If a company is poorly run, or is not minimizing costs, it creates an opportunity for someone to take over the firm, fire incumbent management, and implement the cost-reducing schemes.
In fact, when 3G announced its intention to acquire Kraft, its stock went up by 36%, in expectation that 3G would implement their "zero-based budgeting" at the target firm.
Other food and beverage companies are embracing 3G’s financial tool, in part out of fear that they, too, could become targets of activist investors or stronger rivals. Big packaged-food companies have been particularly appealing targets for zero-based budgeting.
So what does zero-based budgeting do?
[it] requires managers to plan each year’s budget as if no money existed the previous year, rather than using the typical method of adjusting prior-year spending. That forces them to justify the costs and benefits of each dollar every 12 months.
...zero-based budgeting is a symbol of the new reality for U.S. business: Activists are pressing at all sides, giving managements little room for slack or bloated budgets. This ethos has seeped into nearly every boardroom, prompting pre-emptive steps that emulate the activists themselves.
The effects of this change are improved shareholder returns and dividends. But on the flip side, it has made the work for employees more rigorous and, some would argue, more ruthless.
At Heinz, ... 3G quickly set out to make deeper changes, paring staff at its Pittsburgh headquarters and gutting individual offices in favor of open floor plans. It slashed Heinz’s overall head count by about 1,480, or 4% of the world-wide workforce, shut several factories and grounded corporate jets.
Sounds like a good management tool for the government.
According to Thomson Reuters, 2014 was a big year for M&A. The number of M&A deals in 2014 jumped up 47% from 2013. Some of the larger deals include Comcast buying Time Warner, AT&T purchasing Dish Network, and Activis acquiring Allergan. (Primack, 2015)
ReplyDeletePrivate Equity and Buyout firms seek out companies that they can acquire and add value to through a shakeup in management structures or cost cutting. It comes as no surprise that firms are adapting a zero-based budget out of fear of becoming a potential target. Using a zero-based budget technique is a great way for an acquiring company to extract value immediately from their investment. Mergers often require a strict overview of budgeting, expenses, and personnel anyways.
One firm in particular that could stand to gain some value from such an approach would be Sears. Every quarter they continue to hemorrhage cash and are staying afloat thanks to the CEO's investment firm. Who knows whether their plan to launch REIT's by the middle of this year will help Sears with their financial troubles. By possibly adapting a zero-based budget, Sears could extract some value and stem the bleeding.
Primack, D. (2015). 2014 was a huge year for M&A and private equity. Fortune. Retrieved from: http://fortune.com/2015/01/05/2014-was-a-huge-year-for-ma-and-private-equity/
There are many companies that have benefited from zero-based budgeting, such as PepsiCo's HQ located in Westchester County, New York, which "features seven interconnected three-story office buildings designed in the 1960s by Edward Durell Stone, a pioneering American modernist architect" (The Economist 2014). Two years ago PepsiCo began a $243m upgrade of the complex to make space for more staff and create a more collaborative and innovative work environment. At PepsiCo, “overheads such as general, administrative and sales costs minus advertising spending are 32% of sales” (The Economist 2014).
ReplyDeleteThe zero-based budgeting approach, which has been applied by Heinz had already undergone a round of cuts during which “all spending must be justified from first principles each year. Swathes of managerial jobs were axed, as was the company's aviation department, which ran its corporate planes” (The Economist 2014). The zero-based budgeting approach focuses on strengthening centralized control over companies’ many divisions.
How did so many companies find themselves with so much “bloat”? “The crusade for leaner, more focused companies, ran out of steam after the turn of the century and three other issues moved up bosses' agendas, each seemingly justifying extra staff at HQ: globalization meant that the mother ship had more far-flung operations to oversee; new digital technology made it easier, in theory, to centralize control and oversight; and, starting with America's Sarbanes-Oxley act in 2002, deregulation gave way to a growing regulatory burden, bringing with it a bigger head-office compliance operation” (The Economist 2014). Many companies are now fighting back against the bloated conditions in which they currently find themselves and using zero-based budgeting as the tool to accomplish the lean operations that they once enjoyed.
References:
- Fighting the flab; schumpeter. (2014, Mar 22). The Economist, 410, 69.
TIFFANY ANTOINE .... STUDENT ID 0954241
ReplyDelete3G and companies it controls, including Burger King parent Restaurant Brands International Inc. and H.J. Heinz Co.—which it plans to merge with Kraft—have used the technique to slash costs in everything from jobs to corporate jets and the use of color photocopies. Some such cuts seem obvious, but this tool goes deeper than that. For example, corporate traveling and being in field. Why pay for a plane ticket and accommodations when video chat is cheaper and more efficient.
In zero-based budgeting, managers plan each year’s budget as if starting their department from scratch—a contrast with the prevailing method of adjusting the previous year’s spending. The system calls for managers to break programs or activities into individual “decision packages,” including all associated costs, to help identify how funds are used. The technique forces them to justify the costs and evaluate benefits every 12 months, and to scrutinize whether dollars should be shifted from less-profitable to more-profitable projects. The ultimate being the reduction of corporate spending the increase in profits.
(2015) Father of Zero Based Budgeting., www.wsj.com
The Growth of Franchising
ReplyDeleteThere has been a steady growth in the franchise industry and the franchises serve just about everyone. Amid the tough economic times, franchises were still able to stay alive and grow in the United States of America, because they go after a specific demographic. Looking at the segments of our populations, some of the most successful and well established franchises are focusing as well as seeking out customers and potential franchisees. Some of these include:
Seniors - These are the newcomers to the franchising over the last few years.
Latinos - As the populations in the United States grows, the Latinos also grow in numbers.
Kids - Some of the most successful franchises always aim for children.
When a sound market analysis is being done by the franchisor, it can definitely help to differentiate their products and any new venture can move rapidly through the existences and continuity stages.
Reference:
1. Frobe, McCann, Ward and Shor. (2014) Managerial Economics – A Problem Solving Approach.
2. Churchill, Neil C. and Lewis, Virginia L. (1993) Harvard Business Review - Small Business Growth
The Growth of Franchising
ReplyDeleteThere has been a steady growth in the franchise industry and the franchises serve just about everyone. Amid the tough economic times, franchises were still able to stay alive and grow in the United States of America, because they go after a specific demographic. Looking at the segments of our populations, some of the most successful and well established franchises are focusing as well as seeking out customers and potential franchisees. Some of these include:
Seniors - These are the newcomers to the franchising over the last few years.
Latinos - As the populations in the United States grows, the Latinos also grow in numbers.
Kids - Some of the most successful franchises always aim for children.
When a sound market analysis is being done by the franchisor, it can definitely help to differentiate their products and any new venture can move rapidly through the existences and continuity stages.
Reference:
1. Frobe, McCann, Ward and Shor. (2014) Managerial Economics – A Problem Solving Approach.
2. Churchill, Neil C. and Lewis, Virginia L. (1993) Harvard Business Review - Small Business Growth
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ReplyDeleteWe concentrate on what we do best creating, developing, training in and constantly improving the tools that drive business success through maximizing people's performance. Our breakthrough delivery technology, customize to your needs. We provide project support from planning to review...
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ReplyDelete