Putting it into practice
A planning-parameters session usually takes a board half a day of quite intense discussion. Figure 1 in the panel presents some examples of planning parameters for your consideration and possible adoption.
[breakoutbox][breakoutbox_title]Figure 1[/breakoutbox_title][breakoutbox_excerpt]Examples of planning parameters[/breakoutbox_excerpt][breakoutbox_content]
• Planning horizon for strategic plan (eg three years)
• Capital expenditure limitations
• Profit and cash flow in dollar terms
• % return on shareholders’ funds
• % of revenue from exports
• % of revenue from a certain product/service group
• % of revenue from a geographic region (eg, Asia)
• % growth in revenue over planning period
• Types of businesses the organisation should embrace or avoid (eg areas likely to involve litigation)
• Policy on diversification and acquisition opportunities
• Major impacts to be taken into account[/breakoutbox_content][/breakoutbox]
The first one, the planning horizon, relates to the strategic plan itself. Some plans have a horizon of three years, others less and others more. It depends on the industry and the amount of change occurring in it. For some industries, there is little certainty beyond a two-year span. Change is slower in others, and a longer period is not only possible but also highly desirable.
Another planning parameter that a board may devise relates to capital expenditure limitations. From its knowledge of the finances of the organisation, a board may decide to restrict the amount of capital available to management, perhaps because of the organisation’s debt situation. Obviously, it is important for a strategic planning team to know this limitation up front, as it may restrict the activities proposed.
Other planning parameters relate to strategic plan outcomes such as profit, either in dollar terms or as a percentage of shareholders’ funds, or as revenue, either by product group or geography or by domestic and export sources. A parameter that is clearly the province of a board is the required percentage return on shareholders’ funds. Naturally, these requirements would impact on profit and cash flow as well.
But a board may also rightly express a view on the sources of revenue. In Figure 1, these streams are shown as a percentage of revenue from exports or certain product/service groups or geographic region. For instance, a CEO and his or her strategic planning team may be told that certain revenues need to come from markets other than the domestic. A board may also provide guidelines to management regarding the percentage of revenue from new products as compared with older ones. It may suggest that certain geographic regions be avoided for social and political reasons, so as to reduce risk.
Growth is another parameter to be considered by a board. A certain percentage return on shareholders’ funds might be achieved at the expense of growth. So a board may require that revenue growth keep pace with the return on shareholders’ funds, competitor activity and industry growth.
The last three items in the list of examples relate to policy parameters. These might include the type of businesses the organisation should avoid for reasons of litigation, for example, or it might be a policy on diversification and acquisition. Lastly, a board may identify certain major influences of an economic or social nature that need to be encompassed by the strategic plan.
Take a closer look
In this article I’ve concentrated on a board’s role in developing a strategic plan. However, a board has an additional role in monitoring the plan once developed. But that’s a different story.
All boards and management should take a closer look at the process that operates within their organisations to develop a strategic plan. Boards should review the form their involvement takes and question whether or not that involvement compromises their ability to make an impartial evaluation of the plan once produced.
The requirement of a board to give sufficient guidance, yet be able to impartially assess a strategic plan developed by management, can be met by adopting the planning parameters approach.
