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Planning in the smaller company
Planning in the Smaller Company Douglas Foster Chairman and Managing Director, Planning for Growth Ltd., London
This is a comprehensive guide to planning in the smaller company including check lists for each aspect of the business, and a case history showing how the procedures were put into action in developing a strategy and a 5 year plan for a particular firm.
"IF
YOU DO NOT KNOW WHERE YOU WANT
to go any road will lead you there." This quotation from Professor Levitt contains much truth. While it may not be too critical for the individual, not knowing where they want to be in the future can be fatal for the companies. Business is highly competitive today and the only sure forecast which can be made of the future is that it will become more so. Everyone is getting into everybody else's business. In such circumstances, companies content to be blown hither and thither by the winds of chance and change, or who are content to stagnate, will find themselves in difficulties. Liquidation or takeover become real possibilities. This is especially true for the smaller company.
SETTING OBJECTIVES It is important that management know where they want their company to be in the future. They must define this clearly in written statements of objectives. To do this they must first answer the following questions. Where is the company now ? This involves a thoroughly objective appraisal of the company's present operations and the subsidiary questions are: What markets are we in and why ? What products do we produce ? Why do we produce them ? Who buys them ? What is the purpose
SEPTEMBER, 1971
of the purchases? Where are they located ? What do the customers really want, i.e. what unfilled needs do they have ? Wllat new or modified products are, or should be, under way ? What are our skills and resources (manpower, know-how and finance)? What are our strengths and weaknesses ? How can we build on the first and eliminate the second ? Who are our competitors ? Where and how do they compete with us ? What are the market standings of our competitors? In what non-competing areas do they operate ? What are their strengths and weaknesses ? What are the economic and technical environments in which we do our business ? How are they likely to change in the future ? What government policies and controls are likely to affect us ? What is the labour availability ? Next, managements need to ask themselves the key question: Where is the company going? The answer to this will depend largely upon the answer to the first series of questions and the assumptions made about the future, as it is likely to affect the company. When this has been done management can get down to writing its corporate objectives. The key questions are listed in Figure 1 and their relationships illustrated by Figure 2.
Types of Objectives Here, objectives of the credo type, so favoured by American companies, consisting of flowery phrases on the company's responsibility to the workforce, shareholders and the community are not require& Statements of this nature may be included in the secondary or qualitative
objectives which give depth and philosophy to the management of a company. What is needed is a statement of primary or quantitative objectives which will point the company firmly towards its correct future.
Quantitative Objectives These state: The level of profitability to be achieved; the return on assets managed (R.O.A.M.) to be attained; the sales turnover to be achieved over stated time; the annual rates of growth to be realized; any improvements required in other control ratios which have meaning to the company's operations. By "stated time" is meant the period of the plan, which in most instances will be 3, 5 or 7 years. The writer's experience indicates that the best planning period for most industrial operations is 5 years as this gives sufficient time to plan and implement the schemes and to achieve logical continuity to the operations. For fast-moving consumer products and some small industrial products with short life, 3 years may be a better period. Seven years may be too long, except for capital goods, since the degree of uncertainty in market and general economic forecasting increases rapidly with time. Broken down into more detail, the primary, quantitative objectives of a company will state: Profits to be earned expressed in £ and in such ratios as £ profit/£ sales per cent "profitability" (see below), etc; R.O.A.M. (per cent) being £ profit/ £ assets managed per cent; turnover or sales in £ and unit volumes for each year; market shares to be achieved by product, area, industry, etc; annual rates of growth required (per 71
Today's position.
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Current position audit
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Future position audit
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Resources audit
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WHAT BUSINESS ARE WE IN ?
WHAT B U S I N E S ~ S H O U L D WE BE IN ?
WHAT ARE OUR FINANCIAL RESOURCES ?
Where is the company now ?
WHAT BUSINESS DEFINITION IS RIGHT FOR THE FUTURE ?
WHAT ADDITIONAL FINANCE CAN BE PROCURED ? -o ve r w h a t t im e ?
- w h a t markets Et w h y ? - w h a t products Et why ? - w h o are our customers ? - why do they buy f r o m us
W h a t are our skills and resources ? WHAT ARE OUR STRENGTHS AND WEAKNESSES ? WHO ARE OUR (MAJ OR) COMPETITORS ? - h o w do they compete ? -where do they ? - w h a t products ? -where do they NOT compete ? - w h a t are THEIR strengths and weaknesses ?
WHAT LENGTH OF TIME IS " THE FUTURE "' ? WHAT PERIPHERAL GROWTH IS POSSIBLE ? WHAT ADDITIONAL OR " N E W " GROWTH IS NEEDED ? HOW ARE TECHNOLOGY, MARKETS, CHANGING ? HOW ARE ENVIRONMENTAL FACTORS (economic, social, political, demographic, etc.) CHANGING ?
WHAT OTHER RESOURCES (plant, skills, men) ? HOW CAN THESE BE DEVELOPED ? -better utilisation - m a n p o w e r training management development ? -cost reduction and cost saving to free assets ? etc. WHAT ADDITIONAL RESOURCES CAN BE ADDED OVER THE PROPOSED PERIOD OF THE PLAN ?
etc. WHAT ECONOMIC AND OTHER FACTORS AFFECT US?
etc.
Profitability
LABOUR AND MANAGERIAL TALENT AVAILABILITY ?
etc.
I FUTURE CORPORATE OBJECTIVES AND TARGETS Profit/profitability Return on assets managed (R OA M ) ( G r o w t h of nett w o r t h ) Sales M a r k e t shares Annual rates of g r o w t h
Figure 1. Key Questions. cent) for sales, profits & R.O.A.M. other control ratios.
Control ratios A large number of control ratios can be calculated but the ones of prime importance to the general run of companies, and their usual safety levels are shown below. The average values for British industry are shown. More precise figures for specific industries will be found in Business Ratios (published by Dun & Bradstreet). Current assets/current liabilities: should not be less than 2. Liquid assets/current liabilities: should not be less than 1. Current liabilities/nett worth: 72
The value ot these ratios will vary for different industries but if a company consistently obtains values of more than double (or half) the last five ratios for its industry, then it may well be overtrading dangerously. Intelligent use must also be made of these ratios. Managers should use discretion in judging whether they should exceed one or more of the ratio values without endangering the operation. For example, they may decide that in order to be up to their industry's norms for one or two ratios, they may have to exceed the norm in another and they may have to accept this situation if it represents the most efficient operation available to the company. For example, nett sales/inventory may be 4 and inventory/nett working assets of 3. These may be the best they can achieve, or they may seek adjustments which will get the last ratio nearer 12 (or whatever is their industry's figure) and sacrifice something else. For example, they may decide to increase sales by 50 per cent, reduce nett working assets by 25 per cent and keep inventories unchanged when they will obtain nett sales/inventory of 6, inventory/nett working assets of 100 per cent and nett sales/nett working assets of 6.
should not be greater than 75 per cent. Total liabilities/nett worth: should not be greater than 100 per cent. Funded debt/nett working assets: should not be greater than 100 per cent. Fixed assets/nett worth: should not be greater than 75 per cent. Nett sales/inventory: should not be less than 3 per cent (but varies considerably). Inventory/nett working assets: should not be greater than 100 per cent. Nett sales]nett worth: should not be greater than 8 times for most manufacturing companies. Nett sales/nett working assets: should not be less than 12 times fcr most manufacturing companies.
This is calculated from: Sales margin (per cent) × rate of turnover of capital. If a company is making 8 per cent profit and turning over its capital 2.5 times, its profitability is 20 per cent. It can also achieve the same profitability if profits are 16 per cent and capital is being turned over 1.25 times. Which is preferred will depend upon other circumstances and the values of the control ratios shown. Rate of turnover of capital is simply sales (£) capital employed (£) "
Using Ratios The method of compiling and using ratios is simple. They are calculated from figures available in current balance sheets or management financial control forms and should then be compared with those accepted as norms or yardsticks for the industry. The average values for the industry are good guides to the tolerances which are permissible. If any ratio deviates from the mean by more than twice (or half), a study must be made to identify the factor causing this. Next, an examination should be carried out of its relationship with other ratios in which it occurs. Consideration can then be given to the financial adjustments needed to correct the factor to bring the ratios back into line with the average or
LONG RANGE P L A N N I N G
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range of the industry. The ideal is that a company must be at peak efficiency or should try to operate in the top 5 per cent or 10 per cent of its industry. This is possible regardless of size. In fact, the small companies may find this easier to achieve since they will not be burdened with the overheads and ancillary services which their bigger competitors may not be able to avoid. Assets M a n a g e d and Capital Employed
In most companies the total capital employed can be broken down into those assets which are directly managed by executives and others which are not under their control, or which they cannot influence in any way. One example is money invested or loaned to other companies or operations in a group or unit. Since managers should be accountable for the assets entrusted to their care and be judged on their performance, it seems only fair that assets over which they have no control should be excluded. Hence the preference for "assets managed" when setting objectives and in management control systems instead of "return on capital" or "return on investment". Assets managed may be calculated as shown in Table 1. Qualitative Objectives
Apart from the credo type statements favoured by Americans, these can include such statements as: To weld together diverse operations into the company, with corporate identity and purpose, having decentralized but controlled profit centres, to ensure optimum utilization of available resources to achieve maximum expansion and profit performance. The company will only enter operations to which it can make a positive contribution (in management skill, or
technical and production know-how, etc.). Projects will be undertaken only if the company can enter them at the right scale and achieve a satisfactory market share (these must be definedquantitatively and will vary with industry). The company must be capable and and willing to mount the right level of marketing and other effort to achieve this right scale of operation. The company will be big in a limited number of operations and not small in a large number of operations. The company must achieve the right market standing to sustain any operation and to gain the level of profitability required in the time stated for it, etc., etc. DEFINITION
OF THE
BUSINESS
If a company is to tackle all its opportunities on the right scale for its resources and skills, it must define its business accurately. Too narrow a definition will stifle its own thinking and opportunity horizons. Too wide and management will be confused and misled. Difficulties will arise through the company over-reaching itself. It is true that all companies have some idea of the business they are in but it is seldom the full story and so managers do not have a thorough appreciation of what their total capabilities might be. Most executives are by now familiar with Professor Theodore Levitt's example of the railways mistakenly thinking they were only in the railway business when they could have seen themselves, more correctly, in the business of transportation. There are many more cases which can illustrate how a correct definition of a business can open the eyes of management to the real opportunities available to them. First, consider a company producing air-conditioning equipment. It thought it was in the air-conditioning industry. In fact, a study of its skills and resources
Table 1. Calculation of Assets Managed Item Fixed assets Inventory Debtors and prepayments Bills receivable Bank retentions and cash in hand Patents/selling rights/goodwill Unquoted investments Quoted investments Less (Liabilities) Credits, accruals and provisions H.P. contracts due within 1 year H.P. contracts due after 1 year Overdraft Loan capital
74
Basis of Valuation Nett book value
Nett book value Market value Nett book value Amount outstanding Amount outstanding
showed that it was in the "environmental control" industry and was fully capable of designing and installing environmental control systems for both human and manufacturing process environments. Once this definition was established, the management could begin to evolve new products and markets for itself which would have escaped its notice before. Another company produced heavy concrete products such as bridge-beams used in building bridges, raised motorways and roads, etc., T-beams and box beams used for culverts, pedestrian subways and so on, large panels used for the submerged and surface walls and platforms of wharfs, walling for industrial buildings and a few other smaller items. They saw themselves as being in the "concrete industry", but they could have produced these ploducts in other materials. A more correct definition, at least for the first 5 years of the planning period, was that they were in the business of "producing products in concrete for transportation applications". They could then begin to think in terms of entire multi-storey garages, multi-level shopping areas, terminals for air, rail, sea and hovercraft, motel units based on some of their panels and other total applications which would not have occurred to them if they continued to think of themselves as producers of concrete products. Many other cases could be quoted but perhaps these two will suffice to show the benefits which could accrue and that it is possible to obtain more meaningful definitions even for relatively technical or restricted operations. However, it is not an easy task. This part of the work can take 3, 6 or more months of very hard thinking before usable definitions are evolved. In the second case quoted further redefinitions would probably be needed in time. Managements will find considerable benefit will flow from correct definitions of their businesses provided these are related to the skills and resources of the company and the changes taking place in their selected markets. Nor should these be allowed to stand for all time. Regular reviews are necessary to keep the definitions in line with external circumstances and the growing skills and resources of the company. It may well be that once a business definition has been established, the objectives may need to be reviewed. It can be argued that the business should be defined first before objectives are set. Experience shows, however, that setting objectives first---even if they have to be modified later, as they will need to be from time to time anyway--helps to focus the attention of management on to their prime task, LONG RANGE PLANNING
obtaining adequate return and growth of return on the assets entrusted to them. It also helps to give them a measure of the scale and type of problems which have to be faced and overcome.
PLANNING FOR THE FUTURE Once a business has been defined and corporate objectives set for a declared period of time, management can get down to the investigations needed to allow them to prepare detailed operational plans. The main investigations required are outlined below.
Development Gap The development gap will have been defined automatically by the objectives. This is simply the difference between current operations and those which the company must achieve by the end of the planning period for profits, R.O.A.M., sales, market shares and annual rates of growth. The development gap may be increased or decreased according to the rationalisation which may be needed in product-market strategy and the additional resources which can be made available.
Product-Market Strategy An objective and thorough review of the company's product-market strategy, by the marketing staff, is the first step. The hyphen is intentional. It stresses that managers must study their product and market strategies together at all times. A common error of management is that they will look at their market strategy assuming that the product mix is as fixed as the planets around the sun, or they will look at their product mix assuming that market conditions will remain unchanged. Companies live in a situation of continuous change and the two strategies are irretrievably linked. The action taken on one will affect the other and call for some corresponding action on it. Looking at products and markets together will eliminate some of the problems encountered in marketing operations but, more important, will bring to light new opportunities that could otherwise be missed. (This idea was fully explained in the article Developing A Product-Market Strategy, in Long Range Planning, Vol. 2, No. 3, 1970.) The purpose of the study is to identify which of the existing product-market operations are: Making acceptable levels of profit contributions. Not making acceptable contribution but capable of doing so. Never likely ever to make acceptable contributions. The last should be rationalized out of the company's operations on some time
SEPTEMBER, 1971
scale, linked to the speed at which new product-market operations can be introduced. The second should be studied in depth to find out what alterations are needed to make them profitable. Depending upon the extent of the rationalization and the improvements in performance which can be achieved for the remainder, the original development gap might have been increased. This is now the measure of new business which will have to be developed.
Resources The next step is to conduct a study of the resources and skills of the company (in practice this will be done at the same time as the product-market studies). It will indicate the limits to the new business which can be developed. Starting as a broad study, it will eventually be refined into detailed investigations of specific ideas. From this will emerge a final shortlist of new ventures which will have to be matched against the additional resources which can be made available. Once this matching has been done, the new ideas remaining must pass through the usual screening and assessing processes to measure chances of success, market opportunities, financial possibilities and the company's ability to produce the products and exploit the market situations. Any new idea which fails to meet criteria during any of the screening processes will be dropped or referred back for further study and be replaced by other ideas in the pipeline. Even when a new venture is launched, it must be controlled and the results monitored so if it falls below expectations and is not likely to achieve targets, it can be withdrawn or reduced in scope. The audit of new resources which can be provided over the time of the plan is therefore a very vital part of planning for the future.
Improving Profitability Product-market operations may not be profitable for various reasons. This may be because of: Some transient factor producing a temporary state of unprofitability (e.g. short-term government restrictions). Over expenditure in marketing for a project of limited potential. Insufficient expenditure on marketing. This means that management must ask the following questions: Would the total marketing profit be increased by the elimination of these products or markets ? Would the variable manufacturing and marketing costs saved be greater or less than the revenue lost ? Would the total marketing profit be
increased if the effort placed behind these operations is placed behind more profitable ones ? Are these operations entering a stage of obsolescence or can their lives be extended with substantial gain in overall profitability ?
Selling Operations The selling operations must also be investigated to establish: Which are satisfactory. Those which are not but could be made so. Those which are never likely to be satisfactory. This should be done by area, salesman, industry and customer. Steps must then be taken to improve the second category and an analysis made to see if the third could be eliminated. This means that the following questions must be considered: Should the selling effort be shifted from unprofitable to profitable areas and accounts ? How and when should this be done ? Should the pricing or discount structure be altered to increase the nett prices to the unprofitable ? Should the channels of distributions be changed with greater use of agents or distributors better equipped to handle the small account, or by franchises ? Should incentive discounts be offered for larger orders or annual purchases, in effect imposing service charges on those who place small individual or annual orders ? Should areas of sparse (customer) population be handed over to agents, etc., who are better able to service them ? Should sales calls be reduced in frequency and substituted by other methods, e.g. telephone selling from head office with the approval of the accounts so served and an adequate back-up emergency technical service if this is needed? In considering any change in the direction and type of the selling effort, management must first ask themselves two key questions: Will increased sales and profits result if a greater marketing effort is put behind the profitable operations ? How will sales and profits be affected if fewer calls are made on unprofitable operations ? Obviously there should be prospects of a nett gain in profits and sales before any change is implemented. The results must be monitored and the ideas extended in scope or abandoned.
Production While the marketing aspects are being 75
studied, production will be considering their side of the business in conjunction with colleagues from marketing, finance and personnel. The resources audit will show what additional facilities will be needed to match the requirements of marketing, and finance department will check the costs and decide if the money can be provided. In addition studies should be made into all existing operations to see how they can be improved. The aim is for greater productivity, cost and stock reductions and the better utilization of manpower.
dation of costs and the estimates of the total of new money which will be needed cannot be made until the end. In practice the financial department will have been working closely with their colleagues in other departments and will have been identifying the financial criteria which would affect their colleagues' own work and plans. In many instances, the financial department will have to be the "team leader" in some of the planning work. They will in effect, set the limits on the development plans which the company can consider.
Manpower Planning
Financial planning must identify the additional resources which can be obtained by self-generation by the company and those which must be obtained from any or all of the external sources available. They will have to calculate which of the varying interest rates the company can afford. It must also involve studies which will show how existing operations can be improved through reduction in stocks, better utilisation of existing assets by all departments and how economics can be achieved. The effects of taxation and high interest rates on future plans must be estimated. Financial planning must also be concerned with (legal ways of) keeping a company's liability for tax as low as possible and certainly must ensure that a company does not, by default, pay more tax than would legally be required. The work also involves establishment cf the annual rates of growth which would be possible, recommendations on acquisitions and mergers which may be advisable and for private companies, the possibility and cost of going public or issuing more shares.
The personnel department must also review their side in conjunction with colleagues from other departments. Manpower requirements are never static. Even if a company remains in relatively the same position in its markets, workloads and the type of work which has to be done will change in time. The methods of operation and the manpower needs will change. These changes will be even greater when a company is growing or changing its course. These studies will identify the manpower gaps which will occur at various stages of the corporate plan and will indicate the additional men and new specialists which will be required. Also, the organizational structure and methods will have to be altered from time to time. All these must be forecast beforehand and allowed for in the company's plans. Personnel department must therefore draw up manpower and training plans. It must define the organizational changes which will have to take place and the timing for these. Job descriptions and man specifications must be prepared and these too will need to be modified from time to time.
Buildings and Services These must also be reviewed as demand for them will change. There is little point in planning to achieve growth if there will not be the accommodation and services to provide or sustain them. This part of planning for the future is the one most overlooked. Management seems too ready to assume the impossible here, that a quart will go into a pint pot.
Financial Planning This section being located at the end of 'Planning', should not be seen as an indication that financial planning is of least importance. It is simply last in time as financial planning cannot be finalized until all the other planning stages have been more or less completed. The consoli76
Controls If a company is to achieve its targets, it must plan logically, implement the plans but above all it must control and monitor the operations and results. The control system should not be over-elaborate or time-consuming to operate. It must provide the essential information quickly and allow management to take remedial action speedily when operations deviate from the norm or when external circumstances have changed substantially or permanently. Most companies will find the following financial control returns adequate for most purposes: Summarized profit and loss account. Sales and profit contribution--by markets, by products, by areas, (and if needed by industry and customer). Profit on investments. Inventory levels--raw materials and bought in supplies, work in progress, finished goods.
Cash forecasts and forward allocations. Capital expenditure and commitments with forecasts of returns anticipated. Movement of funds in the company. Manpower situation-- management, other. The financial and cost control side may be built up in stages. Stage 1. Capital expenditure control. Cash budgeting and liquidity control. Monthly financial reports against budgets. Statistical analyses of sales, orders and production (if these can be shown as trend graphs all to the good). Stage 2. Standard product costs. Product group profitability reports. Analyses of expenses, wages and salary costs. Analysis of job costs vs. budgets for special projects or one-off jobs. Stage 3. Revision of pricing policy based on standard costs. Material cost control. Labour cost and performance control. Departmental analyses of expenses and other costs. Marketing departments will need the following basic information for control purposes: Sales performance vs. budget--by area, by product group (if needed by salesman, customer and industry). Profitability vs. budget--by area (and salesman if different), by product group, by customer category if this is useful. Salesman's call records and call reports. Logging of enquiries received, quotations issued, orders received--by product group or product, by area, by customer. Profit analyses of orders received. Customer record cards showingm name, address and various buying locations, executive making buying decision at the various locations, quotations issued and orders received, delivery of orders, date of salesman's call and reference of further correspondence which results.
OPERATIONAL PLANNING When the corporate planning has been completed, the various departments must get down to making detailed plans covering the marketing, production, personnel and financial operations of the company. This involves taking the corporate targets and breaking them down into individual ones for each major department and its subunits for each year and trading period LONG RANGE PLANNING
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(month, week, etc.). Marketing will also break theirs down by areas and salesmen. When these detailed plans are approved (and for most companies they have to be started at least 6 months before the start date for the plan) they are implemented (Figure 3 indicates the various major steps to be taken by each department and the inter-relationship between them). The results are watched and assessed through the control systems which have been installed before the plans were put into operation. Changes are effected if results, or variations in market and economic conditions, indicate these to be necessary. In other words, there must be flexibility in the plans and planning process just as there must be in management thinking and philosophy. MANAGEMENT
TECHNIQUES
In recent years too many companies have rushed into using every new management technique that came along regardless of their relevance to the business. Managements must assess the techniques available and select only those which make a positive contribution to their operations. They must use these sensibly; e.g. market research should not be undertaken at the same time every year but be spread over the year--or held at different times, so that cyclical or seasonal fluctuations of the market can be detected and exploited. The cost-benefit principle must apply also just as when new marketing operations or plant are being considered, if increased costs are to be avoided. In this way a company avoids "managerial overkill". When selecting techniques management must be prepared to modify the basic textbook approach to suit their special needs. Companies must evolve their own systems based on these techniques, arriving at tailor-made systems for their requirements. Only in this way can they hope to obtain improved performance and profitability. Anything else will just help to maximize losses ! AN EXAMPLE The following example, showing how these procedures are put into action, up to the setting of the 5-year corporate plans (since space does not permit a complete illustration down to the minutiae of depart-
mental operations), will indicate how lethargic and ineffective management may be revitalized. BACKGROUND COMPANY
TO THE
NOTE: The figures of the company's operations have been altered by a factor to prevent identification. To keep the relationships similar to that of the actual case, the market figures have also been increased by the same factor. Readers must forgive the author if thereby, the market figures look ridiculous! However, they do not negate the idea or the approach embodied in this article. The company produced a range of airconditioning equipment and plant including the small heat exchangers used by this equipment. There were four product groups each of four product lines. The small compressors used by these machines, the fans and other electrical components were bought-in. The company also produced an associated range of ventilation ducting in mild steel and aluminium. There were 12 "systems" of ducting and each had about 12 variations! Although the end products were relatively simple, this variety of output created problems for production and distribution staff. The performance of the company at the time the planning process began is shown in Table 2 from which it will be seen that there was about £19m. of sales in airconditioning equipment earning about £2m. profit. There was £1m. worth of ducting which was said to be at breakeven but was probably running at a loss--the costing system being so haphazard as to defy analysis. For 4 or 5 years the company had experienced marginal growth in sales and no growth in profits earned in money terms, so in real terms, its profitability was declining. It was the realization of this fact that prompted the management to start planning to achieve sustained growth over the longer-term. This had been defined as "the next 5 years" since this was as far ahead as they felt they dare look in view of the difficult situation then prevailing in the air-conditioning industry. The ducting business was one of the major problems. Initially intended to be able to design systems in 3 months and install most of them in 3-6 months, the
Table 2. Performance of Company at Start of Planning Process
Item Sales: £m. Profit: £m, Profit/Sales Return on assets managed
78
Air conditioners
Ducting
Total
£19 £2 10.5 per cent
£1 Breakeven --
£20 £2 10 per cent 20 per cent
department in fact, took up to 9 months on design and installation took up to 12 months. The department was always well behind schedule; it appeared to be working beyond its initial, intended capacity of £1m. and the drawing office staff were almost fully occupied on this work and had very little time to spend on designing new air-conditioning plant on which the company was making its money. The company as a whole had had little success in trying to think up new products and activities and while its air-conditioners were accepted as quality products and market leaders, there was very little in the pipeline to sustain this reputation. Of the total air-conditioning business 80 per cent was against commercial or government (local and national) tenders announced 12-18 months in advance. 60 per cent of the total business went into buildings in the U.K. and 10 per cent into overseas installations, normally Europe and the Middle East. The remaining 10 per cent was in a special small air-conditioner for military tanks and 2 per cent went into British tanks and the balance of 8 per cent went into foreign ones. The other 20 per cent of the air-conditioning business was sold through a large number of agents, very few of whom held stock, but all of whom obtained 33½ per cent commission. The company did not have any marketing services and the sales force was frustrated in that all the important contacts were done by the managing director, on his insistance. This meant that the selling effort was limited to fruitless visits to agents. There was no attempt to analyze tenders when announced, to identify the items which the company needed to give it profitable business. If they had, they could have identified the desirable tenders and would have been in a position to plan effective marketing and pricing strategies to obtain them. The company, with assistance from outside, decided to take a very critical look at itself to identify its problem areas. The experts called in, with the company staff, identified the strengths and weaknesses of the company as follows:
Strengths Good quality products, reliable and having long-life. Although no attempt had been made to do this, the company could have arranged attractive credit terms for its major customers, an important factor in large contracts. Company had a reputation for dependability generally, except for deliveries of ducting. Considerable improvement could be achieved, in the right circumstances, to LONG RANGE PLANNING
improve the utilization of its assets. It had access to a further £2m. of capital if it needed it. Weaknesses Tended to sell on price. Did not promote its products well, if at all. Too much capital tied up in stocks, especially compressors. No advance analysis of tenders on offer. No real marketing or selling effort. Production'staff were preoccupied with the problems on the ducting side of its business. Bad distributor network which just cut into profit margins without making any substantial contribution to profits or earnings. Excessive domination of the business by the managing director.
However, the worst weakness was that in seeing itself in the "air-conditioning business", it appeared to be restricting the opportunities open to it, as witnessed by its apparent inability to devise new saleable products. REMEDIAL
ACTION
Steps were taken immediately to attempt a redefinition of the business, to carry out a details audit of its assets of all kinds and to conduct market and product research work. This decision was achieved only after long and tortuous discussion between the experts called in to assist the company and its managing director! Market research and resources audit. The market research estimated the size of the market and the anticipated growth over the 5-year period under consideration as shown in Tables 3 and 4 and the resources
Table 3. Estimated Size of Market I
Air conditioning equipment for human environment Air conditioning equipment for process environment Total market "Most likely" market size taken as £200m.
£20-100m. £106-120m. £190-210m.
Table 4. Estimated Growth of Market (Air conditioning equipment) Growth rate for next 5 years : not more than 5 per cent per annum not less than 2 per cent per annum Market size: £m. Year 1 Year 2 Year 3 Year 4 Year 5 £204-210 £208-220 £212-231 £216-242 £220-255 Min/max size, approx. £205 £210 £220 £230 £240 Most likely size If market shares:* 10 per cent 11 per cent 12 per cent 13 per cent 14 per cent £20.5 £23.1 £20.4 £29.9 £33.6 Possible sales targets: Incr. on previous yr.: £1.5 £2-6 £3.3 £3-5 £3.7 *Market studies indicated that this order of growth could be possible, even though "straightline" growth of this nature is unusual and can be upset by changing economic, technical and other matters. Table 5. Summary of Assets and Facilities at Start of Planning Process Assets managed Capacity in sales terms:
£10m. £20m. (Operating at £19m. or ca. 75 per cent capacity) Ducting £1m. (Effectively in excess of 100 per cent) Additional finance available over 5 years £2m. (Equiv. to new prodn, capacity on present operation of £5m.) Improvements in production (incl. elimination of ducting and reutilization of assets, reorganization) £2m. Possible capacity at end of 5 years £33m. Buildings With reorganization and some additional accommodation on available space, would be adequate for next 5-year period. Services Adequate for possible expanded requirements of 5-year period. Manpower Adequate resources available for foreseeable 5-year period. Improvements in methods and utilization would increase efficiency. 5-year training plans would improve performance of existing manpower etc.
SEPTEMBER, 1971
A/c eqpt.
audit gave the facts outlined in Table 5. Redefinition Of the business. The attempts to redefine the business finally resulted in the staff--after much prompting--realizing that their skills and resources allowed them to be in the Environmental control business. In other words, they were making equipment for human environments and with the addition of one or two specialist engineers and designers they could extend their business into environmental control equipment for industrial processes. Certain processes (e.g. nuclear engineering; others requiring fine dust control; etc.) were beyond their immediate capabilities but even so, in seven or eight years, once their new base had been well established, they could be able to expand into even these areas. Policy changes. The redefinition led to a remarkable opening of eyes at all levels and the following major changes of policy were undertaken. 1. Ducting work would cease--it could be obtained through several good subcontractors--and the design and manufacturing assets released could be better utilized elsewhere. 2. With the design staff freed and the recruitment of two specialist design engineers and two other technical specialists, as the results of the product research became known, work started on the design and development of plant suitable in three carefully selected areas of industrial process environmental control. 3. The managing director relinquished his tight hold on the operations and took responsibility more for corporate planning rather than being chief jack-of-all-trades, and the sales and other departments were allowed to flourish in the more usual ways. 4. A marketing services operation was added, covering marketing research, advertising and carefully selected promotional activities; these and sales were placed under a marketing director. 5. The distributor network was overhauled and greatly reduced in number; commission was cut to a standard 15 per cent but annual bonuses were added which depended on the business obtained and the average level of stocks held by each agent, adjusted for the total space they had available (so as not to penalize agents with limited storage capacity). 6. Technical and sales contacts with major customers and consulting engineers and architects were improved; the aim of the sales and 79
7.
8.
9.
10.
11.
total promotional activity was to promote the quality and reliability of the products. A method was introduced for the analysis of tenders and an information feedback and control system was introduced throughout the company. Production department began to study its methods and introduce alterations and adjustments which would lead to better output and improved (reduced) costs. Stock levels were reduced. Arrangements were made with the compressor manufacturer for annual contracts with specified levels and timings for calls-off of stock which placed the onus for holding a substantial proportion of the stocks on the compressor manufacturer. Similar arrangements were made with the fan or blower manufacturers. Improved production planning and control allowed them to work on greatly reduced stocks of heat exchangers and sheet metal. Financial department introduced budgetary control systems and began planning for the realization of additional assets. Other assets were "freed" through the introduction of cost-reduction programmes in every department but the "costs saved" were to be utilized in other areas and aimed to increase profitability. Personnel department were then able to plan with greater precision the manpower and executive needs of the company and the associated training programmes. A proper manpower development plan could be, and was, prepared.
Corporate
Policy
and Objectives
Middle management from all departments, in the course of the work, had begun to identify the product-market production, financial and personnel opportunities which would become available to
the company, given correct detailed planning and support. Each department had begun to outline their own targets and objectives for the period of the plan. As a result, top management with full support from all departments, was able to establish the corporate policies and objectives for the company. Corporate policy. This was stated as the doubling of profits and turnover by the end of the fifth year with appropriate improvements in other areas. Although the company had not achieved this order of growth in the immediate past, the changes in train and objective study of their existing markets showed that it was more than a possibility for the immediate future. In addition the Board decreed that profit targets and improvements in return on assets managed (R.O.A.M.) were to have priority over growth in sales, indicating for the first time that preoccupation with the state of the order book, without due regard to the prime purpose of the company (to make profits and secure acceptable levels of return) would not be tolerated. The Board itself was obviously also interested in the growth of the nett worth of the company. Corporate objectives. These were then stated in quantitative and qualitative terms. The qualitative objectives were similar to the examples given earlier in this article and the quantitative objectives (and policy statement) are shown in Table 6. Outline 5-year plan. The various departments of the company, working in their own areas and in full co-operation with each other, the financial department often having to act as "honest broker" between other departments when their individual objectives and thoughts were incompatable, got down to the preparation of the outline 5-year plan. Each department involved as many of its executives as possible and the opinions and comments of even the junior executives were sought. Team-spirit and drive rose to an all time high. After much hard work, many false starts,
Table 6. Corporate Policy and Objectives Policy
To achieve a doubling of profits and sales over the next 5 years with appropriate improvements in return on assets managed (R.O.A.M.), market shares, profit/sales ratios. Profit targets and improvements of R.O.A.M. were to have priority.
Quantitative Objectives
Profit fromfrom £2m.20toper£4m. R.O.A.M. centortobetter 32.5 per cent or better
t bo~,~h;eern:
Sales from £20m. to £40m. if possible Profit/sales from 10 per cent to 15 per cent or better Market share from 9.5 per cent to 12.5 per cent or better Annual rates of growth of all the above to be as near 10 per cent per annum as possible. Qualitative Objectives
80
(Similar to those in text of article).
scrapping of several plans, but all based on objective study of markets, the environment in which the company had to work, its assets, skills, strengths and weaknesses, and the knowledge of the competitive situation, they were able to produce an acceptable plan. The important steps in the thinking are outlined in Table 7. First they assumed that sales could be increased in the 5 years by 5 per cent, 15 per cent and 10 per cent, the last applying to each of the last 3 years (see Line 1). They assumed that growth in the first year would be marginal but as a result of the impetus gained from the changes being implemented, growth in sales for year 2 would be substantial and then tail off to a lower figure. Detailed forecasts of the actual growth for the fourth and fifth years would have to be left for 1 or 2 years when they expected to have more reliable information on relevant factors. Next they estimated what the profit might be if profit/sales ratio remained at 10 per cent, as in Line 2. Line 3 shows the resultant profit. This was unsatisfactory as the fifth year figure fell below the doubling which had been made mandatory. Further studies were made into their profit and product-market operations. They found that some operations could be phased out immediately and the effort saved put behind some of the remainder to give improvement in profit earned. Also, as a result of the redefinition of their business they could see some "new" activities which would be implemented almost immediately since they had most of the hardware and knowledge to do so. As a result of these and other adjustments, (e.g. adjustment to the sales areas and operations), middle management forecast with confidence that there was every possibility of profit/sales being increased as shown in Line 4 following a similar pattern to growth of sales. Then if sales remained as in Line 1, profits would become those shown in Line 5, giving a fifth-year figure well above the original target. The assets required were estimated to vary as shown in Line 6. R.O.A.M. would then be as in Line 7. The change in the profitability and the times the capital would be turned-over were also noted. After very careful consideration of the implications of this plan, it was submitted to the Board. It was accepted and implemented. The company made steady progress in the achievement of this plan until government controls brought about a temporary recession in the economy. However, the morale of the management team had improved to such levels that they were not dismayed by this. They laid plans immediately to "hold their gains"--which LONG RANGE PLANNING
Table 7. Outline 5-Year Plan £ in Millions Start
Item
1. £,20.0
Sales (INCR)
2. 10 per cent
Profit/Sales
3. £,,2.0
Profit (INCR)
4.
P/S to grow to meet objectives (I NC R)
--
Year 1 £21.00 (5 per cent) 10 per cent
5. £,2.0
If sales as 1
6. £,10.0 7. 20 per cent
profit and P/S as 4 (INCR) Assets managed R.O.A.M. (INCR)
Times capital T/O:
Profitability:
£2'10 (5 per cent) 11 per cent (10 per cent) £2.31 (15"3 per cent) £10-5 22.0 per cent (10 per cent)
Year 2 £24.29 (15 per cent) 10 per cent
Year 3 £.26.60 (10 per cent) 10 per cent
Year 4 £29.30 (10 per cent) 10 per cent
Year 5 £32"80 (10 per cent) 10 per cent
£2.42 £2"66 £2"93 £3-23 (15 per cent) (10 per cent) (10 per cent) (10 per cent) 12.25 per cent 13-5 per cent 15.0 per cent 16.5 per cent (11.3 per cent) (10.2 per cent) (11.1 per cent) (10 per cent) £2.96 £3.60 £4.40 £5.33 (28.1 per cent) {21.6 per cent) (11.2 per cent) (21.1 per cent) £11.5 £12.0 £12.0 £12.0 25.7 per cent 30.0 per cent 36.7 per cent 44.5 per cent (16.6 per cent) (16.7 per cent) (21.7 per cent) (21.3 per cent)
Year 1 : 2.00, year 5: 2.73. Year 1 : 22.00 per cent, year 5: 45.00 per cent.
they did--and went on to prepare a further 5-year plan for implementation when "things returned to normal". A dejected team, though its own efforts and a fundamental re-thinking of its business and methods became a dynamic one capable of achieving what in previous years might have been considered as the impossible. For the statistically minded, the raw figures of this plan will indicate another interesting fact. Through concentration on improving the efficiency and profitability of the operation, the company, with the profit/sales ratios projected, could have
achieved improvement in profits and R.O.A.M. even if their sales had declined below the initial figures, during what might have been a crucial year, the first, when management would have been heavily engaged in sorting out their problems. This is illustrated in Table 8. This point is of more than academic interest. One of the main problems of a major reorganization of this nature is that immediate improvements in sales are not always possible. In fact, through rationalization some loss of sales may be unavoidable. Yet the impatient City and share-
Table 8.
holders can still receive firm indications of the better future to come, if accent is placed on improving profits. Finally, it illustrates, perhaps, the fallacy of being preoccupied with sales or the state of the order book. Perhaps 1 day, when British managers have reached the level of sophistication enjoyed by some of the leading teams in America, we may even stop being preoccupied with profit! By then we will have reached a stage when any statement on sales to be achieved automatically implies the achievement of 'x' per cent profit and what is more, barring major upsets beyond the control of management, such growth at stated profit margins will be achieved. •
/ Item Year 1 Year 2 If profit/sales 11 per cent 12.5 per cent and profit targets (say) £2.10m £2.50m. Sales could be only £19.20m. £20.40m.
Year 3 Year 4 Year 5 | 13.5 per cent 15.0 per cent 16.5 per cent I £3.00m. £3.50m. £4.00m. / £22.25m. £23.30m. £24.30m. /
1
SEPTEMBER, 1971
ACKNOWLEDGEMENT Copyright D. W. Foster. This article contains material from the author's book: Planning for Products and Markets, to be published shortly by Longmans.
81
This is a comprehensive guide to planning in the smaller company including check lists for each aspect of the business, and a case history showing how the procedures were put into action in developing a strategy and a 5 year plan for a particular firm.
"IF
YOU DO NOT KNOW WHERE YOU WANT
to go any road will lead you there." This quotation from Professor Levitt contains much truth. While it may not be too critical for the individual, not knowing where they want to be in the future can be fatal for the companies. Business is highly competitive today and the only sure forecast which can be made of the future is that it will become more so. Everyone is getting into everybody else's business. In such circumstances, companies content to be blown hither and thither by the winds of chance and change, or who are content to stagnate, will find themselves in difficulties. Liquidation or takeover become real possibilities. This is especially true for the smaller company.
SETTING OBJECTIVES It is important that management know where they want their company to be in the future. They must define this clearly in written statements of objectives. To do this they must first answer the following questions. Where is the company now ? This involves a thoroughly objective appraisal of the company's present operations and the subsidiary questions are: What markets are we in and why ? What products do we produce ? Why do we produce them ? Who buys them ? What is the purpose
SEPTEMBER, 1971
of the purchases? Where are they located ? What do the customers really want, i.e. what unfilled needs do they have ? Wllat new or modified products are, or should be, under way ? What are our skills and resources (manpower, know-how and finance)? What are our strengths and weaknesses ? How can we build on the first and eliminate the second ? Who are our competitors ? Where and how do they compete with us ? What are the market standings of our competitors? In what non-competing areas do they operate ? What are their strengths and weaknesses ? What are the economic and technical environments in which we do our business ? How are they likely to change in the future ? What government policies and controls are likely to affect us ? What is the labour availability ? Next, managements need to ask themselves the key question: Where is the company going? The answer to this will depend largely upon the answer to the first series of questions and the assumptions made about the future, as it is likely to affect the company. When this has been done management can get down to writing its corporate objectives. The key questions are listed in Figure 1 and their relationships illustrated by Figure 2.
Types of Objectives Here, objectives of the credo type, so favoured by American companies, consisting of flowery phrases on the company's responsibility to the workforce, shareholders and the community are not require& Statements of this nature may be included in the secondary or qualitative
objectives which give depth and philosophy to the management of a company. What is needed is a statement of primary or quantitative objectives which will point the company firmly towards its correct future.
Quantitative Objectives These state: The level of profitability to be achieved; the return on assets managed (R.O.A.M.) to be attained; the sales turnover to be achieved over stated time; the annual rates of growth to be realized; any improvements required in other control ratios which have meaning to the company's operations. By "stated time" is meant the period of the plan, which in most instances will be 3, 5 or 7 years. The writer's experience indicates that the best planning period for most industrial operations is 5 years as this gives sufficient time to plan and implement the schemes and to achieve logical continuity to the operations. For fast-moving consumer products and some small industrial products with short life, 3 years may be a better period. Seven years may be too long, except for capital goods, since the degree of uncertainty in market and general economic forecasting increases rapidly with time. Broken down into more detail, the primary, quantitative objectives of a company will state: Profits to be earned expressed in £ and in such ratios as £ profit/£ sales per cent "profitability" (see below), etc; R.O.A.M. (per cent) being £ profit/ £ assets managed per cent; turnover or sales in £ and unit volumes for each year; market shares to be achieved by product, area, industry, etc; annual rates of growth required (per 71
Today's position.
I
I
Current position audit
I
Future position audit
I
I
Resources audit
I
WHAT BUSINESS ARE WE IN ?
WHAT B U S I N E S ~ S H O U L D WE BE IN ?
WHAT ARE OUR FINANCIAL RESOURCES ?
Where is the company now ?
WHAT BUSINESS DEFINITION IS RIGHT FOR THE FUTURE ?
WHAT ADDITIONAL FINANCE CAN BE PROCURED ? -o ve r w h a t t im e ?
- w h a t markets Et w h y ? - w h a t products Et why ? - w h o are our customers ? - why do they buy f r o m us
W h a t are our skills and resources ? WHAT ARE OUR STRENGTHS AND WEAKNESSES ? WHO ARE OUR (MAJ OR) COMPETITORS ? - h o w do they compete ? -where do they ? - w h a t products ? -where do they NOT compete ? - w h a t are THEIR strengths and weaknesses ?
WHAT LENGTH OF TIME IS " THE FUTURE "' ? WHAT PERIPHERAL GROWTH IS POSSIBLE ? WHAT ADDITIONAL OR " N E W " GROWTH IS NEEDED ? HOW ARE TECHNOLOGY, MARKETS, CHANGING ? HOW ARE ENVIRONMENTAL FACTORS (economic, social, political, demographic, etc.) CHANGING ?
WHAT OTHER RESOURCES (plant, skills, men) ? HOW CAN THESE BE DEVELOPED ? -better utilisation - m a n p o w e r training management development ? -cost reduction and cost saving to free assets ? etc. WHAT ADDITIONAL RESOURCES CAN BE ADDED OVER THE PROPOSED PERIOD OF THE PLAN ?
etc. WHAT ECONOMIC AND OTHER FACTORS AFFECT US?
etc.
Profitability
LABOUR AND MANAGERIAL TALENT AVAILABILITY ?
etc.
I FUTURE CORPORATE OBJECTIVES AND TARGETS Profit/profitability Return on assets managed (R OA M ) ( G r o w t h of nett w o r t h ) Sales M a r k e t shares Annual rates of g r o w t h
Figure 1. Key Questions. cent) for sales, profits & R.O.A.M. other control ratios.
Control ratios A large number of control ratios can be calculated but the ones of prime importance to the general run of companies, and their usual safety levels are shown below. The average values for British industry are shown. More precise figures for specific industries will be found in Business Ratios (published by Dun & Bradstreet). Current assets/current liabilities: should not be less than 2. Liquid assets/current liabilities: should not be less than 1. Current liabilities/nett worth: 72
The value ot these ratios will vary for different industries but if a company consistently obtains values of more than double (or half) the last five ratios for its industry, then it may well be overtrading dangerously. Intelligent use must also be made of these ratios. Managers should use discretion in judging whether they should exceed one or more of the ratio values without endangering the operation. For example, they may decide that in order to be up to their industry's norms for one or two ratios, they may have to exceed the norm in another and they may have to accept this situation if it represents the most efficient operation available to the company. For example, nett sales/inventory may be 4 and inventory/nett working assets of 3. These may be the best they can achieve, or they may seek adjustments which will get the last ratio nearer 12 (or whatever is their industry's figure) and sacrifice something else. For example, they may decide to increase sales by 50 per cent, reduce nett working assets by 25 per cent and keep inventories unchanged when they will obtain nett sales/inventory of 6, inventory/nett working assets of 100 per cent and nett sales/nett working assets of 6.
should not be greater than 75 per cent. Total liabilities/nett worth: should not be greater than 100 per cent. Funded debt/nett working assets: should not be greater than 100 per cent. Fixed assets/nett worth: should not be greater than 75 per cent. Nett sales/inventory: should not be less than 3 per cent (but varies considerably). Inventory/nett working assets: should not be greater than 100 per cent. Nett sales]nett worth: should not be greater than 8 times for most manufacturing companies. Nett sales/nett working assets: should not be less than 12 times fcr most manufacturing companies.
This is calculated from: Sales margin (per cent) × rate of turnover of capital. If a company is making 8 per cent profit and turning over its capital 2.5 times, its profitability is 20 per cent. It can also achieve the same profitability if profits are 16 per cent and capital is being turned over 1.25 times. Which is preferred will depend upon other circumstances and the values of the control ratios shown. Rate of turnover of capital is simply sales (£) capital employed (£) "
Using Ratios The method of compiling and using ratios is simple. They are calculated from figures available in current balance sheets or management financial control forms and should then be compared with those accepted as norms or yardsticks for the industry. The average values for the industry are good guides to the tolerances which are permissible. If any ratio deviates from the mean by more than twice (or half), a study must be made to identify the factor causing this. Next, an examination should be carried out of its relationship with other ratios in which it occurs. Consideration can then be given to the financial adjustments needed to correct the factor to bring the ratios back into line with the average or
LONG RANGE P L A N N I N G
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S E P T E M B E R , 1971
73
range of the industry. The ideal is that a company must be at peak efficiency or should try to operate in the top 5 per cent or 10 per cent of its industry. This is possible regardless of size. In fact, the small companies may find this easier to achieve since they will not be burdened with the overheads and ancillary services which their bigger competitors may not be able to avoid. Assets M a n a g e d and Capital Employed
In most companies the total capital employed can be broken down into those assets which are directly managed by executives and others which are not under their control, or which they cannot influence in any way. One example is money invested or loaned to other companies or operations in a group or unit. Since managers should be accountable for the assets entrusted to their care and be judged on their performance, it seems only fair that assets over which they have no control should be excluded. Hence the preference for "assets managed" when setting objectives and in management control systems instead of "return on capital" or "return on investment". Assets managed may be calculated as shown in Table 1. Qualitative Objectives
Apart from the credo type statements favoured by Americans, these can include such statements as: To weld together diverse operations into the company, with corporate identity and purpose, having decentralized but controlled profit centres, to ensure optimum utilization of available resources to achieve maximum expansion and profit performance. The company will only enter operations to which it can make a positive contribution (in management skill, or
technical and production know-how, etc.). Projects will be undertaken only if the company can enter them at the right scale and achieve a satisfactory market share (these must be definedquantitatively and will vary with industry). The company must be capable and and willing to mount the right level of marketing and other effort to achieve this right scale of operation. The company will be big in a limited number of operations and not small in a large number of operations. The company must achieve the right market standing to sustain any operation and to gain the level of profitability required in the time stated for it, etc., etc. DEFINITION
OF THE
BUSINESS
If a company is to tackle all its opportunities on the right scale for its resources and skills, it must define its business accurately. Too narrow a definition will stifle its own thinking and opportunity horizons. Too wide and management will be confused and misled. Difficulties will arise through the company over-reaching itself. It is true that all companies have some idea of the business they are in but it is seldom the full story and so managers do not have a thorough appreciation of what their total capabilities might be. Most executives are by now familiar with Professor Theodore Levitt's example of the railways mistakenly thinking they were only in the railway business when they could have seen themselves, more correctly, in the business of transportation. There are many more cases which can illustrate how a correct definition of a business can open the eyes of management to the real opportunities available to them. First, consider a company producing air-conditioning equipment. It thought it was in the air-conditioning industry. In fact, a study of its skills and resources
Table 1. Calculation of Assets Managed Item Fixed assets Inventory Debtors and prepayments Bills receivable Bank retentions and cash in hand Patents/selling rights/goodwill Unquoted investments Quoted investments Less (Liabilities) Credits, accruals and provisions H.P. contracts due within 1 year H.P. contracts due after 1 year Overdraft Loan capital
74
Basis of Valuation Nett book value
Nett book value Market value Nett book value Amount outstanding Amount outstanding
showed that it was in the "environmental control" industry and was fully capable of designing and installing environmental control systems for both human and manufacturing process environments. Once this definition was established, the management could begin to evolve new products and markets for itself which would have escaped its notice before. Another company produced heavy concrete products such as bridge-beams used in building bridges, raised motorways and roads, etc., T-beams and box beams used for culverts, pedestrian subways and so on, large panels used for the submerged and surface walls and platforms of wharfs, walling for industrial buildings and a few other smaller items. They saw themselves as being in the "concrete industry", but they could have produced these ploducts in other materials. A more correct definition, at least for the first 5 years of the planning period, was that they were in the business of "producing products in concrete for transportation applications". They could then begin to think in terms of entire multi-storey garages, multi-level shopping areas, terminals for air, rail, sea and hovercraft, motel units based on some of their panels and other total applications which would not have occurred to them if they continued to think of themselves as producers of concrete products. Many other cases could be quoted but perhaps these two will suffice to show the benefits which could accrue and that it is possible to obtain more meaningful definitions even for relatively technical or restricted operations. However, it is not an easy task. This part of the work can take 3, 6 or more months of very hard thinking before usable definitions are evolved. In the second case quoted further redefinitions would probably be needed in time. Managements will find considerable benefit will flow from correct definitions of their businesses provided these are related to the skills and resources of the company and the changes taking place in their selected markets. Nor should these be allowed to stand for all time. Regular reviews are necessary to keep the definitions in line with external circumstances and the growing skills and resources of the company. It may well be that once a business definition has been established, the objectives may need to be reviewed. It can be argued that the business should be defined first before objectives are set. Experience shows, however, that setting objectives first---even if they have to be modified later, as they will need to be from time to time anyway--helps to focus the attention of management on to their prime task, LONG RANGE PLANNING
obtaining adequate return and growth of return on the assets entrusted to them. It also helps to give them a measure of the scale and type of problems which have to be faced and overcome.
PLANNING FOR THE FUTURE Once a business has been defined and corporate objectives set for a declared period of time, management can get down to the investigations needed to allow them to prepare detailed operational plans. The main investigations required are outlined below.
Development Gap The development gap will have been defined automatically by the objectives. This is simply the difference between current operations and those which the company must achieve by the end of the planning period for profits, R.O.A.M., sales, market shares and annual rates of growth. The development gap may be increased or decreased according to the rationalisation which may be needed in product-market strategy and the additional resources which can be made available.
Product-Market Strategy An objective and thorough review of the company's product-market strategy, by the marketing staff, is the first step. The hyphen is intentional. It stresses that managers must study their product and market strategies together at all times. A common error of management is that they will look at their market strategy assuming that the product mix is as fixed as the planets around the sun, or they will look at their product mix assuming that market conditions will remain unchanged. Companies live in a situation of continuous change and the two strategies are irretrievably linked. The action taken on one will affect the other and call for some corresponding action on it. Looking at products and markets together will eliminate some of the problems encountered in marketing operations but, more important, will bring to light new opportunities that could otherwise be missed. (This idea was fully explained in the article Developing A Product-Market Strategy, in Long Range Planning, Vol. 2, No. 3, 1970.) The purpose of the study is to identify which of the existing product-market operations are: Making acceptable levels of profit contributions. Not making acceptable contribution but capable of doing so. Never likely ever to make acceptable contributions. The last should be rationalized out of the company's operations on some time
SEPTEMBER, 1971
scale, linked to the speed at which new product-market operations can be introduced. The second should be studied in depth to find out what alterations are needed to make them profitable. Depending upon the extent of the rationalization and the improvements in performance which can be achieved for the remainder, the original development gap might have been increased. This is now the measure of new business which will have to be developed.
Resources The next step is to conduct a study of the resources and skills of the company (in practice this will be done at the same time as the product-market studies). It will indicate the limits to the new business which can be developed. Starting as a broad study, it will eventually be refined into detailed investigations of specific ideas. From this will emerge a final shortlist of new ventures which will have to be matched against the additional resources which can be made available. Once this matching has been done, the new ideas remaining must pass through the usual screening and assessing processes to measure chances of success, market opportunities, financial possibilities and the company's ability to produce the products and exploit the market situations. Any new idea which fails to meet criteria during any of the screening processes will be dropped or referred back for further study and be replaced by other ideas in the pipeline. Even when a new venture is launched, it must be controlled and the results monitored so if it falls below expectations and is not likely to achieve targets, it can be withdrawn or reduced in scope. The audit of new resources which can be provided over the time of the plan is therefore a very vital part of planning for the future.
Improving Profitability Product-market operations may not be profitable for various reasons. This may be because of: Some transient factor producing a temporary state of unprofitability (e.g. short-term government restrictions). Over expenditure in marketing for a project of limited potential. Insufficient expenditure on marketing. This means that management must ask the following questions: Would the total marketing profit be increased by the elimination of these products or markets ? Would the variable manufacturing and marketing costs saved be greater or less than the revenue lost ? Would the total marketing profit be
increased if the effort placed behind these operations is placed behind more profitable ones ? Are these operations entering a stage of obsolescence or can their lives be extended with substantial gain in overall profitability ?
Selling Operations The selling operations must also be investigated to establish: Which are satisfactory. Those which are not but could be made so. Those which are never likely to be satisfactory. This should be done by area, salesman, industry and customer. Steps must then be taken to improve the second category and an analysis made to see if the third could be eliminated. This means that the following questions must be considered: Should the selling effort be shifted from unprofitable to profitable areas and accounts ? How and when should this be done ? Should the pricing or discount structure be altered to increase the nett prices to the unprofitable ? Should the channels of distributions be changed with greater use of agents or distributors better equipped to handle the small account, or by franchises ? Should incentive discounts be offered for larger orders or annual purchases, in effect imposing service charges on those who place small individual or annual orders ? Should areas of sparse (customer) population be handed over to agents, etc., who are better able to service them ? Should sales calls be reduced in frequency and substituted by other methods, e.g. telephone selling from head office with the approval of the accounts so served and an adequate back-up emergency technical service if this is needed? In considering any change in the direction and type of the selling effort, management must first ask themselves two key questions: Will increased sales and profits result if a greater marketing effort is put behind the profitable operations ? How will sales and profits be affected if fewer calls are made on unprofitable operations ? Obviously there should be prospects of a nett gain in profits and sales before any change is implemented. The results must be monitored and the ideas extended in scope or abandoned.
Production While the marketing aspects are being 75
studied, production will be considering their side of the business in conjunction with colleagues from marketing, finance and personnel. The resources audit will show what additional facilities will be needed to match the requirements of marketing, and finance department will check the costs and decide if the money can be provided. In addition studies should be made into all existing operations to see how they can be improved. The aim is for greater productivity, cost and stock reductions and the better utilization of manpower.
dation of costs and the estimates of the total of new money which will be needed cannot be made until the end. In practice the financial department will have been working closely with their colleagues in other departments and will have been identifying the financial criteria which would affect their colleagues' own work and plans. In many instances, the financial department will have to be the "team leader" in some of the planning work. They will in effect, set the limits on the development plans which the company can consider.
Manpower Planning
Financial planning must identify the additional resources which can be obtained by self-generation by the company and those which must be obtained from any or all of the external sources available. They will have to calculate which of the varying interest rates the company can afford. It must also involve studies which will show how existing operations can be improved through reduction in stocks, better utilisation of existing assets by all departments and how economics can be achieved. The effects of taxation and high interest rates on future plans must be estimated. Financial planning must also be concerned with (legal ways of) keeping a company's liability for tax as low as possible and certainly must ensure that a company does not, by default, pay more tax than would legally be required. The work also involves establishment cf the annual rates of growth which would be possible, recommendations on acquisitions and mergers which may be advisable and for private companies, the possibility and cost of going public or issuing more shares.
The personnel department must also review their side in conjunction with colleagues from other departments. Manpower requirements are never static. Even if a company remains in relatively the same position in its markets, workloads and the type of work which has to be done will change in time. The methods of operation and the manpower needs will change. These changes will be even greater when a company is growing or changing its course. These studies will identify the manpower gaps which will occur at various stages of the corporate plan and will indicate the additional men and new specialists which will be required. Also, the organizational structure and methods will have to be altered from time to time. All these must be forecast beforehand and allowed for in the company's plans. Personnel department must therefore draw up manpower and training plans. It must define the organizational changes which will have to take place and the timing for these. Job descriptions and man specifications must be prepared and these too will need to be modified from time to time.
Buildings and Services These must also be reviewed as demand for them will change. There is little point in planning to achieve growth if there will not be the accommodation and services to provide or sustain them. This part of planning for the future is the one most overlooked. Management seems too ready to assume the impossible here, that a quart will go into a pint pot.
Financial Planning This section being located at the end of 'Planning', should not be seen as an indication that financial planning is of least importance. It is simply last in time as financial planning cannot be finalized until all the other planning stages have been more or less completed. The consoli76
Controls If a company is to achieve its targets, it must plan logically, implement the plans but above all it must control and monitor the operations and results. The control system should not be over-elaborate or time-consuming to operate. It must provide the essential information quickly and allow management to take remedial action speedily when operations deviate from the norm or when external circumstances have changed substantially or permanently. Most companies will find the following financial control returns adequate for most purposes: Summarized profit and loss account. Sales and profit contribution--by markets, by products, by areas, (and if needed by industry and customer). Profit on investments. Inventory levels--raw materials and bought in supplies, work in progress, finished goods.
Cash forecasts and forward allocations. Capital expenditure and commitments with forecasts of returns anticipated. Movement of funds in the company. Manpower situation-- management, other. The financial and cost control side may be built up in stages. Stage 1. Capital expenditure control. Cash budgeting and liquidity control. Monthly financial reports against budgets. Statistical analyses of sales, orders and production (if these can be shown as trend graphs all to the good). Stage 2. Standard product costs. Product group profitability reports. Analyses of expenses, wages and salary costs. Analysis of job costs vs. budgets for special projects or one-off jobs. Stage 3. Revision of pricing policy based on standard costs. Material cost control. Labour cost and performance control. Departmental analyses of expenses and other costs. Marketing departments will need the following basic information for control purposes: Sales performance vs. budget--by area, by product group (if needed by salesman, customer and industry). Profitability vs. budget--by area (and salesman if different), by product group, by customer category if this is useful. Salesman's call records and call reports. Logging of enquiries received, quotations issued, orders received--by product group or product, by area, by customer. Profit analyses of orders received. Customer record cards showingm name, address and various buying locations, executive making buying decision at the various locations, quotations issued and orders received, delivery of orders, date of salesman's call and reference of further correspondence which results.
OPERATIONAL PLANNING When the corporate planning has been completed, the various departments must get down to making detailed plans covering the marketing, production, personnel and financial operations of the company. This involves taking the corporate targets and breaking them down into individual ones for each major department and its subunits for each year and trading period LONG RANGE PLANNING
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(month, week, etc.). Marketing will also break theirs down by areas and salesmen. When these detailed plans are approved (and for most companies they have to be started at least 6 months before the start date for the plan) they are implemented (Figure 3 indicates the various major steps to be taken by each department and the inter-relationship between them). The results are watched and assessed through the control systems which have been installed before the plans were put into operation. Changes are effected if results, or variations in market and economic conditions, indicate these to be necessary. In other words, there must be flexibility in the plans and planning process just as there must be in management thinking and philosophy. MANAGEMENT
TECHNIQUES
In recent years too many companies have rushed into using every new management technique that came along regardless of their relevance to the business. Managements must assess the techniques available and select only those which make a positive contribution to their operations. They must use these sensibly; e.g. market research should not be undertaken at the same time every year but be spread over the year--or held at different times, so that cyclical or seasonal fluctuations of the market can be detected and exploited. The cost-benefit principle must apply also just as when new marketing operations or plant are being considered, if increased costs are to be avoided. In this way a company avoids "managerial overkill". When selecting techniques management must be prepared to modify the basic textbook approach to suit their special needs. Companies must evolve their own systems based on these techniques, arriving at tailor-made systems for their requirements. Only in this way can they hope to obtain improved performance and profitability. Anything else will just help to maximize losses ! AN EXAMPLE The following example, showing how these procedures are put into action, up to the setting of the 5-year corporate plans (since space does not permit a complete illustration down to the minutiae of depart-
mental operations), will indicate how lethargic and ineffective management may be revitalized. BACKGROUND COMPANY
TO THE
NOTE: The figures of the company's operations have been altered by a factor to prevent identification. To keep the relationships similar to that of the actual case, the market figures have also been increased by the same factor. Readers must forgive the author if thereby, the market figures look ridiculous! However, they do not negate the idea or the approach embodied in this article. The company produced a range of airconditioning equipment and plant including the small heat exchangers used by this equipment. There were four product groups each of four product lines. The small compressors used by these machines, the fans and other electrical components were bought-in. The company also produced an associated range of ventilation ducting in mild steel and aluminium. There were 12 "systems" of ducting and each had about 12 variations! Although the end products were relatively simple, this variety of output created problems for production and distribution staff. The performance of the company at the time the planning process began is shown in Table 2 from which it will be seen that there was about £19m. of sales in airconditioning equipment earning about £2m. profit. There was £1m. worth of ducting which was said to be at breakeven but was probably running at a loss--the costing system being so haphazard as to defy analysis. For 4 or 5 years the company had experienced marginal growth in sales and no growth in profits earned in money terms, so in real terms, its profitability was declining. It was the realization of this fact that prompted the management to start planning to achieve sustained growth over the longer-term. This had been defined as "the next 5 years" since this was as far ahead as they felt they dare look in view of the difficult situation then prevailing in the air-conditioning industry. The ducting business was one of the major problems. Initially intended to be able to design systems in 3 months and install most of them in 3-6 months, the
Table 2. Performance of Company at Start of Planning Process
Item Sales: £m. Profit: £m, Profit/Sales Return on assets managed
78
Air conditioners
Ducting
Total
£19 £2 10.5 per cent
£1 Breakeven --
£20 £2 10 per cent 20 per cent
department in fact, took up to 9 months on design and installation took up to 12 months. The department was always well behind schedule; it appeared to be working beyond its initial, intended capacity of £1m. and the drawing office staff were almost fully occupied on this work and had very little time to spend on designing new air-conditioning plant on which the company was making its money. The company as a whole had had little success in trying to think up new products and activities and while its air-conditioners were accepted as quality products and market leaders, there was very little in the pipeline to sustain this reputation. Of the total air-conditioning business 80 per cent was against commercial or government (local and national) tenders announced 12-18 months in advance. 60 per cent of the total business went into buildings in the U.K. and 10 per cent into overseas installations, normally Europe and the Middle East. The remaining 10 per cent was in a special small air-conditioner for military tanks and 2 per cent went into British tanks and the balance of 8 per cent went into foreign ones. The other 20 per cent of the air-conditioning business was sold through a large number of agents, very few of whom held stock, but all of whom obtained 33½ per cent commission. The company did not have any marketing services and the sales force was frustrated in that all the important contacts were done by the managing director, on his insistance. This meant that the selling effort was limited to fruitless visits to agents. There was no attempt to analyze tenders when announced, to identify the items which the company needed to give it profitable business. If they had, they could have identified the desirable tenders and would have been in a position to plan effective marketing and pricing strategies to obtain them. The company, with assistance from outside, decided to take a very critical look at itself to identify its problem areas. The experts called in, with the company staff, identified the strengths and weaknesses of the company as follows:
Strengths Good quality products, reliable and having long-life. Although no attempt had been made to do this, the company could have arranged attractive credit terms for its major customers, an important factor in large contracts. Company had a reputation for dependability generally, except for deliveries of ducting. Considerable improvement could be achieved, in the right circumstances, to LONG RANGE PLANNING
improve the utilization of its assets. It had access to a further £2m. of capital if it needed it. Weaknesses Tended to sell on price. Did not promote its products well, if at all. Too much capital tied up in stocks, especially compressors. No advance analysis of tenders on offer. No real marketing or selling effort. Production'staff were preoccupied with the problems on the ducting side of its business. Bad distributor network which just cut into profit margins without making any substantial contribution to profits or earnings. Excessive domination of the business by the managing director.
However, the worst weakness was that in seeing itself in the "air-conditioning business", it appeared to be restricting the opportunities open to it, as witnessed by its apparent inability to devise new saleable products. REMEDIAL
ACTION
Steps were taken immediately to attempt a redefinition of the business, to carry out a details audit of its assets of all kinds and to conduct market and product research work. This decision was achieved only after long and tortuous discussion between the experts called in to assist the company and its managing director! Market research and resources audit. The market research estimated the size of the market and the anticipated growth over the 5-year period under consideration as shown in Tables 3 and 4 and the resources
Table 3. Estimated Size of Market I
Air conditioning equipment for human environment Air conditioning equipment for process environment Total market "Most likely" market size taken as £200m.
£20-100m. £106-120m. £190-210m.
Table 4. Estimated Growth of Market (Air conditioning equipment) Growth rate for next 5 years : not more than 5 per cent per annum not less than 2 per cent per annum Market size: £m. Year 1 Year 2 Year 3 Year 4 Year 5 £204-210 £208-220 £212-231 £216-242 £220-255 Min/max size, approx. £205 £210 £220 £230 £240 Most likely size If market shares:* 10 per cent 11 per cent 12 per cent 13 per cent 14 per cent £20.5 £23.1 £20.4 £29.9 £33.6 Possible sales targets: Incr. on previous yr.: £1.5 £2-6 £3.3 £3-5 £3.7 *Market studies indicated that this order of growth could be possible, even though "straightline" growth of this nature is unusual and can be upset by changing economic, technical and other matters. Table 5. Summary of Assets and Facilities at Start of Planning Process Assets managed Capacity in sales terms:
£10m. £20m. (Operating at £19m. or ca. 75 per cent capacity) Ducting £1m. (Effectively in excess of 100 per cent) Additional finance available over 5 years £2m. (Equiv. to new prodn, capacity on present operation of £5m.) Improvements in production (incl. elimination of ducting and reutilization of assets, reorganization) £2m. Possible capacity at end of 5 years £33m. Buildings With reorganization and some additional accommodation on available space, would be adequate for next 5-year period. Services Adequate for possible expanded requirements of 5-year period. Manpower Adequate resources available for foreseeable 5-year period. Improvements in methods and utilization would increase efficiency. 5-year training plans would improve performance of existing manpower etc.
SEPTEMBER, 1971
A/c eqpt.
audit gave the facts outlined in Table 5. Redefinition Of the business. The attempts to redefine the business finally resulted in the staff--after much prompting--realizing that their skills and resources allowed them to be in the Environmental control business. In other words, they were making equipment for human environments and with the addition of one or two specialist engineers and designers they could extend their business into environmental control equipment for industrial processes. Certain processes (e.g. nuclear engineering; others requiring fine dust control; etc.) were beyond their immediate capabilities but even so, in seven or eight years, once their new base had been well established, they could be able to expand into even these areas. Policy changes. The redefinition led to a remarkable opening of eyes at all levels and the following major changes of policy were undertaken. 1. Ducting work would cease--it could be obtained through several good subcontractors--and the design and manufacturing assets released could be better utilized elsewhere. 2. With the design staff freed and the recruitment of two specialist design engineers and two other technical specialists, as the results of the product research became known, work started on the design and development of plant suitable in three carefully selected areas of industrial process environmental control. 3. The managing director relinquished his tight hold on the operations and took responsibility more for corporate planning rather than being chief jack-of-all-trades, and the sales and other departments were allowed to flourish in the more usual ways. 4. A marketing services operation was added, covering marketing research, advertising and carefully selected promotional activities; these and sales were placed under a marketing director. 5. The distributor network was overhauled and greatly reduced in number; commission was cut to a standard 15 per cent but annual bonuses were added which depended on the business obtained and the average level of stocks held by each agent, adjusted for the total space they had available (so as not to penalize agents with limited storage capacity). 6. Technical and sales contacts with major customers and consulting engineers and architects were improved; the aim of the sales and 79
7.
8.
9.
10.
11.
total promotional activity was to promote the quality and reliability of the products. A method was introduced for the analysis of tenders and an information feedback and control system was introduced throughout the company. Production department began to study its methods and introduce alterations and adjustments which would lead to better output and improved (reduced) costs. Stock levels were reduced. Arrangements were made with the compressor manufacturer for annual contracts with specified levels and timings for calls-off of stock which placed the onus for holding a substantial proportion of the stocks on the compressor manufacturer. Similar arrangements were made with the fan or blower manufacturers. Improved production planning and control allowed them to work on greatly reduced stocks of heat exchangers and sheet metal. Financial department introduced budgetary control systems and began planning for the realization of additional assets. Other assets were "freed" through the introduction of cost-reduction programmes in every department but the "costs saved" were to be utilized in other areas and aimed to increase profitability. Personnel department were then able to plan with greater precision the manpower and executive needs of the company and the associated training programmes. A proper manpower development plan could be, and was, prepared.
Corporate
Policy
and Objectives
Middle management from all departments, in the course of the work, had begun to identify the product-market production, financial and personnel opportunities which would become available to
the company, given correct detailed planning and support. Each department had begun to outline their own targets and objectives for the period of the plan. As a result, top management with full support from all departments, was able to establish the corporate policies and objectives for the company. Corporate policy. This was stated as the doubling of profits and turnover by the end of the fifth year with appropriate improvements in other areas. Although the company had not achieved this order of growth in the immediate past, the changes in train and objective study of their existing markets showed that it was more than a possibility for the immediate future. In addition the Board decreed that profit targets and improvements in return on assets managed (R.O.A.M.) were to have priority over growth in sales, indicating for the first time that preoccupation with the state of the order book, without due regard to the prime purpose of the company (to make profits and secure acceptable levels of return) would not be tolerated. The Board itself was obviously also interested in the growth of the nett worth of the company. Corporate objectives. These were then stated in quantitative and qualitative terms. The qualitative objectives were similar to the examples given earlier in this article and the quantitative objectives (and policy statement) are shown in Table 6. Outline 5-year plan. The various departments of the company, working in their own areas and in full co-operation with each other, the financial department often having to act as "honest broker" between other departments when their individual objectives and thoughts were incompatable, got down to the preparation of the outline 5-year plan. Each department involved as many of its executives as possible and the opinions and comments of even the junior executives were sought. Team-spirit and drive rose to an all time high. After much hard work, many false starts,
Table 6. Corporate Policy and Objectives Policy
To achieve a doubling of profits and sales over the next 5 years with appropriate improvements in return on assets managed (R.O.A.M.), market shares, profit/sales ratios. Profit targets and improvements of R.O.A.M. were to have priority.
Quantitative Objectives
Profit fromfrom £2m.20toper£4m. R.O.A.M. centortobetter 32.5 per cent or better
t bo~,~h;eern:
Sales from £20m. to £40m. if possible Profit/sales from 10 per cent to 15 per cent or better Market share from 9.5 per cent to 12.5 per cent or better Annual rates of growth of all the above to be as near 10 per cent per annum as possible. Qualitative Objectives
80
(Similar to those in text of article).
scrapping of several plans, but all based on objective study of markets, the environment in which the company had to work, its assets, skills, strengths and weaknesses, and the knowledge of the competitive situation, they were able to produce an acceptable plan. The important steps in the thinking are outlined in Table 7. First they assumed that sales could be increased in the 5 years by 5 per cent, 15 per cent and 10 per cent, the last applying to each of the last 3 years (see Line 1). They assumed that growth in the first year would be marginal but as a result of the impetus gained from the changes being implemented, growth in sales for year 2 would be substantial and then tail off to a lower figure. Detailed forecasts of the actual growth for the fourth and fifth years would have to be left for 1 or 2 years when they expected to have more reliable information on relevant factors. Next they estimated what the profit might be if profit/sales ratio remained at 10 per cent, as in Line 2. Line 3 shows the resultant profit. This was unsatisfactory as the fifth year figure fell below the doubling which had been made mandatory. Further studies were made into their profit and product-market operations. They found that some operations could be phased out immediately and the effort saved put behind some of the remainder to give improvement in profit earned. Also, as a result of the redefinition of their business they could see some "new" activities which would be implemented almost immediately since they had most of the hardware and knowledge to do so. As a result of these and other adjustments, (e.g. adjustment to the sales areas and operations), middle management forecast with confidence that there was every possibility of profit/sales being increased as shown in Line 4 following a similar pattern to growth of sales. Then if sales remained as in Line 1, profits would become those shown in Line 5, giving a fifth-year figure well above the original target. The assets required were estimated to vary as shown in Line 6. R.O.A.M. would then be as in Line 7. The change in the profitability and the times the capital would be turned-over were also noted. After very careful consideration of the implications of this plan, it was submitted to the Board. It was accepted and implemented. The company made steady progress in the achievement of this plan until government controls brought about a temporary recession in the economy. However, the morale of the management team had improved to such levels that they were not dismayed by this. They laid plans immediately to "hold their gains"--which LONG RANGE PLANNING
Table 7. Outline 5-Year Plan £ in Millions Start
Item
1. £,20.0
Sales (INCR)
2. 10 per cent
Profit/Sales
3. £,,2.0
Profit (INCR)
4.
P/S to grow to meet objectives (I NC R)
--
Year 1 £21.00 (5 per cent) 10 per cent
5. £,2.0
If sales as 1
6. £,10.0 7. 20 per cent
profit and P/S as 4 (INCR) Assets managed R.O.A.M. (INCR)
Times capital T/O:
Profitability:
£2'10 (5 per cent) 11 per cent (10 per cent) £2.31 (15"3 per cent) £10-5 22.0 per cent (10 per cent)
Year 2 £24.29 (15 per cent) 10 per cent
Year 3 £.26.60 (10 per cent) 10 per cent
Year 4 £29.30 (10 per cent) 10 per cent
Year 5 £32"80 (10 per cent) 10 per cent
£2.42 £2"66 £2"93 £3-23 (15 per cent) (10 per cent) (10 per cent) (10 per cent) 12.25 per cent 13-5 per cent 15.0 per cent 16.5 per cent (11.3 per cent) (10.2 per cent) (11.1 per cent) (10 per cent) £2.96 £3.60 £4.40 £5.33 (28.1 per cent) {21.6 per cent) (11.2 per cent) (21.1 per cent) £11.5 £12.0 £12.0 £12.0 25.7 per cent 30.0 per cent 36.7 per cent 44.5 per cent (16.6 per cent) (16.7 per cent) (21.7 per cent) (21.3 per cent)
Year 1 : 2.00, year 5: 2.73. Year 1 : 22.00 per cent, year 5: 45.00 per cent.
they did--and went on to prepare a further 5-year plan for implementation when "things returned to normal". A dejected team, though its own efforts and a fundamental re-thinking of its business and methods became a dynamic one capable of achieving what in previous years might have been considered as the impossible. For the statistically minded, the raw figures of this plan will indicate another interesting fact. Through concentration on improving the efficiency and profitability of the operation, the company, with the profit/sales ratios projected, could have
achieved improvement in profits and R.O.A.M. even if their sales had declined below the initial figures, during what might have been a crucial year, the first, when management would have been heavily engaged in sorting out their problems. This is illustrated in Table 8. This point is of more than academic interest. One of the main problems of a major reorganization of this nature is that immediate improvements in sales are not always possible. In fact, through rationalization some loss of sales may be unavoidable. Yet the impatient City and share-
Table 8.
holders can still receive firm indications of the better future to come, if accent is placed on improving profits. Finally, it illustrates, perhaps, the fallacy of being preoccupied with sales or the state of the order book. Perhaps 1 day, when British managers have reached the level of sophistication enjoyed by some of the leading teams in America, we may even stop being preoccupied with profit! By then we will have reached a stage when any statement on sales to be achieved automatically implies the achievement of 'x' per cent profit and what is more, barring major upsets beyond the control of management, such growth at stated profit margins will be achieved. •
/ Item Year 1 Year 2 If profit/sales 11 per cent 12.5 per cent and profit targets (say) £2.10m £2.50m. Sales could be only £19.20m. £20.40m.
Year 3 Year 4 Year 5 | 13.5 per cent 15.0 per cent 16.5 per cent I £3.00m. £3.50m. £4.00m. / £22.25m. £23.30m. £24.30m. /
1
SEPTEMBER, 1971
ACKNOWLEDGEMENT Copyright D. W. Foster. This article contains material from the author's book: Planning for Products and Markets, to be published shortly by Longmans.
81