I heard a corporate CEO say something that is very, very rare. We were chatting about the economy and he rattled off the key economic assumptions of his company’s strategic plan. He cited the sector of the economy he sold to, the dollar, and energy costs as the three big assumptions.
CEOs almost always have opinions about the economy, but rarely do I hear them articulate the three or four key economic drivers of their company’s plans. This is vital not because CEOs are great forecasters of economic trends, but because successful business planning requires an understanding of what really matters to your company.
Begin the planning process by identifying the economic issues that really concern your business. It’s easy for an economics discussion to get caught up in the budget deficit and American’s low savings rate. For most businesses, however, those are not the key determinants of their future. To discover the key drivers, think of a simple process: a firm buys inputs, processes them, and sells outputs.
How much can you sell? That will be a key driver for almost any business. The economic driver behind sales, though, depends on what part of the economy you are selling to. Starbucks sales are driven by discretionary consumer spending. A door manufacturer’s sales are driven primarily by housing starts. The finicky guy in the company will note that some sales are for remodeling, and other sales are for non-residential construction. Tell the finicky guy to shut up until the one or two big drivers of company success have been identified.
The factors at work may include enablers of customer spending, such as credit availability. Also consider major alternatives that consumers might enjoy. It never hurts to put a laundry list of ideas on a whiteboard, but one or two (three at the max) entries should stand out as the dominant sales drivers.
Now think about those inputs. For most companies, they are far more diverse than the product sold. Some companies will begin with raw steel, but pretty much everyone should include human talent, energy and financing on the long list of items they purchase. Sorting out the big drivers is a bit more complicated here than it was for sales. Some inputs are very important to the company, cost a lot, but are fairly stable. If their prices and availability are steady, don’t bother worrying about them. When considering big drivers related to the inputs, don’t neglect issues of availability. When the economy improves, vendor performance falls. For many inputs, availability is far more important than price.
The inputs are not only the raw materials that go into the finished process, but the purchased goods and services that enable production. Think about labor, energy and capital. Again, the key drivers will vary from company to company. The business with a conservative balance sheet probably won’t worry about credit too much, but the firm that is highly leveraged will need watch both interest expense and credit availability.
Identifying the key economic drivers is just one first step. Next, sketch out some scenarios. Don’t try for a perfect forecast, but try to construct some logically-consistent stories. Here are a few examples.
- The economy continues to strengthen at home and globally. Sales grow, but energy costs rise faster. Vendor performance suffers. Interest rates rise, but financial institutions make credit more available. Labor markets tighten, with less-skilled workers readily available but skilled job applicants hard to find.
- Middle East political disruption pushes oil prices up. European economies stumble. The rising energy costs combine with weak sales to clobber profit margins. Bankers tighten credit standards as they fear another recession.
There are other stories to consider, but you get the idea.
Now combine these economic scenarios with key non-economic issues, such as the competitive environment and technological change. You may want to consider a couple of different scenarios regarding the non-economic issues, just as you did for the economics.
Now develop strategy for each possible scenario. It may be a bit cumbersome, with two or three economic scenarios combining with three or four non-economic scenarios, resulting in nine to 12 combined scenarios. This may look like a daunting task, but you only need to sketch out the major elements for each scenario.
After developing the appropriate strategies, compare them all. You may find that certain strategic actions are robust. You reach the same conclusion regardless of the scenario under consideration. For example, “using information technology to pass information from sales representatives to top management faster” may be an appropriate action step whether the scenario is fairly optimistic or fairly pessimistic. Other ideas may turn out to be unwarranted in any scenario.
The difficult part, of course, is choosing among strategic actions that make sense in one scenario but not another. This is where the senior management team will earn its bonuses. Picking actions to actually implement may depend on management’s judgment about the likelihood of the various strategies. However, great teams will also consider ways to add flexibility into their strategy. An simple action step might say, “Expand into the southeast region.” An alternative would be “We will begin planning for a new expansion into the southeast market, but not start hiring or signing leases unless data through the second quarter reaches specified targets.”
Good planning is not easy. Some people want to get a decision made, whether it’s right or wrong, and implement immediately. Those are great people for getting things done, but they can work against good strategy. Calm them down and keep them participating. Ask them questions such as, “What problems will we run into trying to implement this stragegy.”
Other members of a management team will be more inclined to think and discuss and analyze and deliberate. These are valuable steps in the planning process, but it’s easy to get bogged down. When the leader (or perhaps facilitator) feels that the paralysis of analysis is setting in, it’s time to unleash the doers. Reach a consensus a move forward.
Planning is much more than economics, but the economic environment is still an crucial part of the planning process. It drives much of the variation in sales and costs—it has to be important. Though it’s often handled poorly, you can do well enough by focusing on the big economic drivers specific to your company.