Reinventing Budgeting

I was talking the other day with a friend of mine who was preparing for lessons in budgeting on his MBA class. I know January is normally not the time for budgeting, but I decided to write about budgeting anyway, because

So many companies are currently revising their sales estimates and cutting costs

In other words they are revising their sales and cost budgets.

About a year ago I was reading Winning by Jack Welch. One of the chapters in the book is about Reinventing the Ritual – about reinventing budgeting, where Welch is giving a totally different approach to budgeting.

Budgets the wrong way

Before describing how to devicse budgets the right way, he describes two common approaches to budgeting – Negotiated Settlement and Phony Smile.

In Negotiated Settlement (also known as Split the Difference) people in the field come up with conservative targets they absolutely think they can meet, because they are rewarded for hitting budget. Back in headquarters senior managers want to see significant growth in sales and profits, because they are rewarded for increased earnings. Finally and inevitably the sides split the difference, both sides are more or less satisfied and think they can live with the numbers.

In Phony Smile (also known as Everyone Make Nice) people in the field are filled with good ideas, exciting opportunities and bold dreams on where they can go given the right amount of investment. The headquarters smiles and listens to these ideas, but already has plans how to invest and what revenues and earnings they expect. The meeting ends with smiles, but afterwards field gets only part of the investment but is expected to produce higher revenues.

That's budgeting, isn't it? Welch asks, and adds that it's done backwards without thinking of execution.

He then presents a better way – an operating plan that looks forward to hows

• How can we beat last year's performance?
• What is our competition doing, and how can we beat them?
• How can you find out every possible opportunity for growth?
• How various moving parts will be synchronized to achieve targets?

Operating plan needs to include realistic, debated, synchronized and executable product launches, marketing plan, sales plan including new market opportunities, manufacturing plan and productivity plan for improved efficiency in each process.

These should be dealt with simultaneously, since they all interact - optimally in a management workshop where they can be debated.

Jack Welch adds that this kind of budgeting can only happen if compensation is not linked to budget but to actual performance against previous year and competition.

I am yet to participate such a management workshop.

Innovation Experience

Last week I wrote a post about Toyota being known for their innovations. Earlier I have been writing about how ideas come from everywhere, and how ideas come from customers. Now

Toyota is organizing an Innovation Experience and
calling for your ideas to make this world a better place.

"We're constantly challenging ourselves to think of breakthrough ways to make the world a little better. Now it's your turn. We've created a place where we can all join together to make a difference. Come in, explore, and submit your original ideas for others to see and share."

Can YOU make the world a better place?

The competition is open only for legal residents of the US, but the idea is free for anybody to explore.

Long Term Goals

I was walking past a small Toyota car dealer and service shop in Tokyo on Friday morning. I saw a typical Japanese morning meeting being held on the shop floor. I became wondering what might the manager be saying to his staff when

Car sales are falling, exchange rates work against Toyota, and the company expects to post an operating loss for the first time since 1938.

I became curious and checked the importance of this kind of morning meetings in Japanese Business Culture.

Many Japanese businesses start their day off with a morning meeting, where workers line up and chant the company's slogans as a way of inspiring motivation and loyalty, and as a means of keeping the company's goals fresh in their minds.

Obiously Toyota's growth goal must be changed, while staying bigger than GM is still a valid goal.

Toyota is known for their quality and innovation, and I bet that is one thing the manager is stressing his team. They have several other guiding principles that also remain valid.

Toyota's quality and innovation reminded me about an excellent book I read last year - Elegant Solutions: Toyota's Formula for Mastering Innovation

Matthew E. May starts the book by noting that Toyota implements 1 million ideas each year. He continues, Do the math: 3000 ideas a day. That number, more than anything else, explains why Toyota appears to be in a league all their own, playing offense on a field of innovation, while their competitors remain caught in a crossfire of cost-cutting.

Here’s the thing: it’s not about the cars. It’s about ideas. And the people with those ideas. But not just any ideas. Mostly tiny ones, but effective ones nonetheless—elegant solutions to real world problems. Not grand slam homeruns, but groundball singles implemented all across the company by people that view their role not to be simply doing the work, but taking it to the next level…every day, in some little way. Good enough never is. When an entire organization thinks like that, it becomes unstoppable.

There is pleanty of material in the book for my future blog posts. But for the time being the ChangeThis Manifesto below gives you a good overview of the ideas on the book.


You can find the original ChangeThis Manifesto here.

Benefits of a Better Corporate Culture

Just before Christmas Harvard Business School's Working Knowledge Newsletter contained an article about corporate culture. I had just been blogging about culture a week before.

The article asks: Why is it that many of the same companies appear repeatedly on lists of the best places to work, the best providers of customer service, and the most profitable in their industries? The answer lies in recognizing that

strong, adaptive cultures can foster innovation, productivity, and a sense of ownership among employees and customers.

The article lists top 10 lessons from the new book Ownership Quotient by HBS professors Jim Heskett and Earl Sasser and coauthor Joe Wheeler.

1. Leadership is critical in codifying and maintaining an organizational purpose, values, and vision. Leaders must set the example by living the elements of culture.
2. Like anything worthwhile, culture is something in which you invest. An organization's norms and values aren't formed through speeches but through actions and team learning. Strong cultures have teeth. They are much more than slogans and empty promises.
3. Employees at all levels in an organization notice and validate the elements of culture. Converatsions such as the "fairness of my boss" have the underlying theme of the strength and appropriateness of the organization's culture.
4. Organizations with clearly codified cultures enjoy labor cost advantages for the following reasons:
   - They often become better places to work.
   - They become well known among prospective employees.
   - The level of ownership—referral rates and ideas for improving the business of existing employees—is often high.
   - The screening process is simplified, because employees tend to refer acquaintances who - behave like them.
   - The pool of prospective employees grows.
   - The cost of selecting among many applicants is offset by cost savings as prospective employees sort themselves into and out of consideration for jobs.
   - This self-selection process reduces the number of mismatches among new hires.
5. Organizations with clearly codified and enforced cultures enjoy great employee and customer loyalty.
6. An operating strategy based on a strong, effective culture is selective of prospective customers. It also requires the periodic "firing" of customers.
7. The result of all this is "the best serving the best," or as Ritz-Carlton's mission states, "Ladies and gentlemen serving ladies and gentlemen."
8. This self-reinforcing source of operating leverage must be managed carefully to make sure that it does not result in the development of dogmatic cults with little capacity for change. High-performing organizations periodically revisit and reaffirm their core values and associated behaviors.
9. Organizations with strong and adaptive cultures foster effective succession in the leadership ranks. In large part, the culture both prepares successors and eases the transition.
10. Cultures can sour. Among the reasons for this are success itself, the loss of curiosity and interest in change, the triumph of culture over performance, the failure of leaders to reinforce desired behaviors, the breakdown of consistent communication, and leaders who are overcome by their own sense of importance.

It is amazing how important culture is, how easy it is to notice and distinguish good culture from bad, and how difficult culture is to define and measure.

Personally I am happy that I work in a great company with a great culture, great products and great business results.