Fundamentals of Business Planning
Professor Steven E. Phelan, PhD
AGENDA
Review Simulation Results
Fundamentals of Planning
• Goals:
• To understand the relationship between strategy,
plan, and execution
• To understand the components of a good plan
• To assess the strategic readiness of select plans
• To make the numbers believable
Tomorrow: Basics of Project management
• Please install OpenProj (http://openproj.org/openproj)
Tools
Readings
• Mintzberg “Fall and Rise of Strategic
Planning”
• Kaplan/Norton “The Office of Strategy
Management”
• Kaplan “Resource Capacity Planning”
• McGrath/McMillan “Discovery-Driven
Planning”
MCI Case
Mintzberg on Strategic Planning
Observations:
• “Strategic planning isn’t strategic thinking”
• “One is analysis the other is synthesis”
• “Real strategic changes requires inventing new
categories, not rearranging old one”
• “Planning is a calculating style of management,
not a committing style”
• “Planning has often been used to exercise blatant
control over business managers”
Mintzberg…
 The Fallacies of Strategic Planning
• Fallacy of Prediction
• Can planners forecast with any accuracy?
• Fallacy of Detachment
• The idea that strategy must be detached from operations
• A strategy can be deliberate or emergent (and probably has
elements of both)
• Fallacy of Formalization
• Formal procedures will never be able to create novel
strategies
• Do we think then act or act then think? Effectuation logic…
• Should be called strategic programming
Mintzberg…
 Planning as Strategic Programming
• Codification
• Clarifying strategies in operationally relevant terms
• Elaboration
• Breaking down the codified strategies into projects and action
plans (i.e. the non-routine aspects of organization)
• Conversion
• Restating objectives, reworking budgets, reconsidering
policies, and standard operating procedures (i.e. the routine
aspects of organization)
• Benefits:
• Focus, coordination and communication (internal/external)
Mintzberg…
Other roles for planners
• As strategy finders
• As analysts
• Carrying out analysis of specific issues
– The quintessential MBA?
• As catalysts
• Getting others to question conventional wisdom
and think about the future in creative ways
Kaplan/Norton
THE OFFICE OF STRATEGY
MANAGEMENT
The Office of Strategy Management
Statistics
• 67% of HR/IT department strategies don’t
reflect corporate strategy
• 90% of frontline workers not compensated
for success of strategic priorities
• 95% of workers don’t know or understand the
strategy
• 60% of organizations don’t link budgets to
strategies
• Are you surprised?
• How big of an issue is this for your organization?
OSM…
Sher’s view
• “…while many people believe that chief
executives wield direct and easy influence,
the reality is that any CEO has a difficult time
influencing his or her organization”
• “I want to exert my influence indirectly…I don’t
command any parts of the organization”
• “Information, particularly bad news, is filtered
before it gets to me”
• “we were spending way too much time debating
the quality of information”
• “much of management is the search for the truth”
OSM…
What good OSMs do
• The OSM is a facilitating organization, not a
dictating one (uhuh!)
• Roles
•
•
•
•
•
•
Create and manage balanced scorecard
Align the organization (cascade BSCs – rare)
Facilitate monthly strategy reviews
Develop and communicate strategy
Manage strategic projects/initiatives
Integrate strategic priorities with other depts
– Budgeting, HR alignment, knowledge mgt
Planning for the 1990s
MCI COMMUNICATIONS
MCI…timeline
Evolution
• 1960s to 1980 – battles with AT&T and
regulators
• 1984 – decentralization to compete with
Baby Bells
• 1986 – crisis
• How did the strategy process evolve over
this time?
MCI…
1990s – globalization, new technologies,
sophisticated customers
• How should MCI alter its strategy processes
to cope with these growth opportunities?
• What do you think of the goals in Exhibit 5?
Robert S. Kaplan
RESOURCE CAPACITY
PLANNING
Resource Capacity Planning
MBA assessment issue
• No concrete data-driven recommendations
Linking strategy to operations
• Typically 90% of corporate spending on
routine operations (OpEx) vs StratEx
• Four steps:
•
•
•
•
Derive sales forecasts for strategic plan
Translate into operating plan
Use time-based ABC to forecast resources
Derive budgets for operational and capital
spending (see DA example)
McGrath/McMillan
DISCOVERY DRIVEN PLANNING
Discovery-driven planning
New ventures…
• have a high ratio of assumptions to
knowledge
• often deviate from plans because
assumptions are wrong
Traditional planning bakes in
assumptions
• Companies don’t have hard data but proceed
as if assumptions were facts
• When they do get data they often don’t check
assumptions
Discovery-driven planning
Reverse income statement
• Start with required profits
• We want to generate $100K in additional profit
• Necessary revenues if 10% sales margin = $1m
• Allowable costs with 10% sales margin = $900K
• Calculate per unit figures
• Required unit sales at $100 per unit = 10,000
• % of market = 10% of US market per year
• Allowable costs per unit = $90
Next steps
 Estimate expenses
• Cost of sales
• E.g. Unit sales / size of order = no. of orders
• Sales calls per order x handling time = no. of staff
• Cost of manufacturing
• Cost of shipping/warehousing
• Capital expenditure/depreciation
 Allows you to identify and track assumptions
 Plan to test assumptions at milestones with a
“keeper of the assumptions”
•
http://faculty.unlv.edu/phelan/MGT709/ShadBusinessPlanningModel2005.xls
Strategic Readiness Audit
You need to analyze your chosen plan for
its strategic readiness
• By that I mean the ability to execute on the
plan
What makes a plan more executable?
• What ideas have influenced you the most in
the readings?
• What things would you look for in a plan?
• What are some red flags?