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www.myCNI.com.my www.OOBEY.com STRATEGIC PLANNING AND BUDGETING Part 2: Alignment, Budgeting and Resources Case Study, Concepts and Debatable Ideas Kenny Ong CNI Holdings Berhad

Strategic Planning And Budgeting Part 2: Alignment, Budgeting, and Resources

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ABF Budgeting, Forecasting and Financial Planning Conference, Feb 2009*Understanding what strategic planning is and why it is important*Clarify the difference between vision, mission statement, goals and objectives*The external environment: The need to understand the economic cycle*Tying the strategic plan to the budget*Cost Reduction methods and advice

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Page 1: Strategic Planning And Budgeting Part 2: Alignment, Budgeting, and Resources

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STRATEGIC PLANNING AND BUDGETING Part 2: Alignment, Budgeting and ResourcesCase Study, Concepts and Debatable Ideas

Kenny OngCNI Holdings Berhad

Page 2: Strategic Planning And Budgeting Part 2: Alignment, Budgeting, and Resources

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Summary: Today’s presentation

1. Business Model Done2. Strategy

3. Alignment

4. Resources

Done

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3. Align the business to the strategy

Dangers of Benchmarking, BSC, KPIs and other evils sold by Consultants

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“…in the past 18 months, we have heard that profit is more important than revenue,

quality is more important that profit, people are more important than profit,

customers are more important than our people, big customers are more important than small customers, and that growth is the key to our success. No wonder our

performance is inconsistent"CEO, Anonymous

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Before we start…

In the old days of HR…• Average training hours per staff• % of staff attending training• # of training programs• % of training programs conducted• Training needs analysis conducted• Competency models developed• Training budget as % of payroll

What’s wrong with this picture?

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Before we start…

Moral of the story…

1. Innovation:– Business models– Products– Services

2. Market Leadership

3. Competitive differentiation

Get the picture?

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Wrong KPIs

“What is the moral of the story?”

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Dangers of Best Practice and Benchmarking…

“Abraham Wald’s Work on Aircraft Survivability”, M. Mangel and F.J. Samaniego

Where would you focus reinforcement?

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Dangers of Best Practice and Benchmarking…

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Company Performance

high

low

‘Best Practice’ theories

low high

zero Performance

Trend line

“Selection Bias and the Perils of Benchmarking”, Jerker Denrell, Harvard Business Review 2005

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Dangers of Best Practice and Benchmarking…

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Company Performance

high

low

‘Best Practice’ theories

low high

zero Performance

Trend line

“Selection Bias and the Perils of Benchmarking”, Jerker Denrell, Harvard Business Review 2005

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Dangers of Best Practice and Benchmarking…

Selection Bias:

1. Success Traits = Failure Traits

2. Successful Cases + Failure Cases

3. Worst effects in ‘Old’ industries

4. Overvalue ‘best practice’ theories

5. Current accomplishments unfairly magnified by past achievements

6. Reverse Causal

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Dangers of Best Practice and Benchmarking…

Also known as ‘Beware of Consultants’:

1. Selection Bias

2. Big vs. Small company

3. Selective success stories

4. Correlation vs. Causal

5. Survey problems

6. Practical vs. Glamour-to-have

7. Leaders who benchmark

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Survey Problems…

“In business after business, 60% to 80% of lost customers reported on a survey just prior to defecting that they were satisfied or very satisfied.”

HBR March/April 1996

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Why BSC?

• Reason 1: Balanced

• Reason 2: Cause-and-Effect

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Financial

“To satisfy our stakeholders, what Financial objectives must we accomplish?”

Internal Process

“To satisfy our customers, in which internal business processes must we excel?"

Customer

“Who are our target customers?

What is our value proposition?”

Learning & Growth

“What capabilities and tools do our employees require to help them execute our strategy?

Focus: Corporate Alignment

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Revenue Growth

Base Retention

Share Gain Positioning Adjacent Market

New Business

Operational Excellence

Product Leadership

Customer Intimacy

Competencies Information Systems

Motivation, empowerment,

alignment

Financial

Learning & Growth

Internal Process

Customers

Investment Strategy

Productivity Market Value

Linking BSC to Strategy

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Financial

Learning & Growth

Internal Process

Customers / Distributors

Revenue Growth

ProductivityMarket Value

Department Operations

Supplier & Alliances

External Involvement

Target Markets

Products/ Services

Channel Strategies

Human Resources

Technology

Information & IntelligenceSystems &

Processes

Focus: Corporate Alignment

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Example: Selection of KPIs for BSC

•Customer satisfactionCustomer loyaltyMarket shareCustomer complaintsComplaints resolved on first contactReturn ratesResponse time per customer requestPrice relative to competitionTotal cost to customerAverage duration of customer relationshipCustomers lostCustomer retentionCustomer acquisition ratesPercentage of revenue form new customersNumber of customersAnnual sales per turnover

•Win rate (sales closed/sales contact)•Customer visits to the companyHours spent with customersMarketing cost as a percentage of salesNumber of ads placedNumber of proposals madeBrand recognitionResponse rateNumber of trade shows attendedSales volumeShare of target customer spendingSales per channelAverage customer sizeCustomers per employeeCustomer service expense per customerCustomer profitabilityFrequency (number of sales transactions)

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Financial

Learning & Growth

Internal Process

Customers / Distributors

Example: 1st Level BSC & KPIs

Profit after Tax. Revenue. Cash-to-cash cycle. Operating cash flow

Customer Complaints. Customer Acquisition Rate. Product Availability. Product Quality & Service. Renewal Annual Subscription. No. of Active Customers. No. Retail Shops.

Customer Database Availability. Accuracy of Forecast Planning. Continuous Improvement. Response Time to Customer Needs. Perfect Order Fulfillment. Inventory Turnover. Number of Effective Sponsoring Program. On Time Delivery. No. of Effective Training. Number of Effective A&P

% of staff evaluated on Core Competency Framework. % of staff with Career Development Plans. No. of training hours completed per staff. % of staff with access to strategic information. Q12 Index. % staff evaluated on Culture alignment

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Sample: Other 1st Level KPIs across industries…

Financial Services Retail Telecommunications

•Maximize ARPU•Minimize Churn•Mutichannel customer service

•Understand customer behavior related to customer conversion, acquisition, and retention•Single view of customer•Multichannel customer experience•Personalized customer experience

•Anticipate and prevent churn despite compensation•Increase number of products per customer•Turn call center information opportunity to up-sell and cross-sell•Increase customer satisfaction and loyalty

Hospitality Travel & Leisure Manufacturing

•Personalized customer experience•Maximize share of wallet•Player/customer loyalty•Multichannel customer service

•Increase customer loyalty and preference•Maximize customer revenue•Improve service quality and efficiency•Capture and close sales opportunities

•Single view of customers across supply chain•Zero-error order capture•Streamline opportunity to cash processes•Leverage investment in ERP and backoffice systems

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Lagging and Leading KPIs

Lagging

Leading

Historical, Outcome, Results, 1st Level, Usually Financial or tangible, Quarterly and Annually

Current, Indicators, Drivers, 2nd Level onwards, usually non-financial or intangible, Weekly, Monthly and Quarterly

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Developing ‘Driver’ KPIs

Customer Retention % Lagging, 1st Level

Customer Satisfaction Index

Leading, 2nd Level

On time delivery

Time to market for new products

TNA %

Defect levels, warranty claims

Leading, 3rd Level onwards

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Operational Excellence(low cost producer)

Ref: The Discipline of Market Leaders, Michael Treacy & Fred Wiersema; 1995

Product Leadership(best product)

Customer Intimacy(best total solution)

Strategy: Disciplines, Priorities, and KPIs

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Operational Excellence

• Competitive price

• Error free, reliable

• Fast (on demand)

• Simple

• Responsive

• Consistent information for all

• Transactional

• 'Once and Done'

Operational Excellence

• Competitive price

• Error free, reliable

• Fast (on demand)

• Simple

• Responsive

• Consistent information for all

• Transactional

• 'Once and Done'

Customer Intimacy

• Management by Fact

• Easy to do business with

• Have it your way (customization)

• Market segments of one

• Proactive, flexible

• Relationship and consultative selling

• Cross selling

Customer Intimacy

• Management by Fact

• Easy to do business with

• Have it your way (customization)

• Market segments of one

• Proactive, flexible

• Relationship and consultative selling

• Cross selling

Product Leadership

• New, state of the art products or services

• Risk takers

• Meet volatile customer needs

• Fast concept-to- counter

• Never satisfied - obsolete own and competitors' products

• Learning organization

Product Leadership

• New, state of the art products or services

• Risk takers

• Meet volatile customer needs

• Fast concept-to- counter

• Never satisfied - obsolete own and competitors' products

• Learning organization

Strategy: Disciplines, Priorities, and KPIs

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• Operational Excellence• Move know-how from top performing

units to others• Benchmark against best in class• Ensure operations training for all

employees• Use disciplines like TQM for continuous

learning to reduce costs and improve quality

Strategy: Value Disciplines

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Strategy: Value Disciplines

• Customer Intimacy• Capture knowledge about customers• Understand customer needs• Empower front line employees• Ensure that everyone knows the

customer• Make company knowledge available to

customers

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• Product Leadership• Reduce time to market• Commercialize new products fast• Ensure that ideas flow• Reuse what other parts of the company

have already learned• Ensure there are multiple sources of

funding

Strategy: Value Disciplines

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Operational Excellence(low cost producer)

Ref: The Discipline of Market Leaders, Michael Treacy & Fred Wiersema; 1995

Product Leadership(best product)

Customer Intimacy(best total solution)

Strategy: Value Disciplines

Page 29: Strategic Planning And Budgeting Part 2: Alignment, Budgeting, and Resources

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Operational Excellence(low cost producer)

Ref: The Discipline of Market Leaders, Michael Treacy & Fred Wiersema; 1995

Product Leadership(best product)

Customer Intimacy(best total solution)

Strategy: Value Disciplines

Page 30: Strategic Planning And Budgeting Part 2: Alignment, Budgeting, and Resources

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Sample KPIs for Each Discipline

Operational Excellence

• Price• Selection• Convenience• Zero Defects• Growth

Operational Excellence

• Price• Selection• Convenience• Zero Defects• Growth

Customer Intimacy

• Customer Knowledge

• Solutions Offered• Penetration• Customer Data• Customer-success

focus

Customer Intimacy

• Customer Knowledge

• Solutions Offered• Penetration• Customer Data• Customer-success

focus

Product Leadership

• Marketing• Functionality• # of Successes• # of Failures• Learn from key

users• Interdisciplinary

teams• Pipeline

Product Leadership

• Marketing• Functionality• # of Successes• # of Failures• Learn from key

users• Interdisciplinary

teams• Pipeline

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E3 – Department BSC

Financial Perspective

Goals Measures Targets CAPEX OPEX

Quality

Innovation

On Time Delivery

Budgeting

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Summary: Today’s presentation

1. Business Model Done2. Strategy

3. Alignment

4. Budgeting

Done Done

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4. Budgeting

The art and science of allocating and aligning Resources to strategic plans

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Budgeting: Some thoughts…

Two major roles of Budgeting:

1. Provide real-life CONSTRAINTS to strategic planning

2. Provide RESOURCES to realize strategic plans

Why Constraints?1. Over aggressive unrealistic planning, usually by

Marketing/Sales need to be grounded to real life2. Creative entrepreneurial thinking when resources are

limited3. Enforce the need for Accountability i.e. ‘ROI’ thinking for

all Managers

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Alignment: 4-Wheels Model

Culture

Business

ModelStrategic Planning

StructurePerson

Leadership

Resources

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Alignment: Framework

• Focus point• Alignment• Quality• Innovation & Differentiation• Risk taking• Performance Management• Corporate obsession• Decision making

Culture

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Alignment: Framework

• Org Structure• Job Design• C&B• Policies & procedures• Decision making• Job fit• Management Systems• BSC and KPIs• Decentralized & Empower

Structure

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Strategy: Framework

• Role modeling• Vision/Mission/Philosophy• Leadership Style• Delegation & Empowerment• C&B, Promotions• Sense of Urgency• Speak regularly about Performance

Leadership

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Strategy: Framework

• Recognition• Recruitment• Training• Profit sharing• Values• Motivation• Self Efficacy• Awareness• Useful Competencies• Career aspirations• Attribution (control)

Person

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Strategy: Framework

Enablers• Technology• Equipment• Materials• Human• Intellectual

Property• Partners• Property

Resources

Funding • CAPEX• OPEX

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Alignment: 4-Wheels Model

Culture

Business

ModelStrategic Planning

StructurePerson

Leadership

Resources

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Operational Excellence

Operational Excellence

Customer Intimacy

Customer Intimacy

Product Leadership

Product Leadership

Organization, jobs,skills

Management systems

Information and systems

Culture, values,norms

Each Discipline Requires Different Priorities & Resources

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Operational Excellence

•Central authority, low level of empowerment•High skills at the core of the organization

•Disciplined Teamwork•Process, product- driven•Conformance, 'one size fits all' mindset

• Integrated, low cost transaction systems•The system is the process

•Command and control•Quality management

Operational Excellence

•Central authority, low level of empowerment•High skills at the core of the organization

•Disciplined Teamwork•Process, product- driven•Conformance, 'one size fits all' mindset

• Integrated, low cost transaction systems•The system is the process

•Command and control•Quality management

Organization, jobs, skills

Management systems

Information and systems

Culture, values,norms

Each Discipline Requires Different Priorities & Resources

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Organization, jobs,skills

Management systems

Information and systems

Culture, values,norms

Product Leadership

•Ad hoc, organic and cellular•High skills abound in loose-knit structures

•Concept, future-driven•Experimentation and 'out of the box' mindset

•Person-to-person communications systems•Technologies enabling cooperation

•Rewarding individuals' innovative capacity•Risk and exposure management•Product Life Cycle profitability

Product Leadership

•Ad hoc, organic and cellular•High skills abound in loose-knit structures

•Concept, future-driven•Experimentation and 'out of the box' mindset

•Person-to-person communications systems•Technologies enabling cooperation

•Rewarding individuals' innovative capacity•Risk and exposure management•Product Life Cycle profitability

Each Discipline Requires Different Priorities & Resources

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Organization, jobs,skills

Management systems

Information and systems

Culture, values,norms

Customer Intimacy

•Empowerment close to point of customer contact•High skills in the field and front-line

•Customer-driven•Variation and 'have it your way' mindset

•Strong customer databases, linking internal and external information

•Strong analytical tools

•Customer equity measures like life time value•Satisfaction and share management•Focus on ‘Share of Wallet’

Customer Intimacy

•Empowerment close to point of customer contact•High skills in the field and front-line

•Customer-driven•Variation and 'have it your way' mindset

•Strong customer databases, linking internal and external information

•Strong analytical tools

•Customer equity measures like life time value•Satisfaction and share management•Focus on ‘Share of Wallet’

Each Discipline Requires Different Priorities & Resources

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Managing Gaps between actual and planned budgets

1. Budgeting vs. Priorities

2. Basic Budgeting policies

3. Activity Grid to determine budget priorities

4. Budgeting for Investments based on the ‘BCG Matrix’ principles

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Budgeting vs. Priorities

Priority = Time + Money

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Budgeting vs. Priorities

Upturn Flat Downturn

Fight Complacency

Sharpen Edge

Keep Momentum

Conquer

NPD Cycle Time

Improve Edge

Extensions

Counter Competitor

Innovation

Acquire

Profits

Build momentum

Sales

Cash Flow

Focused on ‘Breakthrough’

JV, In-source, Out-source

Eliminate bottom 20%

Improve Top 15% revenue-generating products

↓ R&D, ↑Sales

Example: Business Situation vs. R&D Priorities

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Basic Budgeting policies

• Flexibility to switch between line items• Reserve Funds• Loans/External Funding

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Activity Grid to determine budget priorities

Increase (↑)What are features/

activities/services to increase?

Create (+)What are features/

activities/services to introduce?

Reduce (↓) What are features/

activities/services to reduce?

Eliminate (-)What are features/

activities/services to eliminate?

1. Manage conflicts where limited resources should go2. Solve problem of compounding activities & resources

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Budgeting for Investments based on the ‘BCG Matrix’ principles

Business Performance

Market Potential

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How to maximize Budget?

1. Align budget to priorities

2. Integration of businesses and functions for teamwork

3. Do practical, implementable stuff that bring real results (hard work)

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Budgeting in a Downturn

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Budgeting in a Downturn

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Budgeting in a Downturn

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Budgeting in a Downturn

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Budgeting in a Downturn

1. StratEx

2. CoREx

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Planning, Budgeting, Schedules, Processes

Tying it all up

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The Planning & Budgeting ProcessStages Output Month

1. Pre-Planning Analysis & Brainstorming

•Current ½ yr budget & revision•Next yr options and budgets required

July - Sep

2. High-level Group Strategy and Targets

•High-level strategy of Group Corp Plan. •Circulation of Main Budget simulation to all departments

Sep

3. Functional Strategy and Budgets

•BSC & Budget preparation by HODs to HODivs

Sep - Oct

4. Formal Results Planning

•BSC & Budget to CEOs, followed by BOD•Revised and Finalized Plans and Budgets

Oct-Nov

5. Communication and Cascading

•Presentation of Group Budget and Planning summary & distribution•Communication of Highlights to the field and staff

Nov-Jan

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Review processes

1. Result Planning schedule inc. BSC, Budget2. Quarterly Performance Appraisals3. Sales performance4. Non-sales performance5. Divisional meetings6. Annual Appraisals7. Specialized KPI committees8. CAR, PAR, SCAR KPI improvements9. Internal Audit – process problems10. HRM & TND – people problems11. Supervisor Induction – PM training12. Talent Management

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Problems, problems and more problems…

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Problems, problems and more problems…

1. No serious budget to tackle key risks2. Too much optimism or pessimism3. Innovation vs. Results vs. Baseline4. Investment ≠ Portfolio Management5. Top down vs. Bottom up6. Good to have vs. Need to have7. Line Manager not thinking like Investors8. Too focused on KPI and BSC9. Budget allocation seen as ‘popularity’ vote10.Public Listing -> pressure for short-term

budgets and results vs. long-term innovation

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Alignment: 4-Wheels Model

Culture

Business

ModelStrategic Planning

StructurePerson

Leadership

Resources

Page 64: Strategic Planning And Budgeting Part 2: Alignment, Budgeting, and Resources

Thank You.

soft copy of slides: www.totallyunrelatedrandomanddebatable.

blogspot.com