In the previous article in this series, I discussed why we need to rethink corporate planning, and I opened the box for discussing alternatives. The suggested way forward was to adopt active planning as opposed to reactive or static planning. Now I’ll go into more detail why that is and what that means for your planning process.
Why is active better than reactive or static? In simple terms, it’s because the world around us changes all the time, meaning the environment we do business in can change at any time. It doesn’t wait for your planning process to take place before it shifts. That means you must act on the changing business environment whenever appropriate.
In principle, this means you should plan more often, but in reality, you probably don’t need to change your whole plan every time. It also means:
- You should do assumptions-based planning based on what you assume must be true for your strategy or plan to be a good one.
- Most of your work will be on building and challenging the assumptions on which the plan is based.
- Your first and foremost task once the plan is built will be to monitor reality versus the assumptions you made.
- Every time reality changes more than your plan assumed, you should re-plan.
I know it still sounds kind of high level, so let’s look at an example.
Making active planning concrete
Here’s a real situation I experienced last year. The container shipping industry is characterized by oversupply of capacity due to an arms race of building bigger and more efficient vessels. Still, you plan for a certain supply-demand balance and then you act on how the actual market demand turns out. Supply shocks can occur though, and that’s exactly what happened last year.
Situation: We’ve just gotten our budget signed off for 2019 when a competitor announces that it will induce 15% more capacity on our trade lane starting in April 2019.
Complication: However, our next forecasting and major decision-making cycle is not starting until two months later.
Question: How can we make a major decision on how to respond to the competitor’s actions and mitigate the impact before the capacity is added?
Answer: We immediately go into re-planning mode, come up with three scenarios and make a recommendation to the executive board for fast decision-making.
You can see how absurd it would’ve been to wait until the next forecasting cycle. We had to act immediately as one of the significant assumptions for our original plan had moved way beyond our comfort zone.
Sometimes businesses are responding to what they see in the market, but either finance is not involved because it doesn’t fit into the fixed cycle or the assumptions weren’t documented properly, and the reaction comes too late.
Think of Blockbuster versus Netflix. Blockbuster clearly acted too late. If its leaders would’ve had a better understanding of their customers and the assumptions for their business, they likely would’ve acted sooner. The same goes for Nokia, Kodak and all the other famous bust stories.
Active planning is smart planning
If your company does active planning, it means you’re ready to respond to a change in your assumptions at any time. You can only do that if finance gets involved in the business to have an in-depth discussion about the assumptions for your plan (be it tactical or strategical).
If finance is not involved, then you won’t have a proper monitoring system that can tell you when to act. However, finance must prove this case to business leaders, as the concept of active planning might be somewhat foreign to them.
The case for change is clear though, and next week we’ll discuss how to move to active planning. You can start now by figuring out what assumptions your plans are built on and how reality has changed since you made those plans. Perhaps nothing needs to change. Maybe everything needs to change. It’s your job to provide the recommendation!