Business planning, also known as strategic planning or long-range planning, is a management-directed process that is intended to determine a desired future state for a business entity and to define overall strategies for accomplishing the desired state. Through planning, management decides what objectives to pursue during a future period, and what actions to undertake to achieve those objectives.
Successful business planning requires concentrated time and effort in a systematic approach that involves: assessing the present situation; anticipating future profitability and market conditions; determining objectives and goals; outlining a course of action; and analyzing the financial implications of these actions. From an array of alternatives, management distills a broad set of interrelated choices to form its long-term strategy. This strategy is implemented through the annual budgeting process, in which detailed, short-term plans are formulated to guide day-to-day activities in order to attain the company's long-term objectives and goals.
For entrepreneurs and small business owners, the first step in successful business planning involves creating a formal business plan, of the type commonly used to attract investors and secure bank loans. Careful preparation of this document forces a small business owner to examine his or her own goals as well as the market conditions in which the business operates. It also includes a detailed financial analysis, a look at current staffing levels and future needs, and information about management's expertise. "All the elements can be folded together to formulate a strategic plan that focuses on where you want your company to be in the long run, and how you plan to get there," Vince Maietta wrote in The Business Journal. "That also helps entrepreneurs focus on the strengths and weaknesses of the firm, as well as opportunities and threats."
The use of formal business planning has increased significantly over the past few decades. The increase in the use of formal long-range plans reflects a number of significant factors:
* Competitors engage in long-range planning.
* Global economic expansion is a long-range effort.
* Taxing authorities and investors require more detailed reports about future prospects and annual performance.
* Investors assess risk/reward according to long-range plans and expectations.
* Availability of computers and sophisticated mathematical models add to the potential and precision of long-range planning.
* Expenditures for research and development increased dramatically, resulting in the need for longer planning horizons and huge investments in capital equipment.
* Steady economic growth has made longer-term planning more realistic.
BENEFITS OF PLANNING
Planning provides a means for actively involving personnel from all areas of the business enterprise in the management of the organization. Company-wide participation improves the quality of the plans. Employee involvement enhances their overall understanding of the organization's objectives and goals. The employees' knowledge of the broad plan and awareness of the expected outcomes for their responsibility centers minimizes friction between departments, sections, and individuals. Involvement in planning fosters a greater personal commitment to the plan and to the organization. These positive attitudes improve overall organizational morale and loyalty.
Managerial performance also benefits from planning. Planning focuses the energies and activities of managers in the utilization of scarce resources in a competitive and demanding marketplace. Able to clearly identify goals and objectives, managers perform better, are more productive, and their operations are more profitable. In addition, planning is a mental exercise from which managers attain experience and knowledge. It prepares them for the rigors of the marketplace by forcing them to think in a future- and contingency-oriented manner.
THE PLANNING HORIZON
Basically, there are two timetables for planning. The first is long range, extending beyond one year and normally less than five or ten years. Often called the strategic plan or investment plan, it establishes the objectives and goals from which short-range plans are made. Long-range plans support the organizational purpose by providing clear statements of where the organization is going.
The second planning horizon is short-range, covering a period of up to one year. Short-range plans are derived from an in-depth evaluation of the long-range plan. The annual budget is a quantified expression of the enterprise's plans for the fiscal year. It generally is divided into quarters, and is used to guide and control day-to-day activities. It is often called the tactical plan because it sets priorities, in the near term, for the long-range plans through the allocation of resources to specific activities.
TYPES OF PLANS
In addition to differentiation by planning horizon, plans are often classified by the business function they provide. All functional plans emanate from the strategic plan and define themselves in the tactical plans. Four common functional plans are:
1. Sales and marketing: for developing new products and services, and for devising marketing plans to sell in the present and in the future.
2. Production: for producing the desired product and services within the plan period.
3. Financial: for meeting the financing needs and providing for capital expenditures.
4. Personnel: for organizing and training human resources.
Each functional plan is interrelated and interdependent. For example, the financial plan deals with moneys resulting from production and sales. Well-trained and efficient personnel meet production schedules. Motivated salespersons successfully market products.
Two other types of plans are strategic plans and tactical plans. Strategic plans cover a relatively long period and affect every part of the organization by defining its purposes and objectives and the means of attaining them. Tactical plans focus on the functional strategies through the annual budget. The annual budget is a compilation of many smaller budgets of the individual responsibility centers. Therefore, tactical plans deal with the micro-organizational aspects, while strategic plans take a macro-view.
STEPS IN THE PLANNING PROCESS
The planning process is directly related to organizational considerations, management style, maturity of the organization, and employee professionalism. These factors vary among industries and even among similar companies. Yet all management, when applying a scientific method to planning, perform similar steps. The time spent on each step will vary by company. Completion of each step, however, is prerequisite to successful planning. The main steps in the planning process are:
* Conducting a self-audit to determine capabilities and unique qualities
* Evaluating the business environment for possible risks and rewards
* Setting objectives that give direction
* Establishing goals that quantify objectives and time-frames
* Forecasting market conditions that affect goals and objectives
* Stating actions and resources needed to accomplish goals
* Evaluating proposed actions and selecting the most appropriate ones
* Instituting procedures to control the implementation and execution of the plan.
THE SELF-AUDIT In order to create an effective over-all plan, management must first know the functional qualities of the organization and what business opportunities it has the ability to exploit. Management conducts a self-audit to evaluate all factors relevant to the organization's internal workings and structure.
A functional audit explores such factors as: sales and marketing (competitive position, market share and position, quality and service); production (operational strategies, productivity, use and condition of equipment and facilities, maintenance costs); financial (capital structure, financial resources, credit facilities, investments, cash flow, working capital, net worth, profitability, debt service); and personnel (quantity and quality of employees, organizational structure, decision making policies and procedures).
THE BUSINESS ENVIRONMENT Management surveys the factors that exist independently of the enterprise but which it must consider for profitable advantage. Management also evaluates the relationships among departments in order to coordinate their activities. Some general areas of the external environment considered by management include: demographic changes (sex, age, absolute numbers, location, movement, ethnicity); economic conditions (employment level, regional performance, sex, age, wage levels, spending patterns, consumer debt); government fiscal policy and regulations (level of spending and entitlements, war and peace, tax policies, environmental regulations); labor supply (age, sex, education, cultural factors, work ethics, training); competition (market penetration and position, market share, commodity or niche product); and vendors (financial soundness, quality and quantity of product, research and development capabilities, alternatives, foreign, domestic, just-in-time capabilities).
SETTING OBJECTIVES AND ESTABLISHING GOALS
The setting of objectives is a decision-making process that reflects the aims of the entire organization. Generally, it begins at the top with a clear statement of the organization's purpose. If well communicated and clearly defined throughout the company, this statement becomes the basis for short-range objectives in the annual budget.
Management articulates the overall goals to and throughout the organization in order to coordinate all business activities efficiently and effectively. It does this by: formulating and distributing a clear, concise statement of the central purpose of the business; leading in the formulation of long-range organizational goals; coordinating the activities of each department and division in developing derivative objectives; ensuring that each subdivision participates in the budget process; directing the establishment of short-term objectives through constructing the annual budget; and evaluating actual results on the basis of the plans.
The organization must know why it exists and how its current business can be profitable in the future. Successful businesses define themselves according to customer needs and satisfaction with products and services. Management identifies the customers, their buying preferences, product sophistication, geographical locations, and market level. Analyzing this data in relation to the expected business environment, management determines the future market potential, the economic variables affecting this market, potential changes in buying habits, and unmet needs existing now and those to groom in the future.
In order to synchronize interdepartmental planning with overall plans, management reviews each department's objectives to ensure that they are subordinate to the objectives of the next higher level. Management quantifies objectives by establishing goals that are: specific and concrete, measurable, time-specific, realistic and attainable, open to modification, and flexible in their adaptation.
Because goals are objective-oriented, management generally lists them together. Some examples of goals might include:
1. Profitability. Profit objectives state performance in terms of profits, earnings, return on investments, etc. A goal might call for an annual increase in profits of 15 percent for each of the next five years.
2. Human resources. This broad topic includes training, deployment, benefits, work issues, and qualifications. In an architectural consulting firm, management might have a goal of in-house computer-aided design (CAD) training for a specified number of hours in order to reach a certain level of competence.
3. Customer service. Management can look at improvements in customer service by stating the number of hours or the percentage of complaints it seeks to reduce. The cost or cost savings are stated in dollar terms. If the business sells service contracts for its products, sales goals can be calculated in percentage and dollar increases by type and level of contract.
4. Social responsibility. Management may desire to increase volunteerism or contributions to community efforts. It would calculate the number of hours or dollars within a given time frame.
FORECASTING MARKET CONDITIONS Forecasting methods and levels of sophistication vary greatly. Each portends to assess future events or situations that will affect either positively or negatively the business's efforts. Managers prepare forecasts to determine the type and level of demand for products currently produced or that can be produced. Management analyzes a broad spectrum of economic, demographic, political, and financial data for indications of growing and profitable markets.
Forecasting involves the collection and analysis of hard data, and their interpretation by managers with proven business judgment. Individual departments such as sales, and divisions such as manufacturing, also engage in forecasting. Sales forecasting is essential to setting production volume. Production fore-casting determines the materials, labor, and machines needed.
STATING ACTIONS AND RESOURCES REQUIRED
With the objectives and forecasts in place, management decides what actions and resources are necessary in order to bring the forecast in line with the objectives. The basic steps management plans to take in order to reach an objective are its strategies. Strategies exist at different levels in an organization and are classified according to the level at which they allocate resources. The overall strategy outlines how to pursue objectives in light of the expected business environment and the business's own capabilities. From the overall strategy, managers develop a number of more specific strategies.
* Corporate strategies address what business(es) an organization will conduct and how it will allocate its aggregate resources, such as finances, personnel, and capital assets. These are long-term in nature.
* Growth strategies describe how management plans to expand sales, product line, employees, capacity, and so forth. Especially necessary for dynamic markets where product life cycles are short, growth strategies can be a) in the expansion of the current business line, b) in vertical integration of suppliers and end-users, and c) in diversifying into a different line of business.
* Stability strategies reflect a management satisfied with the present course of action and determined to maintain the status quo. Successful in environments changing very slowly this strategy does not preclude working toward operational efficiencies and productivity increases.
Defensive strategies, or retrenchment, are necessary to reduce overall exposure and activity. Defensive strategies are used to reverse negative trends in profitability by decreasing costs and turning around the business operations; to divest part or all of a business to raise cash; and to liquidate an entire company for an acceptable profit.
* Business strategies focus on sales and production schemes designed to enhance competition and increase profits.
* Functional strategies deal with finance, marketing, personnel, organization, etc. These are expressed in the annual budget and address day-to-day operations.
EVALUATING PROPOSED PLANS Management undertakes a complete review and evaluation of the proposed strategies to determine their feasibility and desirability. Some evaluations call for the application of good judgment—the use of common sense. Others use sophisticated and complex mathematical models.
ASSESSING ALTERNATIVE STRATEGIC PLANS
Because of the financial implications inherent in the allocation of resources, management approaches the evaluation of strategic alternatives and plans using comprehensive profit planning and control. Management quantifies the relevant strategies in pro forma statements that demonstrate the possible future financial impact of the various courses of action available. Some examples of pro forma statements are: budgets, income statements, balance sheets, and cash flow statements.
The competing strategic long-range plans constitute simulation models that are quite useful in evaluating the financial effects of the different alternatives under consideration. Based on different sets of assumptions regarding the interaction of the company with the outside world, these plans propose various scenarios of sales, production costs, profitability, and viability. Generally categorized as normal (expected results), above normal (best case), and below normal (worst case), the competing plans project possible outcomes at input/output levels within specified operating ranges attainable within the fiscal year.
Management selects courses of action relative to pricing policy, advertising campaigns, capital expenditure programs, available financing, R&D, and so forth based on the overall return on investment (ROI) objective, the growth objective, and other dominant objectives. In choosing between alternative plans, management considers:
* the volume of sales likely attainable,
* the volume of production currently sustainable,
* the size and abilities of the sales forces,
* the quality and quantity of distribution channels,
* competitors' activities and products,
* the pace and likelihood of technological advances,
* changes in consumer demand,
* the costs and time horizon of implementing changes,
* capital required by the plan, and
* the ability of current employees to execute proposed plans.
CONTROLLING THE PLAN THROUGH THE ANNUAL BUDGET Control of the business entity is essentially a managerial and supervisory function. Control consists of those actions necessary to assure that the company's resources and operations are focused on attaining established objectives, goals, and plans. Control compares actual performance to predetermined standards and takes action when necessary to correct variances from the standards. Exercised continuously, control flags potential problems so that crises may be prevented. It also standardizes the quality and quantity of output, and provides managers with objective information about employee performance.
In recent years some of these functions have been assigned to the point of action, the lowest level at which decisions are made. This is possible because management carefully grooms and motivates employees through all levels to accept the organization's way of conducting business.
The planning process provides for two types of control mechanisms: feedforward, which provides a basis for control at the point of action (the decision point); and feedback, which provides a basis for measuring the effectiveness of control after implementation. Management's role is to feedforward a futuristic vision of where the company is going and how it is to get there, and to make purposeful decisions coordinating and directing employee activities. Effective management control results from leading people by force of personality and through persuasion; providing and maintaining proper training, planning, and resources; and improving quality and results through evaluation and feedback.
Effective management means goal attainment. In a profit-making business or any income generating endeavor, success is measured in dollars and dollar-derivative percentages. The comparison of actual results to budget expectations becomes a formalized, routine process that:
* measures performance against predetermined objectives, plans, and standards,
* communicates results to appropriate personnel,
* analyzes variations from the plans in order to determine the underlying causes,
* corrects deficiencies and maximizes successes,
* chooses and implements the most promising alternatives,
* implements follow-up to appraise the effectiveness of corrective actions, and
* solicits and encourages feedback to improve ongoing and future operations.
Business planning is more than simply fore-casting future events and activities. Planning is a rigorous, formal, intellectual, and standardized process. Planning is a dynamic, complex decision-making process where management evaluates its ability to manipulate controllable factors and to respond to uncontrollable factors in an environment of uncertainty.
Management evaluates and compares different possible courses of action it believes will be profitable. It employs a number of analytical tools and personnel, especially in accounting, to prepare the appropriate data, make forecasts, construct plans, evaluate competing plans, make revisions, choose a course of action, and implement that course of action. After implementation managerial control consists of efforts to prevent unwanted variances from planned outcomes, to record events and their results, and to take action in response to this information.