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Decades of budget planning are a thing of the past at IKEA

Instead of traditional budget planning, IKEA plans scenarios and scenarios that increase the flexibility of the organisation.

At privately-owned IKEA, decades of budget planning are a thing of the past, and the focus is now on "scenario planning".


The roots of traditional budget planning


Jesper Brodin, head of Ikea, says that he doesn't usually get nostalgic. But at a pre-Christmas gathering of former senior executives at the Swedish furniture group, he couldn't help but join the chorus of those who said they missed the old days - when the world seemed relatively stable, trends were predictable and could be translated into a more or less credible multi-year business plan. "We always argue about whether it was better before. I always argue that it is better now. But this time we tended to agree that it was better before," he said. "The risks, the uncertainty, everything that used to be in the 'risk matrix' has more or less been ... . We laugh at the period when we did one-year budgets and that we were generally wrong by 0.3 percent." Brodin's thoughts resonate across the corporate world. CEOs struggle to make sense of confusing macroeconomic signals.


Moreover, a year ago, the 54-year-old was expecting customers to cut spending because of high energy bills and mortgage rates. This has not happened. Meanwhile, supply chain disruptions improved more quickly than expected, leaving the group with more inventory and forcing it to cut the price of some of its products. "We're very pleased that things are moving in the right direction," said Brodin, "but we have no idea how to predict exactly what will happen in 6-12 months' time".


Creating scenarios


In Europe and the US, the economic downturn is accompanied by record low unemployment and labour shortages. Consumer behaviour is puzzling: until recently, people continued to spend despite the fact that almost everything has become more expensive. The worst predictions of an economic crisis and energy shortages last year did not materialise. But it is now uniquely difficult to predict the road ahead. On both sides of the Atlantic, there is little consensus on where the economy is heading, and it is harder than ever for listed companies to give guidance to the market. In the UK, accountancy firms fear that the forecasts submitted to them for approval by their corporate clients are impossible to assess. Some are better placed than others to adapt to these new forms of chaos.


In general, there is less pressure on privately owned companies, which do not have to publish profit targets. IKEA, for example, has changed direction. Rather than setting specific targets for the year, it has prepared different 'scenarios/scenarios' to give the business room for manoeuvre by outlining different outcomes. This means recognising that very different options are possible. "It teaches us about the flexibility of our operations," Brodin said.


For IKEA, the most tricky thing is to predict production and delivery costs. Delivery prices have decreased. But Brodin did not expect that the higher demand for wood to burn as fuel would make some of the company's materials more expensive. It was not only the traditional variables of financial modelling, such as inflation and consumer spending, that became harder to predict. The past few years have also provided unexpected lessons on how business and society cope with shocks and uncertainty. "Let's look at what people have been through: the pandemic, the economic damage, the tragedy of war, energy prices," said Brodin. "What people may have underestimated is human resilience."


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Decades of budget planning are a thing of the past at IKEA
Instead of traditional budget planning, IKEA plans scenarios and scenarios that increase the flexibility of the organisation.


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