Planning from the outside-in

The opposite of the long-gone Industrial Age

April 2022

Phil Ruthven AM

In my March 2022 Insight titled Emerging from the pandemic, I described this decade we are in as being a discombobulated one with some already-knowns and probabilities, but a lot of unknowns. So, how can we identify the developments that will impact our own business, for better and worse, and identify the implications for our best forward strategy over the next 5 years or so?

The Ruthven Institute’s (RI’s) key guidelines include 12 golden rules of business success as a useful starting point.  By contemplating all the many environments that lie outside our business you can begin to understand the foundation for the sixth rule on the list: Planning from the outside-in.

Our own industry (the immediate environment) and the six operating environments that we directly deal with in a cash flow and P&L relationship are the most important.  However, we should not ignore the impacts of the four influential environments.  One only needs to note the enormous challenges that ensued from this environment via the events below:

  • COVID pandemic
  • breakdown in supply chains, the downside of JIT
  • brutal attack on Ukraine by Russia

 The consequences for world stability and investment directions and flows include:

  • rising inflation and interest rates, and exchange rate volatility
  • obvious climate change catastrophes
  • rise of popularism over rationality in politics and communities, the rise of tyrants, dictatorships, autocracies, and diminishing democracy
  • environmental, social & governance (ESG) issues

The days when managers planned from the inside-out as if they were a threatened fortress in a hostile environment, have given way to fashioning our future by starting with the real world and its direction beyond our own “walls”. These “walls” are more transparent these days than the proverbial stone walls of the Industrial Age that appeared over a two-century year period from the 1760s in the UK to the mid-1960s.  This all changed as we entered the 1970s over half a century ago.   And the paradigm exhibit below simply puts the earlier exhibit into a more dynamic and inter-dependent and inter-related mode.

It is true we didn’t see the above global examples of influential changes coming nor its disruptive impacts.  But these matters are a reminder that our response capacity to significant impacts, that were not foreseen, is as important as anticipating the ones which we can predict.  And there is a lot we can anticipate and build into our long-term strategy and business plans.

Some CEOs and Boards suggest long-term planning is now too uncertain and too hard. Yet these leaders continue to make decisions on the development of their IP & uniqueness and capital expenditure that have lives well beyond 5-years (which amounts to strategy – successful or not), and by default are making long-term decisions.

The starting point in getting a fix on the external environment is, of course, within our own industry.  Or, more specifically the industry class within the official 500+ classes as officially defined via the ANZSIC classification system.  In some cases, multiple industries, being a conglomerate.  There are many aspects we need to know, including:

  • basic statistics of revenue & growth, participants, market shares, cost structures et al
  • the industry’s lifecycle (averaging 40-50 years in Australia), and where it is now on that lifecycle
  • the industry’s segments by products, customer groups, and geography
  • operating conditions, systems & technology, WBP, capital intensity, volatility, and regulations
  • risk conditions and sensitivities affecting growth and profitability

Of vital importance are the six (6) operating environments:

  • the marketplace (source of revenue, all the other 5 operating environments being expenditure)
  • the finance environment
  • the government environment
  • the labour environment
  • the services environment
  • the goods & materials environment

In all six operating environments, adequate information is necessary to provide confidence that a long-term plan or strategy, a medium-term plan (three-year business plan), and a one-year budget can be prepared. These should be rigorous enough – with contingency ‘shock absorbers’ built in – to withstand the inevitable vagaries of the real world.

To understand the operating environments, first knowing the marketplace and its customers, including their attitudes, behavioural patterns, and spending is necessary. Of equal importance is the finance environment, involving equity and debt, availability and costs, risks, exchange rates, the need (or otherwise) for hedging, and many other factors of a monetary nature. The government environment is also significant, firstly in terms of relevant laws and regulations, and secondly in terms of its costs (averaging around 6% of revenues) and subsidies.

The labour environment is critical – especially in service industries, where labour costs often amount to more than half of revenues. Important factors here include labour availability, wage rates, productivity, and industrial relations (IR), which can make or break a firm.  The services environment is becoming pivotal due to the outsourcing of non-core functions once done on a DIY basis, now with a growing trend to do-it-for-me (DIFM).  Then there is the goods & materials environment, involving raw materials, finished goods and capital equipment. Capital expenditure on goods is a factor for all businesses, even if leasing – the preferred option – is chosen over purchase; whilst materials and other goods are more relevant to the goods-based industries such as mining and agriculture, manufacturing, construction, electricity, wholesaling and retailing. These goods-based industries nowadays constitute the minority (38%) of the nation’s GDP.

So, just what are some of the impacts emerging in this third decade of the 21st Century?   All six environments create challenges.  Just a sample of them include:

  • The marketplace is moving away from the traditional salesperson intermediary to online buying, in B2C, B2B and B2E (exports)
  • The finance environment is experiencing a metamorphosis in funding, transactions, currency (including blockchain and crypto-currencies)
  • The Government environment is in a no-reform mode and has been for well over a decade with resultant negligible productivity growth, well below our historical 1.7% p.a.
  • The Labour environment is moving to a hybrid of work and home premises, aided by modern IT and communication technologies
  • The services environment continues to grow as a result of businesses outsourcing non-core activities, and is approaching $1 billion per annum (nearing a sixth of the nation’s revenue!)
  • The goods and material environment is in a very volatile availability and pricing period for the reason given earlier in this Insight

And those are accompanied by hundreds of other changes, opportunities, threats and challenges.  Picking the ones that are the most important to one’s own industry and business is critical to avoid an overload of interesting-to-see versus must-monitor factors.

And why is planning from the outside in the Institute’s rated a number 6 in its 12 golden rules of business success?  In short, it is because it is generally accepted that the management of a business constitutes two-thirds of its risks, and the environment is outside just one-third.  Then again, this discombobulated decade may see this ratio edge a bit towards the external risk versus the internal.

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