Ideally, such advanced analytical methods are linked with an effective framework for capital allocation. Resource allocation processes are often flawed, because they tend to ignore the true cost of capital and its impact on shareholder value creation. For instance, performance targets for individual departments often undermine capital cost effectiveness, because the metrics used to assess managers are based on accounting principles rather than on measures that favor value creation. Projects that do not meet the cost of capital, but appear to help meet revenue or profit targets, may proceed despite the fact that they ultimately destroy, rather than create, value.

A more effective capital allocation framework rewards employees who act like owners, by ensuring that only projects with a return greater than the cost of capital are allowed to go forward. A structured framework also links capital allocation with the strategic plan. Clear strategies and clearly stated criteria help senior managers make informed choices that lead to value creation.

Taking a Broader Perspective

In volatile times, managers may tend to focus on shorter-term planning components, such as budgeting or current year forecasting, without covering the coming year. Overreacting to short-term economic fluctuations, however, impairs long-term strategy and compromises a company’s ability to create value in the future.

A broader planning perspective strikes the right balance between short-term and long-term performance. Similarly, a broader perspective takes into account both capital and investment activities that may fall into the selling, general and administrative (SG&A) category but are nonetheless crucial for future value creation.

Although the discipline of strategic planning has lost some of its prestige in the recent economic turmoil (indeed, 13 percent of the organizations that Accenture surveyed said that they’re executing no strategic planning at all), the discipline helps companies identify and address key questions. Businesses need to know, for instance, if they are being rewarded for their differentiated strategy and plan, and, if so, which components of the business portfolio generate those rewards. They need to identify critical elements of the strategy and decide how to communicate those elements to investors in order to achieve or maintain a premium valuation. And, of course, they need to know which projects deserve the most funding.

Investor expectations as to how a company’s future growth will exceed GDP growth or outperform a peer group should be the cornerstone of strategic planning. Companies that rely on extrapolations of past performance may set targets too high or too low, almost guaranteeing investor disappointment.

Properly executed strategic planning also helps to maintain a healthy balance sheet. Companies with strong cash flow and balance sheet planning are more effective at executing their strategies and at responding to new opportunities and challenges. Over 90 percent of our survey respondents who said they’re fully satisfied with their cash flow and balance sheet planning processes said they are also able to execute their strategic plans effectively and efficiently.

Balance sheet planning should address, among other concerns, the expected cash flows from operating, investing, and financing activities; the relevant ratio trends of a strong balance sheet; the special needs of key assets over the projection period; and the forecasted internal sources of funds, along with needs for new external funding. Such planning should also incorporate scenarios to adjust the financial plan as economic and competitive events unfold.

Finally, it should be clear to all by now that intangible assets such as brand, intellectual property, channel relationships, and human capital represent a growing proportion of business value. Yet traditional planning misses this trend. One-third of the organizations we surveyed have no plan for intangibles in any form. While measurement of intangibles can be difficult, as can devising links between intangibles and financial outcomes, companies risk under-managing some of their most important drivers of value. A broader perspective recognizes, for instance, that certain SG&A costs should be managed strategically, especially when they affect key intangibles such as employee engagement, communication, and company culture.

Taking a new and revitalized approach to strategic planning encourages managers to think like investors, pursuing long-term value with less concern for short-term profitability. With better information and analytical tools, management can identify and pursue long-range objectives and provide investors with the information they need to evaluate the company’s performance against those goals.