Management Accounting

What are different stages of business planning?

Good businesses and managers plan ahead which mean they try to predict the future e.g., how much they will/can sell in future and how would they achieve the production required to meet those sales targets. Planning also involves looking at outside the organisation and foresee the future of the organisation in the changing political, economic, social, technological, legal, and environmental (PESTLE) environment.

This planning is carried out in three stages or levels.

•Strategic Planning

•Tactical Planning

•Operational Planning

In this article, I will discuss these three levels of planning, what is the connection between these levels and how the planning differs at these levels by giving various examples.

Strategic Planning

Strategic planning involves setting long term objectives and strategy of a business. Whatever decision will be made, it will affect the whole organisation and the impact will be long-term because strategic planning is usually for long-term which may extend to 5-10 years period. It is set by the top management ( Board of Directors) who has a vision for the business and are aware of the macro environment of the industry in which the business is operating. This type of planning is not very detailed in nature but gives clear objectives and milestone. These objectives and milestones will be different depending on which strategy is adopted.

Strategic planning involves looking into the future, predicting the macro environment, and assessing the availability of the resources e.g., money, people and technology and choosing the right strategic option. One of the main objectives of all businesses is to grow which is usually achieved by selling more products and services. However, sometimes businesses need to consolidate and focus on their main business which means they need to sell part of their business. Diversification is another example of a strategy where a business may enter into a new market which may or may not be related to the existing products of the business.

Growth is a natural desire for all entities, but it is vital to consider the elements which are required to grow. A growth strategy is only suitable for the businesses which foresee their products and/or services will have more demands in the future. It also requires political, economic, social, technological, legal, and environmental (PESTLE) backing.

How PESTLE factors affect a strategy?

Electric Vehicles (EVs) sector is a perfect example for observing the impact of PESTLE on the strategy of the companies operating in it. Although EVs were invented more than 100 years ago, it is only now that these are being adopted globally. Although the main reason for this move is environmental, the main catalyst for the massive growth in this sector is the better technology, thanks to Tesla Inc which made EVs an alternative to internal combustion engine (ICE) cars. EVs are being promoted by the governments with tax credits and government grants to buy EVs, ban of fossil fuel cars and introduction of low emission zones all over the world. Better EV technology also supports the growth of businesses in the sector which has resulted in many EV manufacturers popping up like mushrooms on the stock markets. Lucid and Rivian are the latest examples which are following the footsteps of the pioneer in this market, Tesla Inc.

Examples of strategic planning.

All the above factors are pushing ICE car manufacturer to change their strategy by manufacturing and selling EVs. However, the main question which these traditional car manufacturers are trying to answer is “should they completely ditch ICE cars and focus on EVs only or not?” A focus is needed as growth will only be possible in that case and if they don’t focus now, they will lose their market share which they may never be able to get back. However, ditching a profitable business which they are good at is also a hard choice to make (at least at the moment as they can see that their technology cannot compete with the EVs in future).

Coca Cola Plc has been one of the biggest and most successful company in the last two hundred years. However, social (health concerns and change in eating habits) and legal (sugar tax etc) factors have put a lid on the growth of its main products. As a result, they have diversified by buying Costa Limited from Whitebread PLC for $4.9 billion.

Another very interesting example is energy sector (Oil & Gas industry) which has a lot of demand for its products, but macro environment (economical and environmental factors) is restricting the flow of capital (finance/money) towards this sector which has made it difficult for this sector to grow.

These examples suggest that strategic planning is massively driven by the external factors and not only the desires of management can drive a company growth or other strategy. It needs support from all the PESTLE factors to be successful. However, incorrect strategy can put the organisation to a path of destruction and many companies can be scared to change their path i.e., adopting to the new environment, technology etc. in the past, Nokia is an example and for future, German auto car makers are in this dilemma now in 2020s to move away from ICE car production towards EVs production or not?

Tactical Planning

This type of planning is a medium-term planning (1-3 years) to implement the strategy of the business. At this level of planning, middle (tactical) level managers look at all the objectives and milestones set by the strategy and focus on the actions, paths and tools to get the organisation to the place where strategy wants it to be. This will involve looking at the different options to achieve an outcome by assessing which option is the better one to execute the strategy. This part of the planning creates a link between strategic planning and operational planning (coming next) by converting the strategy into actionable chunks and providing the support to operational planning to execute those actions.

For example, to produce in higher numbers and quality, managers may look into automating the production process. This will require looking into what technology is available and which one would work best for the organisation. If no technology is available, management will look into creating it inhouse.

At this level of planning, managers will also be investigating making supply chain commitments e.g. choosing a certain supplier (Tesla’s nickel supply deal with Talon Metal Corp in 2022 is an example of tactical planning and decision making), seeking new customers by entering into new markets, synergy partnerships with other businesses, developing new products to compete with the market, evaluating the existing products/services to reduce their cost and improve their quality, cost cutting measures across the organisation, improving the whole supply chain and arranging finance (if needed) are the few examples of the tactical planning.

Operational Planning

Operational planning involves planning to achieve the targets and objectives which are set by the tactical level planning to accomplish the business strategy. This planning can be done on daily, weekly, monthly and/or yearly basis. By completing these smaller bits of planning in the short term, the strategy of the business will be accomplished if operational planning is aligned with strategic planning.

For example, in a restaurant, a manager would need to plan for daily sales and resources required i.e., staff and raw material to make those sales possible. For busy days, the restaurant will need more staff and raw material while for not so busy days it will need less of that.

The manager will also need to keep in mind the monthly budget of the restaurant especially the staff pay as there will be a maximum budget for that. Talking of budgets, these are an excellent tool to carry out operational planning. Functional budgets e.g., raw material, labour and cash budgets can be extremely helpful for managers to keeps thing on track and predicting the future. I have written an article on introduction to budget which can be accessed on the www.rmr-accountants.co.uk/purposes-of-budgeting. There is also a video discussing the topic which you should watch if you are interested to learn this topic. Managers will use each department, shop, or a restaurant to co-ordinate and align the activities of the whole organisation to achieve their overall objectives. There is an excellent video on YouTube which show how the work of different departments is co-ordinated to achieve common organisational goal which can be accessed on the link https://youtu.be/uQMIR1YVKEY

This planning will help the managers to meet their quarterly and yearly targets which will eventually lead to accomplishment of the strategy. For example, if they need to open more shops/ restaurants, they will require trained staff which can be trained in the existing shops/ restaurants.

I hope the above discussion has clarified the three different levels of planning.

This article is written by Raja Mizan who is a senior lecturer in accounting & finance in a UK university. He is an ACCA member and also runs his own accountancy practice RMR Accountants & Business Advisors.

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