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Top Down vs. Bottom Up Planning

insightsoftware -
April 15, 2023

insightsoftware is a global provider of reporting, analytics, and performance management solutions, empowering organizations to unlock business data and transform the way finance and data teams operate.

04 2021 Is Blog Top Down Vs Bottom Up Planning Blog

All successful businesses have one important trait in common: planning. In order to start and maintain a profitable business, careful and well-thought-out strategies must be deployed across all divisions. Top-down and bottom-up planning are two of the most common strategies found in modern businesses.

At first glance, top-down planning and bottom-up planning appear to be polar opposites. Top-down planning aims to take a company from general endeavours to specific goals, whereas bottom-up planning is a tactic that synchronizes specific targets into a general framework. However, as you will see in this article, these two opposing strategies often go hand in hand in practical applications.

It could be overwhelming to choose the right planning approach, especially for a new business. insightsoftware provides a state-of-the-art solution that incorporates financial, operational, and people planning into a single user interface. This planning software extends beyond the executive’s office and empowers every decision maker to positively influence the company’s direction. As you will learn in this article, for any plan to be successfully executed, there must be buy-in from the employees.

Top Down Planning

As the name suggests, top-down strategic planning starts from the top of the company’s hierarchy. Management develops an all-encompassing framework that includes goals essential for the success of the business. These targets are then communicated down the chain of command and shape the workflow of each department. The specifics of how to achieve the target are left for the frontline workers to develop.

Top-down planning takes macroeconomics of the market into consideration, and it doesn’t get bogged down with the details of achieving the objectives. In top-down strategic planning, the goals are set to address the bigger picture and long-term plans of the company.

Bottom Up Planning

Bottom-up strategic planning starts from the workers on the front lines. Instead of being communicated down from management, goals are communicated up from individual departments. Each division is given the opportunity to identify its potential for growth. The philosophy behind this method is that each sector knows their workflow best and can develop more meaningful and achievable targets. The goals that are communicated up to management are analyzed by the executives and formed into a cohesive plan for the whole company.

Bottom-up planning takes the microeconomics of each section of the company into consideration. The targets are set to meet the current and future demands of each division. Bottom-up strategic planning doesn’t constrict the individual workers with abstract and intangible company-wide goals. It focuses on empowering each division of the organization to define how they want to move forward.

Finding what planning method works best for a business or market is a lengthy and tedious procedure. insightsoftware’s collaborative and efficient solutions aim to make this process easier.

Even though top-down and bottom-up planning are very different methods, they both play crucial roles in a company’s growth. Top-down strategic planning is often applied at businesses that are in their early stages, whereas bottom-up strategic planning is typically implemented at established companies. The top-down approach steers a company in a general direction that the market demands, whereas the bottom-up approach provides a detailed guideline for each cog in the machine.

This article is not written to pit one strategy against the other. It is not about top-down vs. bottom-up planning, but about how a business can leverage both strategies at the right time to be a leader among its competitors.

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Top-down and bottom-up planning both have advantages and disadvantages. It is up to business managers to decide what planning style works best for the company. Here we highlight a few key benefits and downsides of each strategy:

Advantages and Disadvantages of Top-Down Planning

One of the most important advantages of top-down planning is that targets can be set quickly for the whole business. There is no time wasted in analyzing each department’s performance, and management can rapidly implement the company’s goals.

One of the other noteworthy advantages of top-down planning is that its targets are global. Because the directives are coming from the head of the organization, a cohesive and uniform message is sent to all departments. This means that there is no extra effort required to realign the endeavors of each department.

However, top-down strategic planning also has its disadvantages. For instance, even though this method is inclusive and quick to implement, the company goals might not be accepted by managers in every department. Decision makers should not be surprised to find that top-down planning doesn’t produce the expected results in every department.

Advantages and Disadvantages of Bottom-Up Planning

One of the biggest advantages of bottom-up planning is that, because it is generated at a department level, it results in a higher engagement rate from workers. In bottom-up planning, each key performance indicator (KPI) has been carefully crafted to help departments reach their potential. In this approach, employees feel more control over the future of their jobs.

One of the other significant advantages of bottom-up planning is that the deployment of targets has a higher success rate. In this planning style, each department collaborates within itself to create meaningful goals. This creates an environment in which individual workers feel more responsibility in achieving the objectives, there is a higher chance that the targets are met, and the desired results are attained. In addition, there is no extra effort required by each department to transform a global target into meaningful KPIs.

However, it is worth noting that similar to top-down planning, bottom-up strategic planning also has its disadvantages. Because the goals are set by each subsection of the organization, management will have to work harder to amalgamate each approach into a single company-wide message.

Many companies struggle to maintain course after the initial goal-setting; it is common to define an objective and move on. However, goals require tending. Correcting course based on new data is vital for success. insightsoftware provides all-encompassing planning solutions that will ensure a fast response to external and internal changes.

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Top-Down vs. Bottom-Up Planning Examples

To better understand top-down and bottom-up planning, let’s use a simple analogy: food preparation. How do you decide what to cook?

In a top-down planning scenario, you have a nutrition plan. Your dietician has given you direction on how much protein, fat, and carbs to consume. This is an important but general goal. Even though it provides you with a guideline, it lacks specifics. What foods should you purchase? What recipes should you follow?

In a bottom-up planning scenario, you do not have a nutrition plan. So, before every meal, you start at your fridge and pantry. You assess what you have in stock or available to you at a nearby grocery store. Based on this information, you develop a meal plan. But is this a healthy meal? Are you eating enough of each food group?

You can see that neither of these plans are complete on their own. But what if we married the two concepts? What if when assessing the items in your fridge you considered which food group each item belonged to? This approach would allow you to prepare a meal that follows the dietician’s guidelines while taking availability into account. It’s the perfect solution!

This new planning strategy is called a countercurrent procedure. We will discuss this new method in detail at the end of the next example.

Let’s explore an example in the retail sector: a retail chain that sells children’s clothing. In a top-down planning approach, after careful analysis of company-wide sales data, the retail chain owner identifies the company’s best-selling item: children’s overalls. It then sets target numbers for sale of this item based on projected demand. This objective is then communicated to each region and branch.

In a bottom-up planning approach, each branch sets their own targets. A branch in North America sets targets for their best-selling item, which is overalls. Another branch in Central Europe sets their target for minimizing material waste. In the bottom-up planning method, the details of each target are much more defined. This means that the North American branch will set sub-goals to sell a certain number of overalls in a specific size, and the Central European branch will set sub-goals to optimize procurement and material processing. These goals and sub-goals are communicated to the retail chain owner and developed into a global and generic objective – maximizing profit.

Both strategies could lead to success; however, the best results are achieved when the two methods are combined in a countercurrent procedure. In this example, a countercurrent procedure would mean that all branches will have a common goal communicated from the top – maximize profit from sale of overalls – but the details of this objective are decided by each branch. This means that the North American and Central European branch will have different target values for number of overalls sold. The sale target will depend on demands of each region. In this model, the North American branch is free to use novel marketing tactics to increase overall sale in a variety of sizes, and the Central European branch will have the opportunity to drive up its profit margin by reducing material waste. In this scenario, both branches play an effective role in the company’s macro framework while maintaining autonomy.

Countercurrent Procedure

Countercurrent procedure combines the best qualities of each planning method to create a more feasible objective. In this approach, the framework is set from the top, but it is evaluated by each division and revised into a step-by-step plan. In other words, the goals defined by management are refined by frontline departments.

The key advantages of the countercurrent method are:

  1. Employees feel more connected to the company goals.
  2. Targets are more achievable and aligned with company’s capabilities.
  3. Objectives are more coordinated across divisions.

At insightsoftware, we understand that no two organizations are alike. Every planning strategy highlighted in this article will require time and effort to produce desirable results. insightsoftware’s Budgeting and Planning tool, which offers a collaborative and integrated solution, can significantly reduce the amount of time required to develop and implement a planning strategy. If you are interested in speaking with one of our budgeting and planning specialists, contact us here.

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