MCS - Emerson Electric - Session 6

1) Strong and weak points:

Exhibit 1- The value measurement chart
Advantages
-Lets managers compare the past performance and see where company is now and where it will
be going in the future. Based on this its can help them make important strategic decision for the
company,
Disadvantage
-It does not include the forecast years 1-4, this might not give a complete picture of the
company in five years time.
-When divisional managers are forecasting they will always show a positive picture of the
division, this could lead the top management to make a wrong decision if the forecast does not
go as planned.
- No consideration of market data and market risk it taken into consideration when they are
using this type forecast. Market data is key as any change is the market can not only a
particular division but the company as a whole. Things like inflation, recession and economic
growth rate needs to be considered when forecasting.
-If the forecast is wrong management might make decisions such as cost savings which could
cause missed opportunities.

Exhibits 2 and 3- The Sales Gap Chart and Sales Gap Line Chart
Advantage
-Take market data into consideration
Disadvantage
-Could be time consuming for top management and divisional management to discuss and align
their forecast in one direction
-From the exhibit, direct comparison with market data is not possible

Exhibit 4 - The 5 back by 5 5 forward P&L

Advantages
-Open dialogue and discussion is encouraged between top management and divisional
management.
-It shows the trends/movements for the past 5 years, which serves as a basis for future financial
forecasts
-Assists in strategic planning since this encompasses a time period of five years, and thus
focused on a long-term perspective.
Disadvantages
-The information could be distorted or not accurate as there is no incentive for managers to
report a negative forecast or take a more conservative approach while forecasting.
-Too much time and resources can go into planning and forecasting when the same time could
be used to focus on R&D and come up with new products.
-Not much flexibility is there for changing the forecast. Any change in forecast must be approved
by the top management. This can be time consuming, The divisional manager should be able to
make if any change is required,
-No external market information is being included in the forecasted figures
-Focus on short term gains only

Exhibit 5 - Presidents Operating Report

Advantages:
-Quarterly reports are easily fast tracked since whenever annual figures are obtained, the
actual/expected column is immediately updated.
-Shows numerous items and facilitates multiple analyses in just a single document: (1)
Comparison of actual performance to expected during the current year (2) Comparison of
Current year actual and expected performances to that of the prior year (3) Each line item as a
percentage of sales
Disadvantages:
-Forecasts are not flexible as no changes are being allowed during the fiscal year. This serves
more as a budget rather than a financial forecast.
-The division presidents compensation is tied up to the fiscal years forecast which is being
done at the beginning of the year. This practice is susceptible to division managers
optimistically forecasting their performance for the fiscal year.

Recommend changes that may make the planning and control process a lot better

1) Shorten the budgeting process

Currently, the forecasts need to be prepared almost one year in advance with very leeway for
changing them. This can skew the budgeting process in case of market changes. This will be
most applicable for divisions which exist in a dynamic environment. Hence, the budgeting
process should be shortened.
The budgeting process can be shortened and improved by doing the following:
a. Online and real time adjustments to forecasts based on current data. This will help in
automating the process thereby making it faster
b. Kaizen Approach Budgeting and Activity-based Budgeting
Kaizen approach of budgeting is a continuous improvement approach in which means it
takes into account the costs of improving the product in the planning stage to gain
competitive advantage. On the other hand, the Activity based budgeting is based on
cost-drivers rather than the functions. Basically, this method of budgeting allows us to
identify the high value adding operations from those low value adding. Eliminating
unnecessary steps can reduce costs of production, hence the company can gain
competitive advantage.
2) Incentives for Innovation
The current system favors divisions which operate in a comparatively stable environment.
In the current system, the incentives for Division heads are based only on incremental sales for
the coming year without any emphasis on long term projects, which require innovation.
Incentives should be based also be based on innovation and long term projects.
3) Include market indicators in the analysis
Current system only focuses on what each divisions sales will be in the future. No market
scenario is taken into consideration. It could be that the division is growing a lot slower than the
market it operates in and the division head will still be incentivised because of his good
projections, compared to other departments. Hence Market indicators should also be
considered in the analysis.
4) Review bases of compensation
Currently, division heads are evaluated based on the beginning of fiscal years forecasted
figures and according to measurable objectives (sales, profits and return on capital). This does
not give division managers incentive to perform more than what has been forecasted. Also, this
practice might result to over optimistic forecasts just so that the managers can be compensated
well.

3) The role of the 8 business segment managers that manage the 40 divisions of
Emerson and their role in the planning and control process
1) Provide recommendation and detailed budgeting analysis to upper management
2) Recognize business investment prospects for expansion
3) Cooperate with other segment managers: Allow each division to know what it needs to do to
satisfy the needs of other divisions
4) Assist top management and division heads in deciding the proper action plan need to be
taken to bridge the gap between actual and desired result