Chapter 8 Presentation Final

8/12/2019 Chapter 8 Presentation Final

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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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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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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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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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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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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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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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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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Documents

Chapter 8 Presentation Final