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Acctg 495

November 7, 2001

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Strategic Objectives

+2

+1

0

-1

-2

Oper.Excellence

CustomerResponsiveness

ProductInnovation/Leadership

+2

+1

0

-1

-2

+2

+1

0

-1

-2

Defining Strategic Objectives

Scale for Each Dimension:0 = Parity with Our Overall Competition+1 = Advantage Over Most of Our Competitors+2 = Significant Competitive Advantage-1 = Disadvantage Relative to Most of Our Competitors-2 = Significant Competitive Disadvantage

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FinancialPerspective

How Do We Look to Shareholders?

Goals:•Improve ROIC

•Reduce SG&A

•Reduce COGS

•Increase SpendEffectiveness

Measures:

CustomerPerspective

How do Our Customers See Us?

Goals:•Retention ofExisting Consumers

•Customer Satisfaction

•ConsumerPerceived Value

Measures:

Internal Business Process Perspective

At What Must We Excel?

Goals:•Highly Effic.Bus. Processes

•Do It Right;The First Time

•ContinuousProcess Improvement

Measures:

Innovation &Learning PerspectiveCan We Continue to Improve &

Add Value?

Goals:• Attract and

Retain Motivated Team Mbrs

• Build/EnhanceSkills

• Teamwork/x-Functional

Measures:

Vision

•Customer/Consumer Satisfaction

•Value to Stakeholders

•Process Efficiency•Accountability•Ability to Evolve toAddress ChangingBusiness Needs

•Stewardship& FiduciaryResponsibility

•Cost Effectiveness•Revenue Generation

•Employee Satisfaction•Skills Alignment•Technology Effectiveness•Entrepreneurial Spirit•Continuous Improvement

Balanced Scorecard

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(1) EBIT: Earnings before interest & taxes

Revenue Growth RateRevenue Growth Rate

EBIT (1)EBIT (1)

Cash Tax RateCash Tax Rate

Working Capital Investment

Working Capital Investment

Fixed Capital InvestmentFixed Capital Investment

Competitive Advantage Period

Competitive Advantage Period

Value Drivers

StrategiesStrategies'Cash out'

'Cash in'

Future cash flows

Weighted average cost

of capital

Strategies to Drive Value

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Strategies to Drive Value

Increase in market share Improved fill rates in the replacement market

Rationalize production sourcing Improve productivity and efficiently in the supply chain Improve linkage between demand and production Reduce number of low volume, low margin offerings in

the product line Reduce unit cost of key raw materials Reduce finished goods logistics and inventory carrying

costs Improve SG&A efficiency Effectively leverage technology

Reduce raw material and WIP inventories Reduce finished goods inventories Leverage technology to reduce accounts receivable

Revenue Growth

Working Capital Reduction

EBIT Improvement

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ROIC Assets

Inventory

AssetUtilization

Cash ConversionCycle

Finished GoodsCosts

WIP InventoryCosts

Raw MaterialsInventory Costs

CSC Costs / Performance

Retail OutletsPerformance

Return onInvestedCapital

A/R Speed /Realization

PerformanceMeasures

Key Drivers Initiatives Global OperationsContribution

• Forecast Accuracy• SKU Productivity• Product Creation

Cycle Time• Inventory Mgmt

Strategies/Policies

• CSC Operational Costs• Improved Process Flow

• In-line• SMU

• Distribution Cycle Time

• Successful Impl. of Strategic Initiatives

• Go-live Perf.• Legacy Integr.

• Information / ITStrategic Plan

• POS Info./Demand Input• Consumer Feedback

• Credit Management• Payment Processing

• Strategic Sourcing• Distribution Cycle Time

IT InfrastructurePerformance

A/P Effectiveness/Terms

How Do Our Performance Measures Drive Value Creation?

Balanced Scorecard

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Innovative New Products

Distribution

Product Portfolio

Market Expansion

Investments in Technology

R&D Focus

Product Availability

New Retail Formats

Brand Leverage

Acquisitions, Alliances and Joint Ventures

Strategic Fit

Dealer ExpansionDealer Support Programs(e.g., Blue Ribbon )

Product Enhancements

Revenue Growth

Brand Equity

Customer Satisfaction

OE Approval Time and Cost

Quantity and Mix New Store Openings

Store Closings and Conversion

Demand “Pull”

Order Fill Rates

Integration

Existing Product Line

New Growth Opportunities

Outlets (Dealers / Company)

Response Time

On Time Delivery

Global IntegrationOE Partnerships

Mass Merchandiser Coverage

OE Share

Pricing Common Policies/Procedures

Satisfaction of Market Needs and Preferences

Time to Market

= Areas most affected by current initiatives

Revenue Growth Drivers

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Efficient Use of Chemicals Division

Production

Procurement

Material Forecasting

Volume Per Vendor

Lead Times

Global R&D

Vendor Rationalization

Integration GY/ Kelly

Design Commonality

Spending Efficiencies

EBIT (COGS)

Vendor Partnerships

Product Rationalization

Continuous Production

Focused Production Facilities

Centralized Buying Power

Firm Ticketing

Efficient RunsProduction Shifting

Backward Integration

Flexibility

Complexity

Capacity Utilization

Concurrency

Tire Uniformity

Production Scheduling

Forecasting Accuracy

Labor Productivity

Communication

Training and Development

Effective Teamwork

Appropriate Skill Sets

Plant Rationalization

Efficiency

Process Efficiencies Shared Best Practices

Price to Quality

Monitoring/Rapid Response to Macroeconomic Factors

Contract Management

Hiring

Equipment Productivity Maintenance and Upgrades

= Areas most affected by current initiatives

EBIT (COGS) Improvement Drivers

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Warehousing

Distribution

Load/Route Planning

Corporate Shared Services

Transportation

Grievance Awareness/ Response

Network Optimization

Load/Route Planning

Safety ProgramsOther

Environmental Health and Safety

Outbound

Compliance

Litigation Control

EBIT (SG&A)

Employee Awareness/Training

Inbound

SalesMedia Mix

Customer Service

Number of Programs

Advertising/Promotions

Integrated and Standardized Systems

Pricing/Trade Discounts

Order Management

Facility Rationalization

Network Optimization

= Areas most affected by SAP and related improvements

EBIT (SG&A) Improvement Drivers

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Discount Management

Balance and Turnover

Inventory

Accounts Receivable

Electronic Commerce Link to Customers

Credit Terms

Payment Methods

Transparent Acct Information

Terms and Conditions Volume of Purchases

Terms and Conditions

Age of Balances

Retail Availability

Electronic Commerce Link

Credit Risk Management

Dispute Settlement

Payable Period

Usage Patterns

Mat’l Forecasting

Balance/Turnover - FG

Balance/Turnover - RM

Accounts Payable

Balance and Turnover

Billing Accuracy

Open Items

Number of Vendors

Working Capital

Frequency of Billings

Past Due Tracking

Yields

Delivery Leadtimes

Items in Transit

Manufacturing Leadtime

Sourcing Alternatives

Obsolescence

Currency Exchange MgmtSupplier Partnerships

Demand Forecast Accuracy

= Areas most affected by current initiatives

Working Capital Investment Drivers

Portfolio of Opportunities: The value map

Capital invested

“Which projects are creating value with minimal capital requirements?”

Value

Project A

Project B

Project CProject D

Value created exceeds capital

invested

Capital invested is less than value

created

Shareholder value

Value creating project

Value consuming projects

Overall

Many times, a portfolio must be disaggregated to determine which projects are adding or consuming value

Value Proposition: The Definition

A description of the impact or outcome of a project, e.g., improve customer service

The “unit of analysis” used to evaluate results, e.g., percent decrease in product returns/refunds

The extent to which our work and the measured benefit matches what the client had anticipated

Benefit

Measure

Alignment with expectations

Expectation

Value Proposition: The DefinitionA simple but powerful concept, a clear statement of an initiative's measurable business results

There are several categories of Value Propositions

Direct link to Value

Time

Quantifiable Non-Financial

benefits

Quantifiable Financial Benefits

Quantifiable Financial benefits

and Costs

Value-Based Management

MIGRATION PATH

Most Organisations are migrating toward making more direct links between project efforts and measurements of value

Value Proposition: The Definition

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justifies a choice, rather than necessarily seeking to solve an issue

single stream perspective, i.e. considering the NPV of one investment rather than impact on the overall cash position

single hurdle rate applied to all projects, which is often too high

tends to be self-fulfilling and not particularly objective, i.e. most business cases are designed to be approved

relies heavily on good judgement, often with little connection to the thinking contained in strategic plans or other business initiatives

Weaknesses of traditional Business Cases...

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VALUE ANALYSIS APPLICATION

Understanding the value performance of the business

IMPLEMENTATION

Changing the management of the business to focus on it’s value priorities

Taking actions using a VALUE PROPOSITION to improve the value of the business

Value Based Management Process

Limit Value

Value & Growth Profile

0%

0%

4%

-4%

-4% 4%-2% 2%

-2%

2%

Destroying Value

Creating Value

Market Growth

Unit A

Unit C

Unit D

Unit B

VALUE CREATED

Revenue

Growth and

retention

initiatives

Margin improve

ment initiative

s

CUSTOMER VALUE

OPERATIONAL VALUE

Reduced sales returns

Work Centre Consolidation c.20%

Job Redesign

Changes in Working Practices

c.10%

c.10%

Integrated Order ManagementSystem (i.e. SAP R/3)

Performance Management

c.20%

c.30%

%Benefit

Improvement Opportunity

Impact on Value

Measure

Investment Cost

Benefits

Value ChainDevelop

Products/ Services

Perform Procurement

Produce Products / Services

Manage Logistics /

Distribution

Perform Marketing / Sales,Manage Customer Service

Produce Products / Services•Underlying cash flow

focus to yearly ESP•Decision model established based on business drivers

BUSINESS PLANNING

•Financial and non-financial measures linked to business drivers and strategic objectives

PERFORMANCE MEASUREMENT

•Action oriented performance feedback

•Decision making model reviewed

REPORTING

Real time decision making

Supporting Change Activities•Communication•Training and Development

•Personal Rewards

•Organisation•Leadership and Vision•Culture

Value Reporting

Where Value becomes real, and ...

Value Based Management

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… integrates competencies from three major disciplines.

Finance

Org. Change

Strategy

Vision

Value Based Management