Strategic Planning & Capital Allocation
Many strategists and financial planners are facing the same critical challenge when it comes to allocating resources for the coming years. Due to drastically changed economic and geopolitical parameters, it seems almost impossible to project the mid- to long-term future reliably as a basis for strategic decisions. There is a long list of reasons for the great uncertainty and the manifold difficulties in planning: they range from a rapidly rising inflation and the unprecedented crisis in Ukraine, through to increasingly fragile supply chains resulting from a looming East-West conflict, and regulatory interventions to protect the climate or national interests.
At the same time, exactly these reasons call for an urgent validation – and in most cases update – of the basic strategic assumptions that have led to the current capital and resource allocation. In this regard, almost all industries are affected: whether a food and consumer goods producer planning to extend its Eastern European footprint, an automotive tier 1 supplier depending on rare-earth elements from China, or an energy producer who is considering moving further towards green energy. All companies are experiencing the same struggle and must reflect on the changing environment in order to adjust their strategic and financial planning.
At first glance, a simulation seems like an obvious and simple solution. A quick simulation can provide insights into the strategic and financial impact of the changing parameters. It also offers projections of what the organization and its employees might be able to cope with. This then fuels the related strategic discussion and enables the right capital allocation: namely the conscious decision on which strategic “bets” to finance as well as the trade-off decisions on which strategic initiatives not to equip with capital and resources.
This simulation of the strategic and financial impact is key to balancing the much-needed performance in the current core portfolio as well as growth in new business fields. It is crucial to translate the strategic assumptions into deployable action items. (Fig. 1)
However, in many cases a traditional strategic planning process turns out to be inflexible, long-lasting, or even bureaucratic. Planning results set in the first quarter of a business year are often still based on outdated assumptions made in November and December of the previous year. Different scenarios are often not taken into consideration – and even if they are, require tremendous effort and long lead times to be simulated.1
In order to facilitate decision-making, strategists and financial planners must collaborate closely and focus on three key aspects: simple-to-understand driver trees instead of complex models, easy-to-edit assumptions instead of untransparent updates, real-time simulation with integrated visualization instead of week-long calculations and hard-to-understand data (Fig. 2)
By adhering to these three key aspects, planners avoid the main pitfalls relating to the implementation of a “real-time scenario simulation” approach, namely a too high level of detail, never-adjusted planning processes, and the use of inappropriate support tools.
When taking a closer look at the simulation process, the first thing to tackle is the level of detail and the underlying mindset. Strategists and financial planners must ensure that the results of the simulation and planning answer the crucial strategic questions: “Does our current capital and resource allocation match our industry’s shift of future profit pools?”, “Can we afford to implement these measures taking our capital and resource constraints into account?” and “Can we still afford our strategic plan under new assumptions, e.g. at a higher inflation rate?”.
Moreover, the senior management needs to support the simulation and planning by providing key guidelines, objectives and capital constraints, as well as refraining from focusing on too detailed questions.
The second step then focuses on streamlining the existing planning process to facilitate higher-level strategic decision-making. The adjusted process anchors a top-down approach and the required level of detail with a defined set of assumptions and result templates. It thus synchronizes all involved stakeholder expectations and ‘sub-plans’ in an end-to-end view from strategy definition to operative and budget planning<sup>2</sup>.
The third step is to harmonize the entire system landscape, increase automation, and reduce system gaps as far as possible. One key element here is leveraging an integrated planning tool that can model the company’s key business drivers in the required dimensions such as business unit, geography, product line etc., simulate the impact of assumption changes and visualize the result within short time (Fig. 3).
Companies that follow a best-practice approach can achieve a more flexible strategy that fits to the market. For example, a multi-national player in the energy sector aimed to define a new strategy to match capital market requirements by addressing challenges and opportunities of green energy. However, while defining the new strategy, the external environment changed drastically with the outbreak of the war in Ukraine and subsequent sanctions, continuing material shortages, and high inflation rates – on top of the already ongoing profit pool shift towards green energy and digital- and service-related business. All these effects fundamentally changed the initial assumptions of the strategy definition and might even have required a complete restart of the strategic planning.
However, by following the key best practice elements, the energy player was able to adjust its strategic plan within a few weeks and face up to the new challenges. The company elaborated a new actionable and affordable plan to bring the strategy to life even under these adverse circumstances.
In particular, the easy-to-use simulation of the affordability of the strategic plan was one key success factor for this company. The driver-based planning model including integrated visualization – implemented in the ‘Valsight’ modelling and simulation tool – facilitated a real-time simulation of different scenarios during senior management meetings. Combining a best-in-class approach with the highly flexible ‘Valsight’ tool, which easily handles the complexity of multiple business models and allows for rapid assumption changes, led to better and faster decisions at reduced effort.3
However, simply modelling financials and adjusting processes and tools is only one step on the path to implementing strategic planning and capital allocation as a sustainable strategy deployment mechanism. It is moreover crucial to focus on all people involved and to address their needs and concerns with a dedicated change management approach. An active and inclusive change management approach is key to lasting success – as no change is possible without the support of the people who will work and live with it every day.
Following this overarching approach establishes a flexible mechanism to plan strategic measures and (re-)allocate capital and resources accordingly in order to bring a strategy to life – and adjust it whenever needed. As it seems that the current challenges and insecurities will last for an extended period of time4, only a dedicated best-in-class approach to strategic planning and capital allocation will create a long-lasting competitive advantage.
(1) Compare, i.a., Phadnis, Sheffim, Caplice “How scenario planning influences strategic decisions” in MIT Sloan Management Review (2016), Hoffmann “Strengths and Weaknesses of Scenario Planning as a Risk Management Tool” (2017), or Schwenker, Wulf “Scenario-based Strategic Planning” (2013)
(2) See Porsche Consulting ”Planning in Disruptive Times” (2019) for more details
(3) See Valsight.com
(4) OECD economic outlook November 2022