Superware Products Ltd (hereafter Superware) was formed in 20X9 by three colleagues who had left a major software house to work on the development of accounting software for small businesses. Superware currently (20Y4) employs 18 staff at the company’s head office in California and a further eight regionally based salespeople in various parts of the United States.
Company structure
The three directors of Superware are Paul Smith (Managing), Karl Lagerfeld (Sales) and Christian Dior (Development). They each have a small team reporting directly to them and they meet on a daily basis if they are in the office, to discuss the business and to brainstorm a little over coffee. All three directors come from a background of software sales to small and medium-sized organizations. Chris is responsible for six product development staff and two administrators. His staff work full time on developing and upgrading the Superware product, and meet regularly with the sales staff to get feedback from customers and users. In addition to the eight salespeople, Karl has two sales administrators and a secretary working for him. The sales staff meet at head office on a weekly basis and the administrators work closely with the financial accountant. Paul takes responsibility for the remaining staff who perform general administration, reception and clerical tasks. His only specialist staff member is Zandra who, with her assistant, maintains a high level of control over the company’s financial reporting and accounts.
Planning and control
Once a year the directors, under the guidance of Paul and with assistance from Zandra, agree a full budget for the next twelve months. The budget is always based on the previous year’s performance, with adjustments for known changes such as inflation, costs and forecasts of demand from sales staff feedback. During the discussion of the budget Zandra calculates various ratios to illustrate trends in the company’s profitability and liquidity, and the budget is normally adjusted to ensure that trends are as desired. When the budget is agreed, a copy is sent to the bank for its records.
Each month throughout the year Zandra produces a management report which shows performance against budget for every cost and revenue heading. This report, together with a commentary written by Paul, is sent to each director and they pass copies to their key staff after removing any sensitive information. Four times each year the remaining periods are reforecast and the adjusted end-of-year position (or out-turn) is also compared with the budgeted position. Paul writes an additional commentary in these months which identifies key actions to bring performance back to budget.
The current position
The directors are presently involved in finalizing the budget for 20Y4 and are concerned that the process of budgeting is becoming increasingly meaningless. The results for 20Y3 show a significant shortfall in both turnover and profitability against both the budget and third quarter out-turn for the year, yet Paul is still insisting that the 20Y4 budget should be the 20Y3 budget uplifted for inflation and known changes. During the 20Y4 audit Zandra mentioned the directors’ concerns to the audit manager who suggested that you, as a recently qualified member of the audit team with an interest in strategic planning, might be able to advise the company on how to proceed. The directors have agreed that this would be useful, and have arranged a meeting at which you can meet them and discuss the role of planning within Superware.
Requirement
Prepare briefing notes to present at a meeting with the directors of Superware at which you will be expected to discuss the following.
(i) The current planning process.
(ii) Weaknesses of the current planning process.
(iii) Recommendations for improvement of the planning process. Recommendations should be clearly justified.
Sample Answer:
Briefing notes
To The Directors
From The Auditor
Date Current Date
Subject The strategic planning process of Superware Products Limited.
Weaknesses
This model is commonly used in smaller organisations, and until 20Y3 was perfectly suitable for the purposes of Superware. However, such an ‘incremental’ model, combined with a ‘budget-constrained’ management style such as that practised by Paul, does have some weaknesses in a dynamic environment such as the IT industry. These weaknesses, as illustrated by Superware, are as follows.
(i) The use of corporate appraisal at the first stage tends to lead to a blinkered view of strategy, which will necessarily focus on the current products and markets of the company.
(ii) The lack of environmental analysis throughout the strategy process, with the exception of known economic changes as a constraint to business, leads to opportunities and threats not being considered until too late.
(iii) An incremental approach which led, particularly in 20Y3, to an optimistic plan being formalised which was possibly not achievable.
(iv) The modification of plans to meet personal objectives of the directors, regardless of the achievability of those objectives.
(v) The short-term nature of the process, concentrating on a twelve month planning horizon, will tend to give a distorted view of the future and lead to a lack of direction and consistency in the goals communicated to managers and staff.
Having said all this, the process does have one significant strength in that the focus on implementation and review is very thorough, particularly in the revision of out-turns and the targeting of performance improvements.
Recommended modifications
It is recommended that the company modify the planning process in line with the following model.
The detailed content and major changes from the current process are explained as follows.
(i) External environmental analysis is a formal analysis of the context in which the company does business. It may well include studies of market size, customer needs, competitor behaviour and changes in technology. Such a study should concentrate on major changes which will affect Superware either as opportunities or threats.
Examples of such changes might include an emerging customer need for a tax module to cope with pay and file, demand for an alternative platform such as UNIX, or an opportunity to launch a totally new product line to meet unsatisfied demand.
Internal analysis of the organisation will identify the current strengths and weaknesses, not merely in terms of the financial performance but also some of the qualitative aspects.
Examples might include the organization and resources of the company.
(ii) Corporate appraisal summarized by SWOT.
(iii) Objectives should be agreed, taking into account the requirements of all interested parties, which are perceived as achievable by the managers and staff. Objectives should also take into account the risks and opportunities identified as a result of the environmental analysis.
(iv) Strategies can then be formulated, based on all the previous stages, to achieve the company objectives, protect against threats and exploit opportunities.
Examples of such strategies might be product or market development, or even diversification into, for example, management software for doctors or schools.
(v) Implementation and review of strategy should still take place as currently, but as part of the implementation phase it will be necessary to re-evaluate the organization structure and such tactical issues as investment.
(vi) The time horizon for the planning process should be extended in order to give better strategic visibility and to introduce some consistency between years. Due to the volatile nature of the IT industry, it is probably unnecessary to plan more than three years in advance.
Although the changes outlined seem a radical departure from the process currently carried out in Superware, the benefits in terms of business performance should be significant.
