Business Planning Law and Legal Definition
Business planning in the modern sense has a fairly long history. Henry Mintzberg, in The Rise and Fall of Strategic Planning, pointed out that business planning with modern characteristics (10-year horizon, five-year reviews) was already practiced in the mining industry in France in the 19th century. The current form took hold in the U.S. in the 1950s as an extension of budgeting processes. It became a very major corporate activity and continues so to this day.
With the twenty-first century underway, corporate planning (also known as long-range planning and strategic planning) may become transformed beyond recognition. Resistance to it became visible in the early 1990s. Peter Drucker, the renowned management guru, wrote in 1992 in The Wall Street Journal as follows: "Uncertainty—in the economy, society, politics—has become so great as to render futile, if not counterproductive, the kind of planning most companies still practice: forecasting based on probabilities." Since then uncertainty has increased (terrorism, potential problems of global warming, a looming shortage of hydrocarbon fuels, and waves of epidemics); the electronics age has vastly increased the speed of communications and the Internet has created a vast, global theater of activity. The chorus of critics has also grown louder. Despite these signs of a changing "planning culture," formal planning is still practiced in many if not all major corporations.
WHAT IS BUSINESS PLANNING?
A corporate plan may be a simple statement of objectives, including indications of methods to be used to achieve them—or it may be a very extensive planning process in which every element of the corporation routinely takes part: a formal planning cycle.
An example of the first category might be a simple statement such as the following: "Increase market share by 30 percent within five years by acquiring and integrating two of our smaller competitors, increasing our own sales by exploiting the cost advantages of the triploid valve, and divesting our holdings in toys and children's furniture by spinning them off."
Much more common are formal plans built from the bottom-up by the synthesis of projections and plans produced by the operating element (divisions, wholly-owned subsidiaries). In these cases the corporate expression of objectives will tend to be more abstract and financial, e.g., a projected growth rate for revenues, profits, and return on investment. Communication of such financial goals to operating elements may kick off the process. Each business manager then attempts to make his or her contribution to the corporate objective.
The fundamental elements of formal planning are 1) corporate goals to be met; 2) projections of earnings, costs, and returns; 3) actions to be carried out in light of opportunities and barriers (e.g., competition); and 4) a fixed time horizon. In most corporate environments, plans are for the next twelve months but will have projections out five, 10, or even 15 years. Time horizons in retail industries are typically much shorter: a long-range plan may be a year; the operational plan may be for the next quarter. The corporate budget, including not just cost projections but every aspect of future financial outcomes, is the skeletal framework of the corporate plan. The numbers are used to measure the performance of operational managers; the stock price is used as the way to judge top management.
The complex process is by far the most common. It has become deeply institutionalized. The planning cycle is usually referred to tongue-in-cheek as the "silly season." In many corporations a substantial bureaucratic structure ("the planning staff") has developed; it runs the exercise, coordinates inputs from operating elements, and synthesizes the evolving plan in successive waves. A major draw-back of formal planning is that operating units benefit by promising as little as possible to make it easier to meet plan. Top management objectives are to incentivize operating units to stretch themselves as much as possible. Conflicts are inherent in the process. In recent decades, accelerating change has made it ever more difficult accurately to predict what will happen six months out, much less a year out. Planning structures have grown very large, ritualized, and rigid. Information systems have improved to such an extent that constant adjustment to the environment is somewhat easier. "Rolling" budgets are becoming more popular and resistance to fixed long-range budgets is stiffening. All of these factors are playing a role in the foreseeable transformation of business planning in the years ahead.
PROS AND CONS OF BUSINESS PLANNING
As Henry Mintzberg pointed out in his 1994 book, nothing ever really happens without planning; we cannot even make a sandwich without "looking ahead" a little. He wrote, concerning this subject, that as far back as the late 1960s the business community could no longer come up with a single coherent definition of what "planning" and "long-range forecasting" meant. These phrases had taken on special meanings in every corporation.
It appears, therefore, that business planning, in the modern sense, as described above, is a technique of management in which routine planning (which goes with any kind of activity) is carried out consciously, formally, and with the deliberate projection of measurable outcomes based on a fixed future date.
At the time when this management technique came into widespread use (the 1950s and 1960s), it was well-adapted to business conditions generally. In many industries long-time horizons are required to build new capacity (e.g., the process industries like power, chemicals, and petroleum); in such operations long-range planning remains unquestionably superior to "doing what comes naturally." Even in industries where change has accelerated, a periodic, formal look ahead provides valuable insights. Well-conceived future goals always clarify current decisions. The principal benefit of formal business planning is therefore unlikely to be changed by changes in the environment. Looking ahead is good; looking ahead with concentration and some effort to understand a wide variety of forces that impinge upon our actions is even better. What is likely to change is the frequency with which this will be done and the methods used to arrive at the plans.
The primary negatives associated with modern business planning (the annual cycle), arise chiefly from three factors: 1) the bureaucratization of the process and the resulting high costs associated with it, 2) uncertainty brought about by rapid change, and 3) performance evaluation issues which, many claim, stifle innovation and result in unproductive gamesmanship. To this list some add a fourth issue: namely that the planning process poorly matches the quarterly stock market cycle. Such observers advocate a 3-month rolling planning cycle which matches plans to quarterly reports; such reports influence stock analysts who, in turn, influence stock price.
Business plan contents will be discussed elsewhere in this volume (see Business Plan.) What follows here is a discussion of two of the problem areas in modern planning that will likely undergo change.
Forecasting the future is the very essence of modern business planning. It provides the measurements that justify the planning effort. The operating manager planning for his or her unit makes the best possible projections about future costs, sales, capital needs, and returns. Some of these will be relatively easy to document. Others will be mere guesses. But after a plan has been approved, these forecasts tend to be transformed into something much more solid than they actually are: they turn into numbers which will determine promotions, bonuses, even the future of a job.
In times of rapid change, ability to forecast far ahead becomes more difficult. Pressures increase, therefore, to shorten the time horizon. An unforeseen flu epidemic or terrorist action may severely restrict travel, soften demand, and disrupt supplies. In the 1960s a competing retailer may have had to find and furnish retail outlets and establish warehouse distribution sites; in the 2000s he or she may enter the market suddenly with Internet distribution and a flurry of publicity. In a global market where much specialized labor is outsourced, international conflicts, well beyond a manager's control, can instantly put labor resources out of reach without much warning. Not surprisingly, therefore, pressures are now mounting to replace long-range planning with rolling budgets adjusted monthly or quarterly after brief assessments of changes in the environment.
PERFORMANCE TIED TO ANNUAL PLANS
In today's ever more uncertain business environment, the concepts of trust, empowerment, flexibility, and small, innovative front-line teams capable of rapid adaptation have become popular approaches for gaining a competitive edge. The Planning Group, a major management advisory group, has established the Beyond Budgeting Round Table (BBRT) of which 29 major corporations are currently members (2006). David Marginson and Stuart Ogden recently wrote in Financial Management, (UK) citing BBRT sources, that the necessary conditions of trust and empowerment in today's organizations "are not possible with budgets still in place, because the entire system perpetuates central command and control." Innovation is vital for economic survival. But "budgeting stifles trust and empowerment, according to its critics, which in turn stifles innovation."
Rapid changes in plans and flexible responses to competitive pressure—or to take advantage of suddenly appearing opportunities—are very difficult if individual managers' performances are measured based on formal plans. Long-range plans, out of time-phase with the rhythm of current events, are viewed as obsolete in today's environment. In addition to this emerging factual situation, gaming the system by carefully adjusting projections so that they can be met—in order to achieve bonuses, stock-options, or other benefits—has weakened the originally rational structure of formal business planning.
Business planning, in some form, is here to stay. Highly evolved and complex planning cycles are in use in most corporations. In many sectors which are somewhat immune to rapid changes in the business environment—for structural reasons, above all, such as the long lead time necessary to plan and to build a power plant, for instance—the established form of planning (the annual cycle) will continue to be used as a major management technique. Elsewhere signs are present that business planning will undergo a radical change soon. The annual cycle is already being abandoned by some. The new style of planning will most likely introduce much shorter time horizons, more fluid budgetary methods, and restructure managerial rewards to provide incentives for flexibility and innovation.
SEE ALSO Budgets and Budgeting; Strategy
Ackoff, R. L. A Concept of Corporate Planning. Wiley-Interscience. 1969.
Drucker, Peter. "Planning for Uncertainty." Wall Street Journal 22 July 1992.
Hope, Jeremy and Robin Fraser. Beyond Budgeting. Harvard Business School Press, 11 April 2003.
Marginson, David and Stuart Ogden. "Budgeting and Innovation: Do budgets stifle creativity?" Financial Management (UK). April 2005.
Mintzberg, Henry. The Rise and Fall of Strategic Planning. The Free Press, 1994.
Hillstrom, Northern Lights
updated by Magee, ECDI
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