When talking about performance, Financial Planning and Analysis (FP&A) should be putting things into perspective by considering the industry, competitors, consumer trends, legislation and the overall economy.

Industry – market and segment size and share

In a dynamic environment it is increasingly significant to understand how the industry is developing: 

• Is the overall volume increasing or declining and by how much
• What is the situation in different segments
• What are the main drivers of those changes 

By providing leadership with updates on the industry, Financial Planning and Analysis assists them in deciding on the strategy. Company’s response is different if the consumers are switching to alternatives or the consumption is reduced due to limited purchasing power, change of habits or legal constraints. Also, FP&A can model scenarios to illustrate the potential impacts of the movements in market size.

Even if the company’s volume is on track versus the plan, if the share of the market is declining, it is a warning signal. Equally, if volume is below the plan it should be verified how the market share is doing. If it is growing, it means that the actual market size is lower than expected, which calls for a different action compared to the case when the business is losing its piece of the overall cake.

To manage profitability, visibility of developments in different price segments is a helpful tool. If share growth primarily comes from the cheapest offers in the company’s portfolio, mix and profits will not be as favourable.

Competitors

Position of the key competitors should be an integral part of performance assessments. Ideally, it would include the analysis of both non-financial and financial indicators. However, the financial results of the other companies are often limited and reach public with a significant delay. Therefore it is usually non-financial indicators that Financial Planning and Analysis can consider in order to get a better understanding of the developments in the market. 

Typical competition-related non-financial indicators and information include:

• Share of market 
• Share of segment (a different price or product categories) 
• New launches and product changes (i.e. modification of the components, product design or packaging) 
• Pricing and promotional activities
• Organizational changes

The more the company understands what drives competitors results, the better it can plan its moves.

Consumer trends

In forecast making, it is important to understand who current and potential clients/ customers/ consumers are. Historical data (if available) should be combined with the impacts of technology developments and innovations, state of economy, anticipated legislation and demographics.

We have witnessed the rise of many products and services that did not exist several years ago. Some of them were possible to appear only because the conditions got different, while some led a major game-changer.

Legislation

When assessing specific projects (i.e. large investments), Financial Planning and Analysis should cooperate with the colleagues from different teams, including legal and corporate affairs department – are there any legal obstacles or constraints is a license required, is it possible to get it and under what conditions? 

Also, are there legal threats to the existing business? Number of industries facing restrictions and tighter controls is increasing. By considering the reality instead of relying on how the operations have been run in the past, FP&A supports the decision-makers. 

Data sources

Depending on the company, at least some data is potentially available within the marketing or sales department or is gathered by colleagues in charge of business intelligence, if such a team exists. Knowing what is in the government’s pipe-line when it comes to new legislation is a source of competitive advantage. This is usually within the domain of corporate affairs. Financial Planning and Analysis team should investigate if and who already keeps track of external developments and agree on information sharing. 

In some cases, industry practice and legislation ensure the availability of data useful for understanding how competitors are doing in terms of volume. Also, chambers of commerce and industry associations could have periodical updates.

Research agencies track the main players and this information can normally be purchased. 

In addition to data provided by market research agencies, the company can monitor competitors activities in the market through its sales force. 

Media is another potential channel, with news or articles about the competitors, interviews with executives. Listed companies organize sessions with investors and analysts, and transcripts are usually available on the company website. Those documents can reveal insights about the past and some future actions.

Availability of competitors financial data depends on several factors – company type (i.e. listed/not listed), company size, laws and industry (some fields are more regulated than other), business practices of the countries they operate in, internal policies. Listed companies are obliged to publish specific information. Insights on how smaller companies are performing could sometimes be obtained through local commercial registries.

Watch-outs

It can happen that different teams within the company have different figures for the same type of data. To support decision making, it is essential to ensure data consistency and refer to one, aligned set of numbers. 

Furthermore, consensus about definitions of categories and terminology is important. For example, when talking about market segmentation, criteria for the split should be clear. Also, understanding how the competition is looking at the segments would allow like-for-like comparison when information is available.

If data is based on samples, it should not be treated as the absolute truth. Still, it is usually a good indicator.

When relying on research agencies, one should consider that historical information is subject to modification. If the agency has increased market coverage (i.e. added more outlets in their sample), they would also restate past numbers to facilitate comparability. Indicating the source and the version/date can help in reconciling the figures.

Running the business requires an understanding of internal and external developments. Presenting a complete, comprehensive story based on facts makes FP&A a credible, trusted partner. 

The article was first published in Unit 4 Prevero Blog