Emerson Electric Company

Chapter 8

Strategy and the Master Budget

Teaching Notes for Cases

8-1: Emerson Electric Company

Background

• Emerson is an $8 billion company.

• Its successful strategy is efficient, quality, and low cost production. R&D does not get a great deal of attention from top management.

Planning Process

• Top management sets sales growth and return on total capital targets for the divisions.

• Each fiscal year, from November to July, the CEO and several corporate officers meet with the management of each division at a one or two day division planning conference:

 Prior to its division planning conference, the division president submits four standard exhibits to top management:

1. Value measurement chart

2. Sales gap chart

3. Sales gap line chart

4. 5-back-by-5-forward P&L

• The division president and appropriate division staff then meet with top management to present a detailed forecast for the coming year based on the result from the division planning conference and conduct a financial review of the current year’s actual performance versus forecast:

 Contingency plans for several lower levels of activity also developed to protect profitability at lower sales levels.

 However, changes to the division’s forecast are not likely unless significant changes occurred in the environment or in the underlying assumptions. Changes in the forecast must be approved by top management.

• In August, the information generated for and during the division planning conferences and fiscal reviews is consolidated and reviewed at corporate headquarters by top management.

• In September, top management presents the corporate and division forecasts for the next year and the strategic pan for the next five years to a conference attended by top management and top officers of each division.

Reporting

• Each month each division president submits to Office of the Chief Executive the President’s Operating Reporting (POR).

• Corporate top management meets quarterly with each division president and the division’s chief financial officer to review the most recent POR and monitor overall division performance.

Compensation--Base salary and “extra” salary:

• An extra salary amount is established at the beginning of the year.

• The executive of a division earns the extra salary if the division hits targeted performance.

 The targeted performance consists of primarily measurable objectives such as sales, profits, and return on capital.

 The multiplier ranges from 0.35 to 2.0.

 Other factors considered include inventory turnover, international sales, new product introductions, and an accounts receivable factor.

• Stock options and a five-year performance share plan also available to top executives.

Question 1: Evaluate Chief Executive Officer Knight's strategy for the Emerson Electric Company. In view of the strategy, evaluate the planning and control system described in the case. What are its strong and weak points?

• Planning at Emerson is top-down with CEO Knight actively involved from the start of the process.

• The first four exhibits capture the essence of the planning system.

 The value measurement chart contains comparisons in five-year increments for investments, operating profit, return on invested capital, sales, operating capital turnover, capital charge, and economic profit.

 In addition to NOPAT, Emerson uses a measure of "economic profit".

 The chart reflects the sales and return on total capital targets set by top management.

• The division sales targets that are set by top management are optimistic. The purpose

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