Planning and budgeting Peter Lyman IS208 April 9, 2003

Budget & planning topics Use of budgets as project planning and management tool. How for-profit and non-profit project budgeting differs, and why. Decision making with budgets & financial statements. Case studies: Amazon.com & The University Library. Developing business plan and budgets for your project.

Today’s objectives A.RECAP: IT and strategic management issues B. Accounting as a planning and management tool. C. Analyzing business models

A.RECAP: IT and strategic management “We still lack a well-defined model or theory for the kind of organization now emerging. So managers are confused over the enormous task of restructuring operations for a new era.” Halal Therefore, managers must balance between today’s operations and strategic planning for the future.

RECAP: Venkatraman on information management Management is evolving from a command paradigm to the communications paradigm; from hierarchy to flatter organizations, with more local team autonomy; management by coordination is replacing command and control Information management has rationalized the organization, but real time network communication is changing it fundamentally -- from hierarchy to enterprise (networks of self managed enterprises that operate like an internal market system). Budgeting is the language & medium of coordination.

B] The New Book Publishing Company financial statements This is what the Board of Directors would read quarterly, to discuss with the CEO and executive management what’s happening. Budget statements are a tool for 1) planning, 2) motivation, 3) evaluation, 4) coordination, 5) analysis, depending on the situation.

The Balance Sheet Assets = Liabilities Total assets = current assets (cash, receivable accounts, inventory) + non- current assets (royalty advances + equipment) Total liabilities and equity = current liabilities (accounts payable, accrued royalties) + notes + stock + retained earnings [ see Livingstone p. 231 ]

The pro forma (projected) income statement Gross profit = revenue (sales) - cost of sales (royalties, paper, print, bind, editorial production) Operating profit = gross profit - operating expenses (marketing, sales, fulfillment, editorial acquisition, overhead) Bottom line (net profit) = operating profit - taxes [See Livingstone p. 232]

What story does the balance sheet tell? Accounts receivable falling behind forecast Inventory higher than forecast Royalties paid are lower Equipment costs higher, debt higher liabilities lower (but is this good?) Total: the company’s growth is slowing

Why? If you were reading the budget, how would you figure out what the source of the problems were? What questions would you ask?

The income statement. Bottom line profitable, but profits declining over time. Why? Sales = Book line A ahead of forecast but declining, lines B, C and D behind forecast. Cost of sales = Editorial production lower, therefore costs of royalty and paper print bind lower, but therefore fewer products to sell. Operating costs (marketing, editorial acquisition, overhead) higher than forecast, but not producing sales.

The illusion of health: Decline of costs helps the bottom line, but reflects falling sales.

You are the CEO. What questions would you ask? Is the problem the sales force? Is the problem editorial acquisition - - the wrong products? Is the problem marketing? Is the problem environmental factors: competition? supply chain problems (distribution, etc)?

C. Business models. 1.The value proposition. 2.Technological innovation. 3.The competitive environment & differentiation 4.The revenue model. 5.Source of investment 6.The competent team.

1.The value proposition. How (exactly) does IT innovation add value? To whom does it add value? Think in terms of value chain. Who is the customer? Think about internal and external markets Next: What is Amazon.com’s value proposition?The University Library?

Branding & differentiation... The brand: Why will the customer adopt your solution / return? Are online transactions more cost effective and/or economies of scale or scope and/or larger revenue? Differentiation: How will this business stand out? What will make it one of the best in this market?

2.Technological innovation. Means/ends. Is the technology about reducing costs or increasing revenue? Or developing competency? Or competitive factors? Or quality of service? Or what? How can the costs & benefits be measured? When? Why is this innovation likely to succeed?

3.The environmental scan. What is the competition doing? Are online extensions of brick & mortar business stronger (Amazon vs. Barnes & Noble)? Or, are they less able to innovate? Might competing value chains emerge? (Is our business model sustainable?) What do we have to do to learn about/develop competencies in future innovations?

4.The revenue model. How does your innovation control costs and/or create economies of scale and/or scope and/or produce revenue compared to traditional models? What are the costs of building, implementing, sustaining the new technology?

5.Investment source IT projects are investments. Understand the business model, culture and decision making process of your organization to figure out the politics of IT investment. (a) internal reallocation (b) loans (what cost of funds?) (c) venture capital

Reallocation Operating budgets are cut to create one-time or recurring funding for investment Innovation in one place creates reduction of resources (people, projects, money, attention) in others. This may become a diffusion of innovation problem.

6.The team: attracting and retaining talent How do you find people who can function in an environment of continuous change? How do you recruit & retain them? Note:The team is often the key to finding investors, since every other aspect of the business plan continuously changes.

Who makes the decisions? Does the organization have a strategic decision making process? If so, how does it work? If not, how do IT projects get authorized and implemented? What and who determines the success of an IT project? Note: Institutional history and culture are as important as org charts (“informal organization”).

Next. For profit budgets. Dan Greenstein talk Thursday – will/should CDL replace campus library? Monday. Read and analyze the Amazon financial statement in the readings. Prepare to discuss “Does Amazon have a financially sound business model? What are the strengths and the weaknesses?” Refine your project organizational analysis to include analysis of the business model and work on your ‘economic feasibility statement.’