Whitepaper Controlling of Assumptions

Controlling of Assumptions

In each strategy definition, assumptions are made on which the development of the strategy is based. Such an assumption may be technological advances such as the digitization. Others are a certain customer behavior towards increasing service demand, economic activity or certain expectations regarding market growth.

The Tasks of assumption controlling are:

Assumption controlling implements a early warning system that detects possible deviations in order to counteract in time.

The early recognition of external developments that deviate from the assumptions or premises
Impact Assessment for both qualitative (eg paradigm shift in customer behavior leads to shifts in demand on distribution channels) and quantitative (impact on target revenue, cost items and market shares)
Introduce corrective action to adapt the strategy to new circumstances

Creating an assumption controlling:

1. Working out the assumptions

First, we compile those assumptions / premises that play a role in the future development of the company. We assign these premises as follows:

Environment:
- Society, nature, technology and economy
Stakeholders:
- Customers, employees, suppliers, investors, competition, public, goverment

We have put together a list of topics. It is the same list from which we also compile the main trends for the SWOT:

Figure 1: Environmental and stakeholder issues

Economic environment:

Global development / economic development of individual regions or national economies
Fluctuations in international currencies and interest / inflation rates Rise / decrease of country-specific risks
Customs duties and tariffs / International trade barriers
Economic integration, e.g. Eurozone

Technological developments

Development of key technologies
Digitization / Internet of Things
New technologies as a tool of rationalization
Substitution Technologies / Disruptions

Ecological environment:

Use of raw and auxiliary materials / recycling
Sustainability / energy consumption
Environmentally friendly operating processes
Wastewater and exhaust air purification / heat recovery

Politics:

Form of government / stability / legal certainty
Foreign investment law / tax and depreciation law
Transfer of capital / credit conditions
Party political development / possibility of lobbyist influence
Foreign policy development, conflicts, wars
Increasing government intervention in the economy

Legal Development:

Law changes / changes in regulatory competence
Labour law / consumer protection
Restrictions on competition

Demographic development:

Population / population structure / age structure
Number of households / consumers / size and structure of households (single and multi-person households)
Level of education
Urban / rural population

Social development:

Leisure habits / change of values / consumption habits
Safety conditions / risk tolerance
Qualification level and educational development
Social mobility
Income distribution / structure of household expenditure

Customers:

Market development / market share
Target groups / market segments
Distribution channels per product / product group / dealer and other customer intermediaries
Customer problems and needs (incl. solutions) and demand behavior
Changes of value norms and settings of the customer
Customer sensitivity regarding price and condition changes

Suppliers:

Stocks and supply of essential products
Inventories and supply of operating and auxiliary materials
Options for the substitution of raw materials, consumables and auxiliary materials
General developments in the procurement market
Development of transport prices and costs of supply chain
Dependency on suppliers

Employees:

Recruitment costs and challenges / salary levels and trends
Development of legal benefits
Union activities and demands
Reduction and flexibility of working hours
Education and skilled workers

Investors:

Sources of capital raised
Rules on raising and transferring capital
Foreign exchange rates and interest rates

Public institutions:

Legislator
Government authorities
Local authorities
Unions

Media / NGOs:

Public agenda and interests – e.g. human rights / climate change
Common interests

Competitors:

Existing competitors (by product group / market segment)
Potential new competitors – same industry / other industry
Market entry barriers (norms, laws, etc.)
Degree of rationalization / use of new technologies or goods
Innovation capacity and flexibility

We select the trends from this list and evaluate them with relevance: How important is this trend for our company? A short description will help you later to understand exactly what is meant.

Figure 2: Weighting trends with relevance

Notice::

The rule plus/minus seven also applies here. Limit yourself to one page, and if you write a little larger, it will be full with 10 trends. We want to limit ourselves to a number that is manageable and therefore controllable. The art of selection is to determine the essential trends that make up the majority of possible changes. It is a matter of selecting those influential variables which, from today’s perspective, are the significant drivers for the future development of the environments, markets, products, customers and suppliers.

2. Measurands and assumptions

Now we form the assumptions and define the measurement parameters – how to measure or assess – and provide them with assumptions for the planning period. The time horizon here is three to five years, sometimes even less, depending on the industry or assumption. An example from one of our projects looks like this:

Figure 3: Determine measured variables and make assumptions

3. Precision, method and instrument for controlling

We prepare the controlling by refining the templates and describing the procedure. We will give you a few hints, which you can fill in and define as required.

Data collection

We will collect the data – who is responsible
What are the data sources and how should the data format be
How often are the data collected?

Data analysis

Describes «what happens if the expected values are not met» – does it concern the whole company or only one business area?

4. Controlling of assumptions / early warning system

The current status of all assumptions is recorded periodically and evaluated with regard to the strategy. The system also checks whether new or other external factors or events affect strategy implementation.

This raises questions such as:

Did the economic data develop as expected?
Has the technological development for substitution gone so far that the new basic technologies can be used?
Are the conditions for market entry in China still good?
Are customer behavior and demand for the new service developing according to the assumptions made in the strategy process?
How far is the main competitor with innovative product development? Are we still one step ahead?

Figure 4: Periodic evaluation of developments

From assumption controlling to early warning system

It may well be that certain assumptions have been out of date since the last adoption of the strategy, or that new conditions have emerged that are relevant to the strategy’s implementation.

The 360° radar serves to keep a comprehensive eye on developments around the company, but also within it. The process responsibility for this task lies with the corporate development or the department that we call strategic planning. To ensure that all relevant facts are recorded and taken into account, however, the entire company must be involved. This can be done, for example, by systematically requesting or delivering market-related information from the sales department. A monthly feedback round serves as an instrument to keep the flow of information from the market going. For example, a company holds an open telephone conference every Monday. Sales staff can share their news for one hour. The procedure is organized in such a way that everyone joins in when and as soon as they can. There is no agenda and no discussion. Information is passed on as in an informal coffee break. After some time, this has meant that employees are eager not to miss this «meeting» because it is here that the most important news is exchanged.

Strategically relevant information is systematically collected and tracked in order to make any necessary adjustments or initiate measures.

Figure 5: Observing unexpected events

Systematic market, competitor and customer research is part of this process. In addition, technological topics and news from the field of innovation management can be included.

The capture, filtering and exploitation of the information is then the responsibility of the strategy planning department. For events that require immediate response, the early warning system is turned on (see below); further facts are recorded and incorporated into the strategic review meeting.

5. Development of corrective measures

If deviations relevant to the strategy have been identified, the effects on the strategy must be assessed and the need for action evaluated. The same applies to new influencing factors which have been identified and analyzed in these assessment and evaluation steps.

Figure 6: Capture of corrective actions

The deviation is documented for each premise and the new influencing factors requiring action are evaluated and proposals for corrective measures are developed.

This work is carried out periodically, e.g. every three months or once a year. This ensures that strategy implementation is always based on relevant assumptions and that new influencing variables are identified in good time.

Basic remark

The growing complexity and uncertainty of market and industry developments presents strategic controlling with new challenges. Focusing on a detailed situation analysis and high-level preview methods is only one part of the work. So-called future scenarios are not used to illustrate what will be, but, what could be. The aim is not to predict a future as accurately as possible, but to form the scenarios that are decisive for the implementation of the strategy with the targeted recognition of external drivers and influencing variables. Using new scenario techniques, excellent early warning systems can be developed and introduced in a targeted manner. In addition, managers and employees are sensitized to important trends and external influences and thus to perform an additional «sensory» function for environmental changes.

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