‘Cost control in a Congolese environment’
‘The adaptation of a financial results control system to Congolese culture’
2
‘Cost control in a Congolese environment’
‘The adaptation of a financial results control system to Congolese culture’
Author: T.P.B. Jonkman
Studentnumber 1143301
Date: 05-10-2005
Supervising Professors: Drs. M.M. Bergervoet Dr. B.J.W. Pennink
University: Rijksuniversity of Groningen Faculty: Management and Organization Company: Bralima S.A.R.L.
3
Preface
This thesis is the result of the final project, which I have performed for my study Management and Organization. When I started with Management and Organization, I soon discovered that I wanted to execute my final research project outside The Netherlands, preferably in an ‘underdeveloped’
country with a totally different culture. However getting the opportunity to perform a research during five months in a country like The Democratic Republic of the Congo was something I never would have guessed.
The internship at Bralima has been a wonderful experience. The opportunity to live in Kinshasa for five months and to work with so many Congolese has been a privilege. From day one it has been an adventure and a challenge to learn more about the Congolese and their culture. The totally different language, mind-set, climate, way of working and level of life of the Congolese, caused that I did not only learn a lot on a professional level, I learned a lot from a personal point of view as well.
For this experience I would like to thank a few people. First of all I would like to thank Mr. Hans van Mameren. He is the one who gave me the opportunity to do the internship, which will stay in my mind for the rest of my life.
The second person I would like to thank is Mr. Bernardin Tsongo. He is my ‘Monsieur, le president de control financiel’. We have worked together a lot during my internship and he has taught me a lot about Bralima, the Congolese and their country.
Third, I would like to thank the family Ortolo-Lulofs. Marc and Annerieke have supported me a lot during the internship. In a chaotic company like Bralima it is very helpful and necessary to discuss experiences to create structure in your mind. The discussions I had with both of them have helped me a lot in writing this thesis the way it is written. Furthermore during the whole internship they have been very supportive and they have become dear friends..
Last, but not least I want to thank all employees at the sales and marketing department and mr.
Useni and mr. Mbungu of the financial department for all their kindness and willingness to help at any time.
4
Management summary
The research, which was performed for this thesis, was executed at the sales and marketing department (SMD) of Bralima S.A.R.L. (Bralima). Bralima is a brewery of beer and a bottler of soft drinks in The Democratic Republic of the Congo (DRC) and is 100% owned by Heineken N.V.
The question, at first, of management at Bralima was how to improve cost control at the SMD.
After a short preliminary investigation it soon became clear that planning and budgeting practice was not effective at the SMD, which was mainly causing the lack of cost control at the department. Therefore the goal of the research has been:
“The contribution to the improvement of the planning and budgeting system at the sales and marketing department of Bralima, such that management at the department can be in better
control of cost.”
From this research goal, the main research question was logically derived:
“How can the planning and budgeting system at the sales and marketing department be improved, such that management at the department can be in better control of cost?”
With planning and budgeting system (P&B system) is meant everything that has to do with planning and budgeting practice. By executing a preliminary research it was not only clear that the P&B system was not working effective, but it became also clear that the main reason for this was that the P&B system was not well adapted to its (Congolese) environment. Even the director of the department stated that he thought that a control tool like a P&B system could not be effective in a Congolese environment. For this reason the improvement of the P&B system in this research was mainly focussed on adapting the design to Congolese culture. Next to this subject, separated from the culture-perspective, a second subject was specifically addressed. This subject is the development of plans and budgets, which has much to do with the coordination and communication at the department, which was specifically badly organized.
To start with the first subject: the adaptation of the P&B system design to the cultural environment. To adapt the design of a P&B system to Congolese culture it is necessary to execute a theoretical exploration on cross-cultural difference and on P&B system design. After having analyzed how cultures differ and what the specific characteristics are of Congolese culture and after having analyzed how a P&B system is designed, a framework could be created on how a P&B system ideally should be adapted to Congolese culture.
Cross-cultural difference was reflected by using the theory of Clair Michalon. This theory is built on the difference between ‘western’ and Congolese culture in ‘The right to make mistakes’. This right is reflected on a continuum with two extremes: Highly insecure and secure. The placement of a culture on this continuum depends on the extent to which social security is present in a society. The Congolese culture is, when it comes to this ‘The right to make mistakes’, highly insecure, compared to the ‘western’ culture, which is secure. The theory states that Congolese culture differs from ‘western’ culture on three main issues: initiative, logic and social objective.
Regarding initiative, (off course generally speaking) in a Congolese society initiative means danger. Concerning logic, Congolese live by a conservative logic in stead of a progressive logic.
When it comes to social objective, Congolese are focused on survival, in stead of ‘level of life’, which means that Congolese strive for non-quantifiable goals.
The consequences of these differences are three-fold: Firstly in a Congolese society the value of a person is a result of his position in the group, in stead of what he does. Secondly Congolese are focused on relational principles, in stead of functional principles. Thirdly Congolese have a cyclical time perspective in stead of a linear one.
After knowing what characteristics of Congolese culture were, the focus of the theoretical framework shifted to the design of P&B systems. To design a P&B system many design-decisions need to be taken. For this research, six main design-decisions were used: 1. Coordination and communication, 2. Planning horizon –long term versus short term-, 3. Structure –the extent to which the system is formalized by rules and procedures-, 4. Budgetary slack, or the extent to which slack is built in the budget, 5. Controllability – the extent to which the managers are
5
charged or credited only for items, which are within their control and 6. Budget performance evaluation time horizons. The (theoretic) ideal design of a P&B system could be created by adapting the design-decisions to the characteristics of Congolese culture.
When comparing the ‘ideal’ design with the actual P&B system at the SMD, the following six improvements were identified:
Firstly communication and coordination concerning the P&B system needs to be more intense, far more structured and more open. Secondly the planning horizon of the operational plan and budget for functional department managers should be shortened from one year to for example three months. Not only because of volatility of the market, but also because of a better comprehension of the time period. Thirdly adding new strict rules and procedures does not increase the effectiveness of the process. It is far more important to train functional department managers face-to-face in the use and importance of P&B systems. This means that next to train them in increased financial awareness, it is necessary to train them in specific tasks they need to perform to be able to construct a clear planning and budgeting-policy. Fourthly the financial implications of activities of the marketing department should be clarified in more detail. In the present situation it is not clear how much many promotional, distributional and marketing activities cost and what the contribution is of these activities to the results. This makes it impossible to control the presence of budgetary slack, which creates room for opportunism and fraud. Fifthly the controllability of budgets is low because procedures concerning withdrawal of cash and products are not respected and there is no correction of budgets during the year. And sixthly it appeared that budget performance over 2004 was not evaluated at all. This implicates that a powerful controlling and motivational tool, concerning financial performance of management was not used.
Regarding the second subject, the development process of operational plans and budgets, a model of Vancil and Lorange was used, regarding the ‘formal’ development process. The model distinguishes three cycles: Strategic planning, programming and operational budgeting, Central issue in the model is timing. This timing is explained in two ways: firstly taking the right steps at the right time and secondly involving the right people at the right time. When comparing the ideal situation, which was presented by Vancil and Lorange, with the actual development process at the SMD of Bralima it appeared that both ‘timing-issues’ in reality could be called completely chaotic. Clear coordination and communication was missing and the organization of the steps in time was completely non-logical. Furthermore the involvement of most key-managers in the development process, including the director of the SMD was completely missing.
Both subjects have led to the following recommendations for management at Bralima and management at Heineken:
To improve involvement and transparency of the P&B development process, it is necessary to improve communication and coordination. This can be realized by making one manager clearly responsible for the quality of plans and budgets. It is up to this manager to create more structure in the process and to increase involvement at all relevant management levels.
Furthermore the design of the P&B system should be adapted more to the Congolese ‘mind-set’:
Target setting, planning time horizons and budget performance evaluation time horizons should be adapted to the cyclical time perspective. Next to this it is necessary to support Congolese managers to work with planning and budgets, by providing extra training and education about the purpose and the use of these concepts. Regarding cross-cultural difference, Heineken should be more careful in installing expatriates. When installing expatriates, automatically a mutual burden in understanding between two totally different cultures is present. And especially in these kinds of post-colonial countries this burden is high. This makes it difficult for the western managers to get a solid grip on the department. To solve this problem of mutual misunderstanding, the installation of local managers would be an ideal solution. Apparently this is not always possible. That is why the recommendation for Heineken is, to pay more attention in training expatriates and local employees to deal with cross-cultural difference. In stead of only a three-day preparation training, the training should be extended to periodical evaluations and follow-up training. Furthermore at present it is up to the operating company how and to what extent they educate their local employees. In countries like The DRC, where culture is so different, it would be wise for Heineken to create cross-cultural education which must be compulsory for local employees.
6
Index
INDEX ... 6
CHAPTER 1 BRALIMA S.A.R.L. BREWERIES ... 8
1.1 BRALIMA S.A.R.L. ... 8
1.1.1 Brief history ... 8
1.1.2 Bralima at present ... 8
1.1.3 Structure... 9
1.1 HEINEKEN N.V... 9
1.2 POLITICAL AND ECONOMIC SITUATION DRC... 10
1.3.1 DRC Political history and present situation... 10
1.3.2 DRC economic situation... 11
CHAPTER 2 RESEARCH METHODOLOGY ... 12
2.1 INTRODUCTION... 12
2.2 REASON FOR RESEARCH... 12
2.3 PROBLEM ANALYSIS... 13
2.3.1. Inventory of problems... 13
2.3.2. Management problems ... 14
2.4 PROBLEM STATEMENT... 15
2.5 CLARIFICATION OF TERMS... 16
2.6 CONCEPTUAL MODEL... 17
2.7 RESEARCH SUB-QUESTIONS... 19
2.8 RESEARCH CLASSIFICATION... 19
2.9 LIMITATIONS OF THE RESEARCH... 20
2.10 RESEARCH METHODS... 20
2.11 STRUCTURE OF THE THESIS... 21
2.12 EXPLANATION OF THEORIES USED... 21
2.13 SUMMARY... 22
3.1 INTRODUCTION... 23
3.2 CROSS-CULTURAL DIFFERENCE... 23
3.2.1. The right to make mistakes ... 23
3.2.2 Consequences ... 26
3.3 CHARACTERISTICS OF CONGOLESE AND WESTERN CULTURE... 28
3.4 PLANNING AND BUDGETING SYSTEMS... 29
3.4.1 Introducing Planning and Budgeting systems... 29
3.4.2 Purpose of Planning and Budgeting systems ... 30
3.4.3 Planning and Budgeting Process... 31
3.4.4 The design of effective Planning and Budgeting systems ... 33
3.5 PLANNING &BUDGETING SYSTEM AND CONGOLESE CULTURE... 35
3.6 SUMMARY... 37
CHAPTER 4 THE ACTUAL P&B PRACTICE AT THE SMD OF BRALIMA... 38
4.1 INTRODUCTION... 38
4.2 HEINEKEN AND COST CONTROL AT COMMERCIAL DEPARTMENTS... 38
4.3 ORGANIZATIONAL STRUCTURE OF THE SMDPLANNING AND BUDGETING SYSTEM... 39
4.3 CURRENT BUDGET STRUCTURE, BUDGET AND EXPENDITURES... 41
4.4 THE DEVELOPMENT PROCESS OF PLANS AND BUDGETS... 43
4.5 THE DESIGN OF THE SMD PLANNING AND BUDGETING SYSTEM... 45
4.6 SUMMARY... 48
7
CHAPTER 5 ANALYSIS... 50
5.1 INTRODUCTION... 50
5.2 ANALYSIS OF THE DEVELOPMENT OF PLANS AND BUDGETS AT THE SALES AND MARKETING DEPARTMENT... 50
5.3 ANALYSIS OF THE EXTENT TO WHICH THE P&B SYTEM DESIGN IS ADAPTED TO THE CONGOLESE ENVIRONMENT... 53
5.4 SUMMARY... 57
CHAPTER 6 CONCLUSIONS ... 59
6.1 PRACTICAL CONCLUSIONS... 59
6.1.1 General conclusions... 59
6.1.2 Practical applicability... 60
6.2 ACADEMIC REFLECTIONS... 61
6.2.1 Theories used ... 61
6.2.2 Research methods ... 62
6.2.3 Contribution to science... 62
6.2.4 Suggestions for further research... 62
6.3 SUMMARY... 63
CHAPTER 7 RECOMMENDATIONS ... 64
7.1 THE IMPROVEMENT OF THE DEVELOPMENT OF OPERATIONAL PLANS AND BUDGETS... 64
7.2 THE IMPROVEMENT OF THE SMDPLANNING AND BUDGETING SYSTEM... 65
7.3 ONE-MINUTE RECOMMENDATION... 67
BIBLIOGRAPHY ... 68 APPENDICES...ERROR! BOOKMARK NOT DEFINED.
APPENDIX 1...ERROR!BOOKMARK NOT DEFINED. APPENDIX 2...ERROR!BOOKMARK NOT DEFINED. APPENDIX 3...ERROR!BOOKMARK NOT DEFINED.
8
Chapter 1 Bralima S.A.R.L. breweries
The content of this thesis is derived from a research, which was conducted at Bralima S.A.R.L.
(Bralima). Bralima is a brewery in The Democratic Republic of the Congo (DRC) and it is 100%
owned by Heineken NV. Bralima operates in a turbulent, complex and insecure environment. For a better comprehension of the reader, this chapter will discuss the environment Bralima has to operate in, divided in three levels. The first paragraph will deal with Bralima, the second paragraph with Heineken NV and the third with the DRC.
1.1 Bralima S.A.R.L.
1.1.1 Brief history
When in October 23, 1923 some businessmen with the support of the Bank of Brussels, created The Brewery of Leopoldville, the fundaments for the present Bralima brewery were built1. In 1926 the first beer was produced and consumed. The first few years it was hard for the brewery to stay profitable. This even resulted in a near bankruptcy in 1933. When in the DRC the economy finally showed progression, the brewery immediately profited from this flourishing period and a vast growth of the company was started. This growth resulted in the opening of four other brewing locations in the country during the period 1952-1972.
For a long period growth figures remained stable and the company was able to invest in its own breweries and social projects. At that time Heineken was searching for an opening on the Congolese market. Because of the good performance Bralima was showing, Heineken decided to buy Bralima in 1987.
Then a period of decline came in: Due to very unstable external conditions caused by the war of 1998, it was difficult for Bralima to stay profitable and Bralima was forced to close the brewery of Mbandaka. Despite al the environmental difficulties, Bralima managed to get the ISO 9000 certificate in 2003. Since 2002 Bralima more or less managed to deal with the unstable situation in the DRC and Bralima is right back on track in becoming the number one brewery of the DRC.
1.1.2 Bralima at present
Bralima is one of the two main breweries in the Democratic Republic of the Congo. It is one of the oldest breweries of Africa.
After the loss of a large part of market share in the late 90s, it seems that Bralima has found its way up again. The results are getting better and Bralima is gaining market share bit by bit. Due to bad results in the late 1990s the company was restructured and this has lead to a decrease its workforce from almost 2000 people in 1999 to approximately 980 workers in 2004. In the beginning of 2004 Bralima had 6 expatriates working in Kinshasa. At the initiative of the Chief Executive, mr. Hans van Mameren, this number is increased to 9 at the end of 2004. Although Bralima is a very modern brewery, from a technical point of view, it still has a lot of room to increase professionalism. The most important goal of the appointment of expatriates increasing this professionalism. Furthermore the expatriates are able to share their knowledge and to train local employees to fulfill management functions in the future. Since 2003 Bralima is profitable again and the results in 2004 are even better.
The strategy of Bralima is2:
“Growing market and growing market share by maintaining affordability and improving availability, forcing the competitor to either invest or accept an accelerated loss of market share. Portfolio management should help to improve to become the best brands portfolio supplier”.
1Studio 57 ; Bralima : 4x20 ans
2 Three year plan 2005-2007 Bralima S.A.R.L., General Management Overview: p. 6
9
According to the chief executive the goals of Bralima for 2005 are3:
“The aim is to grow market share in soft drinks and beer in a slowly growing market where purchasing power and price elasticity limits the possibility of increasing prices.
Top line growth has to be realized through volume growth generated by market growth and market share.
Strengthening of our brand portfolio management combined with improved selling skills, in market execution and efficient distribution will give us the required market shares.
Maintaining product quality is a must to achieve this.
Production capacity is available for the volumes of the plan.
Cost control in all departments and at all levels should help to achieve the set targets”.
Bralima operates in a very hostile beer market. An important marketing factor in this market is price. Congolese consumers do not have much to spend and this is why price is trivial in achieving an increase in sales and in the ‘battle’ for market share with the competitor. Price is, next to the threat of war, one of the biggest threats for the profitability of the firm. Although the currency, the Congolese Franc, has been stable during the end of 2003 and beginning of 2004, it has started to lose value drastically in the month of September 2004. This is a serious threat for Bralima and the whole Congolese market. In short the company operates in a very challenging environment: the stakes are high, but so are potential profits.
1.1.3 Structure
Bralima is composed of five main departments. These departments are: Sales & Marketing, Technique, Finance, Human Resources and Information Technology. All departments are located in their own building and are operating pretty autonomous. Every week all directors of the different departments meet each other in a meeting called COMEX.
The subject of the research is cost control at the Sales and Marketing Department (SMD). This is why for this research two departments are the most relevant to discuss: the SMD and the Finance Department.
The SMD has a workforce of approximately 130 people. The SMD director and the marketing Director are both expatriates coming from France and Belgium, the rest of the management team and the employees at SMD are Congolese.
Not only is the department responsible for the marketing and commercial activities of Bralima, it is also responsible for the distribution of beer and soft drinks to the customers. The composition and the responsibilities of these functional departments will be further explained in the fourth chapter The finance department is partitioned in three functional departments: Management Control, Accountancy and Treasury. The director of the department and his right hand are expatriates and, again, the remaining employees are all Congolese. At the finance department, the management control department is for this research the most relevant one. It is the management control department who provides reports on budget and spending of all departments at Bralima.
Heineken N.V.
1.1 Heineken N.V.
Heineken has the widest global presence of all the international brewing groups, operating in over 170 countries and employing 61,000 people. In 2003 Heineken brewed a total of 109 million hectolitres of beer at over 115 breweries in over 65 countries4.
According to Heineken the beer market is growing and consolidating worldwide and will continue to do so. Heineken expects that growth in Latin America and the Asia Pacific region will be the most dominant. Beer has deep historic roots and consolidation has only just begun. This will create many acquisition opportunities and Heineken continues to search for companies that fit in their strategy.
3Three year plan 2005-2007 Bralima S.A.R.L., General Management Overview: p. 6
4Source: http://www.heinekeninternational.com
10
The overall objective of Heineken is market leadership. On markets where other players already provide the total beer demand, Heineken tries to become segment leader. This means that they try to create a premium segment by introducing Heineken beer.
1.2 Political and economic situation DRC
The focus in this paragraph is on the political and economic situation in the DRC. The political situation will includes description of the events that have occurred in history on a political level, starting from the late 1870s when Leopold II, king of the Belgians colonalized the territory5. The economic situation will be the subject of sub-paragraph 1.2.2.
1.3.1 DRC Political history and present situation
After establishing the king’s authority in the Congo basin, European povers recognized Leopold’s claim to the Congo Basin. The borders, set at that time, are more or less the same as they are at present-day. Leopold used the Africans to work for him, so he and western companies could profit from Congo’s minerals. After reports on the brutal way Africans were treated in the region, Belgium annexed the Congo in 1908.
In 1955 the demands for independence were mounting and when the Belgian rule steadily lost control over the events in the Congo, it was decided in June 1960 that the Belgian Congo would become fully independent.
Because of ethnic rivalries, the years that followed were very unstable. At the end of the 1960s the Congo was divided in four quasi-independent parts. Colonel Mubutu was controlling the west, including Leopoldville.
In late 1966 Mobutu established a presidential form of government. He began a campaign for
‘Africain authenticity’. A result was that Mobutu changed names of cities and even of the country itself to more African ones. Although there was ongoing student unrest, the country enjoyed political stability by the end of the 1960s. After firm guidance of the government by Mobutu, the government had to contend with increasingly active political opposition in addition to the economic decline in the 1970s. Between 1975 and 1978 several coup attempts took place.
Although Mobutu tried fiercely to keep control over the country, Mobutu had to agree to a coalition government with opposition leader in 1991. This was the result of a loss of confidence in Zaire’s government and of riots by unpaid soldiers in Kinshasa.
In 1996 and 1997, when Mobutu was in Europe being treated for cancer, rebels dependent on support from Rwandan and Ugandan forces captured the better part of East Zaire. The insurgents, who received aid from Zambia and Angola entered and took over Kinshasa. In 1997, rebel leader Laurent Kabila was installed as president. He changed the name of the country on May 1997 to the Democratic Republic of the Congo. In September of the same year, Mobutu died in Morocco.
The failure of Kabila to revive the economy and to prevent attacks upon thousands of Congolese Tutsis by their Hutu neighbors in the mid-1990s, as well as the revelation that his forces had massacred thousands of Rwandan Hutu refugees in 1996-1997 led to a fading of internal foreign support for his government. After the failure of several peace agreements between Kabila and the main rebel parties, organized by the United Nations, Kabila was assassinated in January 2001.
His son and successor, Joseph Kabila, signed new peace treaties. In 2003 he agreed with the main rebel groups that a power-sharing government would be installed, led by himself. Despite this agreement, the fighting continued in parts and especially in the east of the Congo. In September 2003 a UN peacekeeping force of 10,000 soldiers was installed in the Congo. By mid- 2004 rebel forces had not been integrated into a unified army, and an uprising involving former rebels occurred in June at Bukavu in the east of the Congo. Next to this there were two attempted coups in the first half of 2004. Estimations are that since the establishment of the government 3.3 million people died due to direct or indirect influence of the war that started in 1998.
Despite these events, except for the east, the country was stable during the first half of 2004.
5 Source: http://www.infoplease.com
11 1.3.2 DRC economic situation
Overview6
With extensive agricultural, mineral and energy resources, the DRC is potentially one of Africa’s richest states. Due to instability after the independence in 1960, the economy is keeping far behind its potential. It grew about 1 percent a year until the mid-1980s. Throughout the 32-year regime of Mobutu the country dropped from having one of Africa’s highest standards of living to one of its lowest. Nationalization, corruption, inexperience, heavy borrowing, a deteriorating infrastructure and inappropriate development caused this.
The gross domestic product of DRC fell from $220 U.S. dollar per capita in 1990 to $110 U.S.
dollar in 2002 (compared to $28.600 U.S. dollar per capita in 2003 in The Netherlands).
Due to the war in the east since August 1998 government revenue was dramatically reduced and external debt was increased. Increased government harassment and the uncertain outcome of the war led to the curtailment of operations by foreign investors and businesses. In order to help the government developing the economy, a number of IMF and World Bank missions were organized. At present, associated reforms are unfortunately on hold.
The present beer and softdrinksmarket in the DRC
Because of the developments of the past years, as illustrated above, the present market in Kinshasa is very instable. There is more and more a tendency to make a political issue out of everything and this is not helping the overall development of the market. Despite this fact, Bralima is positive about growth of sales for the next years.
The total beer- and soft drinks-market in 2003 was 1,462,000 Hectoliter for beer and 969,000 for Soft drinks. Due to relative stability in the first half of 2004, the beer and soft drinks-market is increasing rapidly (40% more in September 2004 compared with the same month in 2003). It is an indication that the DRC is, in case of lasting stability, a high potential growing market.
The beer and soft drinks market in DRC is dominated by two companies: Bralima and Bracongo.
Next to brewing beer, both companies bottle soft drinks. As a result, Bralima sells a diverse portfolio of drinks: Primus, Mützig, Turbo King, Guinness, Coca Cola Fanta and Sprite. Bracongo sells two main beer brands: Skoll and Doppel. D’jino and American Cola are the soft drinks that are sold by Bracongo. Bralima has five operating breweries spread over the country, compared to three breweries of Bracongo.
Considering market share it appears that Bralima has a larger market share in soft drinks (latest estimate in August 2004 is 73.3% at the end of 2004), but Bracongo has a larger market share in beer (latest estimate in August 2004 is 43% market share for Bralima).
The presence of only two breweries causes a very aggressive market. Both companies are battling for market share. This even results in anti-advertising campaigns and attempts to sabotage the competitor.
After this short introduction on the environment of Bralima it is time to get to the point. In chapter one it was already mentioned that the content of this thesis is based on a research, which has been performed at Bralima. The next chapter will introduce reason for research and will present the research methodology.
6 Sources: http://www.cia.gov; http://encarta.msn.com
12
Chapter 2 Research methodology
2.1 Introduction
In this second chapter the research methodology will be presented. Initially the research needed to be performed at the SMD of Bralima. The initial assignment was to improve cost control at the department. Why this research is performed will be clarified in the first paragraph.
The problem environment at the SMD, concerning cost control, was not at all clear. That is why paragraph 2.3 deals with a problem analysis, which was executed to set the focus of the research. After finishing paragraph 2.3, it is time to start with the actual research methodology.
This will be done by first identifying a problem statement in paragraph 2.4. Then the terms, used in the problem statement, will be explained in paragraph 2.5 and the conceptual model will be presented in paragraph 2.6. The research sub-questions will be derived from the conceptual model and this is the subject of paragraph 2.7. The research will be classified in paragraph 2.8 and, off course; there are limitations to this research, which will be presented in paragraph 2.9.
An explanation of the research methods, which are used for the research, will be given in paragraph 2.10. To clarify the outline of this thesis, the eleventh paragraph deals with the structure of the thesis. In this paragraph will be reflected which chapter is dealing with which sub- question and what research methods are used to deal with the research sub-questions. The final paragraph will be a summary of this chapter.
2.2 Reason for research
The research performed at the Sales and Marketing Department (SMD) of Bralima was initially focused on the implementation of a new information system, which should provide information about the expenditures of the department. In the eyes the of the General and Financial manager, DMC was spending too much money: Until April 2004 the SMD was far above the official budgets.
The SMD had convinced top management that it was primarily the lack of information, which was causing the spending above budget. At that time there was a monthly report coming from the Management Control department on what was exactly spend by each sub department. It was the opinion of management at the SMD that reporting on a monthly basis was not frequent enough.
As a result they had asked the IT- Department to develop a totally new system, which provided information on the expenditures of the SMD on a weekly and even daily basis. When I arrived this system was almost ready to be implemented and my assignment was to improve cost control by implementing this system.
After a short investigation it appeared that the information that would be provided by the new information system could be extracted from the system that was used by the Management Control Department. After making some minor adjustments in the old system, it was possible to provide a weekly report on the expenditures. This meant that the new system would not create any mentionable extra value.
During a short preliminary investigation it appeared that the lack of information on expenditures was not the real cause of the lack of cost control. It seemed that the practice of planning and budgeting at the department was not effective. There was no communication on the budget and the director of the department even literally said that he did not believe in a Western Model like a P&B system, being effective in the Congoleze environment. He did not want to work with budgets and was just spending money until the finance department would stop him.
I found this personally intriguing. In my opinion a P&B system is a very basic financial management control system that can be, if working effectively, of great value for management.
After a short discussion with the chief executive I then decided to shift the focus on the research to planning and budgeting practice of the SMD.
The new clients for the research would be the chief executive, the financial director and the commercial director. Furthermore indirectly I hoped to serve Heineken NV and Heineken Africa with this research as well, by including generally applicable themes in the research.
The problem situation on planning and budgeting at the SMD was not exactly clear, so a problem analysis needed to be executed. The results of this analysis are presented in the next paragraph.
13 2.3 Problem analysis
In his book De Leeuw7 makes a distinction in different types of problems. In his opinion, there are three sorts of problems: subjective problems, management problems and problem statements.
The difference between subjective problems, management problems and problem statements is according to De Leeuw that subjective problems are the problems that people actually experience. Subjective problems are not automatically clear functional problems. Often personal goals and one’s personal view influences the way people experience a problem. In other words, the problem at hand can be very important in the eyes of one person, but this does not mean that it is automatically an objective functional problem.
The second category of problems is management problems. Management problems are problems that ‘objectively’ need to be resolved. These are problems that objectively are frustrating managerial processes.
The third category, the problem statement, is a clear definition of the aimed research product, the objective and the constraints of the research.
The definition of the problem statement is the beginning of the research process. To realize the creation of a problem statement it is necessary to perform a problem analysis first. This means for this research that first an inventory of problems that employees have on planning and budgeting practice needs to be made. Then these subjective problems need to be assessed to state the actual objective managerial problem(s). After the definition of the managerial problems, the problem statement for the research can be defined.
To get a clear view of the whole problem situation a variety of people were interviewed: The financial manager, the cost controller of the SMD and (almost) every manager at SMD that had a budget at his disposal8
The main focus of the problem analysis was to find out what was causing the difference between the budgets and the actual expenditures at the SMD and why cost control was so hard to achieve. The first clue was that much was caused by the planning and budgeting practice. The most important subjective problems, coming from the interviews with management are defined in paragraph 2.3.2.
2.3.1. Inventory of problems
The problems that were heard the most during the interview will be presented here one by one.
The process of development of budgets is very badly managed
“Until Tsongo was installed, budgets were very non-transparent and plans and budgets were not prepared”9.
“The budgets are prepared, based on last year”10
These are two quotes that illustrate the fact that one of the problems I heard the most was the fact that budget for the year 2004 was not well prepared. Almost every functional department manager and the budget controller had the opinion that the preparation of the budget was not well organized. If you look at the actual expenditures of SMD last year and you compare this with the actual expenditures of the different departments at SMD, there are tremendous differences in what was budgeted and what has actually been spent. There are even parts of functional departments that officially didn’t get any budget at the beginning of the year, although they needed funds and over the year spent money without having an official budget.
7 Prof. Dr. Ir. A.C.J. de Leeuw, Bedrijfskundige methodologie, management van onderzoek, p. 174-179; 1996 Van Gorcum &
Comp. B.V.
8See Appendix 1
9See interview 2 with Vianney Bomboro in appendix 1
10See interview 8 with Hija Miringita in appendix 1
14
Furthermore the partitioning of the budget for 2004 was based on the year before and not on the (operational) plans for next year. The director of the marketing department partitioned the budgets. The managers of the functional departments were not involved in the demand for budget and in the determination of departments’ strategy.
A third point is that during the year there is no follow-up on the budget. With this is meant that management is not updating their budget during the year. Bralima operates in a very hostile and changing environment. As a result it is hard to make predictions of the near future. This asks for a flexible operational plan and a budget that is just as flexible. At SMD, there is no periodic assessment on the budgets compared with the short-term operational plan.
Management at the SMD neglects budgeting procedures when it comes to spending money.
Merchant and Van der Stede11 state that ‘Budgets are structured to match the organizations responsibility structure, with as much revenue, expense, asset and liability line item detail as is appropriate’.
At the SMD there is a formal budget structure in place, which is meant to reflect the responsibility structure, but in practice it is not working. This is because management at the department is not respecting procedures. An example of this is that managers use funds of managers at lower echelons, without informing or consulting them12. If this happens on a structural basis, it is not possible to assess the performance of management on their individual cost control.
Coordination is weak
Several functional department managers regret that the budget and the plans of the SMD are not on a weekly agenda. At the SMD, the informal communication is very important. Although this informal communication can be very effective, still there is a need for frequent formal communication on the budget and on the short term plans. At the moment there are even chiefs of department who do not know where they are with their expenditures, because they are not receiving a report13.
To be able to use the budgeting and planning system as a tool to inform management and to coordinate activities, there must be transparency and effective communication between management at the department.
2.3.2. Management problems
Taking the three subjective problems into account, they are all pointing in the same direction.
Normally the P&B system14 is a management tool that enables management to be in better control of costs. The P&B system at the SMD, however, is not adequately managed. This is why the full potential of the tool is not used. In other words:
The P&B system at the SMD is not effective.
Next to the conclusion that the P&B system is not effective, an overall occurring problem is the belief of top management at Bralima, and especially at the SMD, that a ‘western model’ like a P&B system can not be effective in the specific Congolese environment. The director of the SMD himself does not belief that the existing P&B system can be applied effectively in the existing Congolese environment. Although he does not know a better tool to support cost control, he thinks that the P&B system is not the tool that can increase cost control at the department.
Taking these two managerial problems into account, the focus of the research will be on how the P&B system can be improved in general and especially focusing on the adaptation of the P&B system to the Congolese environment in which the system has to operate. Next to the more general improvement of the P&B system at Bralima, research has to be done on how to improve the planning and budget preparation process. The basis of a P&B system is this process.
11 Kenneth A. Merchant, Wim A. Van der Stede, Management and control systems; Performance, Measurement, Evaluation and Incentives, p. 306; 2003 Pearson Education Limited
12See interview 10 with Christian Ensa Nsabaka in appendix 1
13See interview 7 with Mr. Muhindo in Appendix 1
14The explanation of planning and budgeting systems is given in paragraph 2.4
15
Research objective
This research contributes to the improvement of the planning and budgeting system at the sales and marketing department of Bralima, such that management at the department can be
in better control of cost.
Main Research Question
How can the planning and budgeting system at the sales and marketing department be improved, such that management at the department can be in better control of cost?
Based on these conclusions the problem statement can be defined, which will be done in the next chapter.
2.4 Problem statement
In this paragraph the problem statement will be presented. The problems statement reflects the questions the author wants to answer by executing the research15. Here the problem statement is partitioned in the research objective, the main research question and the research constraints.
The goal of this research is to advice management of Bralima on how they can increase the effectiveness of the P&B system, so they can be in better control of cost. Referring to the problem analysis, the existing P&B system is not working because of mainly two reasons. The first reason is that the system itself is not managed properly; the director of the SMD of Bralima is not interested in the system and sees it as a rather time consuming routine in stead of an attractive management tool. The second reason is that the system is (probably) not adapted to the specific Congolese or Bralima environment. This is why the focus of the research is divided in two subjects. First point of discussion is the management of the P&B development process. The process in time and especially the coordination of this process will be analyzed for re-design.
Second point of discussion is the adaptation of P&B process and structure to the specific Congolese (or Bralima-) environment. When improvements are found on the developing process and on the P&B system design in general, the expectation is that it will not be hard to increase effectiveness of the P&B system.
This leads to the following research objective:
The main research question is directly derived from the research objective. It reflects the research objective in, for research, easier accessible terms.
The constraints for this research are partitioned in constraints in research process and constraints in research content.
Research constraints
Process:
The practical research will be conducted within a period of 5 months.
The final thesis will have to meet with the demands of Bralima, on one side and of the Faculty of Management and Organization, on the other.
Content:
The research will include the operational plan and budget development process and the general design of the P&B system at the sales and marketing department, nothing less and nothing more.
The research will be focused on increasing the effectiveness of planning and budgeting practice, looking at the development process and the most important design and implementation decisions.
15 Prof. Dr. Ir. A.C.J. de Leeuw, Bedrijfskundige methodologie, management van onderzoek, p. 83; 1996 Van Gorcum & Comp.
B.V. Assen
16
The next subject of the research methodology is the explanation of the terms, which are used in this paragraph.
2.5 Clarification of terms
The terms that will be clarified are planning and budgeting system and cross-cultural difference.
Cross-cultural difference is not directly derived from the research objective, but is will be a very important term in this thesis.
Planning and budgeting system
To explain the term planning and budgeting systems (P&B systems) the definition of Merchant and Van der Stede16 is used. According to them, planning and budgeting systems are an important element of financial results control systems. The planning and budgeting systems organize and coordinate the decisions and activities of the organizations employees. The tangible output, produced by these systems, is written plans. These plans clarify where the organization wishes to go, how it intends to get there, and what the results are, that should be expected. On the other side, a part of the planning and budgeting practice is the creation of budgets. Budgets are structured to match the organization’s responsibility structure with as much revenue, expense, asset and liability line item detail as is appropriate. Budgets are important to support managers’ day-to-day decision-making.
Cross-cultural differences
To explain cross-cultural difference in the way it is used in this thesis, culture has to be defined first.
Culture, according to Geert Hofstede is: ‘the collective programming of the human mind that distinguishes the members of one human group from those of another. Culture in this sense is a system of collectively held values”. Culture is not something a person is born with. It is a pattern one has developed throughout its life that influences the way one thinks, feels and potentially acts.
A cross-cultural difference is in this thesis means the difference in mental programming, or culture, between two groups. In the near past and present Dutch, French and Belgian (or in short western) managers are managing the SMD department. At the time of research two French and one Belgian manager were working as part of the management team at the SMD, compared to more or less 6 Congolese managers and 120 Congolese workers17. Next to this, one of the assumptions of this research is that the P&B system at the SMD of Bralima is too much standardized or, in other words, suitable for a western environment. This is why the cultures, which will be compared, are called: ‘western’ culture and Congolese culture.
In short, cross-cultural difference means the difference in mental programming of the ‘western’
and Congolese employees at the SMD of Bralima.
The problem statement is set, that is why in the next chapter the conceptual model is presented to show the link between objects of this research.
Conceptual model
16 Kenneth A. Merchant, Wim A. Van der Stede, Management and control systems; Performance, Measurement, Evaluation and Incentives, p. 302; 2003 Pearson Education Limited
17Based on numbers in the most recent Organizational Diagram (2002)
17 2.6 Conceptual model
The conceptual model is a reflection of the different research objects and the relations between these research objects. Based on the conceptual model, the research sub questions will be defined.
Explanation of the model
Explaining from top to bottom, the first object of research is cross-cultural difference. More specifically, it is the difference in the Congolese and the ‘western’ culture. Based on the problem analysis, it seems that the P&B system is not enough adapted to the Congolese environment.
P&B systems are ‘western’ control tools, or at least they are originally created to operate in
‘western’ environments. For a P&B system to be effective, it is necessary to pay extra attention when implementing it in a totally different culture like the Congolese. The Congolese culture has its own traditions and rules that vary significantly from the ‘western’ culture. Furthermore the two cultures have totally different characteristics.
To show how much the two cultures differ, both cultures are placed on a continuum, which is called ‘The right to make a mistake’. This right to make a mistake has its effect on three characteristics of human culture: initiative, logic and social objective (the second set of research objects in the model). These characteristics of culture are specifically interesting in light of this research, because they influence peoples’ perspective on aspects like communication and time,
Fig. 2.1 Conceptual Model Western
Culture
Congolese Culture HEINEKEN
N.V.
BRALIMA S.A.R.L.
Initiative Logic Social objective
Cultural Differences
View on Cost control
practice
Actual P&B system P&B system design
• Coordination
• Planning Horizon
• Structure
• Budget Slack
• Controllability
• Budget Evaluation Time Horizon
Effective P&B system for SMD
P&B development
process
18
which are important when designing an effective P&B system. More on this topic will be presented in the first part of the next chapter.
The third set of objects in the model is related to the discussion of the design of the P&B system itself. Six topics concerning the design of P&B systems and the P&B development process are reflected. The six topics will be important in this research to analyse the actual P&B system design and to identify improvements in the design. The coordination topic is specifically important, because many things go wrong when it comes to the first step in a planning and budgeting process: the development of plans and budgets. The quality of the P&B system is very much depending on the quality of plans and budgets itself. With quality of plans and budgets is meant that they have to be reflecting the actual strategy that is set for the SMD. It is only possible to get the full benefit of a P&B system when this is the case. That is why the whole development process deserves extra attention in this research. The actual development of plans and budgets at the SMD is very badly managed and therefore it is worthy to discuss what steps normally should be taken when developing plans and budgets and, maybe even more important, who should be involved during the development process. There is no link between cross-cultural differences and the development of budgets, because the aim is to just analyze what possible improvement can be made in the developing process, without taking cross-cultural influence into account.
Next to the discussion of the development process, the six topics concerning effective P&B system desin will be addressed. The second object concerning the P&B system is the
‘effectiveness topics’. In every organization P&B systems are designed in different ways, because this is depending on hundreds of management designs and decisions. The high number of decisions makes it impossible to address every issue concerning the design of a P&B system.
However some main P&B system variable decisions can be distinguished. According to Ueno, Susumu, Sekaran and Uma, multiple researches in this context discuss six different topics on the effectiveness of P&B systems18. The topics are: 1. Coordination and communication, 2. Planning horizon –long term versus short term-, 3. Structure –the extent to which the system is formalized by rules and procedures-, 4. Budgetary slack, or the extent to which slack is built in the budget, 5.
Controllability – the extent to which the managers are charged or credited only for items, which are within their control and 6. Budget performance evaluation time horizons. These six topics will be discussed in this research as well. Taking time-constraints of this research into account, it is necessary to only discuss the most important design decisions. All six topics deal with an important design aspect of a P&B system and when discussing these six, a broad set of issues on P&B system design is dealt with. So this is why it is attractive to use these six topics.
The arrow between the cross-cultural part of the framework and the box ‘effective P&B systems’
emphasizes that, in order to create a clear design of a P&B system it is necessary to adopt the system to the cultural environment.
The fourth set of research objects are the actual P&B system and Heineken’s view on cost control practice. First the opinion of Heineken considering the ideal P&B system and the extent they interfere in cost control practice of operating companies is point of discussion. Then the current development of plans and budgets, and the P&B system design at the SMD in will be dealt with.
The actual situation at Bralima will be preceded by presenting the organizational structure and the budgets structure first of the SMD is included. This will help the reader to understand who are involved and why certain steps are made in the preparation process.
When the view of Heineken and the present situation at Bralima are clear, an analysis can be made on how the effectiveness of the operational plan and budget development process and the design of the P&B system can be improved. From these improvements the recommendations can be identified.
The next paragraph will present the research sub-questions, which are derived from the conceptual model.
18 Ueno, Susumu, Sekaran, Uma: The influence of culture on budget control practices in the USA and Japan; An empirical study, Journal of International Business Studies, 00472506, 1992, Vol. 23, Issue 4
