A Faulty Business Plan

The following is part of a business plan being discussed at a board meeting of the Perks Company:

"It is no longer cost-effective for the Perks Company to continue offering its employees a generous package of benefits and incentives year after year. In periods when national unemployment rates are low, Perks may need to offer such a package in order to attract and keep good employees, but since national unemployment rates are now high, Perks does not need to offer the same benefits and incentives. The money thus saved could be better used to replace the existing plant machinery with more technologically sophisticated equipment, or even to build an additional plant."

Discuss how well reasoned . . . etc.

The reasoning behind the presented business plan is flawed on many counts.

The business plan presumes that it is no longer cost-effective for the Perks company to continue offering its employees a generous package of benefits and incentives year after year. The basis of this statement (high unemployment rate) is neither strong nor clear. If employees loose motivation due to package cuts and,hence, do not perform well, the proposal may not prove to be very cost-effective. In fact, it could cost the company more than it would save. A high unemployment rate not necessarily prevents dissatisfied employees from not working hard.

It can be further said that the stated correlation between national unemployment rates and employee packages may or may not be true. 

Firstly, a general high unemployment does not mean high unemployment in all sectors. For example, only the auto sector may be doing bad causing an exceptionally high number of lay-offs but the finance sector may be doing good and still hiring aggressively. Hence, the company needs to look at the data more closely and verify that indeed it is relevant to their sector. 

Secondly, the higher rate of unemployment may be specific to a particular type of employees rather than to all employees. For example, if a market has too many engineers, it is possible that many of them are unemployed due to large supply. But if,say, there were too few accountants, their demand would still be high. Hence, by taking a blanket approach the business plan actually risks alienating employees that may have specialized skills that are in demand. This, in turn, may lead to a "brain drain" from the company with many talented individuals leaving for good.

Finally, the plan assumes that there are no alternative ways of financing additional equipment and plants. The company could pay less dividend, cut wasteful expenditures or pay it top brass a little less bonus. Why or how the suggested course of action is superior to other alternatives has not been discussed.

Concluding, the business plan appears short-sighted and weakly reasoned. It tries to take a generalist approach without bothering with details or reasons that could explain the basis or show the strength of the logic employed. Clearly, if implemented as it is, the plan would surely alienate some employees and may even cause loss to the company. The board should not pass this plan and should instead press for a better plan that explores various alternatives and presents stronger reasoning .