The Art of Planning

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The Art of Planning

Frank Plaschke, Fabrice Rogh, and Fabian Gnther

April
AT A GLANCE

An increasingly complexand more volatileglobal economy presents changes

and challenges that have altered the context in which companies must undertake
planning. These external diculties are compounded by internal missteps. Yet
smart planning has never been as important as it is today.

E C: A N R
Given the lack of stability and predictability in the new global reality, companies
have to learn to be as agile and adaptable as possible.

I S: H C H T
Internal obstacles to planning include strained resources and employees; process
ineciencies; unreliable, low-quality data; and, oen, a companys own culture.

E C: T P D B P
Ten principles can serve as an overall guide to improving an inecient planning
system: make top-down target-setting a priority, take an analysts perspective, plan
in less detail, apply a dierent level of detail at each stage, shorten the planning
cycle, balance ambitions against forecasting, be adaptable and flexible, rethink the
incentive system, manage tradeos, and clarify governance and objectives.

T A P
H , been relatively straightforward for
company leaders: assess the business environment; agree on objectives and the
means for reaching them within the context of a relatively stable corporate strat-
egy; set target revenues, costs, and time frames; and move on. Today, however,
companies face new challenges that complicate the process and necessitate dynam-
ic and very dierent planning strategies. In this new era of heightened economic
volatility, planning becomes more, rather than less, relevant and critical.

Since businesses face more aggressive competition than ever before and have to
assume increasing risk, they need to prioritize their deployment of resources even
more carefully and govern their wide-ranging global activities more diligently.
Smart planning has never been as important as it is today.

In this Focus, we delve into the changes and challenges that have altered the
context in which companies must now undertake their planning. We break down
the impact of external issues stemming from an increasingly complexand less
predictableglobal economy. We also investigate company-specific internal prob-
lems, which include basic planning missteps, pseudoaccuracy, and poor time
managementshortcomings whose root causes oen run deep. These issues
become even more important in an uncertain environment because they amplify
the impact of external challenges.

How can companies cope with these external and internal changes and challenges?
BCG has worked with clients to help them actively prepare for todays altered
environment. Here, we examine best practices at several of these companies and
reveal ten key principles that have improved eectiveness and eciency in their
planning processes. As companies incorporate more of these principles and related
practices into their playbooks, they will become stronger, more flexible, and more
dynamicready for a new world of business.

External Changes: A New Reality

In the so-called old reality of just a few years ago, a companys market leadership
position was defendable, and its size and position in the marketplace were a clear
determinant of its ongoing performance. Markets were equally attractive to all the
businesses participating in a market, and a companys strategy development and
planning were grounded in a mostly reliable, steady, and predictable context. But
the global financial crisis has both accelerated and amplified fundamental, long-
term changesleading to a new reality and leaving many companies unprepared.

T B C G
World markets have become rife with volatility, large-scale default risks, and
refinancing uncertaintiesan atmosphere that has led to shis in consumer behav-
ior and increased risks in regulation and policy. The eects of globalization, the
fiercer fight for resources, and the emergence of what we call a two-speed world
that is, a world divided into fast-growing emerging markets and struggling devel-
oped ones experiencing slow or no growthwere all felt more acutely as a result of
this economic slowdown.1

The new reality is a globalized marketplace in which information is ubiquitous

and, at times, overwhelming. Unpredictable forces frequently emerge, such as
influential social movements or increased roles for local and national govern-
ments. And in this altered landscape, market leadership is far less sustainable.
Higher percentages of companies are dropping out of top-three industry positions
than before, and those that do are now more apt to slip from top-ten rankings
within five years of their initial falloen because they declare bankruptcy or are
acquired by or merge with other companies. (See Exhibit 1.) Success has become
less stable and less directly correlated with the size or legacy of a business. In
addition, there is a more dramatic disparity in earnings between top and bottom
performers, proving that the cost of being wrong has increased and the attrac-
tiveness of a marketplace differs greatly among the players competing in it.

E | Leading Companies Now Fall from Grace More Oen and

More Quickly
More leading companies are dropping out of ...and, of those, many fall out of
top-three industry positions... the top ten within ve years or less1

Percentage of companies losing Percentage of former top-three companies

their top-three rankings that drop out of the top ten within five years
20 60 Increasingly, rms falling
out of the top three merge
with other companies
or declare bankruptcy
15 within ve years
40

10
20
5

0 0
1960 1970 1980 1990 2000 2010 1960 1970 1980 1990 2000 2010

Source: BCG analysis.

Note: The analysis includes only industries with more than ten companies.
1
This percentage includes former top-three companies that subsequently merged with other companies,
were acquired by other companies, or went bankrupt.

Corporations around the world are feeling the heat from a variety of external
sources. Competition is intense and heterogeneous, with a continuous string of new
upstart players jumping into the ring. New technologies add to the pressures on
corporations as well. The lack of stability and predictability in this new reality
make it that much harder for organizations to flex their muscles, and they now have
to learn to be as agile and adaptable as possible.2

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Internal Strife: How Companies Hobble Themselves
The new reality that has taken hold in the world today brings with it specific
requirements and a new learning curve. Internal, company-specific issues contrib-
ute to planning diculties as well, especially because they leave organizations
ill-prepared to cope with the external situation. Oen, these company-level short-
comings have root causes that run deep, and making adjustments will take commit-
ment. The following are examples of internal issues that limit successful planning
at many companies.

Strained Resources and Employees. In many organizations, the degree of eort

and expense put into planning is so out of line with the value added that it be-
comes a wasteful exercise. Oen, these companies remain wedded to traditional, In many organiza-
full-blown planning that consumes the attention of many employees for a large tions, the degree of
part of the year. Some have even upgraded the degree of detail and the number of eort and expense
dimensions covered by planning, requiring elaborate breakdowns by legal entity, put into planning is
country, division, product, customer type, and factory. so out of line with the
value added that it
The volatility of the current market further complicates detailed planning and becomes a wasteful
requires an even greater time commitment, preventing involved managers and exercise.
employees from taking part in critical business activities. In addition, many compa-
nies become trapped: the complicating factors of planning prompt them to start the
process early in the year, but this early planning sometimes results in outdated
values even before the new year has startedeventually leading to excessive
iterations and reviews. Such eorts actually give companies less flexibility in a
global environment that demands more flexibility than ever.

Process Ineciencies. Many employees say that even when initial planning
seems to occur eciently, they find their figures challenged several times as they
move through the process, which causes parallel planning and redundancies.
Requiring heavy detail early on is unproductive, leading to unnecessary iterations
and number crunching. And all that detail keeps a company sti just when a shaky
economy requires adaptability in working through eective scenario planning.

Unreliable, Low-Quality Data. Despite the significant resources and attention to

detail dedicated to planning, companies oen end up with plans that are based on
inconsistent and sometimes poor-quality data. The results may appear thorough
and consistent when it comes to financials, but many organizations have become
expert at achieving pseudoaccuracy, and the link with strategic planning is fre-
quently missing. Plans oen need to be revised and modified several times a year,
especially in turbulent economic times. This typically leads to even more inconsis-
tencies between dierent partial plans, including cost plans, revenue plans, factory
plans, and plans for full-time equivalents (FTEs).

Company Culture and Management Style. A companys culture is frequently at

the heart of mismanaged planning, with management oen rewarding the wrong
behavior. Because financial incentives are still frequently tied to the achievement of
short-term plans, employees can feel pressured to negotiate financial goals and to
sandbag. Consequently, planning begins to feel like a bazaar instead of the organ-
ized, top-down process it should be. Employees may be motivated to reach goals

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 precisely but never to exceed them, since doing so would mean having to reach
even higher goals the following year. This plan low so you can perform high
approach by employees, in turn, fosters a mindset among top management of
mistrusting data and asking almost by default for still-higher performance. Overall,
this type of planning leads to budgets and targets that reflect internal negotiation
and corporate networking skills rather than true business opportunities.

We argue that given todays volatile environment, the overall focus for planning
must move away from precise forecasting and toward more strategic, top-down
ambition-setting that is validated with bottom-up business insight. This approach
should be tied to contingency plans in case the targets cannot be metand comple-
mented by more frequent short-term forecasts of key metrics. However, embracing
The overall focus for unpredictability and encouraging entrepreneurship within reasonable limits entails
planning must move a significant shi in the management culture of many large corporations.
away from precise
forecasting and
toward more strategic, Embracing Change: Ten Principles Driving Best Practices
top-down ambition- Many organizations have already succeeded in changing their planning processes to
setting that is validat- become more eective and ecient in todays new reality. We have helped clients
ed with bottom-up across several industries make this transition, a process that has revealed the key
business insight. principles that drive the best practices for success. Not every exemplary company
applies all of the principles, and the approach to implementation varies in each
instance. How the best practices are applied depends on the preferences of key
decision makers and on corporate characteristics such as business dynamics,
company culture, and legacy. Still, these ten principles can serve as an overall guide
to improving an inecient planning system. (See Exhibit 2.)

Principle 1: Make Top-Down Target-Setting a Priority. The degree to which an

organization is comfortable with top-down targets and target scenarios is driven
largely by its deep-seated company culture as well as its legacy incentive systems.
Today, that culture must be shaken up, and target setting must become a top-man-
agement responsibility. Setting ambitions (or targets) using a top-down approach
will ensure that goals cascade to all the levels within the organization. Goals and
investments should be rooted in an eective strategic-planning process that in-
cludes a transparent strategic assessment of the respective businesses.

One client we worked with in this area is a fast-moving-consumer-goods (FMCG)

organization that has proved eective at implementing a limited set of top-down
targetssuch as net external revenue, operating income, and cash conversion.
Another best-practice example is a global conglomerate that has found success
using a top-down approach to create an aggressive target range or stretch corridor
aer asking each business unit to provide one-page answers to five strategic ques-
tions. Under this approach, leaders assess the current global market dynamics for a
unit and predict the dynamics for the following several years, taking into consider-
ation how the competition could influence those plans. They then must figure out
the most eective means for bringing about the desired impact on the current
dynamics. These approaches create simple playbooks that do not emphasize the
attainment of specific numbers. Rather, they are meant to result in the best perfor-
mance possible.

T A P
 E | Ten Principles for Eective and Ecient Planning

Make top-down Make planning a clear ambition-setting exercise

1 target-setting a priority Start with top-down targets and cascade them to
the next level
Build planning, reporting, and forecasting systems
2 Take an analysts perspective using metrics based on value drivers

Reduce the number of P&L lines, product lines,

3 Plan in less detail and regional/country aggregates that are actively
planned
Use high-level plans while validating targets
Apply a dierent level of Conduct detailed budgeting aer targets are
4 detail at each stage approved

5 Shorten the planning cycle Start planning later in the year, with a shortened
duration for planning

Balance the target-setting exercise (ambition)

Balance ambitions against light and frequent forecasting (realistic
6 against forecasting outcomes)

7 Be adaptable and exible Conduct scenario planning and use simulation

techniques to account for environmental volatility
Focus the incentive system on comparisons of
actual performance
8 Rethink the incentive system Avoid sandbagging; create a culture focused on
performance

9 Manage tradeos Balance planning speed and planning depth

Make dierences (for example, between divisions)

Clarify governance transparent
10 and objectives
Reach consensus on how to move forward
Source: BCG analysis.

This principle is especially important in dealing with the economic crisis. By

setting the most ambitious yet achievable targets, management stretches perfor-
mance and pushes employees while avoiding overtaxing and discouraging people.
A full 100-percent achievement of goals is not necessary as long as the company
comes close to its target and realizes improvement over the prior years perfor-
mance.

Principle 2: Take an Analysts Perspective. Start to de-emphasize absolute values

in planningthe detailed financial line itemsand become immersed in planning,
forecasting, and reporting systems that use metrics tied to value drivers. A driver-
based approach allows for a more useful discussion of underlying assumptions and
does away with bazaar-like negotiations, or sandbagging. The application of value
drivers facilitates the link to strategic planning and fosters strategic discussions and
a perspective on total shareholder return. (See Exhibit 3.)

One organization that makes eective use of the analysts perspective is a pharma-
ceutical company that now plans deviations from the previous year only on the
basis of underlying business drivers, such as market growth, market share develop-
ment, the development of the relative price point, and the price index for raw
materials. As more companies alter their attitudes toward the details of planning in

T B C G
E | Using Value Drivers Streamlines the Planning Process and Improves Planning Quality
Client example
Illustration: Revenue driver tree

Raw material
increase Improved process eciency
Price (mix) Competitive
growth pressure A dedicated accountability for inputs
Growth +
Base x Customer The exibility to update plans easily
business Volume mix
Base growth
business Important KPIs for business review
(last year) Market growth meetings are included in the driver tree
Net
external New Innovation Driver trees can be used with dierent
revenue business + levels of detail as the context dictates
Net New
total + projects
revenue Improved quality of planning
Cannibali-
Attrition x zation Drivers map business logic and focus
on key levers
Historical
attrition The driver model allows for more-
Other strategic discussions
drivers
Output can be easily validated
Net sales
to other Historical The driver model enables scenario
entities ratio simulation
Net sales (baseline) Net
to other external
entities Change revenue

Calculated Referenced Data input Historical Indicator

Source: BCG project experience.

this way, they can be increasingly flexible in scenario planning, tooa capability
that is crucial in meeting the new external challenges.

Principle 3: Plan in Less Detail. Reduce the scope of the planning process by
validating fewer planning targets. Less detail makes for greater flexibility, quicker
response time, and better simulation capabilities. Some companies are even limit-
ing themselves to considering only the major possible eectsknown or predict-
able factors that will aect future businessand leaving everything else in their
forecasts constant.

One BCG client, a global diversified company, has significantly reduced the amount
of detail included in the planning activities of each of its business units. Globally,
several hundred planning items have been reduced in number by 60 to 70 percent.
Again, the fewer details, the simplerwhich translates into being faster at adapting
and better prepared for competition in a changed world.

Principle 4: Apply a Dierent Level of Detail at Each Stage. Spell out the key
planning parameters before initiating a full-fledged bottom-up validation of targets.
Start detailed budgeting as soon as the targets have been agreed on.

An international consumer-goods company applies this best practice with success.

T A P
The company now conducts high-level plans while validating planning targets for
volume, prices, sales mix, marketing, variable costs, and fixed costs. Aer targets are
approved, the company budgets in greater detail. Another client, an international
automotive company, requires clearly distinct levels of detail at each stage of plan-
ning, including a benchmark-derived target during strategic planning, a systematic
breakdown of strategic targets during operative planning, and a breakdown of targets
to cost centers once the high-level targets have been approved. (See Exhibit 4.)

Such strategies make the most sense, considering the current external realities of
volatility and changeand the call for simplification in Principle 3 above.

Principle 5: Shorten the Planning Cycle. Start the planning process later in the
year and shorten its overall duration. A shorter cycle puts the emphasis on speed
and flexibility and results in less overall company coordination, fewer parallel and
redundant activities, and less frustration. Furthermore, getting a later start trans-
lates into using the most recent information and basing targets on more accurate
data. Less detail, greater process discipline, and more eective use of planning tools
will help ensure a shorter planning cycle.

We helped one global FMCG company reduce its cycle from 120 days to 60and a
German conglomerate cut its entire cycle from ten months to five, enabling it to
begin the planning process in July instead of February. An international automotive
company we worked with now starts its operative planning for the following year

E | Successful Planning Uses Greater Detail in Later Stages

Client example
Illustrative
Month 1 Month 2 Month 3
General planning premises
Macroeconomic parameters
Volume
Pricing
Variable costs
Divisional xed costs
Central xed costs
EBIT
Investment requirements
Net assets
Cash ow
Nonvolume activities
Consolidate divisions
Market/unit alignment
Group planning
Consolidate group
Initialize budgeting
Sign-o
Division Group Division Group
Decision topic Group consolidation Budgeting
Target breakdown Divisional planning
Trend discussion
Source: BCG project experience.

T B C G
 on September 1. In this new economic environmentwith change occurring at a
rapid pacedelayed planning is the best strategy.

Principle 6: Balance Ambitions Against Forecasting. Effective planningand

a more realistic outcomeresults from striking a balance between the setting of
targets (ambitions) and light but frequent forecasting. To make this happen,
management has to agree on the desired level of precisionapplying a common
set of minimal and transparent requirements that are consistent across and
within divisions. (For example, companies must insist on a regulated hierarchy of
planning objectives that follows the steering logic with a consistent set of line
items.) Is it more important to stretch the organization to improve performance,
or is the goal to set targets as precisely as possible? Be sure to differentiate
between target setting and forecasting.

The key is to focus the mid- to long-term plans and the one-year plan more strongly
on ambition setting and to use annual planning for a review of strategies and key
Is it more important business objectives. Detect risks and early deviations from the plans and get input
to stretch the organi- for the short-term optimization of resource deployment such as cash management
zation to improve and short-term liquidity management. Then create a quarterly, or even a monthly,
performance, or is the forecast. Here, scenario planning can be a good strategy: look for trends that
goal to set targets as deviate above and below the plan, and start creating contingency plans early on.
precisely as possible? When forecasts suggest deviations above plan, think about production and the
logistics needed to handle more volume. When deviations below plan are expected,
consider countermeasures, such as sales activation and pricing.

Principle 7: Be Adaptable and Flexible. To be prepared for environmental or

market volatility, stress the importance of scenario planning and simulation tech-
niques and make them integral elements of the planning process. Consider con-
ducting scenario planning at dierent times throughout the year.3

We saw this best practice put to use by a shipping company we worked with. The
company developed a new forecasting system based on value drivers to allow route
managers to adjust volumes within their areas of responsibility. The new targets are
then extrapolated using standard costs.

Principle 8: Rethink the Incentive System. Companies oen measure success

and award incentives by comparing performance to a forecasted planbut this
approach places too much emphasis on plan delivery and not enough on maximiz-
ing performance. Instead, they should calculate incentives using an actual-to-actu-
al comparison, which measures how much actual current performance surpasses
actual prior performancein short, real-world results and improvement. This
change can help reduce sandbagging by employees and foster a culture focused on
performance. An actual-to-actual comparison can better identify where companies
are falling short on long-term strategic ambitions than can data on short-term
deviations from forecasts.

Alternatively, companies can explore having a base plan as well as a stretch plan;
this dual approach requires clear top-down expectations for targets. In the past,
planning may have been used as more of a disciplinary tool than a visionary one.

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Now, it is crucial for management to alter its style and be more willing to accept
degrees of uncertainty, which the dual approach allows.

One client, a global industrial supplier, introduced an annual performance bonus

based on target achievement and complemented it with multiyear objectives for
gains in value creation over actual, rather than planned, levels.

Principle 9: Manage Tradeos. In order to make changes to their planning

systems, companies must acknowledge the necessary tradeos involved. (See
Exhibit 5.) For instance, as described in Principle 6, management has to weigh
ambition setting against forecasting and agree on the required levels of precision.
Business leaders must also balance speed and depth in planning, understanding
that to achieve greater speed, some depth will be sacrificed. For eective simulation
in planning, data on relevant business driverswhich are not always collected and
applied todayhave to be included. And to cope with the complexity inherent in
simulations today, the number of line items included, or planning depth, must be
reduced.

E | Tradeos Must Be Considered When Selecting Planning

Options
Illustrative example
Accurate and detailed Lean and quick
Recommended
option
Accurate forecasting Ambition setting

Planning depth Planning speed

Highly detailed Less detailed

Consensus-driven Top-down approach

approach

Financial line items Value drivers

Highly integrated Simplied and

and complex exible
Status quo Option 1 Option 2

Source: BCG project experience.

Principle 10: Clarify Governance and Objectives. Planning is a key steering

instrument that will influence the overall direction of the business. There might
very well be diering opinions within divisions, among divisions, or between the
divisions and corporate headquarters about the best direction to take. These
dierences have to be made transparent, and all relevant stakeholders must reach
consensus on the best path forward. For example, they must agree on whether to
place greater emphasis on ambition setting or forecasting.

Because shareholders and advisory boards expect external forecasts, companies

must ultimately create two plans: a realistic external plan and a more ambitious
internal plan. Planning has oen been deeply integrated into the reporting logic,

T B C G
 and planning and reporting frequently share the same systems and use similar data
fields. But integration does not always make sense because both views should be re-
ported separately to best meet planning requirements.

Furthermore, as new planning concepts are put into place, changes in IT tools will
be requiredan added cost that management must be willing to accept.

Communication and Change Management

Breaking bad habits and mastering the art of planning is about more than the
implementation of any or even all of the principles described above. Change has to
be balanced with company needs, taking into consideration the business environ-
ment and company culture. Its not just about doing the right things; its about
doing things right.

There are two components of change. So-called hard changewhich includes new
systems and processes, control of new process standards, and the avoidance of
Change cannot be parallel planningis indeed important. But just as key is the concept of so
driven by the finance change, which includes communication, the involvement of top management, and
function; it has to be decisions about tradeos. (Pilot programs are oen an eective means of making
fully endorsed by the so changes in planning succeed.) The best planning requires a combination of
CEO and key leaders, both of these components.
who are willing to
embrace change for A crucial type of soft change involves altering the mindset of the stakeholders.
themselves and in Companies must make sure that their key decision makers accept any planning
their leadership style. adjustments before a new approachthe hard changescan happen effective-
ly. Top-level business managers must be fully on board and believe in the
importance and pursuit of the impending changes. If they are not convinced of
the value of a new planning approach, it is likely to fail. Change cannot be
driven by the finance function; it has to be fully endorsed by the CEO and key
leaders, who are willing to embrace change for themselves and in their leader-
ship style. 4

In addition, excellent communication is paramount. Change is not easy for any

organization and cannot be done on the fly. Decisions have to be made with great
care, and the necessary tradeos have to be identified and explained so that
everyone understands the purpose of the new approach. As the altered planning
concept gets under way, business leaders will continue to make important decisions
and put a lot of eort into change management.

These so changes in planning have to be achieved across all levels of the organiza-
tion. Top-level executives have to comply with certain rules of discipline, such as
not requesting further detail beyond the defined level needed for planning. Middle
management has to take part in honest discussions of business possibilities without
resorting to sandbagging. Collaboration between the business and finance functions
is crucial. And all changes have to be explained clearly to line managers, who then
must be sure to comply with the new tool requirements, timetables, and mandated
levels of detail. If there is open communication among all participants, a revised
planning system can be successfully established and embraced.

T A P
Rewrite the Rules
The status quo for business is no more. Companies have to participate on a world
stage that is more complicated and more unpredictable than ever. At the same time,
old habits die hard, and flaws inbred in organizations must be identified and
corrected. Rewriting the rules for planning is not easy. But with some companies
already leading the way, new best-practice examples are available for everyone else
to learn from and follow. With fine-tuned communication, transparent leadership,
and a willingness to change their culture, companies can implement eective
planning.

N
1. For more about the two-speed world, please see Threading the Needle: Value Creation in a Low-Growth
Economy, BCG Value Creators report, September 2010; Collateral Damage: In the Eye of the Storm; Ignore
Short-Term Indicators, Focus on the Long Haul, BCG White Paper, May 2010; Collateral Damage: Preparing
for a Two-Speed World; Accelerating Out of the Great Recession, BCG White Paper, December 2009; and
Thriving Under Adversity: Strategies for Growth in the Crisis and Beyond, BCG White Paper, May 2009.
2. To learn more about new approaches to strategy, organization, and, consequently, leadership in a
turbulent and unpredictable business environment, please see Adaptive Leadership, BCG Perspec-
tive, December 2010; Adaptive Advantage, BCG Perspective, January 2010; New Bases of Competi-
tive Advantage: The Adaptive Imperative, BCG Perspective, October 2009; and Does Your Strategy
Need Stretching? Adapting Your Strategy-Development Approach to Fit Todays Rapidly Changing Competitive
Environment, BCG report, October 2008.
3. For more about scenario planning, please refer to Rethinking Scenarios: What a Difference a Day
Makes, BCG Perspective, October 2010.
4. See Cascading Change, BCG Perspective, September 2009.

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About the Authors
Frank Plaschke is a partner and managing director in the Munich oce of The Boston Consulting
Group and the global leader for the oce of the CFO topic. You may contact him by e-mail at
[email protected].

Fabrice Rogh is a partner and managing director in the firms Dsseldorf oce and the German
leader for the organization design topic. You may contact him by e-mail at roghe.fabrice@
bcg.com.

Fabian Gnther is a project leader in BCGs Berlin oce. You may contact him by e-mail at
[email protected].

Acknowledgments
The authors would like to thank Sarah Davis for her writing assistance, Ellen Treml for her assis-
tance with the graphics, and Gary Callahan, Mary DeVience, and Angela DiBattista for their contri-
butions to editing, design, and production.

For Further Contact

If you would like to discuss this report, please contact one of the authors.

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The Boston Consulting Group, Inc. 2011. All rights reserved.

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