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What Is a Business Plan?

Understanding business plans, how to write a business plan, common elements of a business plan, the bottom line, business plan: what it is, what's included, and how to write one.

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

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A business plan is a document that outlines a company's goals and the strategies to achieve them. It's valuable for both startups and established companies. For startups, a well-crafted business plan is crucial for attracting potential lenders and investors. Established businesses use business plans to stay on track and aligned with their growth objectives. This article will explain the key components of an effective business plan and guidance on how to write one.

Key Takeaways

• A business plan is a document detailing a company's business activities and strategies for achieving its goals.
• Startup companies use business plans to launch their venture and to attract outside investors.
• For established companies, a business plan helps keep the executive team focused on short- and long-term objectives.
• There's no single required format for a business plan, but certain key elements are essential for most companies.

Investopedia / Ryan Oakley

Any new business should have a business plan in place before beginning operations. Banks and venture capital firms often want to see a business plan before considering making a loan or providing capital to new businesses.

Even if a company doesn't need additional funding, having a business plan helps it stay focused on its goals. Research from the University of Oregon shows that businesses with a plan are significantly more likely to secure funding than those without one. Moreover, companies with a business plan grow 30% faster than those that don't plan. According to a Harvard Business Review article, entrepreneurs who write formal plans are 16% more likely to achieve viability than those who don't.

A business plan should ideally be reviewed and updated periodically to reflect achieved goals or changes in direction. An established business moving in a new direction might even create an entirely new plan.

There are numerous benefits to creating (and sticking to) a well-conceived business plan. It allows for careful consideration of ideas before significant investment, highlights potential obstacles to success, and provides a tool for seeking objective feedback from trusted outsiders. A business plan may also help ensure that a company’s executive team remains aligned on strategic action items and priorities.

While business plans vary widely, even among competitors in the same industry, they often share basic elements detailed below.

A well-crafted business plan is essential for attracting investors and guiding a company's strategic growth. It should address market needs and investor requirements and provide clear financial projections.

While there are any number of templates that you can use to write a business plan, it's best to try to avoid producing a generic-looking one. Let your plan reflect the unique personality of your business.

Many business plans use some combination of the sections below, with varying levels of detail, depending on the company.

The length of a business plan can vary greatly from business to business. Regardless, gathering the basic information into a 15- to 25-page document is best. Any additional crucial elements, such as patent applications, can be referenced in the main document and included as appendices.

Common elements in many business plans include:

• Executive summary : This section introduces the company and includes its mission statement along with relevant information about the company's leadership, employees, operations, and locations.
• Products and services : Describe the products and services the company offers or plans to introduce. Include details on pricing, product lifespan, and unique consumer benefits. Mention production and manufacturing processes, relevant patents , proprietary technology , and research and development (R&D) information.
• Market analysis : Explain the current state of the industry and the competition. Detail where the company fits in, the types of customers it plans to target, and how it plans to capture market share from competitors.
• Marketing strategy : Outline the company's plans to attract and retain customers, including anticipated advertising and marketing campaigns. Describe the distribution channels that will be used to deliver products or services to consumers.
• Financial plans and projections : Established businesses should include financial statements, balance sheets, and other relevant financial information. New businesses should provide financial targets and estimates for the first few years. This section may also include any funding requests.

Investors want to see a clear exit strategy, expected returns, and a timeline for cashing out. It's likely a good idea to provide five-year profitability forecasts and realistic financial estimates.

2 Types of Business Plans

Business plans can vary in format, often categorized into traditional and lean startup plans. According to the U.S. Small Business Administration (SBA) , the traditional business plan is the more common of the two.

• Traditional business plans : These are detailed and lengthy, requiring more effort to create but offering comprehensive information that can be persuasive to potential investors.
• Lean startup business plans : These are concise, sometimes just one page, and focus on key elements. While they save time, companies should be ready to provide additional details if requested by investors or lenders.

Why Do Business Plans Fail?

A business plan isn't a surefire recipe for success. The plan may have been unrealistic in its assumptions and projections. Markets and the economy might change in ways that couldn't have been foreseen. A competitor might introduce a revolutionary new product or service. All this calls for building flexibility into your plan, so you can pivot to a new course if needed.

How Often Should a Business Plan Be Updated?

How frequently a business plan needs to be revised will depend on its nature. Updating your business plan is crucial due to changes in external factors (market trends, competition, and regulations) and internal developments (like employee growth and new products). While a well-established business might want to review its plan once a year and make changes if necessary, a new or fast-growing business in a fiercely competitive market might want to revise it more often, such as quarterly.

What Does a Lean Startup Business Plan Include?

The lean startup business plan is ideal for quickly explaining a business, especially for new companies that don't have much information yet. Key sections may include a value proposition , major activities and advantages, resources (staff, intellectual property, and capital), partnerships, customer segments, and revenue sources.

A well-crafted business plan is crucial for any company, whether it's a startup looking for investment or an established business wanting to stay on course. It outlines goals and strategies, boosting a company's chances of securing funding and achieving growth.

As your business and the market change, update your business plan regularly. This keeps it relevant and aligned with your current goals and conditions. Think of your business plan as a living document that evolves with your company, not something carved in stone.

University of Oregon Department of Economics. " Evaluation of the Effectiveness of Business Planning Using Palo Alto's Business Plan Pro ." Eason Ding & Tim Hursey.

Bplans. " Do You Need a Business Plan? Scientific Research Says Yes ."

Harvard Business Review. " Research: Writing a Business Plan Makes Your Startup More Likely to Succeed ."

Harvard Business Review. " How to Write a Winning Business Plan ."

U.S. Small Business Administration. " Write Your Business Plan ."

SCORE. " When and Why Should You Review Your Business Plan? "

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What is a Business Plan? Definition, Tips, and Templates

Published: June 28, 2024

Years ago, I had an idea to launch a line of region-specific board games. I knew there was a market for games that celebrated local culture and heritage. I was so excited about the concept and couldn't wait to get started.

But my idea never took off. Why? Because I didn‘t have a plan. I lacked direction, missed opportunities, and ultimately, the venture never got off the ground.

And that’s exactly why a business plan is important. It cements your vision, gives you clarity, and outlines your next step.

In this post, I‘ll explain what a business plan is, the reasons why you’d need one, identify different types of business plans, and what you should include in yours.

Table of Contents

What is a business plan?

What is a business plan used for.

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Purposes of a Business Plan

What does a business plan need to include, types of business plans.

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A business plan is a comprehensive document that outlines a company's goals, strategies, and financial projections. It provides a detailed description of the business, including its products or services, target market, competitive landscape, and marketing and sales strategies. The plan also includes a financial section that forecasts revenue, expenses, and cash flow, as well as a funding request if the business is seeking investment.

The business plan is an undeniably critical component to getting any company off the ground. It's key to securing financing, documenting your business model, outlining your financial projections, and turning that nugget of a business idea into a reality.

The purpose of a business plan is three-fold: It summarizes the organization’s strategy in order to execute it long term, secures financing from investors, and helps forecast future business demands.

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Commercial Strategy: Explained with Examples

A commercial strategy refers to a business’s plan or course of action to achieve its commercial objectives, such as increasing sales, expanding market share, entering new markets, improving profitability, or enhancing brand recognition.

It’s crucial that a company’s commercial strategy is grounded in a deep understanding of its market, customers, and competitors and aligns with the broader business strategy. Effective commercial strategies are often iterative, adapting to changes in the business environment or shifts in customer behavior and needs.

The commercial strategy encompasses several areas, including:

Product or service strategy.

Product or service strategy, as part of the overall commercial strategy, involves understanding, planning, and executing how a company’s product or service will meet the needs and expectations of its customers while differentiating it from the competition. Here’s a breakdown of some of the key components of this strategy:

• Unique Selling Proposition (USP) : The USP defines what sets your product or service apart from the competition. It is the reason why customers should choose your product or service over others. It might be anything from superior quality, innovative features, price points, customer service, or your brand story.
• Product or Service Development : This involves designing and developing your product or service to meet the needs of your target customers. It could include functionality, design, user experience, quality, or technological innovation. Regular updates, upgrades, or new product or service versions might also be part of this strategy.
• Product or Service Lifecycle Management : This involves managing a product or service from conception through to its end-of-life. Understanding the different stages of a product or service’s lifecycle – introduction, growth, maturity, and decline – can help businesses plan effectively and maximize profitability at each stage.
• Product or Service Portfolio Management : For companies offering multiple products or services, this involves strategically managing their portfolio to maximize profitability and market coverage. This can include deciding which products to invest in, which ones to retire, how to cross-sell or upsell, and how to manage cannibalization between products.
• Product or Service Customization : This involves tailoring your product or service to meet the specific needs of different customer segments, which can be a powerful way to differentiate and create value. This might involve offering customizable features, modular products, or personalized services.
• Value Proposition : Your value proposition clearly articulates the value your product or service offers customers. It communicates how your product solves customers’ problems, delivers specific benefits, and why it’s better than competing alternatives.

All these elements must align with the broader commercial strategy, which includes pricing, distribution, promotion, customer, and competitive strategies. Notably, a product or service strategy is dynamic; it must be dynamic and responsive to changes in market trends, customer needs, and competitive dynamics. Regular reviews and updates to the strategy are crucial to ensure it remains effective.

Product Development Strategy

Pricing Strategy

Pricing strategy is a critical component of a commercial strategy, as it directly impacts a company’s revenue and profitability and plays a significant role in shaping the perception of a product or service in the market. When developing a pricing strategy, a business must consider several factors:

• Cost-based Pricing : This is a straightforward pricing strategy where the price of a product or service is determined by adding a profit margin to the cost of production. This strategy ensures that all costs are covered, and a profit is made with each sale. However, it does not consider the value perception of the product or service in the marketplace.
• Value-based Pricing : This strategy sets prices primarily, but not exclusively, according to the perceived or estimated value of a product or service to the customer rather than according to the cost of the product or the historical prices. Companies that provide unique, high-quality products or services often use this pricing strategy.
• Competitor-based Pricing : Here, the price of a product or service is determined by considering what competitors charge for similar products or services. Companies can price their offerings higher, matching, or lower than their competitors based on their unique selling proposition (USP) and market positioning.
• Penetration Pricing : This strategy is used when a product or service is new. The price is initially set low to attract customers and gain market share, but it’s increased once the product becomes well established.
• Skimming Pricing : This strategy involves setting high prices for a new product to maximize revenue from the segments willing to pay a high price. The price is lowered over time as the product moves through its lifecycle.
• Dynamic Pricing : This strategy allows businesses to change prices in response to market conditions. It is commonly used in airlines, hospitality, and e-commerce industries. Dynamic pricing factors include demand, time of day, season, or customer behavior.
• Psychological Pricing : This involves setting prices at a level that appeals to a customer’s emotional responses rather than rational responses, such as pricing at $9.99 instead of $10.00 to make the price seem lower.

A pricing strategy should not exist in a vacuum. It should consider the customer’s willingness to pay, the competitive landscape, market conditions, and the company’s overall commercial and business strategy. The right pricing strategy can enhance a product’s market position, support its value proposition, and drive business growth.

Types of Pricing Strategies: Explained with Examples

Distribution or Placement Strategy

A distribution or placement strategy, within the context of a commercial strategy, involves deciding how and where a company’s product or service will be made available to customers. It’s a crucial element of the marketing mix because it affects the customer’s access to the product and can significantly influence sales and profitability. Here are some key aspects of a distribution strategy:

• Direct Distribution : This involves selling directly to customers, bypassing any middlemen. This can be done through a company’s stores, website, or sales team. This strategy gives companies complete control over the customer experience and often leads to higher profit margins, but it also requires more resources to manage.
• Indirect Distribution : This involves selling through intermediaries, such as wholesalers, retailers, or distributors. These intermediaries take over the distribution and sometimes even the product promotion, allowing a company to reach a broader market with less effort and resources. However, it can also result in lower profit margins and less control over the customer experience.
• Multi-Channel Distribution : This strategy involves using several different distribution channels simultaneously, such as selling directly via a company’s stores or website and distributing through third-party retailers or wholesalers. This can expand market reach, but it can also be complex to manage and may lead to channel conflict.
• Selective Distribution : This involves selecting limited outlets in a specific geographical area to sell a product. It is often used when a manufacturer wants to maintain a certain product image and needs control over the placement and merchandising of the product.
• Exclusive Distribution : This strategy involves selling a product only through one or very few outlets. For example, a luxury brand may choose to only sell its products through its own boutique stores to maintain an exclusive image.
• Online Distribution : With the growth of e-commerce, online distribution has become increasingly important. This could involve selling through a company’s website, online retailers like Amazon, or digital marketplaces or platforms.
• Physical Distribution Management : This involves managing the logistics of getting the product from the production site to the point of sale, including warehousing, transportation, inventory management, order processing, and customer service.

The choice of distribution strategy depends on many factors, including the nature of the product, customer preferences, competitive landscape, company resources, and the overall business and marketing strategy. It’s important to regularly review and adjust the strategy in response to changes in the market environment.

Distribution strategies in supply chain management

Promotion or Communication Strategy

A promotion or communication strategy, as a component of a commercial strategy, involves determining how a business will communicate its products or services to its target customers. It encompasses all the tools and channels used to deliver the company’s message and encourage customers to purchase its offerings. Here are some key elements of a promotional strategy:

• Advertising : This includes paid non-personal communication through various media channels like television, radio, print media, online ads, outdoor ads, etc. It’s a powerful way to reach a broad audience and build brand awareness, but it can be expensive.
• Public Relations (PR) : PR involves managing a company’s image and reputation through media exposure, events, press releases, and other non-paid communication methods. It aims to create positive publicity and favorable public perception.
• Sales Promotions : These are short-term tactics designed to stimulate quicker and greater purchases of a product or service. Examples include discounts, coupons, contests, free samples, buy one get one free offer, etc.
• Personal Selling : This involves one-on-one communication between a sales representative and a prospective buyer to make a sale and build a customer relationship. It can be done face-to-face, over the phone, or via video call.
• Direct Marketing : This involves communicating directly with targeted individual consumers to obtain an immediate response, usually through a purchase or inquiry. It can be done through mail, email, telemarketing, or direct response advertising.
• Digital Marketing : This involves using digital channels to promote a product or service. It includes search engine optimization (SEO), pay-per-click advertising (PPC), social media marketing, content marketing, email marketing, and mobile marketing.
• Content Marketing : This involves creating and distributing valuable, relevant, and consistent content to attract and retain a clearly defined audience and to drive profitable customer action. It can be done through blog posts, videos, infographics, webinars, podcasts, etc.  Content Marketing in PR: All you need to Know
• Social Media Marketing : This involves promoting a product or service through social media channels like Facebook, Instagram, Twitter, LinkedIn, etc. It can be a cost-effective way to reach a large audience and engage with customers.
• Influencer Marketing : This strategy involves partnering with influential people or celebrities to promote your product or service. They can help reach your target audience and build trust for your brand.

The mix of promotional methods used will depend on the business’s goals, target audience, resources, and the nature of the product or service. It’s essential to have a cohesive and integrated communication strategy that delivers consistent brand messaging across all promotional activities. The impact of promotional activities should also be regularly measured and evaluated to adjust the strategy as needed.

What is a Marketing Mix? What are the 4Ps of Marketing?

Customer Strategy

A customer strategy, as part of the commercial strategy, involves understanding the needs and behaviors of your customers, deciding which customers to target, and designing a plan to attract, serve, and retain those customers. Here are some key components of a customer strategy:

• Customer Segmentation : This involves dividing your customers into groups based on shared characteristics, such as demographics, psychographics, behaviors, or needs. Understanding these segments can help tailor your product offerings, marketing messages, and overall customer experience to meet their specific needs.
• Target Market Selection : You must decide which segments to target after segmenting your market. This involves evaluating the attractiveness of each segment and the company’s ability to serve it effectively, considering factors such as market size, growth potential, profitability, competition, and alignment with the company’s capabilities and strategic goals.
• Customer Acquisition Strategy : This involves developing a plan to attract new customers to your business. This could include marketing, sales, and business development initiatives. The strategies may differ for each target segment and require ongoing adjustments in response to market trends and competitive dynamics.
• Customer Retention Strategy : Retaining existing customers is often more cost-effective than acquiring new ones. A retention strategy may include superior customer service, loyalty programs, regular communication and engagement, personalized offers, or quality enhancements.
• Customer Experience (CX) and Service Strategy : This involves planning and managing all interactions a customer has with your brand to meet or exceed customer expectations and enhance customer satisfaction and loyalty. It includes every touchpoint from the initial contact to the sale and post-sale service.
• Personalization Strategy : This involves tailoring your product offerings or marketing messages to meet the specific needs or preferences of individual customers or customer segments. With data and technology, companies can now deliver highly personalized customer experiences, enhancing customer satisfaction and loyalty.
• Customer Relationship Management (CRM) Strategy : This involves using CRM systems and processes to manage interactions with existing and potential customers. It can help track customer information, manage sales and customer service activities, analyze customer behavior, and drive targeted marketing efforts.

Developing an effective customer strategy requires a deep understanding of your customers gained through market research, customer feedback, and data analysis. It should align with your product or service, pricing, distribution, and promotional strategies and support your business objectives. Like other aspects of a commercial strategy, it should be regularly reviewed and adjusted in response to changing customer needs and market conditions.

Customer Intimacy Strategy: Meaning & Examples

Competitive Strategy

As part of a commercial strategy, a competitive strategy is a planned and coordinated effort to gain an advantage over competitors in the marketplace. It determines how a business will compete, its goals, and what policies will be needed to meet those goals. Here are some key elements of a competitive strategy:

• Competitor Analysis : This involves identifying your main competitors and analyzing their strategies, strengths, weaknesses, and market positions. Understanding your competitors can help you anticipate their moves, identify opportunities, and plan counter-strategies.
• Differentiation Strategy : This strategy involves creating a product or service that is perceived as unique in some important way. The uniqueness could be based on product design, technology, brand image, customer service, or other attributes. A successful differentiation strategy can allow a company to charge a premium price and achieve higher profit margins.
• Cost Leadership Strategy : This strategy involves becoming the lowest-cost producer in the industry. Cost leadership can be achieved through economies of scale, efficient operations, tight cost control, or other means. A company that achieves cost leadership can charge average industry prices and earn higher profits or undercut competitors’ prices to gain market share.  What is a Cost leadership strategy | Explained with Examples
• Focus or Niche Strategy : This strategy involves focusing on a narrow market segment or niche where you can meet customers’ needs better than your competitors. This could be based on geographic location, product attributes, customer demographics, or other factors. By deeply understanding and serving the needs of a specific niche, a company can achieve a strong market position and command higher prices.  Niche marketing strategy: Explained with examples
• Innovation Strategy : This strategy involves using innovation to gain a competitive edge. This could include product, process, business model, or other forms of innovation. Companies that consistently innovate can stay ahead of competitors and capture new market opportunities.  Innovation Strategies: Explained with examples and framework
• Growth Strategy : This strategy involves expanding the business to achieve a more significant market presence and scale advantages. Growth can be achieved through organic growth (e.g., increasing sales, adding new products, expanding geographically) or inorganic growth (e.g., mergers, acquisitions, strategic alliances).
• Defensive Strategy : This strategy involves protecting a company’s market position and defending against competitive threats. This could include strengthening customer relationships, improving product quality, blocking competitors’ moves, or other actions.

An effective competitive strategy should align with the company’s internal capabilities and external market conditions and support its overall business objectives. It should also be flexible and adaptable, as competitive dynamics can change rapidly in today’s dynamic business environment.

Examples of commercial strategy

Commercial strategies will vary significantly from business to business, depending on the industry, business size, target audience, and more. Here are a few hypothetical examples of commercial strategies:

• Technology Startups : A tech startup has developed a revolutionary AI-based software product. Their commercial strategy could include a product strategy focused on constant innovation and quick adaptation to technological changes or market demand. They might use a value-based pricing strategy, recognizing the unique value proposition of their product. The distribution strategy could be direct via their website and app stores. Their promotional strategy could include heavily emphasizing digital marketing, content marketing, and attending tech conferences. The customer strategy might focus on niche market segments that are early adopters of technology. Their competitive strategy could be differentiation and innovation.
• Luxury Fashion Brand : A luxury fashion brand might have a product strategy centered around high-quality, exclusive designs and a limited product line. They likely adopt a value-based pricing strategy, aligning with the premium positioning of their brand. Their distribution strategy could involve exclusive distribution, selling only through their high-end boutiques or selected luxury department stores. The promotional strategy might include advertising in high-end fashion magazines, celebrity endorsements, and exclusive fashion shows. The customer strategy might focus on affluent customers who appreciate luxury and exclusivity. Their competitive strategy might involve differentiation based on quality, design, and brand prestige.
• Discount Supermarket Chain : A discount supermarket chain’s product strategy might involve a wide range of products, including private label brands that offer good value for money. They would likely adopt a cost leadership pricing strategy, offering lower prices than competitors. The distribution strategy would involve selling through their physical stores in areas with high foot traffic. The promotional strategy might include weekly discount flyers, point-of-sale promotions, and loyalty programs. The customer strategy might focus on price-sensitive shoppers seeking good value for their money. Their competitive strategy might involve cost leadership and a focus strategy, targeting price-conscious consumers.

Commercial strategy of top brands

• Apple Inc. : Apple’s commercial strategy is anchored by a product strategy emphasizing design, quality, and technological innovation. The company differentiates by providing sleek, user-friendly devices with seamless software-hardware integration. Their pricing strategy is premium, reflecting their products’ high value and unique attributes. Apple has a hybrid distribution strategy, selling through its own Apple Stores (both physical and online) and other retailers. Their promotional strategy uses a mix of product launch events, television and digital advertising, public relations, and collaborations. Apple’s customer strategy focuses on creating a high-end, unified brand experience across all touchpoints. Their competitive strategy is differentiation, focusing on innovation and customer experience.
• Amazon : Amazon’s commercial strategy is based on offering a vast selection of products at competitive prices with convenience for the customer. Their dynamic pricing strategy uses advanced algorithms to adjust prices based on various factors. Amazon’s distribution strategy is direct, selling through its platform and delivering directly to the customers, although it also allows third-party sellers on its platform. Promotional activities often involve discounts, deals, and personalized recommendations. Their customer strategy prioritizes customer satisfaction with easy navigation, customer reviews, and exceptional customer service. Amazon’s competitive strategy hinges on cost leadership, a wide selection, and unmatched convenience.
• Coca-Cola : Coca-Cola’s commercial strategy is built around its flagship product, Coke, and a wide portfolio of beverages to cater to different customer preferences. Its pricing strategy is designed to make its products affordable for average consumers. Coca-Cola products are distributed globally via direct store delivery, third-party distributors, and retailers. Their promotional strategy uses a mix of advertising, public relations, sales promotions, sponsorships, and digital marketing, often with an emotional appeal. Coca-Cola’s customer strategy focuses on creating moments of happiness for consumers. Their competitive strategy combines differentiation (based on unique taste and emotional branding) and market penetration.
• Nike : Nike’s commercial strategy is anchored by a product strategy that combines performance, style, and cultural relevance. Nike’s pricing strategy varies, with a range of products from relatively affordable to premium. Their omnichannel distribution strategy sells through their stores, third-party retailers, and online platforms, strongly emphasizing direct-to-consumer sales. Nike’s promotional strategy involves advertising, sponsorships, celebrity endorsements, and community engagement. Their customer strategy aims to inspire and innovate for every athlete globally (and they declare everyone an athlete). Nike’s competitive strategy is differentiation, focusing on innovation, brand strength, and cultural influence.

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A better way to drive your business

Managing the availability of supply to meet volatile demand has never been easy. Even before the unprecedented challenges created by the COVID-19 pandemic and the war in Ukraine, synchronizing supply and demand was a perennial struggle for most businesses. In a survey of 54 senior executives, only about one in four believed that the processes of their companies balanced cross-functional trade-offs effectively or facilitated decision making to help the P&L of the full business.

That’s not because of a lack of effort. Most companies have made strides to strengthen their planning capabilities in recent years. Many have replaced their processes for sales and operations planning (S&OP) with the more sophisticated approach of integrated business planning (IBP), which shows great promise, a conclusion based on an in-depth view of the processes used by many leading companies around the world (see sidebar “Understanding IBP”). Assessments of more than 170 companies, collected over five years, provide insights into the value created by IBP implementations that work well—and the reasons many IBP implementations don’t.

Understanding IBP

Integrated business planning is a powerful process that could become central to how a company runs its business. It is one generation beyond sales and operations planning. Three essential differentiators add up to a unique business-steering capability:

• Full business scope. Beyond balancing sales and operations planning, integrated business planning (IBP) synchronizes all of a company’s mid- and long-term plans, including the management of revenues, product pipelines and portfolios, strategic projects and capital investments, inventory policies and deployment, procurement strategies, and joint capacity plans with external partners. It does this in all relevant parts of the organization, from the site level through regions and business units and often up to a corporate-level plan for the full business.
• Risk management, alongside strategy and performance reviews. Best-practice IBP uses scenario planning to drive decisions. In every stage of the process, there are varying degrees of confidence about how the future will play out—how much revenue is reasonably certain as a result of consistent consumption patterns, how much additional demand might emerge if certain events happen, and how much unusual or extreme occurrences might affect that additional demand. These layers are assessed against business targets, and options for mitigating actions and potential gap closures are evaluated and chosen.
• Real-time financials. To ensure consistency between volume-based planning and financial projections (that is, value-based planning), IBP promotes strong links between operational and financial planning. This helps to eliminate surprises that may otherwise become apparent only in quarterly or year-end reviews.

An effective IBP process consists of five essential building blocks: a business-backed design; high-quality process management, including inputs and outputs; accountability and performance management; the effective use of data, analytics, and technology; and specialized organizational roles and capabilities (Exhibit 1). Our research finds that mature IBP processes can significantly improve coordination and reduce the number of surprises. Compared with companies that lack a well-functioning IBP process, the average mature IBP practitioner realizes one or two additional percentage points in EBIT. Service levels are five to 20 percentage points higher. Freight costs and capital intensity are 10 to 15 percent lower—and customer delivery penalties and missed sales are 40 to 50 percent lower. IBP technology and process discipline can also make planners 10 to 20 percent more productive.

When IBP processes are set up correctly, they help companies to make and execute plans and to monitor, simulate, and adapt their strategic assumptions and choices to succeed in their markets. However, leaders must treat IBP not just as a planning-process upgrade but also as a company-wide business initiative (see sidebar “IBP in action” for a best-in-class example).

IBP in action

One global manufacturer set up its integrated business planning (IBP) system as the sole way it ran its entire business, creating a standardized, integrated process for strategic, tactical, and operational planning. Although the company had previously had a sales and operations planning (S&OP) process, it had been owned and led solely by the supply chain function. Beyond S&OP, the sales function forecast demand in aggregate dollar value at the category level and over short time horizons. Finance did its own projections of the quarterly P&L, and data from day-by-day execution fed back into S&OP only at the start of a new monthly cycle.

The CEO endorsed a new way of running regional P&Ls and rolling up plans to the global level. The company designed its IBP process so that all regional general managers owned the regional IBP by sponsoring the integrated decision cycles (following a global design) and by ensuring functional ownership of the decision meetings. At the global level, the COO served as tiebreaker whenever decisions—such as procurement strategies for global commodities, investments in new facilities for global product launches, or the reconfiguration of a product’s supply chain—cut across regional interests.

To enable IBP to deliver its impact, the company conducted a structured process assessment to evaluate the maturity of all inputs into IBP. It then set out to redesign, in detail, its processes for planning demand and supply, inventory strategies, parametrization, and target setting, so that IBP would work with best-practice inputs. To encourage collaboration, leaders also started to redefine the performance management system so that it included clear accountability for not only the metrics that each function controlled but also shared metrics. Finally, digital dashboards were developed to track and monitor the realization of benefits for individual functions, regional leaders, and the global IBP team.

A critical component of the IBP rollout was creating a company-wide awareness of its benefits and the leaders’ expectations for the quality of managers’ contributions and decision-making discipline. To educate and show commitment from the CEO down, this information was rolled out in a campaign of town halls and media communications to all employees. The company also set up a formal capability-building program for the leaders and participants in the IBP decision cycle.

Rolled out in every region, the new training helps people learn how to run an effective IBP cycle, to recognize the signs of good process management, and to internalize decision authority, thresholds, and escalation paths. Within a few months, the new process, led by a confident and motivated leadership team, enabled closer company-wide collaboration during tumultuous market conditions. That offset price inflation for materials (which adversely affected peers) and maintained the company’s EBITDA performance.

Our research shows that these high-maturity IBP examples are in the minority. In practice, few companies use the IBP process to support effective decision making (Exhibit 2). For two-thirds of the organizations in our data set, IBP meetings are periodic business reviews rather than an integral part of the continuous cycle of decisions and adjustments needed to keep organizations aligned with their strategic and tactical goals. Some companies delegate IBP to junior staff. The frequency of meetings averages one a month. That can make these processes especially ineffective—lacking either the senior-level participation for making consequential strategic decisions or the frequency for timely operational reactions.

Finally, most companies struggle to turn their plans into effective actions: critical metrics and responsibilities are not aligned across functions, so it’s hard to steer the business in a collaborative way. Who is responsible for the accuracy of forecasts? What steps will be taken to improve it? How about adherence to the plan? Are functions incentivized to hold excess inventory? Less than 10 percent of all companies have a performance management system that encourages the right behavior across the organization.

By contrast, at the most effective organizations, IBP meetings are all about decisions and their impact on the P&L—an impact enabled by focused metrics and incentives for collaboration. Relevant inputs (data, insights, and decision scenarios) are diligently prepared and syndicated before meetings to help decision makers make the right choices quickly and effectively. These companies support IBP by managing their short-term planning decisions prescriptively, specifying thresholds to distinguish changes immediately integrated into existing plans from day-to-day noise. Within such boundaries, real-time daily decisions are made in accordance with the objectives of the entire business, not siloed frontline functions. This responsive execution is tightly linked with the IBP process, so that the fact base is always up-to-date for the next planning iteration.

A better plan for IBP

In our experience, integrated business planning can help a business succeed in a sustainable way if three conditions are met. First, the process must be designed for the P&L owner, not individual functions in the business. Second, processes are built for purpose, not from generic best-practice templates. Finally, the people involved in the process have the authority, skills, and confidence to make relevant, consequential decisions.

Design for the P&L owner

IBP gives leaders a systematic opportunity to unlock P&L performance by coordinating strategies and tactics across traditional business functions. This doesn’t mean that IBP won’t function as a business review process, but it is more effective when focused on decisions in the interest of the whole business. An IBP process designed to help P&L owners make effective decisions as they run the company creates requirements different from those of a process owned by individual functions, such as supply chain or manufacturing.

One fundamental requirement is senior-level participation from all stakeholder functions and business areas, so that decisions can be made in every meeting. The design of the IBP cycle, including preparatory work preceding decision-making meetings, should help leaders make general decisions or resolve minor issues outside of formal milestone meetings. It should also focus the attention of P&L leaders on the most important and pressing issues. These goals can be achieved with disciplined approaches to evaluating the impact of decisions and with financial thresholds that determine what is brought to the attention of the P&L leader.

The aggregated output of the IBP process would be a full, risk-evaluated business plan covering a midterm planning horizon. This plan then becomes the only accepted and executed plan across the organization. The objective isn’t a single hard number. It is an accepted, unified view of which new products will come online and when, and how they will affect the performance of the overall portfolio. The plan will also take into account the variabilities and uncertainties of the business: demand expectations, how the company will respond to supply constraints, and so on. Layered risks and opportunities and aligned actions across stakeholders indicate how to execute the plan.

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Trade-offs arising from risks and opportunities in realizing revenues, margins, or cost objectives are determined by the P&L owner at the level where those trade-offs arise—local for local, global for global. To make this possible, data visible in real time and support for decision making in meetings are essential. This approach works best in companies with strong data governance processes and tools, which increase confidence in the objectivity of the IBP process and support for implementing the resulting decisions. In addition, senior leaders can demonstrate their commitment to the value and the standards of IBP by participating in the process, sponsoring capability-building efforts for the teams that contribute inputs to the IBP, and owning decisions and outcomes.

Fit-for-purpose process design and frequency

To make IBP a value-adding capability, the business will probably need to redesign its planning processes from a clean sheet.

First, clean sheeting IBP means that it should be considered and designed from the decision maker’s perspective. What information does a P&L owner need to make a decision on a given topic? What possible scenarios should that leader consider, and what would be their monetary and nonmonetary impact? The IBP process can standardize this information—for example, by summarizing it in templates so that the responsible parties know, up front, which data, analytics, and impact information to provide.

Second, essential inputs into IBP determine its quality. These inputs include consistency in the way planners use data, methods, and systems to make accurate forecasts, manage constraints, simulate scenarios, and close the loop from planning to the production shopfloor by optimizing schedules, monitoring adherence, and using incentives to manufacture according to plan.

Determining the frequency of the IBP cycle, and its timely integration with tactical execution processes, would also be part of this redesign. Big items—such as capacity investments and divestments, new-product introductions, and line extensions—should be reviewed regularly. Monthly reviews are typical, but a quarterly cadence may also be appropriate in situations with less frequent changes. Weekly iterations then optimize the plan in response to confirmed orders, short-term capacity constraints, or other unpredictable events. The bidirectional link between planning and execution must be strong, and investments in technology may be required to better connect them, so that they use the same data repository and have continuous-feedback loops.

Authorize consequential decision making

Finally, every IBP process step needs autonomous decision making for the problems in its scope, as well as a clear path to escalate, if necessary. The design of the process must therefore include decision-type authority, decision thresholds, and escalation paths. Capability-building interventions should support teams to ensure disciplined and effective decision making—and that means enforcing participation discipline, as well. The failure of a few key stakeholders to prioritize participation can undermine the whole process.

Decision-making autonomy is also relevant for short-term planning and execution. Success in tactical execution depends on how early a problem is identified and how quickly and effectively it is resolved. A good execution framework includes, for example, a classification of possible events, along with resolution guidelines based on root cause methodology. It should also specify the thresholds, in scope and scale of impact, for operational decision making and the escalation path if those thresholds are met.

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In addition to guidelines for decision making, the cross-functional team in charge of executing the plan needs autonomy to decide on a course of action for events outside the original plan, as well as the authority to see those actions implemented. Clear integration points between tactical execution and the IBP process protect the latter’s focus on midterm decision making and help tactical teams execute in response to immediate market needs.

An opportunity, but no ‘silver bullet’

With all the elements described above, IBP has a solid foundation to create value for a business. But IBP is no silver bullet. To achieve a top-performing supply chain combining timely and complete customer service with optimal cost and capital expenditures, companies also need mature planning and fulfillment processes using advanced systems and tools. That would include robust planning discipline and a collaboration culture covering all time horizons with appropriate processes while integrating commercial, planning, manufacturing, logistics, and sourcing organizations at all relevant levels.

As more companies implement advanced planning systems and nerve centers , the typical monthly IBP frequency might no longer be appropriate. Some companies may need to spend more time on short-term execution by increasing the frequency of planning and replanning. Others may be able to retain a quarterly IBP process, along with a robust autonomous-planning or exception engine. Already, advanced planning systems not only direct the valuable time of experts to the most critical demand and supply imbalances but also aggregate and disaggregate large volumes of data on the back end. These targeted reactions are part of a critical learning mechanism for the supply chain.

Over time, with root cause analyses and cross-functional collaboration on systemic fixes, the supply chain’s nerve center can get smarter at executing plans, separating noise from real issues, and proactively managing deviations. All this can eventually shorten IBP cycles, without the risk of overreacting to noise, and give P&L owners real-time transparency into how their decisions might affect performance.

P&L owners thinking about upgrading their S&OP or IBP processes can’t rely on textbook checklists. Instead, they can assume leadership of IBP and help their organizations turn strategies and plans into effective actions. To do so, they must sponsor IBP as a cross-functional driver of business decisions, fed by thoughtfully designed processes and aligned decision rights, as well as a performance management and capability-building system that encourages the right behavior and learning mechanisms across the organization. As integrated planning matures, supported by appropriate technology and maturing supply chain–management practices, it could shorten decision times and accelerate its impact on the business.

Elena Dumitrescu is a senior knowledge expert in McKinsey’s Toronto office, Matt Jochim is a partner in the London office, and Ali Sankur is a senior expert and associate partner in the Chicago office, where Ketan Shah is a partner.

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