With businesses undergoing constant changes, targets and budgets need to become more adaptive. Start by setting your goals and ranges rather than single numbers, setting some firm limits, and shortening the budget cycle.
Every two years, we conduct “speed of change” research with our clients and community. In 2018, in a survey of more than 2,000 managers, 47% reported that in order to survive, they needed to reinvent their businesses every three years or less. In 2020 that number jumped to 60% in the make of the pandemic. The data from 2022 is still coming in, but the first 600 respondents show that the speed of change remains incredibly high, with 55.8% reinventing every 3 years or less, with 20.8% changing their plans every 12 months or less — the highest velocity we’ve ever seen.
Surviving — and more importantly, thriving — in this new normal requires a new set of rules across all functions and industries. Take, for example, the practice of “just-in-time” manufacturing. In the relatively certain low-volatility world, having low or even no inventory is incredibly efficient: you don’t have to tie up capital or invest in storage management. But with today’s unreliable supply chains, just-in-time might be exactly what destroys your business.
That, of course, applies to strategic planning — and a number of thinkers, including the authors of this recent HBR article, have already set out new principles for strategy making in turbulent times. But how do we translate these principles into practice — especially when a strategic plan gets cascaded into daily reality through budgets and day-to-day management? Right now, as so many of us are in the middle of a planning and budgeting process, how do we prepare for the volatility and uncertainty of the coming months?
Three science-backed and field-tested hacks can make a difference for you today:
Set your goals in ranges.
It has been the common practice for decades to set goals in a singular, no-room-for-interpretation format: say, 10% net profit growth, 7% EBITDA growth, or a 15% market share achieved. This approach worked great in a predictable, low-volatility world. But in a world of constant change, it won’t.
What’s the alternative?
Instead of singular “10% net profit growth,” have a meaningful debate to determine a market-ready range (say 8–12% or any other range that your analysis suggests). Or replace a “15% market share” with a range that would give flexibility to your team while still providing focus and discipline — perhaps, 12–18%, or 11–17%.
Working with a range is backed by science. Management thinker Steve Martin explains why:
“Researchers at Florida State University recently demonstrated how this small shift in goal setting could have an impressive impact. In one study, members of a weight-loss club wanting to lose two pounds per week were assigned to one of two groups — a single-number goal group ‘lose 2 pounds per week’ or a high-low range goal group that averaged the same ‘lose 1–3 pounds per week.’
The impact of being set a high-low goal on members’ sustained motivation to pursue their goal (by enrolling in an additional 10-week program) was striking. Only half assigned a single-number weight loss goal persisted with the longer-term target, but nearly 80% of those assigned a high-low range weight loss goal did.”
Our fieldwork confirms the scientific data and shows another benefit to using ranges: it solves the age-old war between the “top” and “bottom” of the organization around goal-setting. Often, when the board is aiming high, the team sees its goals as unrealistic, and as a result, all parties leave the planning process dissatisfied, frustrated, or worse — completely demotivated.
Thinking of your goals as a range rather than a singular point gives you the flexibility necessary to adapt to a changing environment. It is important to figure out your range deliberately and clearly — and celebrate when you hit any point within the defined range.
Set predefined limits.
I am sure you’ve seen this before: you worked hard on preparing your company’s budget, with rounds of corrections and a long approval process. The budget is finally signed, and then it becomes irrelevant within months, if not weeks, as market conditions shift.
Traditional budgeting harms innovation and renewal in your business, as we found when advising a large manufacturing group setting up a corporate venture fund. While the incumbent businesses within the group worked relatively well with the traditional planning approach, the start-ups within the venture fund were suffocated by the need to constantly re-approve each line in the budget every time a new pivot was on the horizon.
Limits came to the rescue. Having a few clearly defined and well-calculated lines in the sand gives you a quick and dirty way to move forward while more complex budget re-calculations are performed. Cost per unit, cost per customer acquisition, number of product launches — many different dimensions can be used to set intelligent limits for volatile times.
Limits also help in less dramatic downturns — if a single supplier changes prices mid-year or a new regulation makes things more expensive, limits allow your team freedom to make well-informed decisions without getting the entire budget re-approved every time and thus reducing micro-management.
It’s often claimed that managers need to think outside the box, but as many leading creatives have pointed out, to create something new, we need to start with a box. Limits and constraints are crucial for our creative thinking, and strategy is the best place to apply your creativity. Use the lessons from the past to guide your discussion. What kind of limits will allow to minimize the need for micro-management and give clarity to your team? Perhaps some level of cost? Regional constraints? Customer segment constraints? What imaginary lines should your business not cross as it executes your strategic plan?
Shrink the budget cycle.
The traditional budgeting process is tightly connected to the practice of publicly traded companies, so an annual budget is practiced in many companies. That works well in a relatively stable world, but makes it hard to keep up with disruptive changes in prices, foreign exchange rates, new regulations, new technological breakthroughs, and more. So, shorter sprints between plan adjustments are needed.
This was exactly our experience when working with a large multinational mining company during the 2015 commodity price slump. With prices falling more than 50% on a number of metals, its annual budgets became obsolete in a matter of days — but the traditional budget adjustment process was complex, slow, and limited in nuance. The company knew that if it stuck to the approved budgetary plan, it would destroy itself, but did not know the scope of the damage and the specific areas (across many business units and regions) where the pain was the greatest.
Moving to a shorter cycle (quarterly, rather than annual) and developing a rolling 18-month forecast became the solution. Now the fluctuating data is fed into the budget more frequently, keeping the budget more current. These “just-in-time budgeting” solutions got popular during the 2008–2011 economic crisis but for many were perceived as a temporary fix. Today, high volatility a permanent feature, it’s time to accept that they’re here to stay.
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Whether you take on one of these three hacks or decide to develop your own, one thing is clear. The challenge we face isn’t about trying to survive until things stabilize, but rather about learning to thrive in constant chaos. For that, we have to reinvent the the way we run organizations — as the rules of thriving in a stable world are completely different from rules of succeeding in a volatile one. Creating turbulence-ready targeting and budgeting is a great place to start.