Aligning Budgeting To Corporate Planning - ABF Conference on Corporate Budgeting

Slide 1: ALIGNING BUDGETING TO CORPORATE PLANNING CNI’s Journey, Mistakes, and Lessons Learned Kenny Ong CNI Holdings Berhad

Slide 2: Intro: CNI 1. 18 years old 2. Core Business: MLM 3. Others: Contract Manufacturing, Export/Trading, eCommerce, F&B Retail 4. Malaysia, Singapore, Brunei, Indonesia, India, China, Hong Kong, Philippines, Italy, Taiwan 5. Staff force: ± 500 6. Distributors: 250,000 7. Products: Consumer Goods and Services

Slide 3: Our History of Strategic Planning and Budgeting

Slide 4: How “Planning” got started Business Model BSC KPIs Budgeting + Planning Performance Management System Differentiation Talent Management Succession Planning (Business Continuity)

Slide 5: How “Planning” got started Business Model BSC Today’s focus KPIs Budgeting + Planning Performance Management System Differentiation Talent Management Succession Planning (Business Continuity)

Slide 6: Planning in the “old” days 1. Budget ‘top down’ – no questions asked 2. Only two budget goals – revenue, expenses 3. The only planning we needed to do was “do better than last year” 4. Planning was ‘bottom up’ - compilation of plans within set budget 5. No one knew what the other was planning 6. FAC’s role was only to compile budget for approval 7. KPIs were not used 8. Sales was resource priority, everything else not important 9. Assumed no major changes in market 10. R&D was ‘bottom up’

Slide 7: Problems from the start (1/2) 1. No money 2. Split Objectives: Sales? Share Price? Image? 3. Independent entities 4. FAC controlling schedule 5. S&M always running over budget 6. Compounding activities 7. BOD expectations too high without proper explanation nor justification 8. Lack of Market research 9. Expenses not spent gets punished

Slide 8: Problems from the start (2/2) 1. Budgeting for known, consistent, and predictable business conditions 2. Never learn from past mistakes, usually in under-budgeting (e.g. staff and PCs) 3. Wrong Business Model – blame Budgeting & Planning. Having a good planning process cannot correct a bad business model 4. Focusing on the Process (KPIs), instead of “Business” 5. Planning & budgeting treated as separate processes by businesses/functions

Slide 9: Today’s Agenda

Slide 10: Summary: Planning & Budgeting Long-term Plans Objectives Strategies Enablers Resources Also known as L.O.S.E.R.

Slide 11: Summary: Today’s presentation 1. Business Model 2. Strategy 3. Resources

Slide 12: Assumptions 1: Audience 1. Business 2. Government 3. Non-profit

Slide 13: Assumptions 2: Starting Point 1. Wanting to start proper planning & budgeting process, or 2. Wanting to improve planning & budgeting process

Slide 14: 1. Get the right Business Model first

Slide 15: 1. Wrong Business Model • How to fail without trying

Slide 16: The Roadmap to Failure Fred Wiersema and Mike Treacy The Moment of Downpresure of Truth Unclear Strategy X Performance ic s c Tact A d-ho Performance Freefall Today’s performance Doom Tomorrow’s Projections actual performance Clear Sailing Denial & Defense Overdue Failure Time

Slide 17: Denial and Defense • “It’s not really good value our competitor is offering, because it doesn’t include a lot of our features.” - ABC vs Air Asia • “It’s good value but not in our preferred customer market.” - ABC vs Toyota • “Sure they’re hurting us, but with their unfair advantage, what can we do?” – ABC vs MILO • “The rules we are playing by have always worked before” – AMEX vs VISA

Slide 19: Ad Hoc Tactics • Selectively hold discounts to hold business that has started to go elsewhere • Introduce new promotions, terms, conditions, and offers to confuse and cloud the market • Beef up customer service by adding people to fix mess-ups and quicken delayed shipments • Delay capital investments and adjust accounting methods to portray quarterly financial results more favorably • Introduce “new and improved” products that are new in form, but not in substantive ways that are of consequence to purchasers • Introduce Balanced Scorecards and Performance Management Systems

Slide 21: “What is the moral of the story?”

Slide 22: What is the Business Model? USP Market Profit Model Discipline

Slide 23: Intro: Market Discipline • Mamak stall

Slide 24: Intro: Market Discipline Product "They are the most innovative" Leadership "Constantly renewing and creative" "Always on the leading edge" Customer Operational Intimacy Excellence "Exactly what I need" "A great deal!" Customized products Excellent/attractive price Personalized communications Minimal acquisition cost and "They're very responsive" hassle Preferential service and Lowest overall cost of flexibility ownership Recommends what I need "A no-hassles firm" "I'm very loyal to them" Convenience and speed Helps us to be a success Reliable product and service

Slide 25: Intro: Market Discipline Product/Service Attributes Relationship Image * Treacy & Wiersema, The Discipline of Market Leaders, 1995

Slide 26: Intro: Market Discipline Operational Excellence: Quality and selection in key categories with unbeatable prices Product/Service Attributes Relationship Image Price Time √ Smart Selection √ Shopper Quality * Treacy & Wiersema, The Discipline of Market Leaders, 1995

Slide 27: Intro: Market Discipline Product Leadership: Unique products and services that push the standards Product/Service Attributes Relationship Image √ Time √ Best Function √ Product Brand * Treacy & Wiersema, The Discipline of Market Leaders, 1995

Slide 28: Intro: Market Discipline Customer Intimacy: Personal service tailored to produce results for customer and build long-term relationships Product/Service Attributes Relationship Image √ √ Service Trusted √ Brand √ Relations * Treacy & Wiersema, The Discipline of Market Leaders, 1995

Slide 29: Strategy: Disciplines Product Leadership (best product) Operational Excellence Customer Intimacy (low cost producer) (best total solution) Ref: The Discipline of Market Leaders, Michael Treacy & Fred Wiersema; 1995

Slide 30: Summary: Today’s presentation  Done 1. Business Model 2. Strategy 3. Resources

Slide 31: 2. Set the Strategies Dangers of BSC, KPIs and other evils sold by Consultants

Slide 32: “…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

Slide 33: 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?

Slide 34: Before we start… Moral of the story… 2. Innovation: – Business models – Products – Services 3. Market Leadership 4. Competitive differentiation Get the picture?

Slide 35: “What is the moral of the story?”

Slide 36: What is Strategic Planning? Variables: Research Output: Growth Strategic Plans Risks Stakeholders Planning Priorities KPIs Constraints SWOT Misc.

Slide 37: Before we start… Which comes first? 2. Strategies -> KPI? 3. KPI -> Strategies?

Slide 38: Focus: Corporate Alignment Financial Customer “To satisfy our “Who are our target stakeholders, what customers? Financial objectives What is our value must we accomplish?” proposition?” Learning & Growth Internal Process “What capabilities and “To satisfy our customers, tools do our employees in which internal business require to help them processes must we excel?" execute our strategy?

Slide 39: Linking BSC to Strategy Financial Revenue Growth Productivity Market Value Customers Base Share Gain Positioning Adjacent New Retention Market Business Internal Process Operational Product Customer Investment Excellence Leadership Intimacy Strategy Learning & Growth Competencies Information Motivation, Systems empowerment, alignment

Slide 40: Focus: Corporate Alignment Financial Revenue Market Value Productivity Growth Customers / Distributors Products/ Channel Target Services Strategies Markets Internal Supplier & Department External Process Alliances Operations Involvement Learning & Technology Growth Human Information & Resources Systems & Intelligence Processes

Slide 41: Example: Selection of KPIs for BSC •Customer satisfaction •Win rate (sales closed/sales contact) Customer loyalty •Customer visits to the company Market share Hours spent with customers Customer complaints Marketing cost as a percentage of sales Complaints resolved on first contact Number of ads placed Return rates Number of proposals made Response time per customer Brand recognition request Response rate Price relative to competition Number of trade shows attended Total cost to customer Sales volume Average duration of customer Share of target customer spending relationship Sales per channel Customers lost Average customer size Customer retention Customers per employee Customer acquisition rates Customer service expense per customer Percentage of revenue form new Customer profitability customers Frequency (number of sales Number of customers transactions) Annual sales per turnover

Slide 42: Example: 1st Level BSC & KPIs Financial Profit after Tax. Revenue. Cash-to-cash cycle. Operating cash flow Customers / Customer Complaints. Customer Acquisition Rate. Product Distributors Availability. Product Quality & Service. Renewal Annual Subscription. Distributor Rank Achievement. No. of Active Distributor. No. DC/Regional Sales. Distributor with commission Customer Database Availability. Accuracy of Forecast Planning. Internal Continuous Improvement. Response Time to Customer Needs. Process 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 Learning & with Career Development Plans. No. of training hours completed Growth per staff. % of staff with access to strategic information. Q12 Index. % staff evaluated on Culture alignment

Slide 43: Sample: Other 1st Level KPIs across industries… Financial Services Retail Telecommunications •Maximize ARPU •Understand customer •Anticipate and prevent churn •Minimize Churn behavior related to customer despite compensation •Mutichannel customer conversion, acquisition, and •Increase number of products retention per customer service •Single view of customer •Turn call center information •Multichannel customer opportunity to up-sell and experience cross-sell •Personalized customer •Increase customer experience satisfaction and loyalty Hospitality Travel & Leisure Manufacturing •Personalized customer •Increase customer loyalty •Single view of customers experience and preference across supply chain •Maximize share of wallet •Maximize customer revenue •Zero-error order capture •Player/customer loyalty •Improve service quality and •Streamline opportunity to •Multichannel customer efficiency cash processes service •Capture and close sales •Leverage investment in ERP opportunities and backoffice systems

Slide 44: Lagging and Leading KPIs Historical, Outcome, Results, 1st Lagging Level, Usually Financial or tangible, Quarterly and Annually Current, Indicators, Drivers, 2nd Leading Level onwards, usually non- financial or intangible, Weekly, Monthly and Quarterly

Slide 45: Developing ‘Driver’ KPIs Customer Retention % Lagging, 1st Level Customer Satisfaction Leading, 2nd Level Index On time delivery Time to market for new products Leading, 3rd Level TNA % onwards Defect levels, warranty claims

Slide 46: What is the Objective? ‘Do-or-Die’ KPIs for CNI • Revenue • ARPU • Sponsoring • Retention • Commission Plan (BDP) • Product • Corporate Image

Slide 47: Strategy: Disciplines, Priorities, and KPIs Product Leadership (best product) Operational Excellence Customer Intimacy (low cost producer) (best total solution) Ref: The Discipline of Market Leaders, Michael Treacy & Fred Wiersema; 1995

Slide 48: The McPlaybook* Make it easy to eat Make it easy to prepare • 50% drive-thru • High Turnover • Meals held in one • Tasks simple to learn hand & repeat Make it quick Make what customers want • “Fast Food” • Prowls market for new • Tests new products products for Cooking Times • Monitored field tests *Adapted from: Businessweek , Februrary 5th 2007

Slide 49: Strategy: Disciplines, Priorities, and KPIs Operational Product Leadership Customer Intimacy Excellence • New, state of the • Management by • Competitive price art products or Fact services • Error free, reliable • Easy to do • Risk takers business with • Fast (on demand) • Meet volatile • Have it your way • Simple customer needs (customization) • Responsive • Fast concept-to- • Market segments • Consistent counter of one information for all • Never satisfied - • Proactive, flexible • Transactional obsolete own and • Relationship and competitors' • 'Once and Done' consultative products selling • Learning • Cross selling organization

Slide 50: Strategy: Value Disciplines • 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

Slide 51: 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

Slide 52: Strategy: Value Disciplines • 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

Slide 53: Strategy: Value Disciplines Product Leadership (best product) Operational Excellence Customer Intimacy (low cost producer) (best total solution) Ref: The Discipline of Market Leaders, Michael Treacy & Fred Wiersema; 1995

Slide 54: Strategy: Value Disciplines Product Leadership (best product) Operational Excellence Customer Intimacy (low cost producer) (best total solution) Ref: The Discipline of Market Leaders, Michael Treacy & Fred Wiersema; 1995

Slide 55: Sample KPIs for Each Discipline Operational Product Customer Intimacy Excellence Leadership • Price • Marketing • Customer • Selection Knowledge • Functionality • Convenience • Solutions Offered • Zero Defects • # of Successes • Penetration • Growth • # of Failures • Customer Data • Learn from key • Customer-success users focus • Interdisciplinary teams • Pipeline

Slide 56: MBO – Sources of KRAs and KPIs, Targets 1. Department Scorecard [E3], 2. Employee’s Job Description, 3. Department SOP, 4. Department Quality Objectives, 5. Corrective Action Requests (CAR), 6. Preventive Action Requests (PAR), or 7. Special Projects relevant to the employee.

Slide 57: E3 – Department BSC Financial Perspective Goals Measures Targets CAPEX OPEX Quality Innovation On Time Delivery Budgeting

Slide 58: Individual Performance 1.0 Key 2.0 3.0 4.0 Merit* 5.0 Rating 6.0 Results Goals Achievem (Merit x Appraiser Area (Max and ents and Weight) Overall 6) Targets Efforts for Comments for Q1 Q1 / Feedback

Slide 59: Summary: Today’s presentation  Done 1. Business Model 2. Done Strategy 3. Resources

Slide 60: 3. Budgeting The art and science of allocating and aligning Resources to strategic plans

Slide 61: Budgeting: Some thoughts… Two major roles of Budgeting: 2. Provide real-life CONSTRAINTS to strategic planning 3. Provide RESOURCES to realize strategic plans

Slide 62: Alignment: 4-Wheels Model Business Person Structure Model Strategic Planning Culture Leadership Resources

Slide 63: Alignment: Framework Culture • Focus point • Alignment • Quality • Innovation & Differentiation • Risk taking • Performance Management • Corporate obsession • Decision making

Slide 64: Alignment: Framework Structure • Org Structure • Job Design • C&B • Policies & procedures • Decision making • Job fit • Management Systems • BSC and KPIs • Decentralized & Empower

Slide 65: Strategy: Framework Leadership • Role modeling • Vision/Mission/Philosophy • Leadership Style • Delegation & Empowerment • C&B, Promotions • Sense of Urgency • Speak regularly about Performance

Slide 66: Strategy: Framework • Recognition Person • Recruitment • Training • Profit sharing • Values • Motivation • Self Efficacy • Awareness • Useful Competencies • Career aspirations • Attribution (control)

Slide 67: Strategy: Framework Enablers Resources • Technology • Equipment Funding • Materials • CAPEX • Human • OPEX • Intellectual Property • Partners • Property

Slide 69: Each Discipline Requires Different Priorities & Resources Organization, jobs, skills Culture, values, norms Operational Product Customer Excellence Leadership Intimacy Information and systems Management systems

Slide 70: Each Discipline Requires Different Priorities & Resources Operational Excellence Organization, • Central authority, low level of empowerment jobs, skills • High skills at the core of the organization Culture, values, • Disciplined Teamwork norms • Process, product- driven • Conformance, 'one size fits all' mindset Information and • Integrated, low cost transaction systems systems • The system is the process Management • Command and control systems • Quality management

Slide 71: Each Discipline Requires Different Priorities & Resources Product Leadership Organization, jobs, •Ad hoc, organic and cellular skills •High skills abound in loose-knit structures Culture, values, •Concept, future-driven norms •Experimentation and 'out of the box' mindset Information and •Person-to-person communications systems systems •Technologies enabling cooperation Management •Rewarding individuals' innovative capacity systems •Risk and exposure management •Product Life Cycle profitability

Slide 72: Each Discipline Requires Different Priorities & Resources Customer Intimacy Organization, jobs, • Empowerment close to point of customer contact skills • High skills in the field and front-line Culture, values, • Customer-driven norms • Variation and 'have it your way' mindset Information and • Strong customer databases, linking internal and systems external information • Strong analytical tools Management • Customer equity measures like life time value systems • Satisfaction and share management • Focus on ‘Share of Wallet’

Slide 73: 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

Slide 74: Budgeting vs. Priorities Priority = Time + Money

Slide 75: Budgeting vs. Priorities Example: Business Situation vs. R&D Priorities Upturn Flat Downturn Fight Complacency Innovation Sales Sharpen Edge Acquire Cash Flow Keep Momentum Profits Conquer Build momentum NPD Cycle Time Focused on Improve Top 15% ‘Breakthrough’ Improve Edge revenue-generating JV, In-source, Out- products Extensions source Counter Competitor ↓ R&D, ↑Sales Eliminate bottom 20%

Slide 76: Basic Budgeting policies • Flexibility to switch between line items • Reserve Funds • Loans/External Funding

Slide 77: Activity Grid to determine budget priorities Increase (↑) Create (+) What are features/ What are features/ activities/services to activities/services to increase? introduce? Reduce (↓) Eliminate (-) What are features/ What are features/ activities/services to activities/services to reduce? eliminate?

Slide 78: Budgeting for Investments based on the ‘BCG Matrix’ principles Market Potential CNI’s Performance

Slide 79: 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)

Slide 80: Way back in 2004… • Thomas Cup, Indonesia

Slide 81: Now in 2007… CNI ‘Beemax’ Factory Visit, China 2. Top Leaders 3. Product Development 4. Media

Slide 82: Planning, Budgeting, Schedules, Processes Tying it all up

Slide 83: The Planning & Budgeting Process Stages Output Month 1. Pre-Planning •Current ½ yr budget & revision July - Analysis & •Next yr options and budgets required Sep Brainstorming 2. High-level •High-level strategy of Group Corp Plan. Sep Group Strategy •Circulation of Main Budget simulation to and Targets all departments 3. Functional •BSC & Budget preparation by HODs to Sep - Oct Strategy and HODivs Budgets 4. Formal Results •BSC & Budget to CEOs, followed by BOD Oct-Nov Planning •Revised and Finalized Plans and Budgets 5. Communication •Presentation of Group Budget and Nov-Jan and Cascading Planning summary & distribution •Communication of Highlights to the field and staff

Slide 84: Review processes 1. Result Planning schedule inc. BSC, Budget 2. Quarterly Performance Appraisals 3. EMC – sales performance 4. QMS – non-sales performance 5. Divisional meetings 6. Annual Appraisals 7. Specialized KPI committees 8. CAR, PAR, SCAR KPI improvements 9. Internal Audit & MSD – process problems 10. HRM & TND – people problems 11. Supervisor Induction – PM training 12. Talent Management

Slide 85: Problems still existing 1. No serious budget to tackle key risks 2. Too much optimism or pessimism 3. Innovation vs. Results vs. Baseline 4. Investment ≠ Portfolio Management 5. Top down vs. Bottom up 6. Good to have vs. Need to have 7. Line Manager not thinking like Investors 8. Too focused on KPI and BSC 9. Budget allocation seen as ‘popularity’ vote 10. Public Listing -> pressure for short-term budgets and results vs. long-term innovation

Slide 87: Thank You. soft copy of slides: www.totallyunrelatedrandomanddebatable.b logspot.com

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