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By Richard G. Meloy

How does planning work? Place yourself for the moment in the pilot house of a merchant freighter alongside the pier in Naples. You are the captain. Your ship has just unloaded its cargo, and you have been given orders to deliver a load of marble to Southampton in two-and-a-half weeks. What do you do next?

If you are like me, you would want to start by asking a lot of questions. How long will it take to reach the nearest ports where you can buy marble? What are the prices and availability of marble in each port? When will the ship be ready to sail? What other factors might affect your being able to carry out your orders?

Armed with the answers to these questions, you would determine which port to visit to buy the marble, how you will get there, and what specific tasks must be completed en route to insure a successful voyage. When you have made your decision, you would inform the crew of the mission and make preparations to cast off.

But your job is not complete until you arrive in Southampton; so you would monitor several key factors to be sure you stayed on track: course and speed, nautical miles covered, weather reports, fuel and ballast levels, etc. All of these will signal your likely success, and you make adjustments as indicated by the data.

Now, the point is not to prepare you for command at sea. It is a different point altogether to demonstrate how closely your thought process overlapped mine. My bet is that, despite its unfamiliarity, we both approached this captain's problem in more or less the same way. Using a seven-step thinking process learned in infancy, we defined the task in light of our current situation, collected facts and analyzed them, applied judgment to the results of our analysis, developed an objective, detailed the actions required, and set sail. And once underway, we gauged our progress against our plan, considered alternatives, and perhaps even changed course so that we could still achieve our goal.

In fact, we took all steps needed by any manager in trying to chart a course for a business, and we took them in a logical sequence so they led us to a successful result. We did it naturally, almost unconsciously. Good planning, on the broadest level, is no more than this--applying the mind's own thinking process to an uncertain future. Try this for the next decision you need to make--where to take your next vacation, for example, or what automobile to buy. Follow the discipline, maintain the order of the process, and see what good decisions you will make!


The essential first step in developing a comprehensive business plan is to clearly define the current situation, establish the facts as they exist now and write them down in a logical sequence. This section should include such things as the following:

* Description of the business--definition, scope, brief history, industry overview, etc.

* Mission or vision statement--what are the major accomplishments that are expected? Why do you want to be in this business?

* Nature of the business--describe the business in terms of its critical functions and cost structure.

* Unique capabilities--what special resources/capabilities do you have that support your participation in the business?

* Market position--what is the market share for each product/service by market segment?

* Competitive situation--who are the competitors, and what are their strengths and weaknesses?

* Buyer needs and behavior--what needs do customers have and how do they buy?

* Accountabilities--to whom and in what ways is the business accountable?

* Environmental factors--what outside pressures are acting on the business?


The second step is to analyze the facts identified in step one. Several forms of analysis may be useful. Competitive analysis of your company in its industry can be performed at a number of levels of detail, from a broad-brush approach down to a rigorous quantitative analysis, product line by product line. Whatever the level, such analyses will benefit by following the general guidelines compiled by Michael E. Porter in his book, Competitive Strategy. Porter suggests a business is buffeted by competitive forces from at least five different sources--direct competitors, suppliers, customers, substitute products, and potential new industry entrants. Each of these can exert pressure on a firm's profit margins and should be examined to understand the nature of the threat and how it might be countered.

Another useful form of analysis is that described by Robert M. Randolph in his book Planagement--Moving Concept Into Reality. This method sorts related strengths and weaknesses to develop ideas for creating maximum leverage of strengths while minimizing weaknesses. It operates on a more intuitive level, relying heavily on the skills and experience of the management team, making it particularly useful in achieving management "buy-in" of the plan.

Other ways to consider the facts may be used, some of which may become apparent as the facts themselves are better known. The important thing is to make an honest assessment of the business and its prospects; from this, reasonable alternatives can be formulated.


Steps one and two present management as science; they are fact-based and largely quantitative in nature. The third step introduces the element of judgment into the planning process, utilizing skills better characterized as art, rather than science. In this step, the assumptions underlying the various alternatives identified in step two are evaluated, and the potential inherent in them is examined.

All forecasts are based on assumptions. How fast will the market grow? What will happen to prices? If I can produce at these costs, will new entrants stay out of the industry? Each assumption must be debated and documented for two reasons: first, to achieve a common frame of reference and commitment among the management team; and, second, to provide an audit trail for use in future planning discussions. In effect, management will reach a "compact" at this stage that will clarify the inevitable revisiting of assumptions as business conditions change. Key assumptions might be discussed about:

* the business climate, regulatory environment, and their potential effects on the plan. Will changes in technology impact the plan?

* the future of the competitive environment. Are you assuming the environment will improve, or change for the worse? What are you assuming about specific competitors' actions and their responses to any actions you may undertake? What will be the effect of such changes on your plans?

* the level of support available for the plan. Will additional capital be required? Will a key shareholder need to approve the plan? Will adequate resources be available when needed?

Finally, the potentials available to the business if these assumptions hold should be articulated. These may relate to quantitative goals like profit improvement, market share growth, cost reduction, etc., and also to qualitative goals such as employee retention, training, and customer loyalty.

Step three completes the critical diagnostic phase of the planning process. This phase is absolutely essential and must be completed before actual objectives, strategies, or tactical plans are developed, just as you would prefer your neurologist to complete your diagnosis before opening your neck! Unfortunately, in business planning as currently practiced the value of a comprehensive diagnosis is often overlooked, with the result that plans are not well conceived, nor well underwritten or supported by those who must carry them out. Such plans frequently fail.


Step four involves selection of specific objectives for the business and its various units. An objective is a statement that clearly defines what is going to happen and by when. A sound objective will meet the following criteria:

* Feasible--The objective is practical and can be accomplished.

* Measurable--It clearly states what will happen, and by when.

* Suitable--It supports the company's mission and overall objectives.

* Acceptable--The needed resources will be provided.

* Flexible--It can accommodate change, while still clear enough to give direction.

* Achievable--It can be accomplished within the company's authority and resources.

* Commitment--Management is committed to achieving it.

* Valuable--It is worth achieving.

The primary objective will typically be related to the achievement of the business mission or vision statement. It will normally include quantitative goals concerning market share or growth or profitability. However, objectives should also be created covering qualitative areas such as problem solving, human resources, innovation, and others. For example, the diagnostic step may have identified the value to a business of being recognized as a leader in community outreach. Though this has no measurable effect on profits, a specific objective for it should be developed.


The fifth step moves from objectives to specific strategies and action plans. A strategy is a road map describing how an objective will be achieved. Strategies acknowledge competition, recognize that outside forces often work to limit a company's success, and seek to create specific ways to cross the goal-line first.

In simplest terms, a business strategy describes in detail how the company will deliver the right product (i.e., the right mix of value and price) through the most advantageous channel to the customer, thereby creating barriers to entry and producing superior long-term profitability.

Strategies should be developed for each objective, keying off the analysis used in step two. For strategies relating to internal objectives, the competition should be framed as being the major roadblock to achieving the goal. For example, if a key objective were to raise public capital at the best possible price, the strategy might focus on winning the praise of industry investment analysts who are instrumental in valuing public securities.

At this point it is also appropriate to develop the financial model that will be used to evaluate the selected strategies. This will also form the basis of the operating budget, which will follow from the action plans described below.

Following strategy development, tactical or action plans should be detailed for each strategy. Action plans are the line-by-line instructions needed to carry out a strategy. They specify what needs to be done, who will do it, and when it will be completed.

This five-step process will produce a complete, well-reasoned business plan, with specific actions itemized and accountabilities established. The remaining two steps in the process create the means for managing the plan and adjusting it as dictated by changes in its basic assumptions.


Step six is a process, not a discrete step. It requires measures be selected and monitored on a regular basis. These measures are not financial, since financial results are often reported long after the events they record. Rather, the measures are those that will indicate performance as it occurs so that corrective action, if needed, can be identified and taken in a timely manner. The nature of such measures will be specific to each company and to each key function within that company. For example, they might include such things as unit sales, returns as a percentage of unit sales, manufacturing down-time, scrap rates, inventory turns, or human resource training hours completed. Each one should relate to an objective, and its regular monitoring will signal if the plan needs to be reviewed.

In fact, a well constructed plan will also contain alternative strategies or action plans to be employed if the original goal at some point seems unattainable. The reason for this is that these alternatives will be much more clear in the context of the planning process than they will later, often under the pressure of "bad news." These should be detailed at this point in the process.


The final step in the process is, similar to the prior step, an ongoing function, performed on a management-by-exception basis. Variances from the plan, recorded by the measurement tools described, should be reported, their impact on the overall plan assessed, and recommendations made as to changes that may be required in the plan. The individual ultimately responsible for the plan can then decide what action to take.

Other than these exception reports, little time need be devoted to planning once the basic plan is completed. However, the regular monitoring process will ensure the plan becomes a living document, which will be kept continuously current and focused on the future. The final feedback step establishes a closed-loop decision making process that will enable your company to manage change in the environment to advantage and increase the benefits anticipated from the plan. *

Richard G. Meloy is president of The RGM Company, a company specializing in general management consulting.

Michael Goldstein, CPA
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