For any company, planning is critical.
Whether it's sales forecasting, budgeting, or headcount.
Each requires a firm, data-backed plan.
But where should this data—and the plans that follow it—come from? The top of the company? Or the bottom?
Let's look at a hypothetical: how forecast planning might work with each approach to give you a clearer idea of the differences between top-down and bottom-up planning methods.
We'll then look at each planning strategy's general advantages and disadvantages.
- What is top-down planning?
- What is the bottom-up planning approach?
- Bottom-up planning example
- Who uses bottom-up planning?
- Countercurrent planning: a compromise
What is top-down planning?
Also known as retrograde planning, a top-down approach looks at the big picture—the market layout.
Management observes market trends, conducts painstaking research, and tries to answer questions like "How can we increase our total market share?" or "How can we differentiate ourselves in this competitive landscape?"
From there, they devise a sales plan that filters down to the rest of the company. The specifics of achieving goals laid out in the plan would be left to department heads.
So, top-down planning is more of a classic approach—executives create company goals, and the rest of the organization tries to reach them. There's little or no input from below.
When is top-down planning superior to the bottom-up planning method?
Top-down planning aligns the organization around the CEO's (or Board's) vision for the company.
As our co-founder and CEO is fond of saying, startups die from indigestion, not starvation. So the top-down approach is great for early-stage startups that must focus on growth.
As we'll see, though, bottom-up planning is not the quickest approach. Therefore, a top-down approach will be the best option when a company must move fast.
The macroeconomic view of top-down planning is better for budgeting when a company needs to cut costs. Management has a clearer view of revenue and understands where finances can reasonably be allocated in a crisis.
Disadvantages of top-down planning
Top-down planning is far from perfect.
Despite its broad outlook, it takes a narrow view. The top of the organizational hierarchy may be out of touch with individual departments and set unrealistic objectives.
This results in lower employee buy-in, less motivation, and less likelihood of meeting targets.
In addition, when the decision-making process involves only one person or a small group of people, it's possible they could be making the wrong decisions.
What is the bottom-up planning approach?
Also known as progressive planning, the bottom-up approach begins, at a very basic level, at a company's lower levels.
This might include individual department sales, production capacity, and regional details in sales forecasting. You'd begin with the product and end with the market trends in contrast to top-down planning.
Bottom-up planning is much more inward-focused than top-down planning—it concentrates more on the company's internal operations, getting into the nitty-gritty, granular detail.
Because bottom-up planning is based on solid, very focused data, departments can set more achievable, realistic financial projections.
These more precise metrics carry up the organizational hierarchy and inform the company's overall plan.
Advantages of the bottom-up approach
One of the bottom-up approach's primary advantages is higher employee morale. That's thanks to its inclusive nature.
Looking again at sales forecasting, there's higher buy-in when the data that informs the company-wide planning process originates from frontline workers.
Because workers set and understand their goals, they feel more invested in driving sales. The same could be said when departments help devise their budgets, as in bottom-up budget planning.
Compared to top-down planning, bottom-up planning provides a clearer view of a company's overall situation. When departments communicate goals to the top, management better understands the unique position of each subdivision.
The rich data gathered by bottom-up planning also clarifies how money is spent. Companies that need to make cuts more easily know where these cuts should occur.
Arguably, department heads know their hiring and spending needs better than distant executives—bottom-up headcount planning and budgeting can lead to a more efficient allocation of funds.
Finally, interaction and planning between different company levels help foster a culture of cooperation.
What are the disadvantages of bottom-up planning?
One of the biggest disadvantages of a bottom-up planning method is a time sink—analyzing all this data can take a lot of time, especially if the company is large.
Cohesion can also be a problem. Without a clear, overarching directive, things can get messy—think "too many cooks in the kitchen."
The bottom-up technique is an iterative method, meaning it's down to the top level to formulate all these different objectives into a cohesive plan. This takes time and effort—another disadvantage.
Of course, heads of individual departments might not have the same high-level insights executives have. Say the company needs to be cutting costs. If we're doing budgeting or headcount from the bottom-up, more money may be spent than the company can currently manage.
What is an example of bottom-up planning?
Consider a global company with divisions in many different countries for an example of bottom-up planning.
On average, a top-down approach might see a specific product as the company's bestseller. Executives set a company-wide goal of increasing sales of that product. The problem is they don't necessarily understand each regional market across their very diverse company.
Naturally, no one will understand these better than the local department heads. It could be that the goal imposed from the top is unrealistic—maybe there's a cultural preference that misaligns with the product or unfortunate translations that tank desire in the market.
In a bottom-up planning strategy, that individual department would be free to determine what's best to improve their position and then take action.
Say they're looking at historical data and decide a different item produced by the company would be a much better fit. They set up their marketing budget, made sales, and emerged much stronger than they would have had they been forced to follow an inflexible, company-wide directive.
This is the idea behind bottom-up planning: that each department knows what's best for them regarding growth, where they need to focus their efforts, and so on.
Who uses bottom-up planning?
Bottom-up planning techniques are best for industries that require a spark of creativity—those looking to innovate or disrupt.
Think tech companies. Bottom-up planning widens the brainpower pool. Employees at all levels can bounce ideas off each other and refine the company's vision.
Close collaboration between departments—the kind that might not exist if top-down planning were employed—helps tweak different aspects of a product before it heads to market.
No rule says a company must use only top-down or bottom-up planning. Different circumstances favor different approaches; the best option is sometimes to combine the two methods.
This is known as countercurrent planning.
In a countercurrent procedure, the goals are set by the top. However, each department is permitted to work its own goals into how they achieve the primary goal.
For example, let's say a division wants to increase its online marketing efforts. In a bottom-up plan, that is what they would do. In a top-down plan, management might require funds to be allocated elsewhere.
In a countercurrent plan, the goal communicated from the top might be: increase profitability from this product.
Through their research, the division has determined they can better sell this product through an online channel. By cutting their previous advertising method and boosting efforts online, they can reduce customer acquisition costs and increase profitability.
With a countercurrent plan, you get the best of both worlds—both goals have been satisfied, and everyone's happy.
Now you know all about bottom-up planning.
The difference between these planning approaches lies in how much control you want over the company's finances and the budgeting and planning process.
So what are you going to do now? Are you going to try bottom-up planning?
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