Saturday, December 4, 2010

The New Business Planning

Both large and small businesses in our economy have for many years based their business practices on ideas and haunches of management, a useful product that clients new where to buy and relied on their staff to drag them through challenging times. Today this strategy s fast becoming outdated and a more calculated approach, using business planning software and a regular updated business plan is often at the order of the day in those more successful and sustainable businesses.

This more effective approach uses sophisticated analytics to help managers improve the allocation of capital and resources, and it broadens the business planning perspective to include regular market research and updated information on client expectations.

Companies that make hefty investments in business planning capabilities expect a return for that investment and its often the more sophisticated in business plan software solutions that are being used. Business both large and small, corporate and start-up entrepreneurs tend to look for a more revolutionary approach to the business planning process. These companies watched the fast changing markets, share 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.

Even smaller business are increasingly utilising the scenario based planning strategy to ensure that both their own and their investors capital and time investments are utilised effectively and are protected against possible risks that may harm the business.

Before defining scenario planning, it is necessary to give definition of scenario to make a better understanding of the term. According to Lynch (2003, p. 93-94), scenario are detailed and plausible views of how the business environment of an organization might develop in the future based on grouping of important environment influences and drivers of change about which there is a high level of uncertainty. For example, pub industry in the UK has changed during the past decade. Started from non-smoking area and now the pubs are facing new regulation in which pubs and nightclubs have to turn themselves into non-smoking pubs by 2008. Obviously, it is not possible to forecast precisely over the period of 10 years time that the government will write this regulation. However, pubs can imagine this happening if they look at the non-smoking area policy. Accordingly, it is a need for a pub industry to view business environment of five years or more.

Scenario planning does not make an effort to predict or forecast the unpredictable future business environment. Therefore, it considers multiple and equally plausible futures and works out a strategy to cope with these scenarios in the case that they may well come to fruition.

From a start-up perspective this may often be done by looking at industry reports, through brainstorming or looking at other more evolved industries. The issues really in many ways is that of preparation and as recent economic events have shown us we are seldom sufficiently prepared for what the future may hold.

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