Business success requires making a series of decisions that turn out to be correct or, put another way, a series of intelligent guesses with favorable outcomes. No business owner knows with certainty what the future will bring. It’s like a journey through uncharted territory. Careful planning gives the company a better chance of carving out a path to success. Companies that fail to plan their future often lose their way and fall behind competitors that fully embrace the concept of planning.
Many business owners liken business planning to a chess match. They attempt to make carefully thought out strategic moves designed to outsmart their competitors. In this chess game, there are multiple opponents of varying strength, all making moves at once. Strategic positioning involves deciding what gives the company a potential competitive advantage -- where its strengths lie. A company with a decided advantage in cost of production may decide to compete on the basis of low price, knowing that competitors will lose money if they try to follow the company’s pricing strategy because their gross margins are lower.
Financial Management Approach
Companies that emphasize financial management believe the key to success is the wise use of their limited financial resources. They carefully evaluate every proposed expenditure, making sure it is absolutely necessary and makes a verifiable contribution to generating sales revenue. They believe that each dollar conserved, through careful financial management, is a dollar that can be used to expand the company’s marketing program or improve operational efficiency. They also strive to build cash reserves so they can survive downturns in their market that might cause less financially sophisticated competitors to go out of business.
The long-range planning approach holds that always thinking ahead is the best way to consistently beat out competitors and remain a market leader. Companies that follow this approach do a long-range plan each year that charts out the next three to five years of the company’s activities, in addition to an annual plan. Vision is required on the part of the management team to identify opportunities that appear on the horizon but have not yet fully developed. This approach is used in technology-oriented companies where there are long development times for new products before they can be marketed.
Bottom Up Approach
This approach is based on the idea that sound planning requires the most up-to-date information available about the competitive marketplace, the economy, and the company’s operations. Bottom up planning requires that the company includes managers from all functional areas in the planning process, with the belief that their combined insights and wisdom will result in a more strategically sound final plan. These managers that work “in the trenches” are closest to the company’s customers -- so they know what customers want and need -- and have a better understanding of how to improve operational efficiency than the company’s top management would. Each department is asked to prepare its own operating budget. The job of top management in this type of planning approach is to determine the overall objectives for the company, which are communicated to the other managers as they prepare their department plans.