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Do You Make These Strategic Planning Mistakes?
There is an epidemic of sticking roughly to the previous year's plan and budget. This may be useful if that approach is getting you to be the top brand, but if your results are not radically improving you need to examine both your strategy and budget allocation carefully.
Is your strategic plan and budgeting not that dissimilar year upon year? If your brands are at the top of their areas then that is fine, but if not, doing roughly the same thing year upon year will make it difficult to realize changes and this can undermine performance results. In fact, in companies sticking to the same rough plan and budget year upon year, typically the CEO is removed by year 4-6.
In a review of 1600 US companies, in 33% of these, the amount of capital received each year was almost exactly that received the previous year with a mean correlation of 0.99. So what this means is that despite all the strategic planning and budget allocation exercises that surely the majority of these companies do, only small changes in allocation occurred and in many, they remained exactly as they had been".
Let’s compare two different companies, who shall remain anonymous to protect the guilty. The first one has a range of products and every year they do their strategic plan and allocate their budget making small changes but roughly following a similar approach. Sound familiar? I hope not. The other company runs analytics and continually analyzes the results of the business units and changes or just tweaks the budget allocation based on strong analysis of each products and units relative market opportunities. Funnily enough, the second company is growing significantly more than the first one who appears to only post profits from cost cutting exercises. The second company, although having been roughly the same size as the first a few years ago, is now worth close to 65% more than the other company.
This is not surprising but sadly many pharma companies fit far more closely to the first, rather than the second, company. In a review of 1600 US companies, in 33% of these, the amount of capital received each year was almost exactly that received the previous year with a mean correlation of 0.99. So what this means is that despite all the strategic planning and budget allocation exercises that surely the majority of these companies do, only small changes in allocation occurred and in many, they remained exactly as they had been. Given how much better companies who actually seriously examine the market and the opportunities each year perform compared with those that simply paying these items lip service and rehash what was already done, it is surprising that companies are not doing everything within their power to change this.
By the way, this was found across all industries including pharma. Another interesting finding from this was that companies that made large changes in resourcing annually with an average of 56% change earned on average 30% more returns to shareholders. In addition, the companies making significant reallocation were 13% less likely to be hostilely taken over, or go bankrupt.
Given we have a budget allocation tool in our accelerated growth suite of analytics, we have been taking an interest in how pharma companies make these decisions and looking at what system they use, versus what results they get. As expected, the ones that conduct analytics and really plan their budgets within and across their portfolios are growing at a faster rate than those who modify budgets a little up or down year upon year.
That got us wondering about those companies who are suffering from homeostasis, and considered possible causes. In thinking about it, the reasons range from just copying what was done before to having high costs of switching to no practical options available to change to. However, what we see most is that the failure to do this properly is more a product of failure to really examine it in detail due to either biases or corporate politics. I am sure everyone believes that they do not make these mistakes but given both the studies in the area and what we have seen prior to implementing analytics, the chances are you probably do. Because when you think about it, you have two choices: Allocate where you will reap the biggest financial rewards, or risk the market making decisions on your results for you. And we are not saying every year you need to completely change everything but you should be really looking at what you have invested where and whether it makes sense. Therefore, we would like to suggest a few things to overcome this handicap.
1. Decide on your goals. Do not make these plus or minus something from last year but really look at the market, the size, the expansion or contraction, where you sit, what competitor share is vulnerable etc. Then see what makes sense for a lofty goal. You need to know where you are going if you are going to get there.
2. Use strong analytics.Use whatever good analytics tools you have access to in order to assist with this process. Guessing is not an option. By using powerful tools you will know both what is possible and what sales and marketing activities and budgets are needed to get there. Weirdly, in Japan I heard someone speaking at a conference about their analytics. They said ‘it doesn't work well, but it is better than nothing’. I disagree. I agree something is better than nothing but why waste time and money on something that is inaccurate when there are so many strong tools around. Be sensible with your choices.
3. Create discipline around budget allocation.You sometimes see the voices that shout the loudest getting the most budget. By ensuring that analytics are used, more objectivity rather than emotion will be called into play in the allocation process.
4. Create systems to help implement the plan including accountability for actions with time lines. One of our clients recommended this to us in terms of building it into the recommendations in our portal so the clients can tie tasks to team members with actions and time lines. It is a good idea to assign different part of the plan to different team members for accountability and schedule in reviews.
There is an epidemic of staying roughly to the previous year's plan and budget. This may be useful if that is getting you to be the top brand, but if your results are not radically improving you need to examine both your strategy and budget allocation carefully. With the strong use of analytics, you will be able to uncover any hidden items that you need to add to your plan, as well as uncover the optimal budget allocations within a brand across activities, as well as across brand portfolios, and see what revenue those allocations will be able to provide you. You can also change allocations and see what those changes do to your revenue results. These types of tools are so powerful, why companies fail to use them routinely for budget allocation planning eludes me. If you are unaware of the power of these types of analytics, contact me and I will show you all that is achievable.
For more information, contact Dr Andree Bates at Eularis http://www.eularis.com
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