over the several year period required to recoup the invest- ment in such machines, labor might go out on strike, or new, faster machines might technologically obsolete the older machines. The management response to this increas- ing uncertainty going further out into the future than one year was long-range planning.
As demand began to level off later in the twentieth cen- tury, organizations were facing an environment in which the rising tide of continual growth lifting all players was chang- ing to more of a zero sum game in which growth for one organization frequently came at the expense of another.
Management discovered that there was a learning curve effect which meant the more product built, the cheaper each succeeding product was to produce. A premium, therefore, was placed on having the leading market share. This way the leader built more product than any other, had the cheap- est unit cost, the highest operating margin, and was better able to survive over time. Organizations also discovered that products had a definite life cycle, with different growth characteristics for each stage. They began to plot the S Curve, an aid to the timing and impact of innovation.
Putting into practice these ideas and techniques, as well as other related ones, was management’s response to flattening demand, and collectively was known as strategic planning.
Today, all three types of planning—short-term, long-range, and strategic—are practiced by organizations at different times and in varying situations. Yet, much like the printed telephone directories still popular across the country, no sooner are they off the presses than they become out of date. Accordingly, the accelerating pace of change facing all organizations has fostered another tool to assist organizations in managing for the
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future—the strategic framework. This concept is addressed in Chapter 4, “Build Framework Foundation.”
Focus
Chapter 2, “Calculate Current Value,” dealt with current organizational value from a historical perspective—financial and management performance that was a direct result of past decisions regarding financing, investing, and operating the organization. Planning, with an emphasis on a forward look, encompasses forecasting likely future conditions, a fairly important requirement for managing any organization.
Planning can be done for any time frame, as indicated in the last section. It can also be performed at any level of the organization or at any level of detail desired. However, to be most useful to the management of an organization, it should be approached with a global perspective, keeping the entire organization in mind at all times. The reason for this becomes obvious when you realize the dynamic nature of organiza- tions—you cannot change one part without affecting another.
This holds true, of course, for cash flows which, at any point in time, can be generated by one part of the organization and used by another. Unless one’s cash flow view is global, taking into account these financial interactions, the checkbook can become overdrawn, and/or bankers, suppliers, and investors may come knocking at your door.
Beyond the financial considerations, however, planning also deals with positioning the organization in a desired future landscape. Expectations regarding the future techni- cal, social, economic, and competitive environment should be considered. The ability to think outside the parameters
management normally considers in day-to-day operations is often difficult to achieve. It can be enhanced when a differ- ent setting, such as an off-site retreat center,1 and different personnel, such as a team of facilitators, create an environ- ment and structure more conducive to reflection regarding the future. This holds true whether the focus is on short- term, long-range, or strategic planning.
Techniques
Short-term budgeting and long-range planning are primarily financial in nature. They focus on projecting operating per- formance and the financial requirements required to sup- port future operations. They encompass assumptions made by organization management regarding a variety of future conditions. Initial forecasts created generally take the form of standard accounting statements—income statements and balance sheets—as well as cash flow projections. Time peri- ods covered can range from week-to-week to several years into the future, depending on the type of planning and the purposes involved.
The ease with which computer spreadsheets can be set up and altered allows initial forecasts to be refined with addi- tional information and insights, and the planning /budgeting process is usually an iterative one. However, this computa- tional power needs to be balanced with sound judgment and a highly consistent approach in order to make the planning exercise most useful. Determining which component or com- ponents of the financial statements have the greatest impact on cash flow is fairly easy to accomplish with computer spreadsheet power. This testing of the sensitivity of the initial
Review Planning Fundamentals 55
and subsequent assumptions is also a critical factor in suc- cessful planning.
Strategic planning has gained widespread acceptance and use across a wide variety of organizations since it was first introduced and promulgated by high-priced consultants and consulting firms in the 1970s. The techniques involved, some of which were covered in Chapter 1 (see Exhibits 1.6 and 1.7), were often based on empirical observations and sophisticated calculations and were closely guarded secrets.
Now these techniques and their appropriate application are taught as a matter of course in most business schools and are available to all in any number of textbooks and refer- ence books.
Pros and Cons
Planning professionals have concerns regarding how plan- ning is actually carried out. These are in the areas of consis- tency, efficiency, and culture. The first two relate to problems with computer-generated spreadsheets. Because different parts of the organization have specialized approaches to solving their individual problems, the seams where one department interfaces with another are potential sources of problems.
For example, long-range plans created cannot always easily incorporate special situations such as acquisitions or major capital expenditures. The top-level annual budget, incorporating all the lower-level budgets, does not always coincide with, and therefore, cannot be linked to, the first year of the long-range plan. This lack of consistency (remember the importance of global thinking) can nega- tively impact efficiencyand cause difficulty in the consolida-
tion and revision process and in the ability to conduct vary- ing scenario analysis and what-if and sensitivity analysis.
This, in turn, can cause a lack of confidence in the numbers and much rebuilding year after year.
Shortcomings in these two areas can also adversely affect the organization’s culture. When it comes to plan- ning, there can be a lack of ownership, a lack of account- ability, and much gamesmanship. The process often becomes more political and, accordingly, less realistic and useful.
These difficulties are not inherent in planning. They tend to evidence themselves when there is a lack of strong, con- sistent leadership from the top. However, when no such lack exists, and a strong planning system is in place, the benefits are numerous. Management and staff can spend time analyzing investment opportunities for their cash flow potential, rather than wrestling with inefficient spread- sheets. The longer a solid working system is in place, the more confident everyone who uses it becomes, and the more use it gets as the environment continually changes.
Decisions can be made more quickly and alternatives assessed with greater flexibility. Just one cautionary note—
the installation of a top-to-bottom, comprehensive planning system endorsed by all members of the organization and practiced by people well-educated in its use is a process that usually takes three to five years.