Dynamic Business Steering
by Wolf-Gerrit Benkendorff
More and more companies notice the increasing dynamics and risks of global markets. This constant development puts new demands on the financial management and control systems: The processes for business steering must become more dynamic! This means simultaneously turning away from the rigid system of traditional budgeting, which is characterized by fixed targets, annual planning and very detailed budgets.
Dynamic business steering is based on two basic principles.
Basic principle 1: Clear and binding targets which reflect the dynamic
Predefined, fixed targets are in clear contradiction to the growing dynamic of the business environment. More and more frequently, fixed targets will prove either as too hard or as too easy to reach within the fiscal year.
Therefore, targets which are clear and binding yet reflect dynamic are required. Targets which are set relatively to the market (to the competitors) have these features. An illustrative example for this is provided by the VOLVO Group. The targets for the sales growth as well as the rules for measuring the target achievement are clearly and bindingly defined:
- Target figure = sales growth
- Peer group = Daimler, Iveco, MAN, Navistar, Paccar, Scania, Sinotruk
- Measurement of target achievement = equal or bigger than the weighted average of the peer group
Dynamic is reflected by the fact that the target value to be reached only results in comparison with the peer group. That way it was possible to rate the performance of the VOLVO Group in the year 2016 in a fair way – even in a very demanding market environment: The decline in sales of 5% for the VOLVO Group was a (relatively) good performance in comparison with the weighted average of the peer group of minus 7.3%.
Basic Principle 2: A responsive integrated forecast & planning process
With an increasing dynamic of the business environment, forecasts will gain in importance. A forecast is a description of where we think we are heading, based on current assumptions. Not only does the number and the extent of forecasts become more important, but also the quality of these forecasts. Reliable forecasts become a competitive advantage in a dynamic business environment.
A forecast is ineffective, if the findings are not implemented in the form of corrective measures (i.e. plan adjustment) soon. Forecasting and plan adjustments therefore form an integrated process, which takes place in three steps:
- Creating a forecast: Which future results are to be expected based on current assumptions? Are corrective measures necessary (if the future expected results are not satisfactory)?
- Developing corrective measures (to shape the future in a way that the unsatisfactory forecast in stage 1 does not become reality).
- Performing a plan adjustment: Current plan + corrective measures = adjusted plan.
The integrated forecast & planning process can either be performed periodically (e.g. once per quarter) or on demand. The necessity to run through the integrated forecast & planning process in a quick sequence is obvious: When the business environment changes more and more quickly, then companies must identify the impacts of these changes as early as possible, to react promptly to them in by adjusting their current plans (i.e. in the form of modified resource allocation).
The change from an annual planning process with very detailed budgets to an integrated forecast & planning process with a quick sequence (and less details) represents a major challenge from the cultural, procedural and technical point of view for many companies.
Dynamic Business Steering
The two described basic principles form the core of the dynamic business steering and mutually define each other: Clear and binding targets, which reflect dynamic (basic principle 1) form the framework, which enables a responsive integrated forecast & planning process (basic principle 2) in the first place.