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Ventana Research recently completed an in-depth benchmark research project on long-range planning. As I define it, long-range planning is the formal quantification of the more conceptual strategic plan. It makes specific assumptions and expresses in numbers how a company expects its strategy will play out over time. Almost all (95%) of those participating in the research see a need to make improvements to their long-range planning process. The research shows that one useful improvement is integrating long-range planning with the budgeting process. Today, many corporations confine their long-range planning to a high-level, less detailed extension of their current budget. Our research shows that companies that incorporate individual capital projects and major business initiatives as discrete elements of the long-range plan get better results. Marrying the high-level business outlook with the more significant bottom-up investment details produces better results.
Incorporating specific projects and initiatives into the long-range planning process has been common in companies in project-centric industries, including engineering and construction, aerospace and shipbuilding. Pharmaceutical and other long-cycle businesses that need to plan their major investments also have made specific projects and initiatives explicit parts of their forward-looking projections. Doing so allows drug companies, for example, to map out the transition from late-stage trials to post-approval so they can lay out the details needed for sales, production and distribution, and understand the financial consequences of these actions. The success of early-stage drugs is hit-and-miss, and because the actual timing of approval in various jurisdictions is difficult to forecast, pharmaceutical companies need to be able to revise near-term and long-range plans on an ongoing basis. Yet many other types of businesses can benefit from a more detailed approach to long-range planning that incorporates major initiatives and capital spending projects. Doing so offers a competitive advantage for shorter-cycle businesses that need to manage rapidly evolving products in dynamic markets. Asset-intensive businesses that must plan and execute capacity growth and heavy maintenance programs will also gain from greater integration of capital project details in their long-range plans.
Our research found that there are differences among companies in the degree to which they explicitly integrate planning for capital projects and major corporate initiatives into their long-range financial plans. Only one-fourth of organizations participating in the benchmark research report that their strategic plans are highly integrated with the management of individual projects. A majority – 61 percent – has some degree of integration of the two, and 10 percent say they’re not integrated at all. We cross-tabulated companies’ assessments of the quality of their long-term planning processes with the degree of integration of capital projects and major initiatives and found a positive correlation. That integration results in a better process: Nearly all (85%) of those with a highly integrated process say theirs works well or very well, compared to 63 percent that have a somewhat integrated process and just 22 percent that have not integrated these at all. The research demonstrates that there is a positive correlation between the degree of integration and the quality of alignment of long-range planning with a company’s strategy. The results were similar to the previous point: Nine out of 10 that have a highly integrated process also create long-range plans that are well-aligned with strategy, compared to seven out of 10 that have a somewhat integrated approach, and just one-third where there is no integration.
The research also found a correlation between the maturity of a company’s long-range planning process and its ability to manage the execution of projects and initiatives. Our analysis of long-range planning practices finds the majority (62%) of organizations participating in our research concentrated at the second and third levels of our four-part hierarchy. One-fourth are at the lowest Tactical level while only one in nine have reached the highest Innovative level. More mature companies are those that have a well-designed process, one that explicitly includes initiatives and projects. In addition, they also manage data more effectively, limit their use of spreadsheets and have clear strategic direction from senior executives, among other traits. The cumulative impact of all of these positive qualities is evident in better management of these strategically important and resource-intensive activities. All of the Innovative companies are able to manage the execution of their projects and initiatives well or very well, while nine out of 10 of Strategic companies are able to do so. By contrast, only 57 percent of the Advanced companies and only one-fourth of the Tactical companies are able to handle their execution well. Achieving better outcomes from strategic and long-range planning starts with including key details about projects in the process, yet companies can achieve even better results with a concerted effort to address shortcomings in the people, information and technology elements of strategic and long-range planning.
Organizations – even those that think they’re doing an adequate job – should reexamine their long-range planning to identify where they need improvements. Companies, especially those with more than 100 employees, that don’t do formal long-range planning need to begin the process. Going through the motions of planning is better than nothing, but our research indicates a connection between more mature long-range planning practices and achieving superior results.
Robert Kugel – SVP Research
Ventana Research completed an in-depth benchmark research project on long-range planning recently. As I define it, long-range planning is the formal quantification of the strategic plan and how that strategy is expected to play out over a period of time. The benchmark demonstrated that there’s room for improvement in almost every aspect of the long-range planning process. Almost all (95%) of those participating in the research see the need to advance their process. The research confirmed that long-range planning does not work well in isolation. Greater integration of the annual budget with the long-range plan and deeper integration of individual capital projects and initiatives are two ways to enhance the value of long-range planning process.
One of the main objectives companies have for long-range planning is to assist in the development of the annual budget. This was cited by seven out of 10 participants (69%), the highest percentage among specific five choices provided and ahead of optimally allocating capital or project investments, which was selected by 64 percent. Since almost all company budgets are focused only on a single fiscal year, long-range planning enables executives to look past the current period and get a formal picture of the follow-on years. For that reason, a bit more than half have fully (12%) or mostly (44%) integrated their long-range planning process with operational planning and budgeting. By the same token, almost half have not put them together to any meaningful degree. Our research shows that organizations that have fully or mostly integrated long-range planning with their annual budgeting process get better results. Companies that integrate long-range planning and budgeting react faster to changes in their environment: Two-thirds of those that have fully or mostly integrated the two types can respond to changes immediately or soon enough, compared to just 22 percent of those companies that have little or no integration. The more integrated companies seldom said that it takes them too long to complete their long-range planning process (29%), compared to nearly half (47%) of those that are integrated only somewhat or not at all. Organizations that tightly integrate short- and long-term planning can improve agility if, for example, discussions of near-term allocations include consideration of market or economic contingencies and how best to deal with outcomes, if they establish and follow structured processes that kick in to deal with such changes and if senior executives clearly and consistently communicate long-term strategy and objectives.
An important objective of long-range planning is deciding on which capital investments to make and which major corporate initiatives to pursue. We asked participants to assess how well their process works and compared these results with the quality of these investment choices and found that there is a positive correlation between the overall quality of the process and the decisions that stem from it. Most companies (83%) with a good process make consistently good choices compared to 35 percent that only have an adequate process and just 10 percent of those that say their process is inadequate. A good planning process is one which addresses key people-related issues (clear communications and training, for example), access to consistently timely and accurate data necessary for planning and software that supports effective process execution, agile response to changing conditions and deeper insight into factors driving results.
Companies also differ in the degree to which they explicitly integrate planning for capital projects and initiatives with their long-range plans. This has been more common (though by no means universal) in companies with a project-centric business model (in industries such as engineering and construction, aerospace and shipbuilding, to name three). Or for pharmaceutical and other long-cycle companies that need long-range visibility as, for example, they transition beyond drug trial phases into sales, production and distribution. Increasingly, though, even shorter cycle businesses such as electronics are incorporating capital and project planning to manage their rapidly evolving products and product families. As well, asset-intensive businesses that need more intelligent management of capacity and maintenance can benefit from greater integration of capital project details in their long-range plans.
About one-fourth (26%) of organizations participating in the benchmark research report that their strategic plans are highly integrated with the management of individual projects, while 61 percent integrate the two somewhat and 10 percent say they are not integrated at all. Only 19 percent of very large organizations (those with 10,000 or more employees) have highly integrated the two, likely because their size makes this difficult to manage (especially if they are using spreadsheets in the process). We cross-tabulated companies’ assessment of the quality of their long-term planning process with the degree of integration of capital projects and major initiatives with the long-range planning process and found there is a positive correlation. Integrating capital projects and initiatives with long-range planning results in a better process: nearly all (85%) of those with a highly integrated process say theirs works well or very well, compared to 63% that have a somewhat integrated process and just 22% that have not integrated these at all. There also is a correlation between the degree of integration and the quality of alignment of long-range planning with a company’s strategy. The results were similar to the previous point: 9 out of 10 that have a highly integrated process also create long-range plans that are well aligned with strategy, compared to 7 out of 10 that have somewhat integrated approach and just one-third where there is no integration.
Strategic planning is the formal conceptualization of a corporation’s strategy and its individual supporting elements (such as product strategy, sales and marketing strategy, pricing strategy and financial strategy – to name four). The strategic planning is a high-level process aimed at translating a company’s core approach to its business and environment into words to ensure that everyone has a clear understanding of its strategy. Strategic planning can – and often does – occur in isolation from the details of running a company. Long-range planning cannot. It is the formal quantification of the strategic plan and how that strategy is expected to play out. Our research shows that many if not most types of businesses benefit when there is an iterative approach in the long-range planning process that combines the big picture with the details.
Robert Kugel – SVP Research