Corporate planning in an engineering business

orporate Planning in an Engineering 5usiness H. J. Booth Divisional Commercial Control Components G.E.C. A.E.I. Control Rugby.

Manager, Division, Rectifiers Ltd.,

In the British Engineering Industry, overthe last ten years, in a basically buyers’ market, there has been a drive by management to find new ways to augment the growth of earnings from existing resources. There is also an increasing emphasis on the search for new ideas and new products to provide a contribution to size, growth, and stability of future company profits. The author illustrates the Eharacter of planning in the engineering Business with the aid of a detailed case history from a small division of G.E.C./ A.E.I. selling starters for electric motors.

I

1

THL

BKITISH

EYGIKEERING

INDUSTKY.

there is a very great need for forward planning, based on comprehensive and formal company procedures and disciplineh. All Companies must plan and it can be seen that with increasing costs. the nzcd for nev, markets and more rnrenyive product development. long range is becomlnp more necessary, especially Tn the technology based industries. -4s an introduction. it IS important to consider those factors which influence the need for companies to adopt some form of Long Ranpc- Planning. They can be broad11 di\,ided into two parts: 1. External Pressures 2. lnrernal Benefits 1. External

Pressures

In respect of external pressures. the) represent those aspects which influence

SEPTEMBER,

1970

an already established Company polic) and make necessary changes to that policy in the form of forward plans. Syuer:e 017Prqfits Continual Government influence through fiscal policies. Imposition of Purchase Tax-Fuel Tax-Selective Employment Tax-Corporation Tax. Ma&et Emironrnerir (a) The last 20 years has seen significant sociological changes. (b) increasing number of old people. (c) Increase in leisure time. (d) Population movement. Nell, Tehologies Many new products have come into being only after many years of research, and the need for planning Company research and de\ielopment is a fundamental requirement which not only provides new product development but also enables existing products to remain competitive. Iutegrarion iu IndrrstrJ, The increasing trend to vertical and horizontal integration in industry is affecting the competitive pattern in major sectors of industry. With the pace of industrial integration and the creation of larger Industrial Units now being forced by Government policy,. the urgencv for Company top management to appieciate the benefits of Long Range Planning cannot be overstressed.

2. Internal Benefits The internal benefits are those aspects which Long Range Planning provides for Company direction and strategy. such as: Bole/it to rhr Board q/ Direcrors Long Ranse Planning can establish the essential criteria for Company Directors to evalr;ate the operationa! performance of rhe total Company functions--Sales. Engineering, Manufacturing or Finance.

Benqfit to Middle Management Goals can be set and achieved for the future growth of the Company. This can be established on a Divisional basis or for the total Company, but middle management will know the objectives to be attained and what performance is expected from them. Benqfits to Persomel Motivation Because Long Range Planning stresses future development and growth, the existence of a practical corporate plan can contribute to greatly enhance morale among personnel at all levels of the Company organization. Such a plan also helps to attract and hold capable management personnel, and assists in labour relations and in community relations. Shareholders A sound forward plan outlining directions of growth for increased profits strengthens management’s position with both present and new stockholders.

CORPORATE

PLANNING

dealing with Corporate Plans in Business, there are basically two types of Corporate Planning which can be adopted by businesses. 1. Profit Improvement Planning. 2. Broad Spectrum Planning. Profit Improvetnenf Planning This type of planning is in essence, nothing more than an extension of the profit budget for present products to cover the next five years. Sub-tending from such an extension of existing planned budgets must be the development of accurate profit and sales forecasting of present product lines. This would involve product rationalization, making possible additions and deletions of products processes and marhets. The Profit Improvement Planning In

67

method presumes a market orientation of Company pianning acrivitres. it demands. the establishment of a marketing strategy. that is directed at the customer. It demands, a total rcappraisal of the Company’s present it demands and therefore positron detailed market analysis in order to assess the direction of the selling distribution and product planning activities of the Company. Broad Spectrwn

P/arming

This aspect of corporate planning considers the possible new directions for Company growth and increase in profits over 5, IO and even 20 years. Broad Spectrum Planning would lay down long range programmes of: (a) Research and Development. (b) Factory expansion at home and abroad. (c) Possible merger and acquisition prospects. What is important, in attempting total corporate planning, is the necessity to ensure that all functional activities understand the requirements and disciplines involved. It is possible that such comprehensive planning may inevitably establish a totally new organisation structure in order to achieve the corporate objectives. Establishment of Corporate Objectives Whatever the time span of the profit plan, the vital first requirement is the establishment of corporate objectives. In order to determine these objectives, six things are important.

(1)

%arket

A&raisal

It is essential

to know whether the market for the companies’ products is a growth or declining market. An analysis of such a market should determine : (ni Size (b) Market leaders (c) Market trends (d) Market shares

!a

Analysis

of Company

Records

A review of present orders and examination of customer product buying patterns plus a survey of selling effort and its relation to customer business. (3) Profit Growth An industry financial index can be checked to see the average annual growth earnings per share for a particular industrial sector, against which a standard can be set and it can be assumed that profit growth will come to those companies that are successfully established in growth markets.

(3) Prqtfr Lewis Setting future protit standards may Involve 3 iomparrson of the return on investment over the past ten years

with

other

known

planning involved. the first essential is the present po>itr,>n and environmental audit ,)t‘ the resources avaiiabic. to determine the strengths and weaknesses at’ :hr:

zorn-

petitors. (5)

oi corporate

For\t,artr’ Projecriotl

Profit planning involves projections and this forward evaluation means sales-cost of sales-pro!its---_apital. (6) ,Veir Product .-lppraisal Another aspect of major sienificance is the total appraisal o? the need for new products. This will require close review of products. not only sales. but comparison of product features with those of competitors. A careful look at product costs as well as R & D programme expenditures is necessary to stay with the competition or keeping ahead. Long Range Profit Planning Long Range Planning is not simply a means of predicting future results, but a process of controlling and guiding the forward business activities beyond the not mal tinancial year. In considering the long range plan, we are concerned with the integration of the short term action, covering a period of perhaps, a year, with the long term strategic and operational objectives which could influence the Company‘s future in 3, 5 or 10 years. Ideally, the first year of any long range plan, should be the current financial year and the plan should be updated annually. Whatever the type

company or diviston. Completrn~ this audrt is an absolutely v~tai part of the corporate or Long Range Plan and ideally. should be undertaken by an independent group Sub-tending from such an atrdrt must be the identrhcation of the sales and protits required plus the projection of the constituent parts over the full pertod of the plan. In fact, the corporate profit plan will combine together the individual functional plans of the SalesEngineering and Manufacturing organizations. Every business needs to identify if possible an area where it leads, what opportunities it wants to pursue, plus what risks it ii willing and able to accept. To tllustrate a number of aspects of Short and Long Range Plannmg as related to the engineering business the following case history may prove useful. CASE HISTORY Basic Philosophy We are concerned with a Trading Division manufacturing a wide range OI light engineering products, i.e. el;ctrtc motor starters-contactors and relavs. The overall approach adopted by the operation presented diagrammatically rn Figure I. was to undertake an external and internal appraisal of the diviston establishing basic objectives: preparation of an action plan and a total commitment to the implementation of the findings.

THE

r -------Market

and

I I

PROBLEM I Product

analysis

t MARKETING

Market reaction feedback

STRATEGY

Implementation

of

Objectives

1 i

CAMPAIGN

I

i

L

DEVELOPMENT

-------B-s

FIGURE

1. MARKETING

CONCEPT.

LONG

RANGE

PLANNING

The

Problem

requirement was to put on paper the problems. which were detailed .ind quantified. However. in broad terms ihese could be stated to be: The

first

( a 1 The business

had too many out-ofdate products and a v’ery narrow range of modern and acceptable de\ Ices.

(b) A verv’ small motor CC)

starter

share market.

(2 “,,) of the

verv low customer awareness factor -tn the engineering industry.

A

Cd) rZr1 unsattsfactory

sales and

profit

performance.

The

Analysis

The .Ila~Xet--Gloll.til am/ Cott7pefitim The first requirement was to examine the total market of the U.K. Control Gear Industry. to determine the industry trend. This 1s illustrated in Figure 2. showing the trend since 1954, as a market of significant growth potential and based on forward eiectrical energy predictions, should continue to expand for at least another decade. Figure 2 also shows the increase in the number of major competitors within the industry rising from Ii in 1954 to 46 in 1964.

In view of the increase in the number of competitors in this sector of the industrial market. the top sixteen companies were carefully evaluated assessing turnover, return on capital and product range capability. There was also a close product and Continental rev iew of American competition. Having first established an overall assessment of the market and competition. it was necessary to re-appraise the division and its standing _ azainst the overall market _ trends and product competttion

OEM’s*

z m v) Wholesalers

A detailed sales analysis was undertaken of the order input. establishing the main business sources by grouping- sales into industry categortes Users

-1.C.I. -Dunlop

--Ingersoll Rand (b) Original Equipment Head Wrightson Makers (OEM) (c)

Wholesalers

_’5%

Users

Sales Analysis

(a)

111

T e

--Newey & Eyre -Electrical Conduits -Hathaways Electrical

15%

Export

15% I

* Original FIGURE

Selhg

equipment

manufacturers

3. ANALYSIS

OF SALES.

&fort Analysis

Having established a sales analysis it was decided to confirm the selling effort which is shown in by checking the call record salesman

pattern, expected Figure 4 of each

(d) Export The analysis of the sales gave the distribution pattern shown in Figure 3.

OEM’s

>65%

Users

‘25%

40 -

Others

FIGURE

4. SELLING

EFFORT

I

10%

ANALYSIS.

Pr@itahilitJ ‘4 further aspect of consideration was the necessity to investigate the product profitability, presenting an analysis of material! labour overheads, and thus providing a product profit pattern against each product and the industrial buying category. Producr Range 0 1964

1954

FIGURE

SEPTEMBER,

1970

2. THE

U.K. CONTROL

GEAR

INDUSTRY.

Having looked in some depth at the sales pattern, the whole product range was then reviewed. Plotting product range against turnover a ‘pareto’ curve was produced, (Figure 5). which established the familiar

69

Short

Term

Actions

Objectives

Having established the areas requiring attention. the first essential was to !a> down the basic management objectlves. to meet the short term requirements. The objectives

the Company inore forcefully in the Control Gear Starter market. (Philosophical objective). (bi To obtain at least a IO”,, share of the standard starter market in J years. ot the proportion (cl To increase starter and component sales \ 1;~ wholesalers to 25 “,) of turnover. ,’ L , IO”,, return on capital (d) To obtain employed. (e) To double the divisional turnover wlthin 4 years. (f) Set up over a 2 year period a National network of80 Distributors. (g) To create a small team of ‘specialist’ representatives.

80%

Sales

FIGURE

5. THE

PRODUCT

80-20 relationship-80 “1: of the turnover being derived from 200’, of the product range. After dividing the products into ‘fast moving’ and ‘slow moving’, the manufacture of over 70 products was stopped. A side effect of this decision was that the number of stock parts was reduced by several thousand which, in turn, reduced storage area and clerical staff. After this rationalization of product range. the remaining products formed only a narrow range and somewhat incomplete range compared with other American and German competitors. It was essential, therefore, that the management should find now a product or group of products which could form the basis for developing a new approach to the market. and which could form the basis of improving the customer awareness factor with a greatly increased number of new potential customers. The overall survey had, in fact, provided the ‘big picture’, showing the essential growth trends of the market. the competition and the division’s main strengths and weaknesses. It was from this survey that five main considerations demanded attention :

70

laid down were:

f a ) To re-establish

RANGE

1. 2. 3. 4. 5.

ANALYSIS.

Management objectives Product development Channels of distribution Specialist sales force Presentation and marketing campaign of products to the Industrial customer.

FIGURE

6. THE

Product Derelopmetlt The second urgent consideration was thz establishment of a priority period to implement the decision to modernize and extend the two most acceptable electrical motor starters available and evolve our sales growth as a Control Component specialist. initially around this new range of products. A market study showed that to gain customer acceptance required at least eight motor starters to meet the various motors starting methods for electric (Direct-on-line, and Star-Delta) and also the means of Isolating the motor and starter From the electrlclty supply.

REDEVELOPED

PRODUCT

RANGE.

LONG

RANGE

PLANNING

The final result was a range of twelve starters based on only two contactors and one standard overload relay. thus keeping manufacturing costs low and the minimum number of parts (see Figure 6).

The nest major consideration was the preparation of a new policy in respect of the channels of distribution and the selection of suitable product outlets. A main factor of sales growth is service to customer. It was essential therefore to commence an appraisal of possible channels of distribution which from a preliminar! surve!’ had showed that up to 15 per cenr of the Control Gear market potential went via wholesalers. A concentrated drive was undertaken to appoint certain wholesaling organizations as distributors of the neu range of starters and to establish a national network of 80 distributors holding stocks and giI+n_r a fast service to a wide range of customers in their immediate localities. In establishing a nattonal network. required careful evaluatlon on a reglonal basis of the market potential appraisal of iocai wholesalers in respect of turnover. stock capability, whether the wholesaler was domestic or industrially biased.

Wirh the establishment of a small team of specialist representatives. a region by reeion sales campaign was launched. utihzing direct mail shots. local exhibitions and a T.Y. ‘commercial’ being shown re~ularl\~ during the period of the campalpn. ihe total effect of all these short term mo\es has enabled the motor starter sales to treble o\ler a period of three years achieve an 8 per cenr market share and a great-r customer awareness in the engincerlng industry resulting in a better basis from Mhich to operate in the future.

Long

Term

Proposals

Th~c cease histor) deals with the immediate remedial actions necessary to effect a reorlentatlon of a small manufacturing dt\ i~oi:. If in llnc with the requirements c-f L~n_r Range Planning. we extend this short tern1 case history to the longer term pn~ihlllties. be

clearl!

two

main

considerations

must

specified.

The sales and profit trend and the Justlficarion of ne\+ product dr\elnpment.

, 3 I SlllL’.CTdi/lg 4

possible

Prol?r Pm;cctiorl

for\vard trading account preccnIaIIc,n would be as illustrared in Figure s. 4?0~1n,o tile next five years’ home marl,e: pn:ential. sales and profit contrihtiii:)!~ ai weii as taking into account

SEPTEMBER.

1970

FIGURE

7. STARTER

SALES

certain annual adjustments affecting the contribution. An equally detailed forecast of forward sales could be made, showing the breakdown into the markets and industrial categories from which sources, the business is to emanate.

E(OOOs) Market & Sales Home Market Market Share Home Sales Export Sales Total Sales

OVER

YEAR

1964.

Added to all tabulations, must be reasons for any significant movements of specific figures and there should be a list of published planning assumptions. What cannot be overstressed is the importante of the inter-relationship of all profit planning documents.

1967

1968

1969

1970

1971

4000

4200 37.5% 1800 230 2120

4400 40% 2020 360 2380

4600

4800

35% 1600 300 1900

Contribution Home Export Total inflation Cost Inc. Eficiency Improvement

GROWTH

480 75 555

48% 2250 2640

2650 450 3100

540 80 620 (45) 15

544 85 629 (52) 25

Improvement by new products Selling Price Changes

(27)

25 18

Total

(57)

16

555

563

654

692

790

Period Costs Factory Commerclai Other

(200) (265) (25)

(205) (265) (15) --

(215) (260) (20)

(230) (270) (20) -.

(235) (295) (30)

Total

(490)

(485)

(515)

(530)

(560)

65

78

130

162

230

Changes

Modified

Contrlbutlon

Net Profit

FIGURE

8. FORWARD

TRADING

ACCOUNT

-

652 90 742 (60) 10

742 108 850 (70) -

-

-

(50)

10

-

(60)

PRESENTATION.

71

In respect of Research and Development programmes it is important to create, forward product development objectives in order to maintain the growth pattern expected from the short term acttons. For example, in the case history, the product development objectives were envisaged as shown in the phased plan covering an Y-year period (see Figure 9). Such a development programme was designed to be a logical sequence for product growth but taking into account possible technological changes. (Electromechanical to semi-conductor applications.) Each phase of the development programme wtthin the period of the j-year profit plan, would require careful analysis and expenditure evaluation. A typtcal justification. showing the anticipated profit contribution of new products would be projected as in Figure 10. The projection shown in Figure 10 shows the monetary contribution from a forecast of new product sales compared to the anticipated decline from existing products. In addition to this type of data, would be a detailed cost breakdown of the product development project into Engineering/Draughting time, models and testing.

Preparation of a Forward Profit Plan It is important in the implementation planning procedures, that there must be the minimum of documents involved, so that, an unnecessary growth of financial planning staff is not a concomittant factor with forward profit planning. The preparation of a profit plan will inevitably require the financial staff of the Company to play an important role in the final collation and presentation of the information to top management. The responsibility for planning the profitable growth of the Company or Division must remain with the General Manager or Chief Executive. Profit Planning procedures must be designed to ensure that the required standard and evaluation of information is presented uniformly to the Company top management. The Long Range profit plan should be prepared at the same time as the annual profit budget and exhibit consistency of information in each. The profit plan must reflect clearly the full implications of any major items of expenditure, particularly capital expenditure, in the forecast of fixed and working capital, the effect on revenue and production costs. 1. Planning Assumptions that in the preparation

It is essential

72

of

Phase

1 /

Phase II

I /

Modernisation of existing products

Phase III

Newbasic Range of Components

New Range of Starters

1966

1968

Phase IV

i

Solid State Devices

I 1964

FIGURE

9. PRODUCT

DEVELOPMENT

any profit budget or forward profit plan, the assumptions upon which the plan is based are fully stated. A useful check list of planning assumptions is shown in Figure 11.

New Product New Product

Sales Variable

New Product Contribution

Profit

Existing Product Contribution

Profit

cost

OBJECTIVES.

3. Manpower Another aspect of vital concern to the Company operation is Manpower. The manpower plan may be presented as illustrated in Figure I2 which shows the actual manpower across the Company Departments split between hourly paid and salaried staff. The current position

1968 300 150

1969 450 210

1970 650 280

1971 750 340

150

240

370

410

90

105

75

40

60

135

295

370

Profit

Advantage

0.909

D.C.F. Factors Actual

1972

Similarly a document is required to present the Overseas markets also 111 relation to size and share. This territortal analysis may not be easy to complete and major exporting companies will probably have undertaken a number of market research studies in their important business territories.

2. lMarkets As stressed under the earlier comments on establishing corporate profit objectives, the analysis of the market in which the Company is operating is of vital concern in the credibility of the profit plan. A document is required to present the Home Market size and share in financial values. categorized into Public and Private Enterprise users of the company products, and projected over the period of the plan.

ww

1970to

Worth

0,826

54

Total

0.751

111

222

Contribution

0683 253

630

Development Cost of New Products

105 -

Advantage investment

525 Cover

630 -

=

6:l

105

FIGURE

10. TYPICAL

PRODUCT

DEVELOPMENT

JUSTIFICATION.

LONG

RANGE

PLANNING

15 therl profit Marketing Assumptions

Manufacturing Assumptions

Economic Assumptions

(a) Market

Size

(b) Product

Range

Comments on growth or decline of the market potential

Comments on present product lines: new developments in design stage

(a) Factory Location State any proposed re-iocatlon oi manufacture, plant or manoower

(b) Methods of Manufacture Detail changes in manufacturing techniquesNew automated plant

(a) Material Prices Comment on the trend of material pnce levels and state prices of specific major Items of materlal

Procurement Proposals

(a) Manufacturing Licence State any forward plans for buying a manufacturing licence

Organization

(a) Restructure State any proposed changes in the organization structure or specific management responsibilities

FIGURE

(b) Labour

Costs

Indicate average earnings per employeechanges in piece-work rates etc.

11. PLANNING

ASSUMPTIONS.

(c) Selling

Prices

Comments on competition pnce levels; price changes proposed on new products at home and abroad

projected plan.’

be prepared

cwer

Associated showin_c

the

1970

period

average

ot‘ the can

also

earnln_es

per employee projecting forward the current earnings rate and splitting the projection into Male and Female earnings. 4. Plofit P/a,1 .su!W?K?rt. The Profit Plan Summary presents 111a single document the salient statisttcs of the Company and are of dtrect concern to the Board of Directors. As shown tn Figure 13. forward projections are collated from the other detailed documents. A stmpte graph of net trading profit can be drawn to show at a glance the past. present and future trend of profit. CONCLUSIONS There is sometimes a confuston between long range or corporate planning and straightforward profit planning. From the many’ case histories in small and medium sized businesses, it is clear that detailed opportunistic corporate planning is, in the initial two or three years, difficult, and a mtxture of both aspects of planning is necessary. simply because of the constant inter-relationship of the short and long term needs. In Long Range Planning we are involved with the attitudes prevailing in the various functional activities of the CompanySales. Engineering and Manufacturing, We are also concerned with the procedures adopted in formally preparing the total plan. It is important to remember that Long Range Planning is not a technique. it is simply the development of forward company strategy, utilizing management techniques to bring together relevant information from al! the functional activities of the business. SC that decisions can be made. Long Range Planning is in effect the total planning of the Co:npany resources to ensure the achievement of management objectives in a specific period of time. n

Figures

SEPTEMBER,

the

schedules

12 and 13 overleaf.

73

74

FIGURE

13. FiVE

YEAR

PROFIT

PLAN-PLAN

SUMMAKY.