FREE online courses on Introduction to Strategic Management - Path to Strategic Management - Phase II Forecast-Based Planning

 

As the complexities increase when companies become large, more explicit documentation of the implicitly understood strategies of Phase I are required.  The number of products and markets served, the degree of technological sophistication required, and the complex economic systems involved far exceed the intellectual grasp of any one manager or a small group of managers.

 

The problems start from financial planning.  As treasurers struggle to estimate capital needs and trade off alternative financing plans, they and their staff extrapolate past trends and try to foresee the future impact of political, economic, and social forces.  Thus begins a second phase, forecast-based planning. Most long-range or strategic planning today is a Phase II system.

 

Usually at first, this planning differs from annual budgeting only in the length of its time frame, which is usually 3-5 years as compared to a year for phase I. Very soon, however, the real world frustrates planners by perversely varying from their forecasts, throwing their estimations haywire. To handle these complexities planners typically reach for more advanced forecasting tools, including trend analysis and regression models and, eventually, computer simulation models.  These models help achieve some improvement, but it is not enough.  Sooner or later plans based on predictive models fail to signal major environmental shifts that not only appear obvious after the fact, but also have a great and usually negative impact on corporate fortunes.

 

Nevertheless, Phase II improves the effectiveness of strategic decision-making.  It forces management to confront the long-term implications of decisions and to give thought to the potential business impact of discernible current trends, well before the effects are visible in current financial statements. One of the most fruitful by-products of Phase II is effective resource allocation.  Under the pressure of long-term resource constraints, planners learn how to set up a circulatory flow of capital and other resources among business units.  A principal tool is portfolio analysis, a device for graphically arranging a diversified company's businesses along two dimensions: competitive strength and market attractiveness.

 

However portfolio analysis by phase II companies tends to be static and focused on current capabilities, rather than on the search for options.  Moreover, it is deterministic – that is, the position of a business on the matrix is used to determine the appropriate strategy, according to a generalised formula.  And Phase II companies typically regard portfolio positioning as the end product of strategic planning, rather than as a starting point.

 

Phase II systems also do a good job of analysing long-term trends and setting objectives (for example, productivity improvement or better fund utilisation), but do not help in bringing key business issues to the surface, which are often buried under masses of data generated.  Moreover, Phase II systems can motivate managers in the wrong direction as the focus is on short- or medium-term operating performance at the expense of long-term goals.

 

Therefore, most of the times Phase II planning becomes a mechanical routine, as managers simply copy last year's plan, make some performance shortfall adjustments, and extend trend lines another 12 months into the future.