Download - Practical Budgeting
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Practical Budgeting and
Control TechniquesTarget, Resource Allocation,
Initiative and Budgets
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Achieving Success in the
Information Era To achieve success in the information era,
companies need more than prudent
investment in physical assets and excellentmanagement of financial assets andliabilities
Companies mobilize and create value fromtheir intangible assets as well as theirphysical and financial ones
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Intangible Assets An organizations intangible assets
include:
Loyal and profitable customer relationships
High-quality processes
Innovative products and services
Employee skills and motivation
Databases and information systems
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Measuring Intangible Assets Difficulties in placing a reliable financial value
on intangible assets have prevented them
from being recognized on a companysbalance sheet
These assets are critical for success
Managers have searched for a system thatwould help them measure and manage theperformance of their intangible, knowledge-based assets
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The Balanced Scorecard The Balanced Scorecard (BSC) provides a
system for measuring and managing all aspects
of a companys performance The scorecard balances traditional financial
measures of success, such as profits and returnon capital, with non-financial measures of the
drivers of future financial performance The Balanced Scorecard measures
organizational performance across differentperspectives
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Perspectives
Four different but linked perspectives are
derived from the organizations strategy Financial
Customer
Internal
Learning & Growth
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Balanced Measurements The BSC enables companies to:
Track financial results Monitor how they are building the
capabilities for future growth andprofitability
With customers
With their internal processes
With their employees and systems
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Connecting the Four Perspectives
A strategymap provides a visual representationof the linkages in the four perspectives of the BSC
Financial Perspective Return on Investment
Customer Perspective Customer Loyalty
On-Time Delivery
Internal Perspective
Learning & Growth
Perspective
Process Quality Cycle Time
Employees Process Improvement Skills
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Connections Return on investment (ROI) is a widely
recognized measure of financial success
Repeated and expanded sales from existingcustomers, the result of a high degree ofloyalty among existing customers, could be
one driver of this financial measure
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Connections Analysis of customer preferences may
reveal that on-time delivery (OTD) of orders
is highly valued by customers The company must excel at internal
processes to achieve exceptional OTD
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Connections Short cycle times and high-quality production
processes are two drivers of on-time delivery
The company must have skilled productionworkers, well-trained in process improvementtechniques
A measure of employees skill and capabilitiesin process improvement is used in theLearning & Growth perspective
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Strategy and the BSC A BSC tells the story of the business unit's
strategy
A BSC identifies and makes explicit thehypotheses about the cause and effectrelationships between:
Outcome measures in the Financial andCustomer perspectives
Performance drivers of those outcomes in theInternal and Learning & Growth perspectives
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Vision and Mission Before determining the objectives and
measures, an organization shouldalready have a visionand missionstatement
High-level statements that can then
be translated into detailed objectivesand measures
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Vision A concise statement that defines the mid
to long-term (3 - 10 year) goals of the
organization
The vision should be external and market-oriented and should express, often in
colorful or visionary terms, how theorganization wants to be perceived by theworld:
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VisionThe City of Charlotte will be a model of
excellence that puts its citizens first. Skilled,
motivated employees will be known forproviding quality and value in all areas ofservice. We will be a platform for vitaleconomic activity that gives Charlotte a
competitive edge in the marketplace. We willpartner with citizens and businesses to makeCharlotte a community of choice for living,working and leisure activities
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Mission Statement A concise, internally-focused statement
of how the organization expects tocompete and deliver value to customers
It often states the reason for theorganizations existence, the basic
purpose towards which its activities aredirected, and the values that guideemployees activities:
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Mission StatementThe mission of the City of Charlotte is to ensure the
delivery of quality public services that promote thesafety, health and quality of life of its citizens. We
will identify and respond to community needs andfocus on the customer through:
Creating and maintaining effective partnerships
Attracting and retaining skilled motivated
employees Using strategic business planning
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Putting Vision in Action
The Vision and Mission set the general directionfor the organization
They are intended to help shareholders,customers, and employees understand what thecompany is about and what it intends toachieve
Companies start to make the statementsoperational when they define a strategyof howthe vision and mission will be achieved
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What is Strategy? Strategy is aboutselecting the setofactivities in whichan organization willexcel to create asustainabledifference in the marketplace
Differentiation arises from both the
choice of activities and how they areperformed (Porter)
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Building the Balanced Scorecard
The role for the BSC is to provide
needed specificity that makes vision,mission and strategy statementsmeaningful and actionable foremployees
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Financial Perspective
The ultimate objective for profit-maximizingcompanies
Financial performance measures indicatewhether the company's strategy,implementation, and execution arecontributing to bottom-line improvement
A companys financial performance can beimproved in two ways:
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Financial Perspective Companies generate revenue growth by:
Selling new products
Selling to new customers Selling in new markets
Increased productivity occurs by:
Lowering direct and indirect expenses Utilizing their financial and physical
assets more efficiently
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Customer Perspective Identify the targeted customer segments in which
the business unit competes and the measures ofthe business unit's performance in these targeted
segments This perspective typically includes several
common measures of the successful outcomesfrom a well-formulated and implemented
strategy: Customer
satisfaction
Customer retention
Customer acquisition
Customer profitability
Market share
Account share
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Customer Perspective
A strategy identifies specific segments
targeted for growth and profitability
Companies must also identify the objectivesand measures for the value proposition itoffers customers
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Customer Perspective The value proposition is the unique mix of product,
price, service, relationship, and image offered to thetargeted customers
Defines the companys strategy
Communicate what the company expects to do for itscustomers better or differently from its competitors
Value propositions used successfully by differentcompanies include:
Best buy or lowest total cost
Product innovation and leadership
Complete customer solutions
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Internal Perspective Means by which the organization will:
Produce and deliver the value proposition for
customers Achieve the productivity improvements for the
financial objectives
The Internal perspective identifies the criticalprocesses at which the organization must excelto achieve its customer, revenue growth, andprofitability objectives
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Internal Perspective Organizations perform many different
processes, which may be classified into four
groupings: Operating processes
Day-to-day processes by which companiesproduce their existing products andservices and deliver them to customers
Customer management processes
Processes by which companies expand
relationships with targeted customers
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Internal Perspective Innovation processes
Processes by which companies develop new
products, processes, and services,
Regulatory and social processes
Processes by which companies ensure that
they meet or exceed regulations on businesspractices
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Learning & Growth Perspective
Identifies objectives for the people, systems, andorganizational alignment that create long-term growthand improvement
Define the employee capabilities, skills, technology,and organizational alignment that will contribute toimproving performance in the measures selected in thefirst three perspectives
Identify investments needed to improve the skills ofemployees, enhance information technology andsystems, and align people to the companys objectives
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Learning & Growth Perspective
Identifies how executives mobilize theirintangible assets to drive improvement in
the internal processes most important forimplementing their strategy
Examines each of the processes they
selected in the Internal perspective
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Learning & Growth Perspective
Determine the factors that enable that processto be performed in an outstanding manner so
that it can contribute to the success of thecompanys strategy:
Employee capabilities, knowledge, and skills
Information systems and databases
Employee culture, alignment, and knowledge-sharing
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Using BSC to Implement
Strategy BSC was originally developed to improve
performance measurement, but
organizations learned that measurementhas consequences far beyond reporting onthe past
The BSC concept evolved during the1990s from a performance measurementsystem to a new strategic management
system
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Objectives Concise statements that articulate what the
organization hopes to accomplish
Action phrases
Tell the story of the strategy through thecause-and-effect relationships
Extensive (3-5 sentence) description of eachobjective
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Objectives Typical objectives found in each of the four BSC
perspectives include:
Increase revenues through expanded sales toexisting customers (Financial perspective)
Become service oriented (Customer perspective)
Achieve excellence in order fulfillment throughcontinuous process improvements (Internal
perspective)
Align employee incentives and rewards with thestrategy (Learning & Growth perspective)
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Measures Provide specificity and reduce the
ambiguity that is inherent in word
statements Specifying exactly how an objective is
measured will give employees a clear
focus for their improvement efforts Once the objectives have been
translated into measures, managers
selecttargets for each measure
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Targets and Initiatives Targetsestablish the level of performance
or rate of improvement required for a
measure Should be set to represent excellent
performance
Should, if achieved, place the company asone of the best performers in its industry
Initiatives are the short-term programsand action plans that will help achieve the
stretch targets established for its measures
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Strategy Brochure based on the
balance scorecardCorporate goals Target Initiative
Shareholders Financially strong
To deliver strong andconsistent financialperformance
Cash flow as %
of revenue
Continued to reduce
departmental unit costswith gap closure
Optimized traffic mix,yields and third partyrevenues
Improves the
performance of theairlines capital assets
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Account management/
selling strategic initiativeObjective Measurement Target Action
program
Exceed Marketgrowth
Profitabilitygrowth
Sales growth
Margin growth
Marketgrowth+2%+ 5points in 3years
Perceived value
for moneyRelationships atmultiple levels
Customer survey
Contacts withtargeted sponsors
Rated 1 by
75%100%
Focus group
programAccountpenetrationprogram
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Account management/selling strategic initiative
Objective Measurement Target Action program
Maximizeretention
Develop regionalmarkets
Identifyprofitability newmarkets
Win/lose rate
Potential revenue insales pipeline
Potential customersarrive first
Surprises
Exceed 60%in targetedsegments
increase by30%
Critical opportunitysales support
Reference sellprogram
Develop
marketing skillsDevelop customerdatabase
Percent of strategic
skills availablePercent of customerswith key attributesknows
100% in 2
years
80% in 2years
Selling skills
program
Customer database
Sales learningsystem
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KPI Scorecards
Some organizations identify key performanceindicators (KPIs) and classify them into the four
BSC perspectives KPIs typically are common measures, such as
customer satisfaction, quality, cost, employeesatisfaction, and morale
Companies may expand their compensationsystem to reward executives for a broader set ofperformance than simply short-term financialresults based on KPIs
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BSC in Nonprofits and Government
Organizations The BSC is especially well-suited for nonprofit and
government organizations (NPGOs)
Their success has to be measured by theireffectiveness in providing benefits to constituents
Since nonfinancial measures can assessperformance with constituents, the BSC provides
the natural performance management system forNPGOs
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NPGOs and Strategy Many NPGOs encountered difficulties in
developing their initial BSC, finding that
they didnt have a clear strategy Many NPGOs place their mission objective
at the top of their scorecard and strategymap Cannot use the standard BSC architecture
where financial objectives are the ultimate,high-level outcomes to be achieved
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5 Principles for BecomingStrategy-Focused
Organizations achieved their strategic alignment and focusin different ways, at different paces, and in differentsequences, but they generally followed a common set of
five principles:1. Translate the Strategy to Operational Terms
2. Align the Organization to the Strategy
3. Make Strategy Everyones Job
4. Make Strategy a Continual Process5. Mobilize Leadership for Change