chapter 8 presentation final
TRANSCRIPT
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Chapter 8 Case 8-1
Lin WangBichloan NguyenHank LiuKeye SuJeff Tsai
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Introduction
Emerson Electric Company Founded in 1890 as a Manufacturer of Motors and Fans
1993 Marked Emersons 36thConsecutive Year of ImprovedEarnings Per Share
Manufacturers a Broad Range of Electric, Electromechanical,and Electronic Products for Industry and Consumers
Since 1956, Annual Return to Shareholders Averaged 18%
Is a Major Domestic Electrical Manufacturer
Has Had the Narrowest Focus as a Broadly DiversifiedManufacturing Company
Follows a Growth-Through-Acquisition Strategy
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The Office of the Chief Executive (OCE)
The CEO
The President
Two Vice Chairmen
Seven Business Leaders Three Corporate Officers
Direct Management of the Company
Meets 10 to 12 Times a Year to Review Division
Performance
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The Divisions
Board of Directors
Division President
Key Managers
Meet Monthly to Review and Monitor Performance
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Knights Strategy (Q1) [Cont.]
Best-Cost Producer Strategy Commitment to Total Quality and Customer Satisfaction
Knowledge of the Competition and the Basis on which TheyCompete
Focused Manufacturing Strategy, Competing on Process aswell as Product Design
Effective Employee Communications and Involvement
Formalized Cost-Reduction Programs, in Good Times andBad
Commitment to Support the Strategy through CapitalExpenditures
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Knights Strategy (Q1) [Cont.]
Best-Cost Producer Strategy (Cont.) Keep Staffs at a Minimum
Competitors Products were Disassembled and Studied for
Cost Improvement
Regional Labor Rates and Freight Costs were Analyzed Capital Investments of $1.8 Billion were Made to Improve
Process Technology, Increase Productivity, Gain ProductLeadership, and Achieve Critical Mass
Increased Quality to Reduce Cost
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Knights Strategy (Q1) [Cont.]
Best-Cost Producer Strategy (Cont.) Advantages
Reduced Cost
Not Burdened by Heavy Debts and Interest Payments During EconomicDownturn
Improved Quality
Reduced Investment Risk
Disadvantages Does Not Maximize Possible Leverage
Debts are not Used to Expand
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Knights Strategy (Q1) [Cont.]
Planning ProcessSecond Stage Changes in the Division Plant Must Be Submitted for Approval
by Top Management
Late in the Fiscal Year, Division Managers Meets with Top
Management with Detailed Forecast for the Coming Year andReviews the Actual Performance of the Current Year
Changes in the Forecast Must Be Submitted for Approval byTop Management
In August, Top Management Performs Detailed Financial
Review In September, Top Management Provides the Corporate and
Division Forecast for the Next Year as well as the StrategicPlan for the Next Five Years
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Knights Strategy (Q1) [Cont.]
Reporting Each Division Submits the Presidents Operating Report
(POR), which Compare the Actual and Forecasted Results ofthe Current Quarter along with the Actual Results from the
Previous Year The Division Presidents Performance is Measured Using the
Fiscal Years Forecast and Reviewed Quarterly
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Knights Strategy (Q1) [Cont.]
Compensation Each Division Evaluate All Department Heads and Higher-
Level Managers Against a Set of Specific PerformanceCriteria
Human Resources are Involved in Strategy Implementation Each Division Executive Earns a Base Salary and is Eligible
for Extra Salary based on Division Performance according to
Measurable Objectives (Primarily Sales, Profits, and Returnon Capital)
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Knights Strategy (Q1) [Cont.]
Communication Open Communication Highly Encouraged by Top
Management
Division President and Planning Managers Meet Regularly
with All Employees to Discuss the Goals and BusinessStrategy
The Company Conducts Opinion Surveys of Every Employee,then Performs Statistic Analysis to Uncover Trends
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Knights Strategy (Q1) [Cont.]
Disadvantages The Management would Limit Expense to Meet the Goals,
which Might Hurt the Companys Expansion in the Long Run
or Cause Missed Opportunities
Manual Budgeting Process is Very Time Consuming Budget based on Historical Data may not be Practical for
Forecast Analysis
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Recommendations to CEO (Q2)
Real-Time Budgeting using Intranet-Capable Software Online and Real-Time Capability
Shorten the Budgeting Process
Sensitivity Analysis
In-Depth Analysis
Active Involvement
Integrated Strategic Planning, Budgeting, ManagementReporting, Sensitivity Analysis, and Financial Consolidations
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Recommendations to CEO (Q2) [Cont.]
Using Zero-Based Budgeting From a Zero-Base
In-Depth Reviews and Analysis
Schedule Budgeting Periodically
Using Activity Based Budgeting Extension of ABC System
Focus on High-Value-Added Activities
Eliminate Low-Value-Added Activities
Cost Reduction Continuous Improvement
Coordinate and Synchronize Activities
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Recommendations to CEO (Q2) [Cont.]
Using Kaizen (Continuous Improvement) Budgeting Demands Continuous Improvements
Based on Improved Practices or Procedures
Choosing the Budgeting Approach Select a Proper Budgeting Approach for Each Business
Segment according to the Characteristics of Each BusinessSegment
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Role of Segment Managers (Q3)
Act as a Bridge between Low Level Employee andUpper Management Provide Valuable Data for Trend Analysis
Performs Performance Reviews
Provide Recommendation and Detailed Budgeting Analysis toUpper Management
Motivate Employee to be Involved in the BudgetingProcess and to be Committed to its Implementation
Motivate Employee to Work to Attain the Budgeted Goals Help Employees Identify the Budget as Their Own
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Role of Segment Managers (Q3) [Cont.]
Pinpoint Budgeting Problems and Implement SolutionsEffectively Identify Current and Potential Bottlenecks in Operations
Allocate Critical Resources to Ease Any Bottlenecks andPrevent Them from Becoming Obstacles to AttainingBudgetary Goals
Work Out Any Problems the Company Might Face to Minimizethe Adverse Effects that the Anticipated Problems Could Haveon Operations
Select an Appropriate Budgeting Approach Use the Budget of the Operating Period to Assess Current
Performance and Select Appropriate Budgeting Approach forthe Future
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Role of Segment Managers (Q3) [Cont.]
Cooperate with other Segment Managers Allow Each Division to Know What It Needs to Do to Satisfy
the needs of Other Divisions.
Encourage Open Communication Among Employees Communicate Expected Actions and Results
Monitor and Control Activities Provide Guidelines for Operations
Organizations Success Requires Every Operations be
Carried Out As Planned
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Chapter 8 Reading
HOW TO SET UP A BUDGETING andPLANNING SYSTEM
Strategic Budgeting: A Case Study and
Proposed Framework
H t t b d ti & Pl i
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Penn Fuel Gas (PFG)
public utility company of 550 employees
natural gas, storage and transportation
propane business (not regulated)
How to set up a budgeting & PlanningSystem
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Motivation for Budgeting System
First annual and long-range operating budget process
PFGs bankers, board of directors, and management
requested additional reports
Similar interests in cash flow projections, futureearnings potential
Management wanted capability of slicing and dicingdifferent segments for P&L
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Flexibility in Budgeting System
Budgeting for natural gas and propane operations
Demand driven by weather
Pennsylvania1994 iciest winter, 1995 one of
warmest Rapid growing company
Sensitivity analyses & budget reprojectionquarterly
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Challenges
Northern and Southern divisionsdifferent reportingsystem, different accounting software
Chart of accountsPropane business vs. Utility
business Review expense classification system
Faster accounting system w/o manual processes
Common challenges for new reporting tools
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Why review chart of accounts?
Accounting system less likely updated as companygrows
Budget manager should update classificationsimmediately to accommodate future budgeting
Difficult to change system once developed
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Budgetary Games
Manipulation of revenues/expenses to meet budget
Budgets developed with management with agreed-upon, reasonable expectations
Employees/divisions were not penalized if budget not
met
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Reading2 Strategic Budgeting: A case Studyand Proposed Framework
Critical Chain techniqueEliyahu Goldratt
Strategic Budgeting Method
Many companies applied it, and reduced project time.
- DiamlerChryslter, Lucent, Harris Semiconductor, etc.
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What is Critical Chain Method
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Slack % of Original Budget
Division Budget Total Slack Slack %
Original $5,600,000 0 0%Year 1 $7,359,000 $1,759,000 31%
Year 4 $11,880,978 $6,280,978 112%
Year 10 $32,744,641 $27,144,641 485%
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What is the strategicbudgeting model?
Gathered budget estimates from department heads
Reduced all department budgets by 50%
Grouped all saving from department budgets in a
Group Budget Buffer. Told each department head that if he or she needed
further funds, the funds would be available but therequest would be discussed openly with other
department heads.
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