5 Rules for Effective Business Planning

5 Rules for Effective Business Planning

For effective business planning, companies must be able to properly – and quickly – allocate financial and human capital to either take advantage of opportunity or to right the ship should they find themselves in stormy waters. The five business planning rules outlined below provide key insight on how your company can better plan for success, allowing for nimble responses to meeting your most critical business objectives.

  • Actively anticipate surprises
  • Plan for diverse outcomes
  • Envision and plan for high-impact events
  • Document and outline scenarios
  • Utilize technology

In an early episode of The X-Files, FBI agent Dana Scully asks a shadowy government figure to explain exactly what it is his secretive group does. His answer? "We predict the future. And the best way to predict the future...is to invent it." While the fictional nature of that statement doesn't, on its face, necessarily apply to modern business, consider a more practical variation on that statement: The best way for a company to ensure success in the market is to position itself with the ability to readily adapt for shifting trends and/or sudden changes in the labor force and broader economy.

Quite simply, failing to plan properly is tantamount to planning to fail

If failing to plan means planning to fail, then it stands to reason that success demands planning, and it might be argued that more planning leads to more success. To some extent that is true, but the operative word is better planning and not more planning. And better planning is about anticipating unexpected outcomes, positioning oneself for their prevention, mitigation, and recovery, and then acting quickly to implement and adjust those plans.

Furthermore, more planning does not mean having detailed plans to respond to every eventuality. In fact, more detailed plans are almost certainly LESS accurate and less useful since the likelihood of any one plan being 'right' is much lower than the aggregate being about right. Said differently, being approximately right is far better than being precisely wrong.

Successful plans envision scenarios and reflect the actions that can be triggered to enable the organization to successfully respond to each scenario and meet its objectives. These plans therefore present the expected utilization of financial and human capital under the most plausible scenarios an organization may encounter, including the worst-case ones.

1. Competitive advantage requires actively anticipating surprises

In a 2014 feature piece for the Journal of Accountancy, Jack Hagel examined major conclusions of the book Budgeting, Planning, and Forecasting in Uncertain Times, by CGMA strategy experts Michael Coveney and Gary Cokins. Among their findings, the authors noted that less than half - 46 percent - of these professional accountants identified scenario planning as a function in their businesses, in part because many saw scenario planning as unnecessary. We disagree and believe that competitive advantage comes from planning that actively anticipates surprises and reacting faster than one’s competitors.

Best-case and worst-case scenarios must both be accounted for in resource planning.

A Ford Motor Co. anecdote illustrates the principle: Based on the energy crisis of the mid-to-late 1970s, Ford and others believed that gasoline prices would hit about $3 to $4 per gallon in the latter half of the 1980s. By 1981, this projection drastically fell to an estimated $1.50 a gallon; as soon as this surprise was identified, Ford overhauled its design for the Taurus. Featuring bolstered horsepower and increased overall capacity, the new design led to the most successful new car launch to date when the new Taurus vehicles debuted at dealerships – despite the failure of a fundamental assumption.

Further back in history, the final plans for the invasion of Germany were approved by General Dwight Eisenhower just weeks before Germany launched a major counter-offensive –– a surprise attack that caught the Allied Forces completely off guard. However, as described in the book Hope is Not a Method by General Gordon Sullivan, “Eisenhower’s strategic concept was not a precise blueprint [or] planning chart; but his campaign plan, in the hands of competent commanders … accommodated the Battle of the Bulge and provided the framework” which ultimately led to victory in 1945.

Thus, we believe that effective business planning involves laying out a framework or baseline plan of action, which then allows an organization’s leaders to confidently respond to circumstances as they occur.

2. Plan for diverse outcomes

The ‘published’ business plan for an organization and its period budgets or targets must be singular in nature: after all, the Board of Directors typically approves the plan and budget. But this shouldn't be confused with banking on or expecting any one outcome.

From top to bottom, organizational personnel must develop plans and scenarios for multiple possible outcomes: organizations must be prepared to change direction on the fly when – not if – necessary.

To change directions quickly, organizations must also have plans for very different outcomes, often the polar-opposite of what they most expect. For example, planning for both record-high annual growth and a double-digit revenue dip allows you to rapidly expand the organization in a controlled manner or, conversely, implement the steps necessary to execute a significant downsizing.

But to be fair, sometimes the same strategy can look good one minute and awfully bad the next. In July 2008, oil prices were surging with some projections calling for $150 per barrel. Air Canada managed the first part of that year very well, due to a previously implemented hedging strategy. What was unforeseen however was the polar-opposite event: by the end of 2008, oil prices had plummeted to under $50 per barrel and Air Canada’s previously successful hedge was written off to the tune of $100 million.

All this shows is that most of us do not see into the fog much better than our competitors do, so we better be prepared for events very different from those we expect or desire.

   Apparent "black swan" events, like the 2008 financial crisis, must be accounted for in successful planning endeavors.

Apparent "black swan" events, like the 2008 financial crisis, must be accounted for in successful planning endeavors.

3. Envision and plan for high-impact events despite improbability

Financial expert and former Wall Street trader Nassim Nicholas Taleb coined the concept of black swan events in the immediate wake of the 2007 financial crisis and subsequent Great Recession, both unlikely, difficult-to-predict occurrences that had industry-shaking consequences. While hindsight eventually revealed how certain acts of financial malfeasance and recklessness made the crisis nearly inevitable, black-swan events can often be envisioned and planned for before they occur.

Looking at historical data is but a small part of identifying the possible events that might occur. For one thing, as we’ve previously written, there is no certainty that what has not yet happened will not happen; conversely, there is equally no guarantee that a previous situation will not arise again. Therefore, open discussion about the possible is the best way to plan for the unlikeliest of events.

In keeping with Arthur Conan Doyle's famous axiom, eliminate only the impossible from your planning and make room for improbable events, ranging from the dissolution of a major part of your supply chain to the sudden invention of a product that outperforms yours or greatly undercuts its price. (Bear in mind that you should focus on the least improbable events that tangibly relate to your organization and avoid the most literal interpretation of this principle.) The latest costing and planning software solutions are equipped to support these essential tasks with greater efficacy than legacy reporting systems.

4. Document and outline scenarios

After determining the most likely scenarios, it's necessary to get somewhat more granular. What data and what metrics suggest that an event or trend will occur? Leading indicators are of course ideal, since they provide a lens into the future. Failing that, one needs metrics to advise on what is occurring or just has occurred. And those metrics trigger the organizational response suggested by the plans made earlier. But even that is not enough. Planned responses might not be successful and therefore some measurement of response effectiveness must be made.

Key performance indicators germane to all scenarios being examined, as well as organizational responses to these occurrences, must be catalogued. Even something abstract, like team morale, can be quantified through company-wide satisfaction surveys. No matter the metric, the importance of capturing and reporting actionable information cannot be overstated.

5. Utilizing technology for optimal scenario planning

The goal of modeling outcomes and planning for the future by using multiple KPIs and datasets can be achieved with today's costing and planning tools, in ways never previously imagined – with far greater efficiency and lower cost than ever before. These systems also don't require IT expertise to use, as they segment pertinent information into digestible portions and are designed to have business users develop their own dashboard reporting requirements, each customized to meet specific needs.

Better Business Planning with BetterVu

We started by saying that failing to plan means planning to fail. So, what’s our plan to help you plan? Let us show you how today’s leading planning and performance management technologies make it easy to build scenarios, compare them, and assess how each scenario interacts with other parts of your business. Contact us today to get started.