Planning in uncertain times

In light of all the impacts of the pandemic on business, rethinking some managerial practices and operations systems should be a priority. Business scenarios are highly unpredictable; demand is erratic; sourcing raw materials is panic-ridden; the models of final consumption are morphing. All this has led many companies to reflect or reconsider whether or not business planning – in the short or medium-long term – is worthwhile. Simply consider that the budgets drawn up at year’s end 2019 were scrapped by the first quarter of 2020. The budgeting process for 2021 was typically marked by extreme uncertainty and little in-depth analysis, and budgeting for 2022 is being done while tensions are running high because resources are hard to find. Likewise, in the face of changing conditions, pluriannual plans put in place before 2020 rapidly became obsolete. In terms of reporting, numerous companies dusted off their year-end statements from 2018 and 2019 to compile analyses of deviations with respect to 2021 results, essentially flouting any budget assumptions.  

A recent McKinsey study based on interviews with 127 CFOs showed that 43% of them believed streamlining the overall budgeting process was a good idea, to be able to react with greater speed and efficiency to changes in the business context. At the same time, 65% said they expected to resort to rolling forecasts to come up with more credible projections of future performance. 

Under these circumstances, does it still make sense to keep on planning, when the process only proves effective in stable, relatively unchanging contexts, and breaks down completely in situations where environmental and competitive turbulence is intense? The fact is that planning and budgeting are often burdensome processes for companies, because they take up a great deal of time for company executives. Does it make sense for top management to invest time and energy in processes that generate performance expectations that are quickly dashed? 

The aim here is to underscore how essential planning processes are, especially when conditions are uncertain. The ability to plan activities is always an indispensable skill for managers, and there are a number of reasons why. 

• The initial phase of planning and budgeting processes calls for exploring likely competitive scenarios, identifying and weighing possible action alternatives, and creating what-if models to support sensitivity analysis of company results. This exercise generates value because it focuses the organizational culture on continually reading the surrounding environment.   

• Planning and budgeting involve decision-making. Regardless of the level of analysis of the competitive context or the detailed description of possible options, planning is an activity that forces management to enact a decision-making process. This in turn requires managers to adopt predictive models based on strategic, competitive and financial expectations when they are faced with areas of risk and uncertainty. 

• Planning and budgeting are cross-cutting processes. Different managers, each with their own competencies and vision, lend their voices to these processes with an inter-functional approach and a common goal. Actually, planning processes are one of the few organizational opportunities in which various managerial roles converge in the same decision-making context.   

• Training improves reaction time, not only in sports, but in management too. By training managers to continually draw connections between scenarios, objectives, and actions, the company can react on the spot to unexpected events. 

• Planning and budgeting are processes that reduce areas of corporate risk. In this respect, the pandemic is shining a light on an enormous weakness among companies, that is, the widespread lack of preparation in terms of risk management. To address this problem, well-designed planning processes map risks, both exogenous and endogenous, and force companies to adopt containment or mitigation measures. 

What precautions should be taken in the planning process? What should companies pay most attention to? What are the most common mistakes? Often these are the questions that come up when discussing the criteria for designing and implementing business planning systems. Without attempting to offer an exhaustive list, we can find certain recurring shortcomings that emerge in literature and practice. 

The first is inadequate analysis of revenues and related risks. Studies show that in most cases, failure to hit revenue targets is the reason why business plans are not put into action. But profit projections over a pluriannual period must be grounded on a series of rational, analytical assumptions (such as price/volume per family/product, channels, brands, geographical areas, customers, etc.). Moreover, it is indispensable to schedule time for in-depth discussion of these assumptions with members of the company’s management team.  

Second, clearly managers see planning as a routine, overlooking the fact that the business plan encompasses the company’s competitive strategy. As such, the planning activity presents the opportunity for questioning and modifying current competitive and organizational models. Put another way, managers forget the strategic scope of the planning process, reducing it to a standard sequence of steps. Moreover, in many cases questioning winning strategies from previous years is a difficult thing to do. It’s the “success trap.” This refers to how hard it is to discuss the process of change in a successful company (but much easier to do so when performance is below par). Yet refusing to change means forgetting that the behavior of market players is constantly driven by imitation and innovation. 

Lastly, the current cost structure cannot be a constraint on the business plan. Although in budgeting, the cost structure represents an immovable ceiling in the short term, in the planning process every limitation can theoretically be removed.