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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

Published in: Business
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Strategic Planning And Budgeting Part 2: Alignment, Budgeting, and Resources

  1. 1. STRATEGIC PLANNING AND BUDGETING Part 2: Alignment, Budgeting and Resources Case Study, Concepts and Debatable Ideas Kenny Ong CNI Holdings Berhad
  2. 2. Summary: Today’s presentation 1. Business Model  Done 2. Strategy 3. Alignment 4. Resources  Done
  3. 3. 3. Align the business to the strategy Dangers of Benchmarking, BSC, KPIs and other evils sold by Consultants
  4. 4. <ul><li>“… 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&quot; </li></ul>CEO, Anonymous
  5. 5. Before we start… <ul><li>In the old days of HR… </li></ul><ul><li>Average training hours per staff </li></ul><ul><li>% of staff attending training </li></ul><ul><li># of training programs </li></ul><ul><li>% of training programs conducted </li></ul><ul><li>Training needs analysis conducted </li></ul><ul><li>Competency models developed </li></ul><ul><li>Training budget as % of payroll </li></ul>What’s wrong with this picture?
  6. 6. Before we start… <ul><li>Moral of the story… </li></ul><ul><li>Innovation: </li></ul><ul><ul><li>Business models </li></ul></ul><ul><ul><li>Products </li></ul></ul><ul><ul><li>Services </li></ul></ul><ul><li>Market Leadership </li></ul><ul><li>Competitive differentiation </li></ul>Get the picture?
  7. 7. Wrong KPIs <ul><li>“ What is the moral of the story?” </li></ul>
  8. 8. Dangers of Best Practice and Benchmarking… “ Abraham Wald’s Work on Aircraft Survivability”, M. Mangel and F.J. Samaniego Where would you focus reinforcement? www.myCNI.com.my www.OOBEY.com
  9. 9. Dangers of Best Practice and Benchmarking… www.myCNI.com.my www.OOBEY.com Company Performance high low ‘ Best Practice’ theories low high zero Performance “ Selection Bias and the Perils of Benchmarking”, Jerker Denrell, Harvard Business Review 2005 Trend line
  10. 10. Dangers of Best Practice and Benchmarking… www.myCNI.com.my www.OOBEY.com Company Performance high low ‘ Best Practice’ theories low high zero Performance “ Selection Bias and the Perils of Benchmarking”, Jerker Denrell, Harvard Business Review 2005 Trend line
  11. 11. Dangers of Best Practice and Benchmarking… <ul><li>Selection Bias: </li></ul><ul><li>Success Traits = Failure Traits </li></ul><ul><li>Successful Cases + Failure Cases </li></ul><ul><li>Worst effects in ‘Old’ industries </li></ul><ul><li>Overvalue ‘best practice’ theories </li></ul><ul><li>Current accomplishments unfairly magnified by past achievements </li></ul><ul><li>Reverse Causal </li></ul>
  12. 12. Dangers of Best Practice and Benchmarking… <ul><li>Also known as ‘Beware of Consultants’: </li></ul><ul><li>Selection Bias </li></ul><ul><li>Big vs. Small company </li></ul><ul><li>Selective success stories </li></ul><ul><li>Correlation vs. Causal </li></ul><ul><li>Survey problems </li></ul><ul><li>Practical vs. Glamour-to-have </li></ul><ul><li>Leaders who benchmark </li></ul>www.myCNI.com.my www.OOBEY.com
  13. 13. Survey Problems… <ul><li>“ 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 .” </li></ul>HBR March/April 1996 www.myCNI.com.my www.OOBEY.com
  14. 14. Why BSC? <ul><li>Reason 1: Balanced </li></ul><ul><li>Reason 2: Cause-and-Effect </li></ul>www.myCNI.com.my www.OOBEY.com
  15. 15. Focus: Corporate Alignment 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?&quot; 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?
  16. 16. Linking BSC to Strategy 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
  17. 17. Focus: Corporate Alignment Financial Learning & Growth Internal Process Customers / Distributors Revenue Growth Productivity Market Value Department Operations Supplier & Alliances External Involvement Target Markets Products/ Services Channel Strategies Human Resources Technology Information & Intelligence Systems & Processes
  18. 18. Example: Selection of KPIs for BSC <ul><li>Customer satisfaction </li></ul><ul><li>Customer loyalty </li></ul><ul><li>Market share </li></ul><ul><li>Customer complaints </li></ul><ul><li>Complaints resolved on first contact </li></ul><ul><li>Return rates </li></ul><ul><li>Response time per customer request </li></ul><ul><li>Price relative to competition </li></ul><ul><li>Total cost to customer </li></ul><ul><li>Average duration of customer relationship </li></ul><ul><li>Customers lost </li></ul><ul><li>Customer retention </li></ul><ul><li>Customer acquisition rates </li></ul><ul><li>Percentage of revenue form new customers </li></ul><ul><li>Number of customers </li></ul><ul><li>Annual sales per turnover </li></ul><ul><li>Win rate (sales closed/sales contact) </li></ul><ul><li>Customer visits to the company </li></ul><ul><li>Hours spent with customers </li></ul><ul><li>Marketing cost as a percentage of sales </li></ul><ul><li>Number of ads placed </li></ul><ul><li>Number of proposals made </li></ul><ul><li>Brand recognition </li></ul><ul><li>Response rate </li></ul><ul><li>Number of trade shows attended </li></ul><ul><li>Sales volume </li></ul><ul><li>Share of target customer spending </li></ul><ul><li>Sales per channel </li></ul><ul><li>Average customer size </li></ul><ul><li>Customers per employee </li></ul><ul><li>Customer service expense per customer </li></ul><ul><li>Customer profitability </li></ul><ul><li>Frequency (number of sales transactions) </li></ul>
  19. 19. Example: 1 st Level BSC & KPIs Financial Learning & Growth Internal Process Customers / Distributors 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
  20. 20. Sample: Other 1 st Level KPIs across industries… <ul><li>Single view of customers across supply chain </li></ul><ul><li>Zero-error order capture </li></ul><ul><li>Streamline opportunity to cash processes </li></ul><ul><li>Leverage investment in ERP and backoffice systems </li></ul><ul><li>Increase customer loyalty and preference </li></ul><ul><li>Maximize customer revenue </li></ul><ul><li>Improve service quality and efficiency </li></ul><ul><li>Capture and close sales opportunities </li></ul><ul><li>Personalized customer experience </li></ul><ul><li>Maximize share of wallet </li></ul><ul><li>Player/customer loyalty </li></ul><ul><li>Multichannel customer service </li></ul>Manufacturing Travel & Leisure Hospitality <ul><li>Anticipate and prevent churn despite compensation </li></ul><ul><li>Increase number of products per customer </li></ul><ul><li>Turn call center information opportunity to up-sell and cross-sell </li></ul><ul><li>Increase customer satisfaction and loyalty </li></ul><ul><li>Understand customer behavior related to customer conversion, acquisition, and retention </li></ul><ul><li>Single view of customer </li></ul><ul><li>Multichannel customer experience </li></ul><ul><li>Personalized customer experience </li></ul><ul><li>Maximize ARPU </li></ul><ul><li>Minimize Churn </li></ul><ul><li>Mutichannel customer service </li></ul>Telecommunications Retail Financial Services
  21. 21. Lagging and Leading KPIs Historical, Outcome, Results, 1 st Level, Usually Financial or tangible, Quarterly and Annually Current, Indicators, Drivers, 2 nd Level onwards, usually non-financial or intangible, Weekly, Monthly and Quarterly Leading Lagging
  22. 22. Developing ‘Driver’ KPIs Customer Retention % Lagging, 1 st Level Customer Satisfaction Index Leading, 2 nd Level On time delivery Time to market for new products TNA % Defect levels, warranty claims Leading, 3 rd Level onwards
  23. 23. Strategy: Disciplines, Priorities, and KPIs 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)
  24. 24. <ul><li>Product Leadership </li></ul><ul><li>New, state of the art products or services </li></ul><ul><li>Risk takers </li></ul><ul><li>Meet volatile customer needs </li></ul><ul><li>Fast concept-to- counter </li></ul><ul><li>Never satisfied - obsolete own and competitors' products </li></ul><ul><li>Learning organization </li></ul>Strategy: Disciplines, Priorities, and KPIs <ul><li>Operational Excellence </li></ul><ul><li>Competitive price </li></ul><ul><li>Error free, reliable </li></ul><ul><li>Fast (on demand) </li></ul><ul><li>Simple </li></ul><ul><li>Responsive </li></ul><ul><li>Consistent information for all </li></ul><ul><li>Transactional </li></ul><ul><li>'Once and Done' </li></ul><ul><li>Customer Intimacy </li></ul><ul><li>Management by Fact </li></ul><ul><li>Easy to do business with </li></ul><ul><li>Have it your way (customization) </li></ul><ul><li>Market segments of one </li></ul><ul><li>Proactive, flexible </li></ul><ul><li>Relationship and consultative selling </li></ul><ul><li>Cross selling </li></ul>
  25. 25. <ul><li>Operational Excellence </li></ul><ul><ul><ul><li>Move know-how from top performing units to others </li></ul></ul></ul><ul><ul><ul><li>Benchmark against best in class </li></ul></ul></ul><ul><ul><ul><li>Ensure operations training for all employees </li></ul></ul></ul><ul><ul><ul><li>Use disciplines like TQM for continuous learning to reduce costs and improve quality </li></ul></ul></ul>Strategy: Value Disciplines
  26. 26. Strategy: Value Disciplines <ul><li>Customer Intimacy </li></ul><ul><ul><ul><li>Capture knowledge about customers </li></ul></ul></ul><ul><ul><ul><li>Understand customer needs </li></ul></ul></ul><ul><ul><ul><li>Empower front line employees </li></ul></ul></ul><ul><ul><ul><li>Ensure that everyone knows the customer </li></ul></ul></ul><ul><ul><ul><li>Make company knowledge available to customers </li></ul></ul></ul>
  27. 27. <ul><li>Product Leadership </li></ul><ul><ul><ul><li>Reduce time to market </li></ul></ul></ul><ul><ul><ul><li>Commercialize new products fast </li></ul></ul></ul><ul><ul><ul><li>Ensure that ideas flow </li></ul></ul></ul><ul><ul><ul><li>Reuse what other parts of the company have already learned </li></ul></ul></ul><ul><ul><ul><li>Ensure there are multiple sources of funding </li></ul></ul></ul>Strategy: Value Disciplines
  28. 28. Strategy: Value Disciplines 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)
  29. 29. Strategy: Value Disciplines 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)
  30. 30. Sample KPIs for Each Discipline <ul><li>Operational Excellence </li></ul><ul><li>Price </li></ul><ul><li>Selection </li></ul><ul><li>Convenience </li></ul><ul><li>Zero Defects </li></ul><ul><li>Growth </li></ul><ul><li>Customer Intimacy </li></ul><ul><li>Customer Knowledge </li></ul><ul><li>Solutions Offered </li></ul><ul><li>Penetration </li></ul><ul><li>Customer Data </li></ul><ul><li>Customer-success focus </li></ul><ul><li>Product Leadership </li></ul><ul><li>Marketing </li></ul><ul><li>Functionality </li></ul><ul><li># of Successes </li></ul><ul><li># of Failures </li></ul><ul><li>Learn from key users </li></ul><ul><li>Interdisciplinary teams </li></ul><ul><li>Pipeline </li></ul>
  31. 31. E3 – Department BSC Financial Perspective Budgeting On Time Delivery Innovation Quality OPEX CAPEX Targets Measures Goals
  32. 32. Summary: Today’s presentation 1. Business Model  Done 2. Strategy 3. Alignment 4. Budgeting  Done  Done
  33. 33. 4. Budgeting The art and science of allocating and aligning Resources to strategic plans
  34. 34. Budgeting: Some thoughts… <ul><li>Two major roles of Budgeting: </li></ul><ul><li>Provide real-life CONSTRAINTS to strategic planning </li></ul><ul><li>Provide RESOURCES to realize strategic plans </li></ul><ul><li>Why Constraints? </li></ul><ul><li>Over aggressive unrealistic planning, usually by Marketing/Sales need to be grounded to real life </li></ul><ul><li>Creative entrepreneurial thinking when resources are limited </li></ul><ul><li>Enforce the need for Accountability i.e. ‘ROI’ thinking for all Managers </li></ul>
  35. 35. Alignment: 4-Wheels Model Culture Business Model Strategic Planning Structure Person Leadership Resources
  36. 36. Alignment: Framework <ul><li>Focus point </li></ul><ul><li>Alignment </li></ul><ul><li>Quality </li></ul><ul><li>Innovation & Differentiation </li></ul><ul><li>Risk taking </li></ul><ul><li>Performance Management </li></ul><ul><li>Corporate obsession </li></ul><ul><li>Decision making </li></ul>Culture
  37. 37. Alignment: Framework <ul><li>Org Structure </li></ul><ul><li>Job Design </li></ul><ul><li>C&B </li></ul><ul><li>Policies & procedures </li></ul><ul><li>Decision making </li></ul><ul><li>Job fit </li></ul><ul><li>Management Systems </li></ul><ul><li>BSC and KPIs </li></ul><ul><li>Decentralized & Empower </li></ul>Structure
  38. 38. Strategy: Framework <ul><li>Role modeling </li></ul><ul><li>Vision/Mission/Philosophy </li></ul><ul><li>Leadership Style </li></ul><ul><li>Delegation & Empowerment </li></ul><ul><li>C&B, Promotions </li></ul><ul><li>Sense of Urgency </li></ul><ul><li>Speak regularly about Performance </li></ul>Leadership
  39. 39. Strategy: Framework <ul><li>Recognition </li></ul><ul><li>Recruitment </li></ul><ul><li>Training </li></ul><ul><li>Profit sharing </li></ul><ul><li>Values </li></ul><ul><li>Motivation </li></ul><ul><li>Self Efficacy </li></ul><ul><li>Awareness </li></ul><ul><li>Useful Competencies </li></ul><ul><li>Career aspirations </li></ul><ul><li>Attribution (control) </li></ul>Person
  40. 40. Strategy: Framework <ul><li>Enablers </li></ul><ul><li>Technology </li></ul><ul><li>Equipment </li></ul><ul><li>Materials </li></ul><ul><li>Human </li></ul><ul><li>Intellectual Property </li></ul><ul><li>Partners </li></ul><ul><li>Property </li></ul><ul><li>Funding </li></ul><ul><li>CAPEX </li></ul><ul><li>OPEX </li></ul>Resources
  41. 41. Alignment: 4-Wheels Model Culture Business Model Strategic Planning Structure Person Leadership Resources
  42. 42. <ul><li>Product Leadership </li></ul>Each Discipline Requires Different Priorities & Resources Operational Excellence Customer Intimacy Organization, jobs, skills Management systems Information and systems Culture, values, norms
  43. 43. Each Discipline Requires Different Priorities & Resources <ul><li>Operational Excellence </li></ul><ul><li>Central authority, low level of empowerment </li></ul><ul><li>High skills at the core of the organization </li></ul><ul><li>Disciplined Teamwork </li></ul><ul><li>Process, product- driven </li></ul><ul><li>Conformance, 'one size fits all' mindset </li></ul><ul><li>Integrated, low cost transaction systems </li></ul><ul><li>The system is the process </li></ul><ul><li>Command and control </li></ul><ul><li>Quality management </li></ul>Organization, jobs, skills Management systems Information and systems Culture, values, norms
  44. 44. <ul><li>Product Leadership </li></ul><ul><li>Ad hoc, organic and cellular </li></ul><ul><li>High skills abound in loose-knit structures </li></ul><ul><li>Concept, future-driven </li></ul><ul><li>Experimentation and 'out of the box' mindset </li></ul><ul><li>Person-to-person communications systems </li></ul><ul><li>Technologies enabling cooperation </li></ul><ul><li>Rewarding individuals' innovative capacity </li></ul><ul><li>Risk and exposure management </li></ul><ul><li>Product Life Cycle profitability </li></ul>Each Discipline Requires Different Priorities & Resources Organization, jobs, skills Management systems Information and systems Culture, values, norms
  45. 45. Each Discipline Requires Different Priorities & Resources Organization, jobs, skills Management systems Information and systems Culture, values, norms <ul><li>Customer Intimacy </li></ul><ul><li>Empowerment close to point of customer contact </li></ul><ul><li>High skills in the field and front-line </li></ul><ul><li>Customer-driven </li></ul><ul><li>Variation and 'have it your way' mindset </li></ul><ul><li>Strong customer databases, linking internal and external information </li></ul><ul><li>Strong analytical tools </li></ul><ul><li>Customer equity measures like life time value </li></ul><ul><li>Satisfaction and share management </li></ul><ul><li>Focus on ‘Share of Wallet’ </li></ul>
  46. 46. Managing Gaps between actual and planned budgets <ul><li>Budgeting vs. Priorities </li></ul><ul><li>Basic Budgeting policies </li></ul><ul><li>Activity Grid to determine budget priorities </li></ul><ul><li>Budgeting for Investments based on the ‘BCG Matrix’ principles </li></ul>
  47. 47. Budgeting vs. Priorities <ul><li>Priority = Time + Money </li></ul>
  48. 48. 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
  49. 49. Basic Budgeting policies <ul><li>Flexibility to switch between line items </li></ul><ul><li>Reserve Funds </li></ul><ul><li>Loans/External Funding </li></ul>
  50. 50. Activity Grid to determine budget priorities <ul><li>Manage conflicts where limited resources should go </li></ul><ul><li>Solve problem of compounding activities & resources </li></ul>Eliminate (-) What are features/ activities/services to eliminate? Reduce (↓) What are features/ activities/services to reduce? Create (+) What are features/ activities/services to introduce? Increase ( ↑) What are features/ activities/services to increase?
  51. 51. Budgeting for Investments based on the ‘BCG Matrix’ principles Business Performance Market Potential
  52. 52. How to maximize Budget? <ul><li>Align budget to priorities </li></ul><ul><li>Integration of businesses and functions for teamwork </li></ul><ul><li>Do practical, implementable stuff that bring real results (hard work) </li></ul>
  53. 53. Budgeting in a Downturn
  54. 54. Budgeting in a Downturn
  55. 55. Budgeting in a Downturn
  56. 56. Budgeting in a Downturn
  57. 57. Budgeting in a Downturn <ul><li>StratEx </li></ul><ul><li>CoREx </li></ul>
  58. 58. Planning, Budgeting, Schedules, Processes Tying it all up
  59. 59. The Planning & Budgeting Process Nov-Jan <ul><li>Presentation of Group Budget and Planning summary & distribution </li></ul><ul><li>Communication of Highlights to the field and staff </li></ul>5. Communication and Cascading Oct-Nov <ul><li>BSC & Budget to CEOs, followed by BOD </li></ul><ul><li>Revised and Finalized Plans and Budgets </li></ul>4. Formal Results Planning Sep - Oct <ul><li>BSC & Budget preparation by HODs to HODivs </li></ul>3. Functional Strategy and Budgets Sep <ul><li>High-level strategy of Group Corp Plan. </li></ul><ul><li>Circulation of Main Budget simulation to all departments </li></ul>2. High-level Group Strategy and Targets July - Sep <ul><li>Current ½ yr budget & revision </li></ul><ul><li>Next yr options and budgets required </li></ul>1. Pre-Planning Analysis & Brainstorming Month Output Stages
  60. 60. Review processes <ul><li>Result Planning schedule inc. BSC, Budget </li></ul><ul><li>Quarterly Performance Appraisals </li></ul><ul><li>Sales performance </li></ul><ul><li>Non-sales performance </li></ul><ul><li>Divisional meetings </li></ul><ul><li>Annual Appraisals </li></ul><ul><li>Specialized KPI committees </li></ul><ul><li>CAR, PAR, SCAR KPI improvements </li></ul><ul><li>Internal Audit – process problems </li></ul><ul><li>HRM & TND – people problems </li></ul><ul><li>Supervisor Induction – PM training </li></ul><ul><li>Talent Management </li></ul>
  61. 61. Problems, problems and more problems…
  62. 62. Problems, problems and more problems… <ul><li>No serious budget to tackle key risks </li></ul><ul><li>Too much optimism or pessimism </li></ul><ul><li>Innovation vs. Results vs. Baseline </li></ul><ul><li>Investment ≠ Portfolio Management </li></ul><ul><li>Top down vs. Bottom up </li></ul><ul><li>Good to have vs. Need to have </li></ul><ul><li>Line Manager not thinking like Investors </li></ul><ul><li>Too focused on KPI and BSC </li></ul><ul><li>Budget allocation seen as ‘popularity’ vote </li></ul><ul><li>Public Listing -> pressure for short-term budgets and results vs. long-term innovation </li></ul>
  63. 63. Alignment: 4-Wheels Model Culture Business Model Strategic Planning Structure Person Leadership Resources
  64. 64. Thank You. soft copy of slides: www.totallyunrelatedrandomanddebatable.blogspot.com

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