The next step in drilling down to the actual tasks that people perform is developing the Annual Operating Plan or AOP.  If you have done a good job on the Long Range Plan and the remainder of your Business Plan, you should have several solid objectives ready to be divided into more detailed short term team and individual objectives that can be completed in less than one year.  Now your planning process will shift to subdividing those LRP objectives.

Think of the AOP as scaling down the LRP into what can be accomplished in the next year.  The LRP was an opportunity to evaluate the big picture and focus on risks with some attention given to what might serve as measures.  Conversely, the AOP is an opportunity to detail near term elements of the LRP and focus on detailed measures of performance and results with some attention given to monitoring risks.

In the process of developing your AOP, you will also be developing key components of your annual capital and operating budgets.  It is important to let your long range and operational goals drive your budget and not let the budget drive your goals.  Remember, money is a resource and a measure of success.  Profit is your reward for achieving your annual and long range objectives; it is not the purpose for your organization’s existence.

The detailed objectives in your AOP may consist of sales goals, marketing plans, production goals, new buildings and equipment, revenue and expense targets, employee counts, new and changed processes, or particular activities in your start up process if yours is a new venture.  They may include implementation of new processes or specific annual projects that produce results and align with your business philosophy including community relations and environmental stewardship.  All of them should relate to a specific LRP objective, and to the business plan components we defined earlier.  Again, these objectives must be SMART; Specific, Measurable, Achievable, Realistic and Time-bound, like the LRP objectives discussed in the last post, but even more specific and short term; less than one year.

All of your AOP objectives should include clearly defined measures both of process and results, as well as methods for reporting.  The measures associated with these goals may be lagging measures reporting the results of your operations.  However, as these AOP objectives are further clarified by enterprise, department, branch, team, and individual goals; remember that goals at this level are very process oriented and must include leading measures or indicators.  Without integrating leading measures within processes you will not have advance warning of processes drifting off target that could end in failure to achieve the desired results.

When you have worked through all of the objectives in the LRP and committed them to your AOP, you still have to address the ongoing activities that keep your business running.  There are always things your organization does every year that must be done to keep the doors open and the customers served.  Those activities may not have been directly addressed this year by long range objectives; that doesn’t mean you stop doing them!  To steal a quote from John F. Kennedy, “we choose to go to the moon in this decade, and do the other things…”  We didn’t put the rest of government on hold while we went to the moon.

Landing a man on the moon in this decade (1960’s) was one whopper of a long range plan; parts of going to the moon were inserted into the AOP each year, along with “the other things”, and we landed two men on the moon on July 20, 1969.  When Kennedy established that goal it had only been four years since the Russians orbited Sputnik; by 1961 all we had in orbit were a few communications satellites.  But we had a robust government going (some would argue a little too robust) that still needed attention!  The “management team” took on all those details.

The point; plan and budget for all the day to day activities of your organization, but highlight in the AOP those that relate to the LRP and make sure they get special handling to avoid losing them in the shuffle of your daily work.  When your annual operating plan is complete you will have a roadmap of your entire route from January 1 to December 31.  You’ll know the mile posts you need to pass, and you’ll have that dashboard telling you everything you need to know to gauge progress and results through the year.

Now your management team will need to put that plan into action.  Every Division, Department, Branch, and Work Team will need to figure out all of the tasks and activities needed to achieve the AOP goals.  They’ll need to sit down with their teams and figure out the deliverables, timing and budget objectives and the incentives and consequences needed to keep everyone on track.  While they’re doing all that work they’ll need to keep in sight the key components driving all of their activities, the objectives of the LRP and AOP.

I’ve tried not to get too detailed but to give you just enough about this particular business basic, this piece of common business sense: plan your work and work your plan.  Larry Linville’s character, Major Frank Burns (M*A*S*H, CBS, 1972-1983) put it better than anyone else while digging foxholes all over the camp in preparation for the potential air raid when he said, “prior planning prevents poor performance!” 

Of course, even the best laid plans can be co-opted or sabotaged when people are not all on the same page; as Frank found out the instant he dove into his foxhole outside the “Swamp”; the one Captain B.J. Hunnicutt had conveniently filled with water just before hollering “AIR RAID!”  And that sets up the subject of my next post, get your people aligned!

Long Range or Strategic Planning can be intimidating whether you are a new entrepreneur or a director on a corporate board.  The key is to keep it simple and let yourself and your team be guided by two ideas: convert your vision into goals, and make your goals SMART!  Those goals become the source of the details for your annual operating plan.  By the way, it’s a good idea to have someone with a gift for strategic planning work with you because each goal will need to be divided into team and individual tasks.  The process of drilling down requires a fair amount of organized thinking.

How long do we plan for?  The cliché that a goal is a dream with a deadline is true for long range plans.  The starting point is your dream or vision statement, supplemented by your purpose or mission statement.  Focus your thinking by setting the horizon for your LRP, typically three to five years; and you’ve just put a deadline on the dream, or at least part of it!

Arguments are made for different time spans with three years often preferred due to the pace of change.  Five years is more traditional with longer times like ten or even twenty years set for slow moving and massive changes like building aircraft carriers or reclaiming and protecting large wildlife habitats.  Pick a horizon that makes sense for your organization’s vision.  And remember, you don’t have to achieve your vision in three years; you just need to decide what the organization is going to do over the life of the LRP to move toward the vision.

Speaking of the life of the LRP; think of it as immortal.  The LRP needs to be updated annually.  Each year you can add new long range goals that feed the annual operating plan, assuming that you’re achieving your older goals and they’re rolling off the plan into maintenance mode.  The three or five year horizon is that “rolling” horizon that is always a few miles ahead of your car out on the highway.  The new goal is the milepost way out on that horizon and the horizon always appears to be moving, but the mileposts beside the road identify the previous long range goals you established.

What should we include?  Use the business plan outline as a guide and ask, “What will it take in each of these areas to achieve the vision?”  Remember the first point in each component of the business plan: approach, risks and measures.  How will your approach contribute to achieving the vision?  What risks need to be addressed to enhance the chances for success?  How will you know you are succeeding?

Identify the most significant goal with the greatest benefit for each business plan component and quantify it.  Make it SMART: Specific, Measurable, Achievable, Realistic, and Time-bound.  Make it specific so you can break it down into tasks to be tackled each year.  Make it measurable, you need indicators of progress and results to recognize success or the need for corrective action.  Measurable includes not only the desired result, but also rough estimates of resources and timing.  Make it achievable and realistic; nothing is more frustrating than trying to do something that cannot be completed in a reasonable amount of time.  Make it time-bound; the assumption is that the goal will be achieved within the three year span of the current LRP so specify the date.

You might have noticed I didn’t mention Strength Weakness Opportunity Threat (SWOT) analysis until now.  I mention it now because although it’s a step up in complexity from what I consider to be better business basics and common business sense, it is a very helpful approach to evaluating opportunities and related risks (threats).  It’s also useful for sizing up your core competencies and resources (strengths and weaknesses), key considerations in developing a workable LRP.  There is plenty of guidance available on using SWOT analysis so I won’t elaborate on it here.

One last thought on long range planning; don’t over-analyze or over-plan.  It’s too easy to become the victim of analysis paralysis, a business disease that will keep you from doing anything big and increase your risk of failure.  Learn to know when to say, “That’s good enough!”  It keeps you moving forward and cuts back on those perfectionist tendencies (I speak from a great deal of experience in this area)!

What do we do today?  You’ve come this far; take a breather; building a long range plan is hard work!  Next you’ll need to break down each goal into stages with shorter deadlines of one year or less, and actual tasks that can be completed in the shorter stages.  In other words, you convert your LRP into an annual operating plan (AOP) defining what you’ll do this fiscal or calendar year.

But that’s the subject of another post…

You’ll find this phrase appearing in almost every section of the business plan, so let’s dissect it to aid in the planning process.

Approach is the term I use to describe the direction or strategy you will take for a particular component of your business.  For example, my partners and I define the approach for the Technology component of our business plan as follows:

We will use the PC-Intel platform, with widely used business software to ensure broad compatibility with potential clients’ and business partners’ technology.  We will purchase and maintain our own systems, and outsource any technology functions that are beyond our current or easily acquired expertise.

This approach allows us to purchase or build our own PCs, purchase group licenses for MS Office and other software, and choose from a wide range of free-ware or share-ware for special purposes such as screen sharing, conferencing, and content management.  We outsourced the development and hosting of our proprietary expectation alignment software since we do not have or wish to acquire the expertise to do that work ourselves.  The result is that we keep our technology investment low, easily “on-board” new business partners, and transfer the risks of product development to the experts.

That leads us to the idea of Risk.  Risks, if allowed to materialize, result in loss of resources, failure of processes to remain on track, and/or failure to attain your goals.  Any approach you choose will be subject to some kind of risk.  For example, with our technology approach we know that the PC platform and software are the most common targets for virus, worm, Trojan horse and other kinds of security breaches.  A Mac platform would be less risky, but less commonplace in the business and consulting worlds, and more expensive in general.

The virus and security risks are risks we are willing to accept within limits, so we pay for certain internal controls like antivirus software, router-based firewalls, encryption, and backup that will further reduce our risk to a level we are willing to accept.  Define your risks, determine what level of risk you are willing to accept, and pay for the necessary internal controls to reduce your risk to that acceptable level.  If you can’t reduce the risk enough, then transfer it through insurance with a deductable amount you believe you can afford should the risk materialize.

The last term in our title phrase for this post is Measures, also known as key performance indicators or KPIs.  What we want to decide, right up front, is how we will measure success for this part of our plan; how do we know things are working right and we are meeting our goals, and how would we know it if they stopped working right and we were falling short of our goals.

There are two big challenges with measures.  The first is reducing the activity to something that is measurable.  Many activities, like successful vendor or customer relationship management can be very subjective.  How do you measure the quality of the relationship?  You may need to resort to carefully crafted surveys with numeric responses such as “Exceeds Expectations (4), Meets Expectations (3), Comes Close (2), or Falls Short (1).”  Think carefully about what to measure and how to measure it.

The second big challenge with measures is useful timing.  Measures fall into two groups, leading indicators and lagging indicators.  Leading indicators tell you in advance of reaching a critical situation or result; they tell you that something is about to happen.  Lagging indicators tell you that something has already happened. Lagging measures are generally OK for reporting financial results to owners and shareholders, but not too helpful when you just produced a whole run of molded plastic parts that do not meet the customer’s specifications.  Processes generally need leading indicators so people know if they’re drifting off track or outside of acceptable boundaries.  In other words, we need to stop molding plastic parts immediately if measures indicate they are drifting too close to the limits of tolerance.

The lesson is this: within each component of your business plan define your approach, identify risks and the levels of risk you are willing to accept, and define carefully the measures that will indicate you are following your business plan and achieving your goals.

Next up, the long range plan.

Too many business owners look at the business plan solely as the budget or financial plan for their business.  In reality, a well done business plan covers a lot more territory than finances.  Remember, all you really have so far is a purpose and some rules for how you and your team are going to behave.  Now you need a strategy, a comprehensive guide to fulfilling your organization’s purpose.  You need to define your target market and customers, the resources including people, raw materials, plant and equipment, technology, and money necessary to create and deliver your product or service, some idea of how you’re going to apply those resources in each component of your operations, and what results are expected; i.e., what will success look like?

Here are what I consider to be the key pieces of your strategy or business plan:

• Introduction
  • Restatement of Mission, Vision, and Conceptual  Foundation

• Long Range Plan
  • Objectives, risks and measures related to mission and vision
  • Greater than one year
  • Updated every year

• Annual Operating Plan
  • Current year goals, risks and measures related to long range objectives
  • One year or less
  • Updated every three months or more frequently

• Marketing Plan
  • Approach, Risks and Measures
  • Target markets
  • Promotions and advertising
  • Public and community relations

• Sales Plan
  • Approach, Risks and Measures
  • Customer Relationship Management
  • Lead generation
  • Sales process

• Operations Plan
  • Approach, Risks and Measures
  • Vendor Relationship Management
  • Acquisition
  • Production
  • Distribution
  • Other Systems

• People Plan
  • Approach, Risks and Measures
  • Organization structure
    • Practical governance
    • Risk management
  • Employee relationship management
  • Hiring
  • Compensation
    • Base
    • Incentives
    • Benefits
  • Training
  • Termination

• Technology Plan
  • Approach, Risks and Measures
  • Environment management
  • Application management

• Financial Plan
  • Approach, Risks and Measures
  • Capital Budget
  • Operating Budget
  • Cash Flows
  • Return on Investments
  • Owner relationship management

If your organization does a good job with the business plan, it will have a comprehensive roadmap that is focused on one destination, the purpose described in the vision and mission of your organization.  That roadmap will tell you what systems and processes are necessary and how the organization should be structured to be most effective.  It will also provide guidance for effectively managing your most valuable resource, your people.

In upcoming posts we’ll dissect the components of the business plan, showing you how to build and use it most effectively as a better business basic.