Last Updated on March 12, 2024 by Lukas Rieder
The partial environments of a company or an organization are constantly changing, see the post Environmental Changes are crucial for Management Control. These changes generate opportunities and risks for the continued existence and development of the company. Consequently, managers must regularly find out which changes in the relevant sub-environments could possibly occur or have already happened. The knowledge gained in this process should lead to decisions and, if necessary, to adjustments in strategic and operational plans. Since the variety of available data is immense and hardly completely manageable, it is necessary to determine, based on the existing internal situation, from which information sources relevant early warning information can be obtained for one’s own organization.
Early Warning and Planning
We follow the approach of creating a “basic engine” for the operation of one’s own company in the form of a network. Based on the interface between the company and the environmental areas, the external search areas can subsequently be derived. This approach is intended to channel the data search and thus help to manage the flood of data to be analyzed.
The basic engine represents the data, quantity and value flows of operational planning and control (one-year and medium-term). The processing areas from the revenue generation to the final result are connected by arrows. Arrows with a “+ sign” (blue) mean that the increase of the initial value also causes an increase of the subsequent value.
Example: Increasing sales quantities lead to higher production quantities and these again to higher material consumption. Increasing proportional production and fixed structure costs reduce the result as well as increasing sales deductions and are marked with “- sign” (orange). A proper network always contains positive (+) and negative (-) relationships. If one of the two relationships would be missing, the system would either explode or implode.
The basic engine can be further detailed to be company specific. From the picture it can be deduced which variables (green) at the outer edge of the network are significantly determined by external influences. These should be taken as a starting point when setting up an early warning system.
Order intake depends on internal conditions such as the offered assortment and the sales conditions, but more on external factors such as customer benefit or disposable income. Cost-determining factors are also driven by external developments (personnel costs, raw material prices, investment/plant requirements).
An early warning system should provide and keep up to date a forward-looking knowledge base on these developments in the sub-environments so that managers can draw on this information when setting the course for the future (cf. Bossler, A.,2010, p. 639 ff.).