Fundamentals of Business Planning

1. Fundamentals of Business Planning Professor Steven E. Phelan, PhD

2. 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)

3. 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

4. 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”

5. 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

6. 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)

7. 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

8. Kaplan/Norton THE OFFICE OF STRATEGY MANAGEMENT

9. 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?

10. 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”

11. 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

12. Planning for the 1990s MCI Communications

13. 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?

14. 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?

15. Robert S. Kaplan Resource Capacity Planning

16. 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)

17. McGrath/McMillan DISCOVERY DRIVEN PLANNING

18. 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

19. 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

20. 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

21. 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?