At many organizations, the typical planning process results in one-dimensional business plans that are extremely difficult for senior executives to understand and assess. They’re built on best-guess estimates with no transparency on how individual initiatives will contribute to overall results; little or no assessment of the risks inherent in the plan, and a weak link between operating targets and TSR.
A better approach is to follow an iterative process that starts with a base case, a financial projection of the value that a business unit will generate simply by doing business as usual. Then the company can overlay a series of discrete initiatives that have the potential to improve the base case. Each overlay is associated with a specific amount of TSR it will contribute and a specific timeframe in which that value will be delivered.
One of the great advantages of this approach is that it provides clear guidance for business units in terms of budgets, key performance indicators (KPIs), and management incentives. In effect, it creates a culture where every part of the business has a sense of ownership in the process.