obsolete.
For years, many companies ran their businesses with planning by rote. And, frankly, managers didn't approach it with enthusiasm.
Volatile, complex and fast-moving business markets today require a new, dynamic approach that enables successful companies to make real-time business plan adjustments in response to ever-changing external factors, ranging from new customer segments and expectations to new competition and other variables that could impact a business. This more effective approach uses sophisticated analytics to help managers improve the allocation of capital and resources, and it broadens the planning perspective to include intangible investments and investor expectations.
Companies that make hefty investments in planning capabilities expect a return for that investment. These companies watched the volatility in securities markets, commodity prices and exchange rates during the recession sweep their business plans and budgets aside. As sales declined and credit dried up, management became concerned about capital efficiency. Many also became acutely aware that their corporate performance deviated sharply during the downturn from the guidance they'd given to investors.
Shifting to a new approach to planning can enable companies to allocate resources more efficiently and help managers balance the competing demands of short-term profitability and long-term value creation, if it's done correctly. However, this new approach to planning requires mastery of three areas in particular:
- Flexible and dynamic planning processes;
- More sophisticated analytics and frameworks for resource allocation; and
- A broader planning perspective to account for the greater weight given to future value and intangible assets.
While the recommendations may sound obvious, in practice, companies rarely adopt them. A company's own historical performance oftentimes remains the most frequently used benchmark for business targets.
In the face of today's market realities, companies must refocus their attention on the most volatile aspects of the business. To that end, higher-performing companies more extensively leverage external information about customers, competitors, investor expectations and regulators, and they establish benchmarks for each. Generally, these business targets are tracked via 10 to 15 key performance indicators that explain virtually all of the company's financial performance. This enables them to make decisions fast and get the right information into the hands of the right people who can act quickly on that information.
But high-performing companies don't just track the performance indicators. They create scenarios that incorporate those factors, and help management understand what could happen.
Such scenario planning in and of itself is not new. Businesses have used scenario planning for decades to create predefined alternative views of their company's future. Companies may consider everything from changes in GDP and the effect of disruptive technologies to the bankruptcy of a competitor with high market share.
Although scenario planning has a legacy that is decades old, it is a relatively new practice for many companies, and it's a practice that more companies need to adopt in today's business world. Scenario planning can help managers anticipate material changes in the business environment and, assuming tight links are made to business processes, can help them understand how the impact of such changes make it possible for companies to predetermine what actions they will take, depending on the business conditions.
Consequently, successful companies are more nimble. They are better able to change course more rapidly and effectively when the situation requires change.
Incorporating the execution of new flexible plans relies on communicating the plans throughout the organization, in the form of specific targets and additional qualitative guidance. For instance, the emergence of new competitive threats or external economic factors might trigger postponement of discretionary and nonstrategic initiatives, thereby freeing up cash for higher-priority operational expenses or capital projects. Managers need to understand how the company would change course under those circumstances.
Staying on top of management metrics and making maximum use of that information as it's gathered requires the use of advanced analytics, which today is a key source of competitive advantage for companies that lead their sectors. By analytics, we mean using quantitative methods to derive actionable insights from data, then using those insights to help shape business decisions and improve business outcomes.
Research confirms that high-performance businesses - those that substantially outperform competitors over the long term and across economic, industry and leadership cycles - are five times more likely than lower performers to make strategic use of analytics. And this is set to increase. According to new Accenture research, two-thirds of senior managers in the U.S. and U.K. say their top long-term objective is to develop the ability to model and predict behavior, actions and decisions to the point where individual decisions and offers can be made in real time based on the analysis at hand.
Superior analytics results begin with good data. For the purposes of planning, it's essential to determine what data is the highest priority and then it must be validated, cleaned and consolidated.
Part of data management also involves assessing what additional data is needed, especially external data, and where it can be obtained. Many firms possess surprisingly little solid information about the market share of their major product segments, customer repurchase intent, brand equity data for their own and competing brands, etc. The heaps of available data must be winnowed to determine which data points are most pertinent to various investment options and planning scenarios.
Armed with high quality, comprehensive data, managers must put it to use. Over the past 40 years, we have been able to move from descriptive analytics (the "what?") to predictive analytics (the "now what?"), from "what happened?" to "what's the best that can happen?" Predictive analytics uses the outputs of descriptive analytics - combined with more sophisticated statistical modeling, forecasting and optimization techniques - to anticipate the impact on business outcomes.
Consensus methods use the opinions of experts and crowds, along with mechanical algorithms, to guide decision-making about major business investments. Prediction markets, for instance, operate on the principle that a crowd, collectively, oftentimes can make better decisions than individual managers.
While analytics aids decision-making, capital allocation decisions also hinge on understanding the true cost of capital and its impact on shareholder value. Performance targets for individual departments often undermine capital cost-effectiveness, because the metrics fail to measure the right thing. They need to be aligned with measures that contribute to the value a company creates for its shareholders.
More frequently, projects that appear to help meet revenue or profit targets may be funded and proceed despite the fact that they destroy a company's value.
A more effective capital allocation framework rewards employees who act like owners by ensuring that only projects with a return greater than the cost of capital are allowed to proceed. Nonfinancial benefits, such as employee satisfaction, enhanced capabilities or customer service improvements, should be used as criteria for making capital allocations, as these are just as important as base case financials.
A structured framework also links capital allocation with a company's strategic plan. When strategies are ambiguous and only qualitative, senior management decisions are gambles at best, as opposed to the informed choices required to create shareholder value.
Capital allocation also should be adjusted for risk. Research has shown that companies that explicitly tie risk management to planning report higher satisfaction with their strategic and capital planning, and they have more confidence in their ability to evaluate major investments in the course of planning.
The natural response of many managers to economic volatility may be to focus on shorter-term planning subprocesses, such as forecasting. But overreaction to short-term economic fluctuations inevitably impairs long-term strategy and compromises a company's ability to create value in the future. A broader planning perspective strikes the right balance between short-term and long-term performance, and considers capital and investment activities that fall into the selling, general and administrative category. Nonetheless, they are crucial for future value creation. During previous downturns, companies that thrived used data-derived insights made by informed decision-makers to produce lasting competitive advantage.
Strategic planning also helps a company maintain a healthy balance sheet. In today's world of more restricted credit, cash flow management and forecasting are critical. Companies with strong cash flow and balance sheet planning capabilities are more effective at executing their strategies and responding to new opportunities and challenges.
This more comprehensive approach to planning can encourage managers to pursue more long-term value creating investments regardless of their short-term profitability. With better information, investors can assign a greater future value to investments beyond the immediate fiscal year. That gives managers the leeway they need to take risks and place bets.
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