PART 5: SPECIAL TOPICS16 -1 OVERVIEW OF THE PLANNING PROCESS
A long-term financial plan begins with strategy. Typically, the senior management team analyses
the markets in which the company competes. Managers try to identify ways to protect and increase
the company’s competitive advantage in those markets. For example, a company that competes by
achieving the lowest production cost in an industry might seek to determine whether it should make
additional investments in manufacturing facilities to achieve even greater production efficiencies.
A risk to this strategy is that market demand may turn out to be less than what was expected,
leaving the company’s fixed assets underutilised. This type of company, therefore, will try to forecast
market demand and develop contingency plans for the possibility that the expected demand does not
materialise. If a company’s competitive advantage derives from the value of its brand, it might begin
by assessing whether new or expanded marketing programs might increase the value of its brand
relative to competitors.LO 16.1Jackie Sturm, Vice
President of Finance, Intel
Corp.
‘Once the product
line business plan is
completed, we move
into our annual planning
process, which is more
of a tactical exercise.’
See the entire interview on
the CourseMate website.COURSEMATE
SMART VIDEO
Source: Cengage LearningHOW COMPANIES ADJUST FINANCIAL PLANS WHEN A GLOBAL RECESSION HITS
A recession highlights the importance of clear
financial and strategic operating plans, because a
company’s survival may hinge on how effectively it
can cut costs, and match output to lower demand.
This lesson was brought home to managers in 2008
as the global credit crisis cut demand for goods and
services and forced the world’s major economies to
contract.
A 2008 survey of 1050 chief financial
officers (CFOs) in the United States, Europe and
Asia showed how managers were preparing
to cope with the deepening recession. The
survey found that managers were planning to
cut research and development, marketing andcapital expenditures; to draw down their cash
holdings; and to cut dividend payments. These
actions were dramatic – for example, recall from
Chapter 15 that companies are very reluctant
to cut dividends. The survey results presented
in the figure below also show that managers
in Europe and the US were planning to reduce
personnel, but that Asian managers expected
to keep employment levels virtually unchanged.
Managers in all three regions were planning to
cut marketing expenditures significantly, while
managers in Europe and the US were planning
much more drastic cuts in technology spending
than were Asian managers.
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