Dynamic replanning: Some comments on the practical application of the analytical forecast

Ko zé, J. G.; Du P eez, N. P. A icle Dynamic eplanning: Some commen s on he p ac ical applica ion o he analy ical o ecas Sou h A ican Jou nal o Business Managemen P o ided in Coope a ion wi h: Uni e si y o S ellenbosch Business School (USB), Bell ille, Sou h A ica Sugges ed Ci a ion: Ko zé, J. G.; Du P eez, N. P. (1984) : Dynamic eplanning: Some commen s on he p ac ical applica ion o he analy ical o ecas , Sou h A ican Jou nal o Business Managemen , ISSN 2078-5976, A ican Online Scien i ic In o ma ion Sys ems (AOSIS), Cape Town, Vol. 15, Iss. 3, pp. 169-172, h ps://doi.o g/10.4102/sajbm. 15i3.1123 This Ve sion is a ailable a : h ps://hdl.handle.ne /10419/217868 S anda d-Nu zungsbedingungen: Die Dokumen e au EconS o dü en zu eigenen wissenscha lichen Zwecken und zum P i a geb auch gespeiche und kopie we den. Sie dü en die Dokumen e nich ü ö en liche ode komme zielle Zwecke e iel äl igen, ö en lich auss ellen, ö en lich zugänglich machen, e eiben ode ande wei ig nu zen. 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Ko ze and N.P. du P eez School o Business Leade ship, Uni e si y o Sou h A ica, P e o ia The impo ance o o mal p ocesses o planning and con ol in any o ganiza ion has been ecognized o he las wo decades. Planning and eplanning equi e some o m o o ecas ing. Un o una ely, mos o ecas s u ilized in p ac ice consis o a complex mix o manage ial expec a ions, o gani- za ional momen um, he p edic ed impac o manage ial ac- ions, as well as p oposed manage ial ac ions and good in en- ions. The e alua ion o and con ol o e such a o ecas is di - icul , i no impossible. This has led o e o s o analyse such a o ecas in o i s majo componen s. The p ac ical implemen- a ion o hese di e en o ecas elemen s has yielded g ea success in planning applica ions. In con ol applica ions some undesi able side-e ec s ha e become appa en in ecen yea s. A p oposed modi ica ion o he con ol sys em applica ion should elimina e such e ec s. S. A . J. Bus. Mgm . 1984, 15: 169-172 Die belang ikheid an o mele beplanning- en behee p osesse i enige o ganisasie wo d al i die a gelope wee dekades e ken. Beplanning en he beplanning e eis een o ande o m an oo ui ska ing. Ongelukkig bes aan die mee de heid oo - ui ska ings wa in die p ak yk aange e wo d ui 'n ingewik- kelde sames elling an bes uu s e wag inge, o ganisa o iese momen um, die oo ui geska e esul a e an bes uu saksies, beoogde bes uu saksies en goeie bedoelinge. Die e aluasie an en behee oo sodanige oo ui ska ings is moeilik, indien nie onmoon lik nie. Die oo gaande he gelei o pogings om oo ui ska ings e analisee in hul belang iks e komponen e. Die p ak iese implemen e ing an hie die e skillende oo ui - ska ingselemen e he sukses olle beplanningsaanwendings opgelewe . Seke e onwenslike newe-e ek e in behee aanwen- dings is eg e p ak ies onde ind. 'n Voo ges elde modi lkasie an die behee sis eem- oepassing behoo hie die newe-e ek e e ellminee . S.-A . Tydsk . Bed y sl. 1984, 15: 169-172 J.G. Ko ze* and N.P. du P eez School o Business Leade ship, Uni e si y o Sou h A ica, P.O. Box 392, P e o ia 0001, Republic o Sou h A ica *To whom co espondence should be add essed Accep ed Janua y 1984 In oduc ion In ecen yea s, he p ocesses o co po a e planning, business planning, and managemen con ol o dynamic eplanning ha e ecei ed inc easing a en ion and a ious au ho s ha e empha- sized he impo ance o a s uc u ed, o malized p ocess o planning (A gen i, 1983; Schu e, 1980; Schu e 1981; Wa - son, 1981). To his end, A gen i o iginally de eloped he con- cep s o a mechanis ic o ecas CFoo), an analy ical o ecas (Fo), and an ac ion plan (Fp), o ac ion plans (Fps), in he con ex o co po a e planning. Foo cons i u es' ... he simples onn o o ecas ... I shall e e o ex apola ions as F 00 o ecas s; he double subsc ip is in ended o d aw a en ion o he ac ha ex apola ion implies ha he u u e will be iden ical o he pas ... no will he company ac o change any hing' (A gen i, 1983;219). The single subsc ip o he Fo 'indica es ha his o ecas assumes he company does no in end o ac o change any- hing, bu ha changes in he en i onmen a e ecognized' (A gen i, 1983:219). The inal s age o o ecas ing, he Fp, 'is based on he assump ions ha bo h he en i onmen and he company's policy will change (A gen i, 1983:219). Schu e (1980;1981) subsequen ly ex ended his applica ion o business planning and managemen con ol. Planning is he s uc u ed and well-de ined p ocess o decision-making in an o ganiz.a ion. Wi h ega d o business planning in pa icula , Schu e s a es ha ' he business plan- ning p ocess consis s o a se ies o dis inc s eps p eceded by an inpu om he s a egic planning p ocess and ending wi h an ou pu in he o m o sho - e m inancial plans o budge s' (Schu e, 1981:68). As s a ed ea lie , i is Schu e's con en ion ha he concep s o Foo, Fo and Fps can be applied in his con ex . This a icle concen a es on Foo, Fo and Fp o ecas s in ela- ion o he business planning and con ol p ocess. In so do- ing, pa icula emphasis is placed on he p ac ical applica ion o he analy ical o ecas o Fo, I is a gued ha empi ical e idence sugges s ha , al hough he Fo o ecas should be e- ained in he business planning sys em, i has ce ain undesi able side-e ec s which make i s inclusion in he o mal manage- men con ol sys em o dubious alue. Business plannlng and o ecas ing In i s simples o m, business planning and o ecas ing in ol es: The iden i ica ion o he cu en si ua ion; -an es ima e o he u u e si ua ion; he ini ia ion o some ac ion o achie e an objec i e (Schu e, 1981). • 170 The i s phase in he business o ecas ing. p ocess, o~ pu - poses o business planning and manag~al. con ol, 1s he mechanis ic o ecas (Foo). I is based on his oncal pe onnance and is a s a is ical ex apola ion o he cu en inancial si ua- ion. The mechanis ic o ecas is based on he assump ions ha he u u e will be he same as he pas and ha managemen will ake no ac ion o change his pe cei ed u u e. The end esul once a pa icula o ecas ing echnique has been selec ed, will ~ways be he same; ha is, he o ecas is no subjec o human judgemen . Al hough he p ac icali y o he mechanis ic o ecas may be ques ioned, i is he bes s a ing poin o he planning p~ since i clea ly indica es he inancial posi- ion o he company wi hou any human in e en ion. An il- lus a ion o he mechanis ic o ecas is supplied in Figu e 1. PLANNED RESULTS : (OBJECTIVESj -1 0 1 2 ••.••• // •••.•• 12 TIME ---•(lllNTHS) OBJECTIVE Fps Fo Foo F1&11 e 1 Business o ecas ing applica ions in managemen planning The second phase in he business o ecas ing and planning p ocess is he analy ical o ecas CFo). Du ing his phase he mechanis ic o ecas is adjus ed o an icipa ed changes in he en i onmen which may ha e an in luence on he o ganiz.a- ion's pe o mance. These changes may include: -En i onmen al in luences, i.e. s a u o y wage inc eases, in- c easing uel p ices, changes in in e es a es. Non- ecu ing e en s, i.e. e enue gene a ed om he sale o equipmen o he cos o eplacing exis ing equipmen . Managemen ac ion ca y-o e , he e ec o which will only become appa en in he u u e. The impo ance o he analy ical o ecas has been emphasized by bo h A gen i, (1983:78) & Schu e (1981:76). An illus a- ion is supplied in Figu e 1. Whe eas in he mechanis ic o ecas , he selec ed planning base emains cons an , he analy ical o ecas is always sub- jec o manage ial judgemen . Du ing he planning p ocess, his does no cons i u e a p oblem because o he leng h o he planning cycle, because o he ac ha op managemen will spend some mon hs on he e alua ion o he analy ical o ecas and, inally, because op managemen can alida e he analy ical o ecas in e ms o he s a egic and planning assump ions which we e employed as a base du ing he plan- ning phase. By way o con as , du ing he con ol p ocess, he eac ion ime o managemen is limi ed and he alida ion o upda ed analy ical o ecas s mus be unde aken wi hin a se iously es ic ed pe iod. The hi d phase in he business o ecas ing and planning p o- S.-A . Tydsk . Bed y sl. 1984, 15(3) cess is he gene a ion o ac ion plans; in o he wo ds, en ep e- neu ial ac ion o Fps as de ined by A gen i (1983). En ep e- neu ial ac ion is aimed a changing he p obabili y o u u e e en s, o hal nega i e ends o e en o um nega i e ends a ound. This p o-ac i e esponse o managemen o u u e e en s is also illus a ed in Figu e 1. Managemen con ol (dynamic eplanning) The o ecas ing phases o Foo, Fo, and Fp occupy he same ole in he managemen con ol p ocess as in he business (managemen ) planning p ocess. The only di e ence is ound in he equency o de elopmen . Whe eas he business plan- ning p ocess is ypically an annual exe cise, managemen con- ol is usually o mally exe cised on a mon hly basis. This en- ails a mon hly upda ing o he an icipa ed esul s o he cu - en momen um o he o ganiz.a ion; an analy ical adjus men o allow o he p ac ical impac o en i onmen al changes du - ing he emaining po ion o he inancial yea ; and an analysis o he an icipa ed inancial impac o manage ial ac ion plans which a e aimed a imp o ing he pe onnance o he busin~ uni . This p ocess is illus a ed in Figu e 2. FORECASTED RESULTS I i I : R I ! l OBJECTIVE . . . . ~-:::--,·-= ~-- - -· ---- -; Fp • • • ' • , ~ ~ - • • - - • ~ Fo I ',j Foo I , . : 2 3 S 6 7 8 9 10 11 12 TIM[ (MONTHS) ---- Figu e 2 Business o ecas ing applica ions in managemen con ol Managemen con ol: p ac ical applica ions The success ul p ac ical applica ion o he Foo, Fo, and Fp con- cep s in nume ous Sou h A ican o ganiz.a ions has a es ed o he unde lying s eng h o hese concep s. The g ea es deg ee o success has been achie ed in he business planning applica- ion. The applica ion o he o ecas ing concep s in he manage- men con ol p ocess has also been qui e success ul bu has, howe e , yielded an unexpec ed side-e ec : I has become ap- pa en ha a majo po ion o he c ea i e and analy ical ~e o senio -middle and op manage s is de o ed o he analy ical CFo) adjus men o he 00 ex apola ion o he pe o mance o he o ganiza ional subuni s unde hei con ol. Wha his means is ha he majo objec i e o he manage- men con ol p ocess; ha is, he s imula ion o inno a i e en- ep eneu ial ac ion on he pa o middle and op manage s is no being achie ed. Ins ead o accep ing he Foo o ecas and ins i u ing imeous ac ion o imp o e on he ends e lec ed in his ex apola ion, hese manage s a e 'explaining' o hemsel es and o hei supe io s ha he Foo is w ong and ha he o iginal objec i e (usually embodied as a desi able budge ed esul ) is s ill going o be achie ed. . I is usually o eseen by hese execu i es ha his achie e- S. A . J. Bus. Mgm . 1984, 15(3) men o he desi ed end esul will be b ough abou by a ou able en i onmen al changes. This, in um, implies ha a need o manage ial ac ion does no exis . This phenomenon o un ounded op imism is equen ly en- coun e ed in human beha iou in gene al and in manage ial beha iou pa e ns in pa icula . I has been dubbed he 'Hockey-s ick synd ome' and has up o now, in he manage- men con ol sys ems con ex , been associa ed wi h he p ac- ice o some o ganiza ions o making use o a so-called 'up- da ed' o 'yea -end o ecas ' in hei budge a y con ol sys ems. Schu e sc u inized his issue and discussed he ope a ion o his 'synd ome' in conside able de ail (Schu e, l 981: 137 - 139). As s a ed p e iously, empi ical e idence now indica es ha he same undesi able e ec is achie ed in he applica ion o managemen con ol u ilizing he Foo, F0, and Fp concep s. In Figu e 3 he an icipa ed and ac ual sales esul s o a la ge Sou h A ican insu ance i m which has u ilized he abo e o ecas ing concep s o qui e a numbe o yea s, is ep oduced o a pa - icula inancial yea . SALES R' 000 000 Q3 i 92 ~B.!J_D~GE_T __________ _ 91 i 90 I I B9 1· 88 86 , I I 85 I ACTUAL i· ···································· 84 I I 83 I --=-+------------------- 10 11 12 1981 1982 Figu e 3 Yea -end budge ed and ac ual sales and mon hly upda ed yea - end sales ex apola ions The inancial yea o his pa icula o ganiza ion ex ends om Oc obe o Sep embe . The deg ee o (unwa an ed) op- imism e idenced by he analy ical (F 0) o ecas up o he end o May is s iking. Figu e 4 deals wi h a majo ca ego y o expenses o he same o ganiza ion. Again, he ue posi ion as ega ds he o ecas yea -end pe o mance is accep ed oo la e o any meaning ul manage ial ac ion o be aken. Conclusion Simila examples ansmg om he expe iences o o he o ganiza ions could be ci ed. Howe e , su ice i o say ha he undesi able side-e ec o he Foo, Fo, and Fp applica ion, as desc ibed, has led o a en a i e conclusion ha al hough he Fo o ecas should be e ained in he business planning Sys em, i should no o m pa o he o mal managemen EXPENSES R' 000 000 5 ,5 5 ,4 5,3 5.2 5,1 5 .o 4 ,7 4,6 4,5 I 171 ACTUAL 10 11 12 1 2 3 4 5 6 7 9 1981 1982 Figu e 4 Yea -end budge ed and ac ual expenses and mon hly upda ed yea -end expense ex apola ions con ol sys em. This implies ha he documen a ion o ming he s uc u e o he o mal managemen con ol sys em should be de oid o any analy ical adjus men o he mon hly upda ed mechanis ic (Foo) o ecas . Table 1 illus a es he o m his p esc ibed o mal documen a ion should ake. The momen- um o he o ganiza ion is ex apola ed in he Mechanis ic o ecas column and any 'pe o mance gap' (Schu e, 1980J be ween his column and he Annual budge column should be closed o minimized by manage ial ac ion documen ed in he 'Ac ion plans' column. The e is no p o ision o any analy ical adjus men s o he mechanis ic o ecas . I is belie ed ha his app oach will emo e he majo s umbling block o he achie emen o he eal 'pay-o o an e ec i e managemen con ol sys em. Schu e ( 1981 : 140) has p o ided a s iking desc ip ion o his pay-o . 'Gi en he new planning base, he change agen s in he o ganiza ion should de elop ac ion p og ammes o im- p o e on ha base, i ~pec i e o he ac ha he base may all sho (un a ou able a iance) o exceed ( a ou able a iance) he objec i es as e lec ed in he o iginal budge . I ollows ha he pe o mance o hese manage s should be measu ed by hei con ibu ions o o ganiza ional p o i s in he o m o ac ion p og am- m~ de eloped ... ' The au ho s con end ha his new ( e)planning base should be he mechanis ic <Foo) and no he analy ical C o) o ecas . This aises ques ions abou he ealism o he Foo, Empi ical e idence again sugges s ha doub s abou he F 00 a e alid in he ea ly po ion (ini ial six mon hs) o he inancial yea bu ha he Foo usually becom~ qui e accu a e as a p edic o o yea -end esul s om he se en h mon h onwa ds. Finally, is he ealism o he Foo a ele an conside a ion? I i is accep ed ha he ul ima e objec i e o an e ec i e managemen con ol sys em is he os e ing o c ea i e, en e- p eneu ial ac ion, he Foo can be ega ded as an impe ec , bu a he same ime, an e ec i e ins umen o u ilize in he pu - sui o his objec i e. 172 S.-A . Tydsk . Bed y sl. 1984, 15(3) Table 1 Example o o mal documen a ion Ope a ing cen e: .................................................................... · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · .............................. . Fhuuldal pe o maace epo o llle pe iod ndl .. : ........................... · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · ............................. . Reponble o ldal: ......................... · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · ·· · ···· Pa icula s Rnenae Commission (Se ices) Commission (Insu ance) In e es ecei ed To al e enue Coa ollllble npensa P in ing and s a ione y Wages Main enance Pos age A To al con ollable expenses B Ope a ing cen e con ibu ion A -B = C No11COn ollable expen11e1 Lease cha ges Dep ecia ion To al noncon ollable expenses D Ne p o i /Loss C - D = E Re e encee Yea o da e Budge Ac ual Mechanis ic Va iance 'I o ecas (Foo) Ac ion plans (F.,.) Full yea P ojec ed i- nancial pe - o mance Annual budge Planning gap Schu e, F.G. 1981. In eg a ed managemen sys ems. Du ban: A gen i, J. 1983. Sys ema ic co po a e planning. Middlesex: Nelson. Schu e, F.G. 1980. Budge a y con ol sys ems o he eigh ies. J. Bu e wonhs. Wa son, C.E. 1981. Resul s -o ien ed managing. Reading Mas- sachuse s: Addison-Wesley. Gen. Manage. ol. S.