Zero-Base
Budgeting
Zero-Base Budgeting (ZBB) was first developed and introduced by Peter A. Pyhrr. During the development of ZBB Mr. Pyhrr was the Manager, Staff Control, at Texas Instruments, Inc.
The
ZBB eliminates the major disadvantages of traditional budgeting
systems where the planners focus on the incremental cost that increases from
year to year. ZBB overcomes this weakness by subjecting all proposed programs
and expenditures to the type of scrutiny that is normally conducted for new
programs.
Steps in Zero-Base Budgeting
The development and implementation of the ZBB model requires managers in the organization to engage in several major planning and decision-making processes. These major processes of ZBB include the following:
1. Definition
of the Mission
Usually the organization has already
established mission and goal statements. However, it may be necessary to
redefine them or create new ones. This redefinition is particularly useful when
there are major changes in the internal and external environment.
2. Identification
of Decision Units and Decision Packages
A ZBB decision unit is an operating
division for which decision packages are to be developed and analyzed. It can
also be described as a cost or a budget center. Managers of each decision unit
are responsible for developing a description of each program to be operated in
the next fiscal year or years. In ZBB these programs are referred to as
decision packages and each decision package usually will have three or more
alternative ways of achieving the decision package's objectives. Each decision package must contain goals and
objectives, activities, resources and their costs. It should also contain a
description of how it contributes to the mission and goals of the organization.
3. Analysis
of Each Decision Package
The manager of the decision package has
to assess and justify its operation and
why funds are required for it. Several questions should be asked and answered
during the analytical process.
1. Does this decision
package support and contribute to the goals of the organization?
2. What would be the result
to the organization if the decision package is eliminated?
- Can this decision
package's objectives be accomplished more effectively and efficiently?
This question will require creative planning by the person or persons
developing the decision package.
4. Ranking of Decision
Packages
The ranking process is used to establish
priority of decision packages within the organization. During the ranking
process managers and their staff will analyze each of the several decision
package alternatives. The analysis allows the manager to select the one
alternative that has the greatest potential for achieving the objectives of the
decision package.
5. Acceptance
and Allocation of Resources
Following a review and analysis of
all decision packages, Managers will determine the level of resources to be
allocated to each decision package. Managers at different levels of
responsibility in the organization usually perform the review and analysis.
Sometimes, the executive levels of management may require the managers of the
decision packages to revise and resubmit their decision packages for additional
review and analysis.
6. Budget
Preparation
The organization's budget is
prepared following the acceptance and approval of the decision packages. Once
the organization's budget has been approved managers of the decision units will
place in operation all approved decision packages during the next fiscal year.
7. Monitoring
and Evaluation
The last major process of ZBB is
monitoring and evaluation. What
managers plan to happen in the next fiscal year may or may not occur.
Adjustments may be essential during the year in order to achieve the decision
package objectives. Also, there is a need to know whether or not the
organization did accomplish what it set out to achieve and what level of
achievement was obtained. The monitoring and evaluation process of ZBB requires
that the following be included in the overall design and implementation of
decision packages.
Decision package should include:
- Measurable
performance objectives
- Appropriate
activities as means for achieving the performance objectives
- Resource allocation
essential for conducting the activities
- Methods for carrying
out the activities as planned
- Evaluation of
objective achievement during and at the end of the program of activities
- Procedures for
reporting objective achievement to managers of the organization
The
Importance of Planning
A major planning effort is required
by personnel of an organization when installing ZBB. It is through the planning
process that important guidelines and directions are provided for the
development and ranking of the decision packages. Also, the planning process
enables managers to prepare for the uncertainty of the future. Long-range
planning allows managers to consider the potential consequences of current
decisions over an extended time period.
The common components of the planning process are:
1. Development of the
organization's mission and goals
2. Generation of broad
policies to guide and direct the organization
3. Establishing and
documenting the client or customer needs
4. Preparation of decision
unit goals and/or objectives
5. Creating a set of
organization priorities
6. Resource identification
7. Decision package
analysis, resource allocation and selection
8. Budget preparation
Adherence to concepts and procedures
of ZBB will result in the following:
1. Retention of desirable
decision packages (including modification as may be necessary)
2. Elimination of obsolete,
non-relevant decision packages
3. Increased or decreased
levels of funding for some decision packages
4. Addition of new decision
packages
Summary
ZBB addresses and supports comprehensive planning, shared decision-making, the development and application of strategies and allocation of resources as a way of achieving established goals and objectives. In addition, ZBB supports the added processes of monitoring and evaluation. ZBB when properly implemented in an organization can assist managers to:
ZBB addresses and supports comprehensive planning, shared decision-making, the development and application of strategies and allocation of resources as a way of achieving established goals and objectives. In addition, ZBB supports the added processes of monitoring and evaluation. ZBB when properly implemented in an organization can assist managers to:
- Develop and/or
modify their organization's mission and goals
- Establish broad
policies based on the mission and goals
- Efficiently identify
the most desirable programs to be placed in operation
- Allocate the
appropriate level of resources to each program
- Monitor and evaluate
each program during and at the end of its operation
- Report the effectiveness
of each program
ZBB,
when properly implemented provides personnel of an organization to plan and
make decisions about the most efficient and effective ways to use their
available resources to achieve their defined mission, goals and objectives.
CAPITAL MARKET AND FINANCIAL SERVICES
also refer BENJAMIN GREHAMs INTELLIGENT INVESTOR
impact of business on environment
NATURE OF BUSINESS
Business may be understood as the organized efforts of enterprise to supply consumers with goods and services for a profit. Businesses vary in size, as measured by the number of employees or by sales volume but all businesses share the same purpose ie. to earn profits.
Features of Business
- economic activity
- continuity of operations
- profit motive
- element of risk
- dynamic or changing
The purpose of business goes beyond earning profit. There are:
• It is an important institution in society.
• Be it for the supply of goods and services
• Creation of job opportunities
• Offer of better quality of life
• Contributing to the economic growth of the country.
Hence, it is understood that the role of business is crucial. Society cannot do without business. It needs no emphasis that business needs society as much.
Business Today
Modern business is dynamic. If there is any single word that can best describe today’s business, it is change. This change makes the companies spend substantially on Research and development (R & D) to survive in the market. Mass production and mass marketing are the norms followed by business enterprises. The number of companies with an annual turnover of Rs.100 crore each was only three in 1969-70.The figure has gone up by hundreds these days. Today’s business is characterized by diversification, which may be:
Concentric Diversification - It refers to the process of adding new, but relates products or services.
Horizontal Diversification - Adding new, unrelated products or services for present customers is called horizontal Diversification.
Conglomerate Diversification - It refers to adding new and unrelated products or services. Going international is yet another trend followed by modern business houses. Business houses are exposed to global competition, which argues well for consumers. Also occupying a major role is science in the global economic scenario.
BUSINESS IN 21ST CENTURY
Large organizations, with a large workforce will not exist. They will be ‘Mini’ organizations. Business during the 21st century will be knowledge-based; tomorrow’s manager need not spend his time on file pushing and paper-shuffling. Information technology will take care of most of that work. Organizations will become flat. Linear relationship between the boss and manger and authority flowing downwards and obedience upward will disappear. Employees will have no definite jobs. Most of the jobs will last for two to five years. Remuneration will depend on one’s contribution to organization.
BUSINESS GOALS
Mission
Mission is a statement which defines the role that an organization plays in a society. Mission statement tries to find answers to three basic questions (which Peter Drucker has raised): What business the company is in? What should the company’s business be? And what will the company’s business be? It also defines an organizations direction and provides for its continuity and growth.
Mission of SBT
“The premier bank of Kerala, aspiring to achieve all India stature with the best parameters in profitability, efficiency, systems and technology by carrying on its traditions with commitment to excellence in customer, shareholder and employee satisfaction while continuing to serve the community at large.”
Objectives
Objectives are those ends which the organization seeks to achieve by its existence and operation as they form the basis for the functioning of an organization. Objectives provide a sense of direction and serve as the yard stick of success in business. Objectives of business are multi dimensional in nature. Generally profit motive is considered to be primary objective of business. But profit making is not the sole objective of a business. The objectives include survival and growth power and prestige social and national objectives.
Targets
Targets are short term and time bound goals. The objectives when put into figures indicating yearly budgets we have the company’s goals. Goal realization continuously will lead to mission fulfillment.
Business goals may be summarized as follows:
1. Profit - Making profit is the primary goal of any business enterprise.
2. Growth - Business should grow in all directions over a period of time.
3. Power - Business houses have vast resources at its command. These resources confer enormous economic and political power.
4. Employee satisfaction and development - Business is people. Caring for employee satisfaction and providing for their development has been one of the objectives of enlightened business enterprises.
5. Quality Products and Services - Persistent quality of products earns brand loyalty, a vital ingredient of success.
6. Market Leadership - To earn a niche for oneself in the market, innovation is the key factor.
7. Challenging - Business offers vast scope and poses formidable challenges.
8. Joy of creation - It is through business strategies new ideas and innovations are given a shape and are converted into useful products and services.
9. Service to society -Business is a part of society and has several obligations towards it.
BUSINESS ENVIRONMENT
The term Business Environment refers to all external forces, which have a bearing on the functioning of business. Environment factors are largely, if not totally, external and beyond the control of individual industrial enterprises and their managements. The business environment poses threats to a firm or offers immense opportunities for potential market exploitation.
Business Environment refers to “the aggregate of all conditions, events and influences that surround and affect it.” Keith Daris.
According to M Weimer, “Business Environment is the climate or set of conditions-economic, social, political or institutional in which business activities are conducted.”
Features of Business Environment
1. Aggregate in nature: BE is the totality of all external factors affecting the operations of business. A single factor may not influence the operations f a business.
2. Inter-related: There is relationship between business and its environment. Similarly there is inter-relationship among the environmental factors. e.g: political-legal environment influences economic environment and vice versa. The same relationship between other environment factors too.
3. Dynamic: The environmental forces are dynamic. They keep on changing as years roll by, so does the business.
4. Uncertain: BE is uncertain because it is very difficult to make any forecast or predictions. When the environment is volatile the uncertainty increases.
5. Relative: BE is relative to the particular industry or business.
6. Influences business: Business is the product of the technological, political-legal, economic, social –cultural, global and natural factors amidst which it functions.
7. Business influences the environment: A particular business firm, by itself, may not be in a position to change its environment. But along with other firms, business will be in a position to mould the environment in its favor.
TYPES OF ENVIRONMENT
Internal and External Environment
Internal environment or organizational factors include the owners, or shareholders, the management, value system, mission, objectives, policies, human resources, company image and brand equity, physical and infrastructural facilities, R & D and technological capabilities, marketing and financial resources etc.
The external factors which influence the conduct of business are called external environment of business. These factors are generally regarded as uncontrollable and beyond the control of a company. The external factors are often referred as environmental factors. These include economic factors, socio- cultural factors, political, legal, technological, geophysical factors etc.
Micro and macro Environment
Some external factors have a bearing on the conduct of a firm. These factors are called micro environmental factors. These include suppliers, customers, distributors, market intermediaries, financiers, competitors, publics etc. these factors are also known as risk environment or operating environment.
Some external factors indirectly influence business operations. These include economic policies, industrial policies, demographic factors etc. These factors are called macro environmental factors or general environment or remote environment.
Micro Environmental Factors
The micro environment consists of the factors in the company’s immediate environment that affects the performance of the company. These include the suppliers, customers, distributors, competitors, market intermediaries, financiers, publics etc.
1. Suppliers
An important force in the micro environment of a company is the suppliers. Regular supply ensures smooth functioning of the business requiring maintenance of lower levels of stock. Because of the sensitivity of the supply, many companies give high importance to vendor development, backward integration, partnering and relationship marketing. (SCM, logistics, JIT)
2. Customers
A major task of business is to create and sustain customers. A business exists only because of its customers; therefore, monitoring the customers is a prerequisite for business success. A company may have different categories of consumers like individuals, households, industries and commercial establishments. The choice of the customer segments should be made by considering a number of variables including relative profitability, dependability, stability of demand, growth prospects and the extent competition.
3. Competitors
A firm’s competitors include not only the other firms which produce the same or similar products but also those producers who compete for the discretionary income of the consumers. For example, a T V manufacturer has to face competition from other TV manufacturers but also from manufacturers of similar home appliances like refrigerators, washing machines etc. Consequent to the liberalization, the competitive environment in India has been undergoing a sea change in recent times.
4. Marketing Intermediaries
The immediate environment of a company consists of a number of marketing intermediaries which help the company in the distribution of goods and services to final consumers. These include distributors warehousing and transportation agencies, advertising firms, marketing research firms, media firms, financial intermediaries etc.
5. Financiers
Another micro environmental factor of a company is the financiers of the company. Besides financing capabilities, their policies, and strategies, attitudes, ability to provide non financial assistance etc. are very important.
6. Publics
A public is any group that has an actual or potential interest or impact on an organization’s ability to achieve its interests. A firm’s publics include media group, citizens forums, non govt. organizations (NGOs), social organizations, environmentalists etc. Growth of consumer publics is an important development affecting business.
Macro Environmental Factors
The various macro environmental factors are:
- Economic Environment There is close relationship between business and its economic environment. Business obtains all its needed inputs from the economic environment and it absorbs the output of business units.
- Political Environment
It refers to the influence exerted by the three political institutions viz., legislature executive and the judiciary in shaping, directing, developing and controlling business activities. A stable and dynamic political environment is indispensable for business growth.
- Technological Environment
Technology is understood as the systematic application of scientific or other organized knowledge to practical tasks. Technology changes fast and to keep pace with it businessmen should be ever alert to adopt changed technology in their businesses.
- Global or International Environment
Thanks to liberalization, Indian companies are forces to view business issues from a global perspective. Business responses and managerial practices must be fine-tuned to survive in the global environment.
- Social and culture Environment
It refers to people’s attitude to work and wealth; role of family, marriage, religion and education; ethical issues and social responsiveness of business.
7. Natural Environment
Business, an economic pursuit of man, continues to be dictated by nature. To what extend business depends on nature and what is the relationship between the two constitutes an interesting study.
IMPORTANCE OF ENVIRONMENTAL STUDY
The benefits of environmental study are as follows;
• Development of broad strategies and long-term policies of the firm.
• Development of action plans to deal with technological advancements.
• To foresee the impact of socio-economic changes at the national and international levels on the firm’s stability.
• Analysis of competitor’s strategies and formulation of effective countermeasures.
• To keep oneself dynamic.
· To facilitate decision making under different situations.
ENVIRONMENTAL ANALYSIS PROCESS
The analysis consists of four sequential steps:
Scanning
It involves general surveillance of all environmental factors and their interactions in order to:
• Identify early signals of possible environmental change
• Detect environmental change already underway
Monitoring
It involves tracking the environmental trends, sequences of events, or streams of activities. It frequently involves following signals or indicators unearthed during environmental scanning.
Forecasting
Strategic decision-making requires a future orientation. Naturally, forecasting is an essential element in environmental analysis. Forecasting is concerned with developing plausible projections of the direction, scope, and intensity of environmental change.
Assessment
In assessment, the frame of reference moves from understanding the environment- the focus of scanning, monitoring and forecasting – to identify what the understanding means for the organization. Assessment, tries to answer questions such as what are the key issues presented by the environment, and what are the implications of such issues for the organization.
Limitations of EA
EA has the following limitations:
1. It does not foretell the future nor does it eliminate future uncertainty for any organization.
2. It does not always guarantee effectiveness of organizations. It is only one of the inputs used in strategy development and testing.
3. The potential of EA is often not realized because of the way in which it is implemented.
4. Too much reliance is placed on information gathered through EA which adversely affects the efficiency of the firm.
BUSINESS ETHICS
The two issues - an organization’s social responsibility and responsiveness- ultimately depend on the ethical standards of mangers. The term ethics commonly refers to the rules or principles that define right and wrong conduct. Ethics is defined as the “discipline dealing with what is good and bad and with moral duty and obligation”. Business ethics is concerned with truth and justice and has a variety of aspects such as expectations of society, fair competition, advertising, public relations, social responsibilities, consumer autonomy, and corporate behavior in the home country as well as abroad.
Business ethics can be defined as the study of what is good and right for the business. It tries to determine the responsibilities and ethical obligations of business professionals.
The need for business ethics arises from the fact that profit making objective of business shall not lead to violation of some moral principles. Honesty, integrity, fulfilling commitment, abiding by agreements, respect for human dignity, responsible citizenship, pursuit of excellence etc. are the key ethical principles to be followed by business.
Types of Business Ethics
Moral management
Moral management strives to follow ethical principles and precepts, moral mangers strive for success, but never violate the parameters of ethical standards. They seek to succeed only within the ideas of fairness, and justice. Moral managers follow the law not only in letter but also in spirit. The moral management approach is likely to be in the best interests of the organization, long run.
Amoral management
This approach is neither immoral nor moral. It ignores ethical considerations. Amoral management is broadly categorized into two types – intentional and unintentional.
• Intentional amoral managers exclude ethical issues because they think that general ethical standards are not appropriate to business.
• Unintentional amoral managers do not include ethical concerns because they are inattentive or insensitive to the moral implications.
Immoral management
Immoral management is synonymous with “unethical” practices in business. This kind of management not only ignores concerns, it is actively opposed to ethical behavior.
NEED FOR BUSINESS ETHICS
• Ethics corresponds to basic human needs. It is human trait that man desires to be ethical, not only in his private life but also in his business. These basic ethical need compel the organizations to be ethically oriented.
• Values create credibility with public. A company perceived by the public to be ethically and socially responsive will be honored and respected. The management has credibility with its employees precisely because it has credibility with the public.
• An ethical attitude helps the management make better decisions, because ethics will force a management to take various aspects- economic, social, and ethical in making decisions.
• Value driven companies are sure to be successful in the long run, though in the short run, they may lose money.
• Ethics is important because the government, law and lawyers cannot do everything to protect society.
ETHICAL GUIDELINES
• Obeying the law: Obedience to the law, preferably both the letter and spirit of the law.
• Tell the Truth: To build and maintain long-term, trusting and win-win relationships with relevant stockholders.
• Uphold human dignity: Giving due importance to the element of human dignity and treating people with respect.
• Adhere to the golden rule: “Do unto others as you would have others do unto you”
• Premium Non-Nocere: (Above all, do no harm)
• Allow Room for participation: Soliciting the participation of stakeholders rather than paternalism. It emphasizes the significance of learning about the needs of stakeholders.
• Always Act When You Have Responsibility: Managers have the responsibility of taking action whenever they have the capacity or adequate resources to do so.
Tools for Ethical Management
• Top management commitment: Managers can prove their commitment and dedication for work and by acting as role models through their own behaviors.
• Codes of Ethics: A formal document that states an organization’s primary values and the ethical rules it expects employees to follow. The code is helpful in maintaining ethical behavior among employees.
• Ethics committees: Appointment of an ethics committee, consisting of internal and external directors is essential for institutionalizing ethical behavior.
• Ethics Audits: Systematic assessment of conformance to organizational ethical policies, understanding of those policies, and identification of serious deviations requiring remedial action.
• Ethics training: Ethical training enables managers to integrate employee behavior in ethical arena with major organizational goals.
• Ethics Hotline: A special telephone line that enables employees to bypass the normal chain of command in reporting their experiences, expectations and problem. The line is usually handled by an executive appointed to help resolve the issues that are reported Copyrights©Dr.A.M.Viswambharan
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