Master thesis: The budgeting process and allocation at Heineken

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Master thesis:

The budgeting process and allocation at Heineken

University of Groningen Faculty of Economics and Business Master Organization Management and Control

Heineken N.V.

Department of Finance and Control

Heineken the Netherlands

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Master of Science in Business Administration

Specialization Organizational & Management Control

Title: The budgeting process and allocation at Heineken.

Name: Ewout Jan Geerlof Greven Student number: 1631500

Telephone: +31(0)627544221

E-mail RuG: E.J.G.greven@student.rug.nl E-mail Heineken: ewout.greven@Heineken.com E-mail private: ewoutgreven@gmail.com

Rijksuniversiteit Groningen Faculty of Economics and Business MSc Business Administration OMC

Heineken Nederland Horeca Business Unit Scharenburg 5, Amsterdam

Supervisor RuG: Drs. S. Sibum Second evaluator RuG:

Supervisor Heineken: Drs. R. Rams and Drs. G. van den Brandhof

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This research explores the Horeca budgeting process and allocation at Heineken the Netherlands. This research has identified four problems with the current situation at Heineken. The participation of Business Unit controllers in the budgeting process is low, their commitment to the budget is low, the information asymmetry between the Business Unit controllers and their superiors is high and there is no agreement about the allocation of the budget. In order to overcome these problems, this research identified a six-step model to increase the level of participation and commitment of the Business Unit controllers. Furthermore, a benchmark tool is developed in order to allocate the budget based on relative ratio’s comparing the Business Units. This tool is based on the lean six-sigma approach and can also be used for continuously improving the Business Units’ performance.

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The following paper is my final master thesis for the Master in Business Administration at the University of Groningen. After receiving my bachelor degree in Business at the University of Groningen, I started the master Organizational Management and Control. During this year, I learned a lot about financial management and control. The second part of the year I dedicated to writing my Master Thesis. I wrote my thesis during an internship at Heineken form April until October 2012. Heineken is the most international beer brewer of the world and is originally from the Netherland. Yearly Heineken is

preparing a budget for the different Horeca Business Units. However, the way in which they allocated the budget over these Units was not sufficient. Furthermore, different stakeholders criticized the process of preparing the budget. This problem was in line with what I learned in my field course OM&C at the University of Groningen and therefore provided me the opportunity to apply this knowledge. During my internship at Heineken, I was the main person responsible for carrying out this research. Researching the budgeting process and allocation at Heineken also provided me with the opportunity to write this master thesis.

Before I begin, I would like to thank a number of people. Their support was very important for the result. First, I would like to thank Heineken for giving me the opportunity to combine an internship with writing my thesis. Special thanks go to Gerhard van den Brandhof and Robbert Rams, my supervisors at

Heineken, who supported me whenever needed and provided me with useful ideas and insights. Gerhard and I had weekly meetings that were very important and useful to me. These meetings really helped me to stay on track and manage the progress of my research.

Furthermore, I would like to thank mister Sibum, who was my supervisor at the University, for his feedback and ideas about my research. His critical comments were all very useful to me.

Ewout Greven

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Chapter 1 Introduction 6

1.1 Introduction Research problem 6

1.2 Heineken budgeting process and allocation 6

1.3 Research question and objective 7

1.4 Methodology 8

1.5 Thesis structure 9

Chapter 2 Budgeting in practice 10

2.1 History of budgeting 10

2.2 Budgeting objectives 10

2.3 Budgeting choices 11

2.4 Problems with budgeting in practice 13

2.5 Budgeting principles 15

Chapter 3 Alternatives to traditional budgeting 16

3.1 The activity-based budgeting approach 16

3.2 The beyond budgeting approach 17

3.3 Rolling forecast 18

3.4 The zero-based budgeting approach 19

Chapter 4 Benchmarking in combination with budgeting 21

4.1 The benefits of benchmarking 21

4.2 Types of benchmarking 22

4.3 Best-practice benchmarking 23

Chapter 5 Budgeting at Heineken 24

5.1 Problems current budgeting system Heineken 24

5.2 Validity and reliability 25

5.3 Normal distribution 25

5.4 Descriptive statistics 26

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Recommendations budgeting process 27

Recommendations budget allocation 28

Conclusion 31

Appendix 1 Business Unit Benchmark example 32

Appendix 2 Business Unit Benchmark example 32

Appendix 3 Ratio suitability 33

Appendix 4 Priority setting matrix 33

Appendix 5 Target setting matrix 34

Appendix 6 Business Units Controllers Survey

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Chapter 1. Introduction

1.1 Introduction research problem

Planning and budgeting systems are important elements of a financial control system. In essence, planning and budgeting systems produce written plans that clarify where the organization wishes to go, how it intends to get there, and what results should be expected (Merchant and van der Stede, 2007). Simpler, a planning and budgeting system consists out of goals, strategies and performance targets. Organizational benefits of planning and budgeting come from the process of developing these plans. This planning process forces managers to think about the future, discuss their ideas with others in the

organization, prepare projections, and to be committed to achieve goals that will serve the organization’s interests (Merchant and van der Stede, 2007). Therefore, the issue is not whether to prepare a budget, but rather how to do it, and based on which drivers.

1.2 Heineken budgeting process and allocation

The finance and control department of Heineken Nederland N.V. (from now on: Heineken) is responsible for preparing the Horeca budget for each separate district (Business Unit). Heineken

geographically divided The Netherlands into nine districts, each having a district controller and regional sales manager. Every year, the national sales controller is responsible for an adequate allocation of the total Horeca budget over these nine different districts. However, within Heineken it is not entirely clear which drivers are essential for a sincere and reasonable distribution of this budget. Besides finding the right drivers for an optimal distribution of the Horeca budget, Heineken is also concerned about the planning and budgeting process. This process is primarily top-down structured, since the national sales controller allocates the total budget over the business units. This process of budget allocation is carried out with low participation and influence of the regional controllers.

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The main goal of this Master thesis is to create a systematic analysis for the process of creating and preparing a planning and budgeting system. Furthermore, it will concern the distribution of the budget over the different business units. It is therefore of importance that every choice or decision made with regard to the planning and budgeting process is analysed and design principles in preparing such a budget are presented to Heineken Nederland N.V.

Each year Heineken prepares and distributes the total Horeca budget over the nine different Business Units (districts). In the past few years, the total budget declined, because of retrenchments. This induced the critics and negative attitudes of the district managers towards the current way op preparing and distributing the Horeca budget. It is important to base the distribution of a budget on reasonable and fair variables. Furthermore, it is notable to consider the process of preparing the Horeca budget for each Business Unit.

Following the description above, the objective of this research will be:

- To make recommendations about a set of variables that can be used for budget allocation and for benchmarking the Horeca Business Units. Furthermore, to make recommendations about the planning and budgeting process.

In order to make these recommendations, this research tries to find design principles for creating and preparing a budgeting and planning system. Therefore, this research determines three questions about the budgeting process, as well as, three questions about budget allocation.

Questions about the budgeting process:

 What does the scientific literature say about budgeting processes?  What is the current budgeting process situation within Heineken?

 Which principles about the budgeting process from existing literature are present in the current situation at Heineken?

Questions about the budget allocation:

 What does the scientific literature say about budget allocation?  What is the current way of allocating the budget within Heineken?

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A significant decision to make when constructing a technical research design is what kind of approach to take, i.e. which kind of strategy to follow. The research strategy is a coherent body of decisions concerning the way in which the research is carried out. It mainly refers to the gathering of relevant material and processing this material into valid answers for the research question (Verschuren and Doorewaard, 2010). This master thesis will be an in depth research into the budgeting process and allocation of Heineken. The objective is to gain insight into specific situations in actual practice. An interpretive way of doing research, such as doing a case study, will be the best research method to achieve this objective. A case study is a research strategy in which the researcher tries to gain a profound and full insight into several objects or processes that are confined in time and space (Verschuren and Doorewaard, 2010). Cooper and Schindler (2006) describe a case study as a powerful research methodology that combines individual and (sometimes) group interviews with record analysis and observation. The main reason to do an exploratory research is that the natural context of this research is important.

This research started with doing a literature research about the existing literature on budgeting processes and allocation. It is important to have background information about these subjects in order to ask the right questions during the open interviews that will follow. Secondly, open interviews in order to gain insight into the current situation and the opinion of the Heineken stakeholders about the budgeting process and allocation were conducted. The participants of these interviews were the national sales controller, regional controllers and regional sales managers. Furthermore, people from different divisions within Heineken, such as, Retail and marketing, Heineken Supply and Brewery Control were interviewed. In order to make the understandings from these interviews more specific, a brainstorm session with four business controllers and four Regional Sales Managers from different business units was organized. This brainstorm session helped to gain a deeper understanding in their ideas about the budget allocation and the process of preparing the budget for each business unit.

After the literature research and the open interviews, the findings should be tested on their validity. Therefore, the most important factors about the budgeting system were tested in a survey. The goal of a survey is to derive comparable data across subsets of the chosen sample so that similarities and

differences can be found (Cooper and Schindler, 2006). The survey questions were based on scientific literature and the gathered knowledge during the interviews and the brainstorm session. The response scale was a Likert scale ranging from 1 to 5 or 7. The participants of this survey were the current regional controllers. Six out of the current nine regional controllers responded to the survey. By using the

information gathered from the survey, brainstorm and interviews, principles for the budgeting process and allocation at Heineken were designed. According to these principles, this research makes

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Chapter 2. Budgeting in practice

“The budget process at most companies has to be the most ineffective practice in management” (Jack Welch)

Budgets are often strongly criticized by practitioners and academics (Jensen, 2003). Despite this, studies have shown that the vast majority of organizations still use budgets (Ekholm and Wallin, 2000). Before taking a critical look to the current planning and budgeting system of Heineken. It is important to know what is essential in a planning and budgeting system. Therefore, I will give an overview about important features of a planning and budgeting system, according to existing literature.

2.1 History of budgeting

Used in a responsible way, budgets provide the basis for clear understanding between

organizational levels and can help senior executives maintain control over multiple divisions and business units (Hope and Fraser, 2003). The budgeting process emerged in the 1920s as a tool for managing costs and cash flows in large industrial organizations such as DuPont, General Motors and Siemens. However, in the 1960s companies used accounting rules not just to keep score but also to dictate the actions of people at all levels of the organization (Johnson and Kaplan, 1991). By the early 1970s, a new generation of leaders schooled in the finer arts of financial planning had begun to rely on financial targets and incentives to drive performance improvement. However, rigid adherence to annual fixed plans and budgets stifled innovation, hindering the cost pressures that arose in the 1980s and 1990s. Business units became preoccupied with meeting sales targets rather than satisfying customers.

Eventually, a few companies realized that budgeting played a powerful role in defining and enforcing cultural norms that discourage frontline people from taking responsibility for performance (Hope and Fraser, 2003). In the past decade, more alternatives to traditional budgeting have emerged.

2.2 Budgeting objectives

According to Merchant and van der Stede (2007), there are four main purposes for preparing a budget.

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A second purpose of a planning and budgeting system is coordination. The planning and budgeting processes force the sharing of information across the organization. The processes should involve a top-down communication of organizational goals and priorities and bottom-up communication of

opportunities, resource needs, constraints, and risks. The process also should contain a sideways

communication stream that enhances the abilities of organizational entities (e.g. business units) learning from each other and working together toward common goals. In this way, everyone involved becomes more informed, so the process is more likely to result in decisions that consider all perspectives.

A third purpose is facilitating top management oversight. This oversight primarily occurs in the form of preaction reviews, as plans are discussed, and approved before actions are taken at successively higher levels in the organization. Top management also uses plans as the performance standards used to

implement the management-by-exception form of control. This means that the manager only intervenes in case of a measured performance below target levels. Therefore, a planning and budgeting system reduces uncertainty and is time-efficient for top-managers.

The final purpose is motivation. The plans and budgets become targets that affect manager motivation because the targets are linked to performance evaluations and, in turn, various organizational rewards.

2.3 Budgeting choices

Neil Churchill (1984) argues that budgets should be considered from a broader perspective. He views them as having two primary functions: planning and control. Nevertheless, no matter whether it is used for planning or for control, a budget is more than a forecast. A forecast is a prediction of what may happen and sometimes contains prescriptions for dealing with future events. A budget, on the other hand, involves a commitment to a forecast to make an agreed-on outcome happen (Churchill, 1984). From a planning perspective, a budget is the glue that makes the different parts of the organization fit together. It translates the strategic plans of the organization and its implementation programs into period-oriented operational guides to company activities (Churchill, 1984). According to Curchill (1984), there are three important decisions to make regarding the planning choices of preparing a budget. These issues will be discussed below.

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(1995) argue that employees view participation as a means of influencing the budgetary process to get the budget they want. Therefore, employees have more positive feelings toward decision makers who afford them this opportunity. In essence, participation promotes the view that the unfavorable outcome is the best that can be expected under the circumstances.

The second planning issue is the implementation choice. How can a company blend the overview of top management with the depth of knowledge of operations found in operating units (Churchill, 1984). Churchill (1984) argues a cyclical process whereby the initial budget formulation is done in broad terms, with details added after everyone agrees on planning assumptions, can be quite effective. This type of budgeting provides initial top-level input into the process and allows top-management to retain overall control. It also permits operating managers to contribute before detail has been built into the budget (Churchill, 1984).

Finally, the planning issue timing needs to be considered. It is important to decide when to start the budget process and when it is completed. Furthermore, the budget process needs to be linked to the strategic planning process.

Besides planning choices, there are also five choices to make regarding the control function of the budget. These issues will be described below.

First, an organization should decide about rolling budgets and revision. It is important to have clear understanding whether or not you make the budget rolling. The question is if the budget period should be for a 12 months period followed by another 12 months budget a year later, or should a quarter be added each time a calendar quarter expires. A rolling forecast is usually produced monthly or quarterly, and enables organizations to periodically adjust its expected numbers within an annual period to reflect the current market realities faced by companies (Haka and Krishnan, 2005). By forecasting over short periods, the rolling forecast reduces the time interval between planning and business reality (Sivabalan et al, 2009). Furthermore, an organization must decide to remain the budget for a fixed period, or revise it periodically during the period (Churchill, 1984). Frow et al (2010) argue revision of a budget seeks to avoid the inherently restrictive nature of budgetary control by enabling managers, when confronted with unexpected events, to consider, a revision of plans and reallocation of resources in pursuit of strategic organizational objectives.

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According to Churchill (1984), a flexible budget can help management to identify problems, since it isolates the effects of changes in sales volume or production level from other performance factors. The third control decision to make is whether you base bonuses on budgets. It is important to consider whether incentive compensation should be based on actual versus budgeted performance, or on actual performance against some other standards (Churchill, 1984). Many companies use budgets to evaluate a managers’ performance. These evaluations commonly result in bonuses based on achieved targets. While bonuses based on budgets can have positive effects, they introduce the possibility of “budget games”. According to Merchant (1985), Lukka (1988), and Young (1985), budgetary slack is defined as the express incorporation of budget amounts that make it easier to attain. Managers may build slack into budgets by strategies that understate revenues and overstate costs (Schiff and Lewin, 1970)

The fourth decision regarding the control issues of budgeting is about the evaluation criteria. When using budgets to evaluate performance, top management must decide whether to focus on final net profit or only on the revenues and expenses for which the business unit is responsible. The question is whether the budget should be used to evaluate only those items over which the evaluated manager has control, or should it include all unit costs and revenues appropriate to the managerial unit (Churchill, 1984). Giraud et al (2007) argue that according to the controllability principle, managers should only be evaluated based on elements they can control.

The final decision to make regarding the budget control is how tight the budget should be. In other words, what degree of ‘stretch’ should there be in the budget (Churchill, 1984). It is important that the designer of a budget considers the optimal amount of challenge in a target. What is the preferable amount of challenge or difficulty in a target? According to Merchant and van der Stede (2007), motivation is highest when performance targets are considered challenging, but achievable. Highly achievable budget targets have many motivation, planning and control advantages, such as, increased manager commitment, protection against optimistic projections, higher management achievement, reduced costs and reduced ‘gameplaying’. However, the primary risk organizations face by setting highly-achievable budget targets is that managers might not be inspired to perform at their maximum. However, this risk can potentially be countered by giving managers incentives to exceed their budget targets.

2.4 Problems with budgeting in practice

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traditional budgeting’s financial, top-down, command-and-control orientation as embedded in annual planning and performance evaluation processes (Hope and Fraser, 2003).

A report written by Neely et al. (2001), drawn primarily from the practitioner literature lists the twelve most cited weaknesses of budgetary control. These weaknesses are listed below.

1. Budgets are time consuming to put together.

2. Budgets constrain responsiveness and are often a barrier to change. 3. Budgets are rarely strategically focused and often contradictory.

4. Budgets add little value, especially given the time required to prepare them. 5. Budgets concentrate on cost reduction and not value creation.

6. Budgets strengthen vertical command-and-control.

7. Budgets do not reflect the emerging network structures that organizations are adopting.

8. Budgets encourage gaming and perverse behaviors.

9. Budgets are developed and updated too infrequently (usually annually). 10. Budgets are based on unsupported assumptions and guesswork.

11. Budgets reinforce departmental barriers rather than encourage knowledge sharing.

12. Budgets make people feel undervalued.

The weaknesses summed up above are the most important critics about the use of budgets. Some of the twelve different claims can be grouped together.

First, critics 1,4,9 and 10 relate to the recurring criticism that by the time budgets are used, their assumptions are typically outdated, reducing the value of the budgeting process (Hansen et al., 2003). Wallender (1999) argues that conventional budgets can never be valid because they cannot capture the uncertainty involved in rapidly changing environments. Therefore, Berry and Otley (1980) argue that the operation of a useful budgetary control system requires two related elements. First, there must be a high degree of operational stability, in order to provide a valid plan for a reasonable period of time. Second, managers must have good predictive models so that the budget provides a reasonable performance standard against managers can be held accountable.

Second, critics 2,3,5,6, and 8 relate to the claim that budgetary controls impose a vertical command-and-control structure, centralize decision-making, stifle initiative, and focus on cost reductions rather than value creation.

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success; (2) failing to make people accountable for satisfied customers because financial performance measures dominate; and (3) failing to empower people to act by providing them with resource capabilities because resources have been committed for the budgeting period.

Given these critics about the use of budgets, it seems odd that the vast majority of companies still use budgets today (Ekholm and Wallin, 2000). Scapens and Roberts (1993) argue that one reason budgets may be retained in most firms is because they are so deeply ingrained in an organization’s fabric. Furthermore, Neely et al. (2001) constitute that budgets are the only process that covers all areas of organizational activity. However, in the last decade new approaches towards the budgeting process have been designed. Some of these approaches aim to improve the budget, while others take a more drastic approach in opting to abandon the budget. These new approaches towards budgeting will be described in the next chapter.

2.5 Budgeting principles

After the literature research conducted in the previous paragraphs, this research has identified the most important budgeting principles according to the existing literature. In the first place, several

objectives need to be considered when preparing a budget. According to the existing scientific literature, there are four main purposes for preparing a budget. Furthermore, there a several choices to make when preparing a budget. These choices and objectives are combined the most important principles that need to be considered during the budgeting process. This research has divided the principles in three key

principles. These three main principles that need to be considered when preparing a budget, are based on the problems with budgeting in practice.

First, the way of decision-making need to be considered. Whether the process is centralized, or decentralized is an important decision to take. What is the level of participation and influence of all stakeholders? How is the coordination between different people and is there an appropriate balance between management oversight and a bottom-up procedure?

Second, people need to be considered during the budgeting process. This also connects to the previous principle. The level of motivation and commitment of the people is dependent upon the participation in the budgeting process of these people. How to achieve this motivation and commitment of the people is an important principle to consider when designing a planning and budgeting system.

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The focus of this research will be mainly on the identified principles about centralization and the people concerning the budgeting process. In the next chapter, this research will look at the different alternatives to traditional budgeting and how these alternatives use the principles identified above. After that, this research will take a critical look at the situation about the budgeting process of Heineken in the light of the principles identified in this chapter.

Chapter 3. Alternatives of traditional budgeting

The budget is described as an integral part of management control systems that aims at promoting coordination and communication among sub-units within the company, provide a framework for judging performance and finale motivating managers and other employees (Horngren et al., 2005). However, budgets have been heavily criticized for the reasons mentioned in the previous chapter. As a consequence of this critique, alternative ways of budgeting have emerged (Hansen et al., 2003). The most important alternatives of traditional budgeting will be described below.

3.1 The Activity-Based Budgeting Approach

According to Hansen et al., (2003) the ABB-group’s fundamental thrust is to expand activity-based and capacity management concepts into budgeting. In addition, the ABB-group contends that budgeting serves primarily a planning role and that budgeting suffers because the financial-oriented, higher-level budgeting process is not adequately connected to the underlying operational model of the organization. Unlike the classic budgeting approach, the ABB-approach (Closed Loop Model) creates an operationally feasible budget before generating a financial budget. In the first stage, the operational loop uses activity-based concepts to convert the estimated demand for products into resource requirements. In addition, in the financial loop, a financial plan is developed based on the operational plan.

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availability about activities, processes, and resources, and the cost of creating and maintaining the information.

3.2 The Beyond Budgeting Approach

According to Hansen et al (2003), the Beyond Budgeting (BB) approach seeks to avoid what they label the annual performance trap. This trap involves dysfunctional behaviors that stem from evaluating line managers vis-à-vis budget targets that are set without reference to a credible (outside) source and remain fixed for the next budget year. Beyond Budgeting consists of similar activities as budgeting, such as target setting, forecasting and resource allocation. However, no budget is allocated in advance and the processes are separated in time (Ostergren and Stensaker, 2009). The BB-group proposes replacing rigid annual budget-based performance evaluations with performance evaluations based on relative

performance contracts with hindsight (Hansen et al., 2003). The relative performance component sets budget targets using benchmarked performance, where the benchmarks are either internal or external. Where internal benchmarking compares different business units in the same organization and external benchmarking is a comparison with competitors. Hansen et al. (2003), argue that these benchmarks are likely to increase the accuracy and perceived fairness of performance evaluations, thereby reducing gaming behaviors and motivational problems. Moreover, the relative performance standards can even increase motivation because the performance targets adjusts naturally to be challenging yet achievable when there is an appropriate benchmark.

In contrast, budget targets derived in traditional budgeting processes often create tension between what upper managers identify as desirable and what lower-level managers claim to be feasible.

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Organizations are increasingly using alternative budget forms such as rolling forecasts for management control (Haka and Krishnan, 2005). A rolling forecast is usually produced monthly or quarterly, and enables organizations to periodically adjust its expected numbers within an annual period to reflect the current market realities faced by companies (Haka and Krishnan, 2005). A typical rolling forecast is created every three months and always covers the same period (usually five quarters). By forecasting over short periods, the rolling forecast reduces the time interval between planning and

business reality (Sivabalan et al., 2009). This should make organizations more competitive and responsive to change (Neely et al., 2001). In contrast, the annual budget has been argued to be outdated soon after it is created (Myers, 2001).

According to Hope and Fraser (2003), rolling forecasts differ from traditional budgets in several ways. First, rolling forecasts do not envision a fixed “finish line” at the end of the fiscal year when income, costs, and other elements are measured against the budget’s stale targets. Furthermore, rolling forecasts only include a few key variables, such as orders, sales, costs and capital expenditures, which means they can be compiled relatively easily and quickly. The most important advantage is that rolling forecasts are more accurate, for two reasons. First, they are constantly refreshed by the latest estimates of economic trends, customer demand and by emerging data from the most recent quarter. Second, nobody in the organization has a reason to manipulate or spin the numbers, because there are no fixed profit targets – or penalties for missing them. Organizations that use rolling forecasts rely on information and control systems that allow everyone in the organization to see the same information at the same time.

Because of more accurate and frequent predictions, rolling forecasts facilitate organizational learning and provide managers with more confidence in the budget numbers that are used for short-term operational planning (Hansen et al., 2003). Managers also become more adept at preparing and interpreting rolling forecasts. Therefore managers can anticipate performance changes sooner an improving the ability to establish realistic expectations (Hope and Fraser, 2003).

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BUDGET According to Montgomery (2002), to be most effective, a rolling forecast should:

1. Have a clear strategic financial mind-set.

2. Be performed at a more summarized level of detail.

3. Be modeled with operational and financial indicators used to drive forecast. 4. Closely integrate with the operating budget.

Organizations must take care to ensure that their forecasting process is truly strategic in nature and not simply an extended budget.

3.4 Zero-Based Budgeting Approach

Zero-based budgeting (ZBB) has emerged in recent years as a controversial approach to planning and budgeting (Wetherbe and Montanari, 1981). Lin (1979) suggests that fixed or traditional budgets are inappropriate for firms operating in today’s dynamic business environment. Ogden (1978) argues that, in theory, zero-based budgeting calls for total cost analysis of all programs every year. Each item of

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Wetherbe (1976) summarized the difference between traditional budgeting and zero-based budgeting. He agreed with Lin that manufacturing expenses could utilize a more traditional budgeting model while support expenses require a zero-based approach. The most important differences are shown in the figure below.

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Chapter 4. Benchmarking in combination with budgeting

“Benchmarking is not a policy but a tool to improve performance” (Zairi and Al-Mashar, 2005)

According to the American Productivity and Quality Centre (APQC), benchmarking describes the process of improving performance through continuous identification, understanding and adapting

outstanding practices and process found inside and outside the organization and implementing results. Furthermore, the European Foundation for Quality Management (EFQM) defines benchmarking as: The process of systematically comparing your own organizational structure, processes and performance against those of good practice organizations globally, with a view to achieve business excellence. Benchmarking provides the key interface between identifying and understanding the key criteria for change and attuning these to the reality of specific organizations in the global economy.

Ostergren and Stensaker (2009) argue that, when using the Beyond Budgeting approach, targets are described as relative rather than fixed. The goal is to find relative performance components that measure the real value creation. These relative performance components set budget targets using benchmarked performance. Using this benchmark, business units can indentify performance gaps. The idea of identifying these gaps is to initiate corrective actions. In this way, knowledge sharing and best practice management is emphasized. Furthermore, benchmarking can be used to set relative targets and allocate the total budget for each business unit separately. In the following paragraphs, this paper will discuss the benefits and types of benchmarking according to existing literature. Furthermore, knowledge sharing, best practices and the link towards target setting and budgeting will be discussed.

4.1 The benefits of benchmarking

A large-scale survey by Coopers and Lybrand (1994) found that 75% of large organizations viewed benchmarking projects as successful because they: set meaningful and realistic targets; improve productivity; provide new insights; give an early warning of competitive disadvantage; and motivate staff by showing what is possible. A benchmark is the standard of excellence against which business units can compare each other. Benchmarking is actually the process of learning lessons about how best

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 It prevents reinventing the wheel.

 Causes ‘outside the box’ ideas by trying to improve one’s own organization.  It forces organizations to examine present processes and often causes improvement.  It creates a sense of urgency when gaps are revealed.

 Constantly capture opportunities and counter potential threats.

 Helps prevent organizational and people complacency. Benchmarking sets stretch goals. Inertia and past success causes many organizations to plan for the future in similar patterns. Without benchmarking, the goals for improvement are likely to be “the same as last year, plus 5 percent”.

Cultural benefits:

 Benchmarking promotes the emergence and evolution of a ‘learning culture’ throughout the organization.

 Benchmarking promotes a customer-focused culture, by focusing on critical processes and value adding contributions.

 Benchmarking overcomes a Not Invented Here (NIH) attitude. It offers evidence that ideas NIH can work.

Financial benefits

 In actual financial terms, benchmarking can provide tremendous leverage. Benchmarking can potentially reduce cost or increase value-creating activities.

4.2 Types of benchmarking

Trosa and Williams (1996) make a distinction between results and process benchmarking. The first is merely concerned with the comparative data generated by benchmarking, while the latter considers how results were achieved, so that the performance gaps identified in the ‘results’ can be closed by investigating and learning from others’ practices. This research will mainly focus on process benchmarking. Camp (1995) discusses the most widely accepted fundamental types of ‘process benchmarking’. He makes a distinction between internal, competitive, functional and generic benchmarking. These types will be discussed below.

First, there is competitive benchmarking. This type of benchmarking tries to identify performance gaps in relation to competitors. Second, Camp (1995) distinguishes functional benchmarking. This is a

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The third type is generic benchmarking. This is similar to functional benchmarking but goes beyond comparison of quantitative data and examines the qualitative factors associated with the critical business processes at the heart of the function, i.e. why a performance gap exists. Finally, Camp (1995)

distinguishes internal benchmarking. This is a comparison within one’s own company, and more likely between business units.

4.3 Best-practice benchmarking

Benchmarking is often only one of several performance management tools used by managers (Berry et al., 2005). Elnathan et al. (1996) find that benchmarking can aid managers both to benchmark results and to drive improvement through techniques such as Activity Based Costing. Benchmarking can also be used as an input to target costing approach (Young and Selto, 1991). There is an implicit

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H 5. Budgeting at Heineken

“The Horeca budgeting process and allocation at Heineken is still in its infancy” (District Controller Heineken)

During the past months, this research conducted interviews with different stakeholders of the budget process and allocation at Heineken. The important stakeholders are the national sales controller, regional sales managers and regional controllers. By conducting these interviews, this research got insight in how the budget process and allocation developed at Heineken in the past years. Besides interviewing the stakeholders, this research did a survey among these stakeholders. Based on this survey, the

interviews and the existing literature, this research makes recommendations to Heineken about their budgeting process and allocation.

5.1 Problems current budgeting system Heineken

During the first stage, this research tried to find the most important problems with the current budgeting system. By doing open interviews with different stakeholders, the most crucial points concerning the budget system at Heineken were identified. These key crucial points on which the stakeholders agreed on, are listed below.

1. Top-down process and low participation Business Units. 2. Low commitment within the Business Units.

3. Little use of local knowledge Business Units.

4. No agreement upon the allocation of the budget over the Business Units.

The first three crucial points are tested in a survey. The fourth crucial point about the allocation is separately discussed. The goal of a survey is to derive comparable data across subsets of the chosen sample so that similarities and differences can be found (Cooper and Schindler, 2006). The survey questions are based on scientific literature and the gathered knowledge of the Heineken stakeholders. The participants of this survey are the current business unit controllers. The goal of this survey is to test whether the problems identified during the open interviews were actually valid.

First, this research tried to identify the amount of budget participation. Milani’s (1975) six-item scale to measure budget participation was used. This instrument attempts to assess the respondents’ involvement in and influence on the budget process. The response scale was a seven point Likert-scale ranging from one (very little) to seven (very much).

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a 5 point Likert scale, ranging from 1 (strongly disagree) to 5 (strongly agree). Where question 1,7,8 and 9 are reverse scored.

Finally, this research tried to find the amount of information asymmetry between the regional controllers and their supervisor. These questions stem from a research conducted by Dunk (1993), in order to assess the information asymmetry between a supervisor and subordinates. The response scale is on a 7 point Likert scale ranging from 1 (my superior had much better information) to 7 (I have much better information). Using this instrument, this research tried to identify the gap between the local market knowledge and the supervisors’ knowledge.

The number of participants was six out of the nine regional controllers. Three controllers were not able to fill in the survey, because they only worked for Heineken since a few months. The total survey with the questions is shown in appendix 1. The data will be analyzed by means of SPSS in the nest chapters.

5.2 Validity and reliability

The questions used in this research to test participation, commitment and information asymmetry have all been used in previous literature. Milani (1975), Marginson and Ogden (2005) and Dunk (1993) originally developed questions to test these three variables. This previous literature also tested the validity of the questions in the survey. Because their conclusion was that the results and questions were valid, this research also assumes that the validity of the questions in the survey is sufficient.

Reliability has to do with the accuracy and precision of a measurement procedure (Cooper and Schindler, 2006). To check for reliability of the survey results, the Cronbach’s alpha was calculated for each of the variables. The reliability boundary of Cronbach’s Alpha is generally considered to be around 0.50 – 0.60 (Nunnally, 1967). The Cronbach’s Alpha for commitment to the budget and information asymmetry is sufficient. However, budget participation is below the reliability boundary of 0.6. The Cronbach’s Alpha of these three variables are shown in the figure 3.

Figure 3: Cronbach’s Alpha for all variables

Variable Cronbach’s Alpha

Participation 0,41

Commitment 0,72

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The Kolmogorov-Smirnov test and Q-Q plots were used to check whether the sum scales of the concepts were normally distributed. The findings of this test and plots, decides whether to use parametric or non-parametric tests for the data analysis. As can be seen in figure 4, the P-values were all below 0.05. Therefore, the outcomes of the Kolmogorov – Smirnov test indicate the distribution of all three variables is not normal. Furthermore, the Q-Q plots also demonstrate that the variables are not normally distributed. Because the variables are not normally distributed, non-parametric tests are used for further analysis.

Figure 4: Outcomes Kolmogorov – Smirnov Test

Variables Kolmogorov – Smirnov Z Asymp. Sig. (2-tailed)

Participation 0.18 0,04

Commitment 0.26 0,00

Information asymmetry 0.30 0,00

5.4 Descriptive statistics

Because the numbers used with ordinal scales have only a rank meaning, the appropriate measure of central tendency is the median. The median is the midpoint of a distribution (Cooper and Schindler, 2006). The numbers used in this survey are of ordinal scale. Furthermore, because the variables are not normally distributed, the median is generally considered to be the best representative of the central location of the data. The more skewed the distribution, the greater the difference between the median and mean, and the greater emphasis should be placed on using the median as opposed to the mean (Laerd Statistics). The table below contains the descriptive statistics of participation, commitment and information asymmetry.

Figure 5: Descriptive statistics

Variable N Possible range Actual range Median 95% CI

Participation 6 1-7 2-6 4 3.3 – 4.1

Commitment 6 1-5 1-5 3 2.9 – 3.5

Info. Asymm. 6 1-7 3-6 6 5.1 – 5.7

5.5 Results and analysis

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Using Milani’s six-item scale, this research tries to assess the respondent’s involvement and influence on the budget process. During the open interviews, the stakeholders agreed that the participation and

involvement of the regional controllers was low. Looking at the results of the survey, this argument is not fully supported by the data from this survey. The median on budget participation is 4 on a Likert scale from 1 to 7. Therefore, this score does not fully support the proposition that the budget participation is low.

Furthermore, Marginson and Ogden (2005) was used to identify the commitment to the budget. The median score on the commitment questions is 3 on a 1 to 5 Likert scale. This research therefore concludes that the proposition that commitment to the budget is low, is not fully supported.

Finally, Dunk (1973) was used to assess the information asymmetry between the regional controllers and their supervisor. Looking at the results of the survey, the argument that people closer to the market (Business Unit controllers) have better information in comparison with their superiors is supported. The median score on information asymmetry is 6 on a 1 to 7 Likert scale. This score supports the proposition that the knowledge of the people close to the market is higher than of their subordinates.

Recommendations budgeting process

The most important critics about the current budgeting system are found during the interviews and tested with a survey. In the open interviews participation in the budgeting process and commitment to budget were said to be low. Although the survey does not fully support this proposition, this research still assumes participation in and commitment to the budget should be increased. Furthermore, the information asymmetry between Business Unit controllers and their superiors who prepare the budget was said to be high in the open interviews. This proposition is also fully supported in the survey.

This research has identified several budgeting principles in chapter 2. These principles are important to consider, when designing a planning and budgeting system. Principles from the literature that need to be considered in the Heineken situation will be discussed below.

Participation in the budgeting process is very important. It will evoke commitment and motivate people to achieve the budget. According to the interviews the current participation in the budgeting process is low. Therefore, Heineken should make sure that the people working with and using the budget are more involved in the budgeting process.

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Finally, according to the survey there is a lot of knowledge within the local markets. Heineken should use this knowledge of the regional controllers in the budgeting process. Therefore Heineken should

decentralize the budgeting process in order to make use of the local knowledge and make better budgeting and business decisions.

In order to have a combination of speed in the budgeting process and participation and commitment from below, this research has identified a new approach for preparing the budget. The advice coming from the research about the budgeting process, is that the first round of budgeting should be top-down. This first round should be a target letter with key high-level budgeting points. After that, the business unit controllers themselves should be able to create and allocate their budget within their own business unit. This will create commitment and motivation, because the stakeholders have the feeling they are involved in the budgeting process. The six-step model discussed in the following paragraph should be the basis for the yearly process of budgeting. In this model, the business units can make their own specific plans, set priorities and allocate the budget in order to increase their business performance. During the year, the business units will be assessed according to the benchmark model with other units. This model is useful to the budgeting process, as well as, to the budget allocation.

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Besides giving recommendations about the budgeting process, this research also concerns recommendations about the allocation of the Heineken Horeca budget over the Business Units. In the current situation, the received budget of a Business Unit is mainly based on historical data. The national sales controller prepares the budget for each Business Unit according to previous years’ actual results. Furthermore, budget cuts are often allocated over the units based on simple variables, such as, amount of hectoliters per Business Unit.

The most important recommendation according to this research is that Heineken should use relative data to allocate the budget over the different Business Units. Camp (1995) distinguishes internal

benchmarking, which is a comparison within one’s own company, and more likely between business units. This internal benchmark can be used to allocate the budget, as well as, setting targets and priorities for each Business Unit separately. As described in chapter 4, Ostergren and Stensaker argue that, in the Beyond Budgeting approach, targets are described as relative rather than fixed. These relative

performance components set budget targets using benchmarked performance. In this way, business units can compare each other and identify performance gaps. There are several operational, cultural and financial benefits of benchmarking listed in chapter 4.

This research tried to make an integral benchmark between the Business Units of Heineken. The Business Units are compared in a benchmark tool on the most important cost centers of the profit and loss account. These costs are often caused by different cost drivers. Therefore, several allocation ratios in the

benchmark tool use different cost drivers as the divisor. Furthermore, this research designed a step-by-step model how business units should try to set priorities, targets and make plans. The idea behind this model is focused on continuously improving the business units’ performance. This idea originated from the Lean Six Sigma strategy, used at the Heineken Brewery. Six Sigma is defined by Linderman et al. (2003) as an organized and systematic method for strategic process improvement and new product and service development that relies on statistical methods and the

scientific method to make dramatic reductions in customer defined defect rates. The improvement procedure of Six Sigma is generally known under the acronym DMAIC, standing for Define, Measure,Analyze,Improve and Control (de Mast and Lokkerbol, 2012). Originally described as a method for variation reduction, DMAIC is applied in practice as a generic problem solving and improvement approach (McAdam and Lafferty,

2004).

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Besides lean Six Sigma, the Total Productive Maintenance (TPM) reasoning in the Heineken Brewery was an inspiration for the designed model. TPM aims at continuous and long term improvement in performance and therefore it also results in improving financial performance and profitability of organizations (Seth and Tripathi, 2006). TPM has also been very succesful in terms of improving operating performance of companies.

Based on these theories, this research identified a model for Heineken business units to improve their performances. According to the developed model in this research, business units should follow six steps in order to prepare a budget, achieve relative targets and continuously improve their performance. First, business units are benchmarked based on several variables in a Benchmark tool consisting out of 50 benchmarks. Two examples of these benchmarks are shown in appendix 2 and 3. The suitability of a variable in the benchmark model depends on the degree of comparability and the degree of influence a Business Unit can exercise. It is important that business units are held accountable for variables, which they can influence. This ratio suitability matrix is shown in appendix 4. Second, priorities need to be set. A Business Unit Controller can set priorities, in accordance with the national sales controller, using the Benchmark tool. The priorities will be placed in a matrix, which is shown in appendix 5. The priority set on a benchmark is dependent upon the strategic importance and the difference between the current performance and the benchmark. In the third stage, the budget will actually be prepared. Within the budget, several targets will be set for each Business Unit separately. These targets are based on the benchmark, and the priorities set in the previous stage. How ambitious the target should be set is shown in appendix 6. The amount of challenge set in the target, is dependent upon the feasibility of improvement and the difference between the current performance and the benchmark. By following these steps each Business Unit will have a tailor made budget, based on the benchmark tool and the priorities they have identified. In the fourth stage, knowledge sharing will take place. In this stage, Business Units should share effective practices between each other. In this way, best practice management will take place. The fifth stage is operational planning. In this stage, Business Units make plans to achieve a certain target. In the previous stage, they have learned from other Business Units how they can achieve a better

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performance. In this way, Heineken will create a continuous improvement mindset by relative performance measurement. This mindset is a sustainable solution for continuous improvement for the longer term and can help Heineken during the budgeting process to increase commitment and allocate the budget correctly. The six-step model from benchmarking to closing the gap is shown below:

Figure 3: The six-step model from benchmarking to closing the gap

Benchmark

1

4

5

Close the gap

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After the literature research conducted in chapter two, this research has identified the most important budgeting principles according to the existing literature. This research has divided the

principles in three key principles. First, the way of decision-making needs to be considered. The degree of (de)centralization is an important decision to take. The level of participation and influence of the

stakeholders in the budgeting process needs to be taken into account. Second, people need to be considered during the budgeting process. This principle has a direct link to the previous principle. The level of motivation and commitment of the people is dependent upon the participation in the budgeting process. Decisions to maximize motivation and commitment of the people are important to consider when designing a planning and budgeting system. Finally, the flexibility of the budget should be considered. The people responsible for the budgeting process should consider the timing, tightness and revision of the budget. These principles often come back in the alternatives to traditional budgeting described in the third chapter. The fourth chapter describes benchmarking as a way of allocating the budget and driving best practice management. Heineken’s current way of preparing the budget is top-down and allocated on simple variables. Therefore, budget allocation should be done based on the benchmark tool. Furthermore, participation in and commitment to the budget is low and local knowledge is not used for properly allocating the Heineken Horeca budget. To overcome these identified problems this research made some recommendations to Heineken.

The final conclusion of this research is that Heineken should use a more Beyond Budgeting approach in their way of preparing a budget. This new approach to budgeting should be more focused on

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Reflection

The outcomes of this research answered the research questions formulated before this

project started. I found it very interesting but also challenging to combine scientific theory and

practical knowledge at Heineken. In my opininon this research has met the overall goal of giving

recommendations about the budgeting process and allocation at Heineken. Thereby, this research

developed a new concept for the budgeting process and allocation, based on the TPM approach

used in the Heineken Brewery. Furthermore, this model is very useful to create a continuous

improvement mindset at Heineken, where benchmarking is used to motivate people and let them

participate in the budgeting process in order to gain commitment. I think this research provided

Heineken with a new vision how to design the budgeting process, allocate the budget and

continuously improve their performance. The Heineken financial management recognizes the

value of this vision and will use this model to allocate the 2013 budget. Furthermore, business

units will be quarterly benchmarked in order to stay focused on improving their performance in

each region.

Finally, this research will try to identify the most prominent weaknesses and strengths. In this

way, the academic and practical value of the conclusions and recommendations can be judged.

Strengths:

 Practical relevance of the results. The concrete nature of the change recommendations

have contributed to the practical relevance for Heineken. The value of the developed

model is recognized by Heineken financial management and will be used in 2013.

 The model is not only financially oriented, but also covers the human aspect in the

budgeting process. The developed model is focused on adequately allocating the budget,

as well as, motivating people and make them feel more committed to their budget.

 The developed model and mindset is based on scientific literature, as well as, practical

knowledge at Heineken. It combines opinions and knowledge from the business with

scientific literature.

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Weaknesses

 This research mainly used qualitative data. Although a survey was held among the

business unit controllers, only six of the nine filled in this survey. Therefore, there is a

risk of subjectivism.

 Although there is commitment to this research of the Heineken financial management, it

will take time to really incorporate this way of making decisions and allocating the

budget into Heineken.

 Generalizibility of the results to other situations or organizations. The research is really

specific for the budgeting situation in Heineken the Netherlands.

Suggestions for further research

Although the research questions are answered and the research objective is met. There are

several suggestions for future research listed below:

- How benchmarking influences motivation. During presentations within Heineken I

noticed that benchmarking really triggers people. I think it is interesting to do research in

the linkage between benchmarking and motivation

- Can this benchmarking tool also be used internationally? Because the financial

management of Heineken the Netherland was very enthusiastic about this research and

the developed model, the question was raised whether it could also be used in other

countries. Maybe even become a global benchmarking tool.

- How to implement this model and make everybody known with the concept of

benchmarking in order to allocate the budget and drive performance. It is important to

have everybody on board with this concept and really incorporate this concept into the

DNA of the company. How this can be achieved is an interesting subject for future

research.

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Appendix 1 Business Units Controllers Survey

Budget participation

1. The portion of the budget I am involved in setting.

1 2 3 4 5 6 7

Very little Medium Very much

2. The amount of reasoning provided to me by a superior when the budget is revised.

1 2 3 4 5 6 7

Very little Medium Very much

3. The frequency of budget-related discussion with superiors initiated by me.

1 2 3 4 5 6 7

Very little Medium Very much

4. The amount of influence I feel I have on the final budget.

1 2 3 4 5 6 7

Very little Medium Very much

5. The importance of my contribution to the budget.

1 2 3 4 5 6 7

Very little Medium Very much

6. The frequency of budget-related discussions initiated by my superior when budgets are being set.

1 2 3 4 5 6 7

Very little Medium Very much

Information asymmetry

1. In comparison with your superior, who is in possession of better information regarding the activities undertaken in your area of responsibility?

1 2 3 4 5 6 7

My superior has We have about I have

much better the same quality much better

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2. In comparison with your superior, who is more familiar with the input-output relationships inherent in the internal operations of your area of responsibility?

1 2 3 4 5 6 7

My superior has We have about I have

much better the same quality much better

information of information information

3. In comparison with your superior, who is more certain of the performance potential of your area of responsibility?

1 2 3 4 5 6 7

My superior has We have about I have

much better the same quality much better

information of information information

4. In comparison with your superior, who is better able to assess the potential impact on your activities of factors external to your area of responsibility?

1 2 3 4 5 6 7

My superior has We have about I have

much better the same quality much better

information of information informatio

5. In comparison with your superior, who has a better understanding of what can be achieved in your area?

1 2 3 4 5 6 7

My superior has We have about I have

much better the same quality much better

information of information information

Commitment to the budget

1. You are more concerned with taking actions to improve long-term financial effectiveness than with actions that produce good short-term budget performance.

1 2 3 4 5

Strongly disagree Neutral Strongly agree

2. You expect your business-unit to meet short-term budgets even if deviations from budget are occasioned by events outside their control.

1 2 3 4 5

Strongly disagree Neutral Strongly agree

3. You take corrective action to reduce variances from budget, even if this involves disrupting on-going projects and programmes.

1 2 3 4 5

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4. You expect your business-unit to be more concerned with maintaining progress towards initial budget targets than with negotiating increases to the budget as events unfold.

1 2 3 4 5

Strongly disagree Neutral Strongly agree

5. You expect your business-unit to be more concerned with actions that produce good short-term budget performance than with actions to improve long-term financial effectiveness.

1 2 3 4 5

Strongly disagree Neutral Strongly agree

6. You are committed to achieving the budget.

1 2 3 4 5

Strongly disagree Neutral Strongly agree

7. You expect your business-unit to take corrective actions to reduce variances from budget, but not at the expense of disrupting on-going projects and programmes.

1 2 3 4 5

Strongly disagree Neutral Strongly agree

8. You seek to negotiate increases to the budget where circumstances dictate, rather than focus on achieving initial budgetary targets.

1 2 3 4 5

Strongly disagree Neutral Strongly agree

9. You do not attempt to meet overall short-term budgetary performance targets if deviations from budget are occasioned by events outside your control.

1 2 3 4 5

Strongly disagree Neutral Strongly agree

10. You expect your business-unit to achieve the budget.

1 2 3 4 5

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Appendix 2 Business Unit Benchmark example

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Appendix 4 Ratio suitability

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