complain, about everything—the board, management, prices.” In particular, he noted that the growers had be- come increasingly insistent oa high returns, and they did not thitik the co-operative was offering competitive ‘Duman believed Waikerie Producers was within. 10 percent of the best price available to the growers, but be found it difficult to verify the growers’ claims be- cause packers in the Riverland! area, both co-operative and private, did mot willingly disclose their prices and packing charges. He was aware of some attempts that some growers were trying to "beat the co-op!” for ex- ample, by getting an estimate from the om-aperative ankl “then taking it to private packers to see if they would | better it. It was clear to Duncan that Waikerte Producers sould have to become more efficient to get an increas- ing share of a smaller market. He thought that Waik- ‘erie Producers was large enough to build more special relationships with supermarkets in order to sell di- rectly, rather than on the open market. He also wanted the co-operative to provide consistently superior ser- vice and to offer special promotions so that the River- Chapter 24 Strutogic Planning arf Boxtyetinng 771 Jand product could compete without always being sold at lowest price. It wax also clear that Waikerie management was handicapped by their inability to prepare reasonably accurate annual financial plans. The summary income statement comparisons of budget vs. actual shawn in Exhibit 7 reveals some significant variances. Crop. forocasts were one part of the problem, Consequently, ina note to members accompanying the 1993 budget, Waikerie managers wrote: ‘Crop forecasting, particularly of citrus, bas be- ‘come more difficult and more time consuming, cand ultimately has proved less accurate cach year... Gur projection of volumes in all activities is critical to the budgetary process. and it is only as a result of this exercise that we can propose a budget ... Each year we spend more time and ef= fort to create our estimates, which appear to be Jess accurate through varying kevels of support from our grower suppliers. As the estimate is the singularly most critical factor in the calculations, this causes us much concer. Case 24-3 Patagonia, Inc.* Jn planning for their company’s 1996 fiscal year (end- ‘ing April 36), managers of Patagonia, Inc., which de- ‘signed and marketed high quality outdoor equipment clothing, decided to implement a form of “open- management.” The Patagonia system, which was led the Workbook Process, was intended to be a sin- “gle coordinated process that combined the ‘company’s i¢ planning, bodgeting, and quality improve- 1 processes, But more importantly, the Process “was designed to make information about all aspects of Patagonia’s business available 10 all employces and to rage the employees to be an active part of the "s planning, operating review, and decision ing processes, In September 1997, Karyn Barsa, Patagonia’s chief ial officer, reflected on the company’s first two. * experience with the Process: ‘We think [the Workbook Process] has worked quite well. Among other things, we think employ ees understand better what we've trying to accom © by Kenneth A. Merchant, plish, We think most employees feel more empow- tered because we really are encouraging them to share their ideas, and we are listening to those ‘ideas. We have created a language common to all departments. And we have created a much better spirit of teamwork within the company. ‘That is mot to say we can’t improve the Process. We don’t have good participation from all of eur people. Some people don't seem to un- derstand the Process, or they don't want te be bothered by it. And the Process is unquestionably ‘costly in time, We are looking at a number of op- tions for improvement, THE COMPANY Patagonia’s products were sold: (1) wholesale to sppe- cialty outdoor gear retailers in North America, Europe and Japan, (2) through mail order, (3) through 22 company-owned retail stores in the United States, Japan, and Europe, and (4) through distributors in Italy, Argentina, Chile, Australia, and Korea. In FY 1997, Patagonia grossed over §158 million in sales and employed over 750 people.FAR Part 2 Management ccounting, Patagonia was founded in 1957 by Yvon ‘Chouinard, an avid and renowned outdoorsman. As a rock climber, Yvon was known for having a long list of first ascents, including the North Aanerican Wall of El ‘Capitan in Yosemite National Park, Yeo could not get pitons he liked, so he started producing climbing gear in his own blacksmith shop. Soaa that shop grew imo machine shop and then into Chowinard Equipment, Ltd, Yvon reflected on the star, “I never intended for my craft to become a business, but every time | re= fumed from the mountains, my head was spinning swith ideas for improving the earabiners, crampons, ice axes, and other tools af climbing... My partner and | scented have a gift for good design.” Yvon's pitons, for example, were made of hardened stce!, not soft irom, so they were mote reliable. And because they were intended 10 be removed and reused ona climb, they allowed climbers to earry less gear. Others recog- nized the superiority of Yvon's designs, and by the late 1960s, Chouinard Equipment had an estimated 80 per- sent of the U.S, market for climbing hardware. | Much of this history bs aclapted from Patagonia, Inc., Defining Quality: A Brief Description of How Wie Got Hese (1958), 2. Chouinard, Patagonia: The Next Hundred Years (ventura, ‘Cal: Patagonis, 1995), p. 1. EXHIBIT 1 Patagonia, Inc—Last Arrow Corparation—Consolidated Net Sales, FY 1980-1997 ‘April “Apel 1995 April 1996. April 1997 In the late 1960s, Yvon shifted his attention to the sale of quality outdoor clothes. His company contine ued to grow slowly until 1972 when the clothing busi= ness took off, One of ¥von's early clothing successes stemmed from the sake of raghy shirts and cams: shorts he had brought back from England. Over the years, the clothing business, which mas organized under the Patagonia, Inc. name, thrived. Patagonia added a broad range of company-designed and-produced items, including rain gear, pile jackets fleece vests, hats and gloves, sweaters, underwear, amd children’s clothing. The company produced clothing for just about every intense outdoor pursuit including: backcountry skiing, mountaineering, dog sked rackng, whitewater kayaking, surfing, mountoin biking, trail running, flyfishing. and sailing. All items of Patagooia clothing were designed for heavy use and built fo fast By the late 1980s, Patagonia’s clothing products had proliferated! into 373 different styles, Fueled by pert odie breakthroughs that produced revolutionary new fabrics, company sales grew rapidly, as is shown inthe revenue figures shown in Exhibit | In 1984, Yvon and his wife, Malinda, organized the clothing lines, the mail order business, and a chats ‘of retail stores that had been built up under an ume brella legal catity called Lost Arrow Corporation:EXHIBIT 2 Patagonia, Inc.—Legal Stracture ‘Lost Arrow Corporation A California Corpoescion Chapter 24 Serunie Planning and Bushesing 773 Patagonia Mail “Onder, Inc. ‘A California Coepomstion Great Pacific Iron Works: A Califenia Corporation (GET) Sore © Patagonia —Atlanes ¢ Patagonia Benoa * Paragonia—Denver * Pataponia— Haleiwa imngonia= New York © Paragonia—San Francisco: «+ PaengoniaSanea arbre # Paegeei—Sinea Cre 4 Patagonise—Seattle + Paengoetia=Washingtan, DC *# Groat Pacific lon Werks—Veneurs «© The Patagonia Qutlet—Eullon 18 The Faragonia Curlet—Froeport © The Patagonia Queler—Salt Lake Cry Affiliate Real Cheap Sports —Vensura ‘Great Pacific Europe, SNC + Patagreas (Chamonix Retail Store) (The company’s 1997 legal structure is shown in hibit 2.) The Chouisards still owned 97 percent of ‘the company. MPANY MISSION AND VALUES a's mission statement and statement of values shown in Exhibit 3. Ata May 1996 Conference an ie Citizenship hosted by U.S, President Clinton, ‘Chouinard paraphrased Patagonin’s mission state~ as: "Make the best quality product and couse no harm.” At Patagonia, “quality” was not re- just by how long the products lasted; the term a whole way of doing business, At the Con- ‘Yvon explained: 1% linked: quality product, quality customer ‘service, quality workplace, quality of life for your employees, cven quality of life for all living things ‘on this planet, [f you miss any one pieee there is a ‘good chance you" miss it all. Yvon's efforts to reduce environmental damage began early in the company’s history when, in 1971, he noticed the destruction of rock on climbing rowtes. in ‘Yosemite caused by climbers” pitons being pounded into: the rock. In response, starting with the company’s 1972 ‘catalog, he began to try to convince the U.S. climbing ‘community to switch to “clean climbing” techniques which involved use of chocks and stoppers which were wedged only by hand and then removed after use, Yvon was also concerned that the company used up non-renewable resources and created some pollu- tion. To attempt to create bess damage to the emvi- ronment, Patagonia maintained an active program af!74 Pat 2 Management Accowating EXHIBIT 3 Patagonia, Inc.—Mission Statement and Statement of Values Patagonia Mission Statement ‘Ta deliver innowative, excellent, useful products and service to our customers; to reduce or reverse the environmental harm we cause; to anor our obligations ta each ather and to cur stakeholders: to eam a sufficient profit to achieve these objectives, but without the pursuit of growth for growth’s sake. Patagonia Statement of Values We run a business in a time of environmental crisis and historic social change. This business Is our reason for being together. We value our jobs. We value our products. But we also value the earth whose lite is threatened. This creates.a moral dilemma for all of us. In pursuing our livelihood we create significant environmental harm, We consume irreplaceable resources. We pollute the earth's ait, water and soil, and we da $0 daily. So what do we truly value: economic gain or the health of the earth? This dilemma, like a Zen koan, won't resolve itself; it can't be talked theough, In the meantime, we all have to make choices ang act. The Board has developed a statement of values: it is a moral framework for making decisions. It is a3 simple asit can be; with focus. on the necessary rather than the desirable. It reflects values already at work here as well as values we need to strengthen: + Everyone here, in ie course of our onging Soy. ork arcs sof ei en sc tral ob en environmental irny bility, works to reduce or reverse the harmful pact of everything we da, : + Our products must be innovative, excellent, and useful The world does not need more elutes ‘We will improve, of fight for the reversal af, the quality of life in all communities in which we participate. ‘We will make a profit and yet be true to our principles. ‘We tithe 19 of sales or 10% of profit, whichever is greater, a3 a sell imposed environmental tax. We promote environmental activism at all levels of the company. In management, we valve collaboration, apenniess and maxinsum simplicity. environmental activities, including the promotion of environmental issues, design of environmentally re- sponsible products, and encouragement of employee involvement in community affiirs. The company set Up grants programs mostly focusing on small, griss- roots groups interested in wilderness, biadiversity, and habitat protection issues. In one program, Patagonia imposed on itself a tax of 1 percent of sales or 10 per- cont of pretax profil, whichever is greater, and used the 0 safeguard and restore the natural environ- ment. The establishanent of this “Tithing Program" in 1985 changed the company forever because, as ene ‘company publication described it ‘We could focus on the bottom line with pritie— knowing that if we made money, others would a5 well. Our motivations for business success became more clear—an essential need in a company culture that resented tmditional business diverse pool of applicants.’ * Patagonia, p. 24. ‘Through 1998, this program allowed Patagonia to give away more than $13 million to nearly $00 environ mental organizations. Patagonia managers also set five-year and one-year environmental goals for cack department, tricked environmental performance in considerable detail, and published an annual Environ ‘mental Assessment Report, Rapid growth and maximization of corporate prof its were not among Patagonia’s goals, Yvon Chouinard explained publicly that the only reason he and Malinds had not sold the company was that they were “pes simistic about the fate of the world and felt a responsi bility to-do something about it!“ The Chouinards® bottom-line reason for staying in business was to make money that we could give to [environmental] causes” They did not want “rampant andl senseless growth.” They did not want to “exploit the marketplace." They valued “sustainability.” Thus they were comfortable with company growth in the 3-5 percent range. “Chouinard, pé., * Chouinard, p.In 1991, Yvon felt a need to reorient the company more toward “self-sustaining” principles, one of his core values. The Chouinards and key colleagues went on a three-week retreat in the Patagonia region of Ar- sgentina to discuss the company's “next 100 years." The group concluded that the company was growing too fast; at current rates of growth it would be a billion- dollar company in 11 years, Yvon said: ‘Can a company that wants to make the best qual ity outdoor clothing in the world become the size of Nike? Can a three-star French restaurant with ten tables retain its three stars and add fifty tables? Can a village in Vermont encourage tourism (but hhope tourists go home on Sunday evening), be pro- evelopment, woo high-tech “clean” companies {(s0 the local children won't run off 0 jobs in New ‘York), and still maintain its quality of life? Can ‘you have it.all? | don’t think so.* When Yvon returned to Ventura, he wrote an essay that was published in the company’s Fall 1991 catalog. ‘The essay proclaimed, “We are limiting Patagonia’s growth in the United States with the eventual goal of halting growth altogether.” “The low-growth constraint became clear to everyone in the company when, after the endl of the 1994 fiscal year, Patagonia's president announced the highest levels ff growth in sales and profits in the company’s history. But Yvon Chouinard changed the mood of the meeting ‘when he announced, morosely, “This is really bad,” WORKPLACE AND ORGANIZATION Patagonia had a unique culture. The corporation was comprised of many employees “who share [Yvon's] passion for the cavironment—and his thinly disguised contempt for conventional business.” {These emplay- ers offen refer to themselves as “dirt bags” or “Patag- oniaes.”) The company’s dress code was ultra casual (mostly Patagonia attire), The cafeteria served only health foods at low prices. The company offered flexi ble work arrangements, such as flextime, job-sharing, and work-at-home programs, While the emplayees worked hard, they were allowed to take breaks during the day in order to climb, paddle, or surf. (Good surf- ing could be found only a few blocks from corporate beadquarters, and employees were encouraged to store their surfboards on company grourxds.) “Chouinard, pp. 3-4, FEO, Welles. “Lost in Patagania,” INC (August 1992), pts. ‘Chapter 24 Sinatopic Piacming and Dudgeting 7S Patagonia’ relatively flat organization is shown mm Exhibie 4. Dave Olsen, the CEQ/president, joimed Patagonia in June 1996, The top-management texm com sisted of cight managers. The company’s middle man- agement layer consisted of approximately 30 people. The company culture favored rininum bureau- cricy and maxirnum infoomality. No one in the com- Pany, not even Yvon Chouinard, who was still active in some company affairs, nor senior company officers, had a private office. Because of the lack of private offices, many business meetings were held in the caf- teria. Top-level managers had little respect for organi= zational lines of authority. and they often dealt directly with employees at many organization levels, For ‘example, as one first-level supervisor explained: Tean walk right up tothe CEO's desk, There are 0 waills, ean even walk up tw the owner's desk anytioe and talk te him. 1 don’t need to po through secretaries, We don't have secretaries. Every two weeks top management held an Open Forum. All employees were invited to attend, Manage- mest would provide company updates and answer questions Patagonia’s headquarters site included a child day- ‘care center that offered a variety of programs for chil- dren aged from eight weeks to 10-years old. Patagonia managers observed that most corporations assume the attitude of “That's their problem” when dealing with employees” parental responsibilities. At Patagonia, on the other hand, managers believed that quality child- ‘care is a problem belonging to everyone. Thus, both parents were allowed two months" paid leave after a ‘birth, Mothers were encouraged to continue nursing when they were back at work, Parents were encour- aged to take breaks and have lunch with their children, Farents were allowed to keep young babies right at their desk. Eligible employees were even allowed to take up to five workdays off during the school year to Participate in their child's classroom activities, The company believed that these policies were beneficial to the company, the employees, and the children. It created less anxiety and frustration in the parents and the children and, consequently, increased work satis- faction and productiviry.* * Patagesia was named ie Whe 1993 book The 100 Best ‘Companies to Work for in America, It has alo made Working ‘Mother magatine's of the top 100 list of best comparses to wark for ten consecutive times, arid was fisted in this ‘magazine's top-10 fst three times.(e661 Aa 20 Suquuyiog 24) We) samanng MopETUEZIG—IE NEENAHEMPLOYEE COMPENSATION Patagonia’s system for allocating salary increascs was quite typical, Each employee had individual annual MBO-type goals. Immediate superiors evaluated their subordinates’ performanees and. gave them salary in- creases from a raise pool “The company’s bonus system was quite informal. 1f the company ‘as performing well, all employees were given a SI,000 bonus just before Christnsas and an- ‘other $1,000 at the end of the fiscal year. In FY 1997, however, Patagonia managers elimi- ated the Christmas bonus because company sales ‘were lagging behind plan. Dave Olsen thought that he could create a small bonus poo! ($80,000) in the bast four months of the year, and he recommended that this. pool be divided among 25 worthy employees. This idea was discussed al one of the company’s quarerly ‘Open Forums, and many employees. raised Faimness concems, They asked, for example, “Who wall decide how this pool is allocated?" “What criteria will be used! 10 allocate ir?” “Shouldn't the allocation eriteria be made public so that employees can understand what they must do-to carn a portion of it?" Since answers to all of these questions were not immediately forthcom- ing, the employees decided that nobody. should be given a bonus, They turned the $80,000 back to the company! Company managers did not expect to move toward amore formal individually ocicnted bonus system any- time in the near future, Karyn Barsa, Patagonia’s CPO, “explained that, “We have a difficult time quantifying jadividual contributions. There are. lot of variables “that make up individual performance, and we don’t ‘have the systems in place torhold employees inaividu- ‘ally accountable.” ‘Dave Olsen, in one of his first moves after joining, Patagonia, did create a formal company-wide profite ing plan. This plan became effective im the 1997 ‘year. A pool of 15 percent of adjusted” corporate fits before tax was allocated 1o departments propor Sonately based on base salarics. Department managers subjectively how to allocate their portion of pool to individual cmployecs. Dave wanted the de- managers to allocate the pool to employees ling to merit, but most chose instead to allocate in equal perveniages of base salaries. adjustment iewalved adding tack Yeon and Malinda yomuses, bu pot their base sakaries. Chapter 24 Siraiqge Pana PLANNING AND BUDGETING Until the 1990s, Patagonia did not have a formal plan ning process. Von focused on products, andl demand almost always exceeded supply. Money was not scarce, and many expenditures were made om an itu itive basis. For example, Yvon was “notorious for hir- ing people on impulse—people Ihe met surfing or fishing, people he believed could bring an unfettered intuitive feel t0 the company’! A former Patagonia CEO was quoted as saying: ‘Yvon has no respect for banking and accounting people—people who wear coats and ties. It's al- most a lonthing. But that stuif és part of business. I's almost like hating your left arm.!! Largely because of the lack of attention paid to fi- nancial affairs and business planniag, Patagonia faced its first crisis, in 1991. The economy was in the midst of a recession. and the company was facing more sig- nificant competition; Mainstream apparel makers, spe- cialized niche companies, and cataloguers like UL. Bean, Eddie Bauer, and Lands End were copying Patagonia’s bewer-selling products, and some were of- fering their products at lower prices. Sales were flat: Paiagonia had to dump inventory into the market below cost: and profits plunged. Patagonia’s bank re- used the company’s line of credit, forcing the com- pany to look for alternate sources of credit ‘The financial problems forced Patagonia managers totake a number of steps. They hired some more pia fessional managers, kepta closer eye on credit, cut the umber of clothing styles, and laid off 120 people, 20 percent of iis workforce. (The layoff, in particular, demoralized the workforce.) They also opened the company’s books to employees to show them why ‘expenses needed to be cut. “The problems forced Patagonia managers to bbe- come mare concerned about setting plans and allocat- ing scarce resources effectively. The planning proves. and thinking were sill quite centralized, with only the top management team deeply involved in i. Yvon and Malinda Chouinard, and others, were not pleased with the move toward more formal planning: one manager ‘said "[They] hate it,” But company performance re- bounded nicely: 1993 was a boom year and perfor- mance improved steadily from there. 10 Welles, p. 50. Welles p48.FFB Part 2 Management Accowaning In the summer of 194, Alison May, Patagonia’s 1 manager, conducted a Quality Survey within the company that asked employees, “What do we have todo w make your department “a perfect 10"? ‘One of the findings was that nearly everyone in the company was unhappy with the company’s budgeting process. Employces felt ignorant of the company’s plans and other departments’ activities and, generally, ot in control of their destiny. The Workbook Process grew out of that discontent. THE WORKBOOK PROCESS: ‘The Workbook Process involved (1) making every de- partments and the corporation's plans visible to all employees, (2) making monthly department and cor Porate financial and operating reports visible to all em- Ployees, (3) investing substantial time and resurces to train every employee in financial management 50 that they would understand the information made available to them, (4) encouraging all employees to beceme ac- tively involved in the planning and operating review processes. ‘The Workbook Process actually grew from an idea that was introduced only in the Mail Order Depart- ment for planning for FY 199, The Mail Order exper- iment was judged to be a success, so the Process was extended company-wide the following. year, Patagonia managers hoped that the Workbook Process would provide multiple benefits: 1. Employees woold better understand how their job fits within the strategy of the company, They would be more likely to think strategically because they would be allowed easy access to the highest levels of planning within the company and would have the knowledge to understand it, 2. Employees would be encouraged to take other ‘groups” resources and objectives into consideration in their planning both because all departments” goals and activities would be visible and because all depariments would share a common language. 3. Employees would have an enhanced sense of con- trol of their own destiny because they would be ac- tively involved in the planning processes and could track their department's, and the corporition’s, progress, Many corporate managers resist the open sharing of information with employees. Traditionally, they worry that an open book system might result in competitors gaining access to.the conspany’s important confidential information or that information highlighting the fact that some individuals and groups have missed their” goals might be demoralizing. Sharing information alsa weakerts managers” power base because selective dis= closure of information can be used to control and ma nipulate people. These concerns did not arise at Patagonia, however. Palagonia's top-level managers, at least, embraced the open book system. They thought it was consistent with the company’s culture and, partic= ularly, the company’s respect for employees and com ‘cern for employees’ quality of life. In preparation for FY 1996 planning, managers of each of the 24 workgroups into which the company had been divided were provided Workbook Process training. These managers, who were all middie level managers or higher, in turn, trained the members of their group. In November 1994, a planning manual called the “Workbook Workbook,” was sent to cach of the workgroup heads. The 4i-page Workbook ex plained the intent and goals of the Workbook Process’ and described the I steps in the Process, Here are descriptions of cach of the 11 steps, a3 excerpted from the Workbook Workbook: Step 1: Create a Mission Statement. ‘A mission statement addresses your work group's fundamental reason for being and specifies the ‘functional role that the workgroup is going to play ‘within Patagonia and the market as a whole. It should not describe your workgroup as itis, hut rather it should present your vision for the work- group. Among the suggestions for creating a suc cessful mission stakement are: (1) involve your workgroup, (2) keep it short, and (3) remember, this és only a first step. (Don't spend an inordinate ‘time creating the mission statement, ) Step 2: Develop FY "96 Objectives. ‘The objectives should follow as a natural next step, At the start, assume that your baseline eper- ating expenses for FY "96 will be ne greater than FY°95. In developing their objectives, decide what would be necessary to Rave your workgroup be rated as a perfect “10,” identify objectives in each important area, and involve everyoe in the Workgroup. Finally, prioritize objectives and limit the number of objectives requiring resources above last year's budget to three. [This section of the Workbook provided some information regarding Patagonia’s corporate focus for FY "96. Listed were nine specific goals in the areas of product design, distribution, operations,environment, and personnel training. Three of these goals were (1) 40 have no industrially grown cotton in any Gecrpany products by Spring "6: (2) complete the domestic warehouse relocation ancl move, and (3) complete development of an ‘Asia distribution strategy. This section alse listed preliminary financial objectives for sales, gross profit margin, operating expenses, and net profit] Step 3: Identify Cross-Functional Objectives to Send to Appropriate Departments. Scparate your privritized objectives into two lists: internal workgroup objectives (these requiring: no assistance from a department autsile your own), and cross-functional workgroup ebjcetives. (those requiring some avsistanoe from other de~ partments). Send cross-functional workgroup ob- joctives to cach departnsent affected by them, ‘Step 4: Quantify Objectives. ‘For each internal objective, thake your best guess as to the estinsated capital expenditure, operating ‘expense, and estimated return. For cach eress-funetingal abjeetive sent t0 an- other departnient, meet with the senior manager of that workgroup, That senior manager will pro- vide estimates of the cost and required resources (people, equipment, ctc.) and the time involved to ‘complete the objective. For each cross-functional objective received, meet with the affected parties and provide estimates of the total cost and time involved for your workgroup. Also let them know the priority your workgroup has assigned to the ~abjective Step §: Prioritize All Objectives Take the objectives your workgroup developed and re-peioritize them with the cross-functional objectives you have received fro other workgroups. Communicate back the priorities you have given the cross-functional ebjectives and the reasons for the priorities. Step 6: Develop the Objectives Matrix. Develop the objectives matrix which is designed to organize the objectives and ensure that every aspect of them: is considered. For each objective, show the person responsible, the cost, tbe finan- ial return or benefit, and the timing. [Exhibit $ shows some hypothetical Objectives Matrix sxamples.} _ Step 7: The Off-Site Senior Managers Meeting. “This meeting is designed to allow the senior ‘managers to moet, discuss outstanding cross Functional isswes, and allocate additional expense atollars. ‘Chapter 24 Srospic Manning wal Backgeting 779. Step %: Modify Objectives Matrix Based on Feedback from Off-site Meeting. Fach department shouk work on finalizing their mission statemem and fiscal year objectives for inclusion in the Warkboot ‘Step 9: Complete Budget Worksheets, ‘By now the senior managers groap has agrecd to Ihudget priorities for FY "96, You are now ready’ to complete the process of defining your budget and ‘completing the budget worksheets. Assume a base-line operating budget equal 10 FY "95 and a ‘zero capital expenditure budget unless an increase ‘ora capital expenditure was approved at the se= ior managers’ off-site meeting. Complete the budget worksheets for personnel, monthly cx- pense breakdown, capital expenditures. personal computers or other DP/MIS equipment, informa tion services, travel and entertainment, and out- side services (e.g, contract labor, consulting. ‘egal, Step 10: Develop Back Sections of the Work- book, ‘Consider which aspects of your business you would like to inchide in the back sections of your ‘Workbook. The nature of theve sections will de- pend entirely on the focus of each workgroup. [For example, Mail Order chose to include the fol- Jowing back sections in its Workbook: (|) market~ ing plan, (2) advertising plan, (3) customer ser- vice, (4) customer comments, (5) catalog comments, (6) product comments, (7) training notes, (8) personal performance notes, (9) team otes. The comments afd notes sections provided space for employers to record observations in one centralized, convenient location.] Step 11: Distribute and Implement the Work- books. ‘Senior managers should distribute copies of the Workbooks to all workgroup members and briefly describe each section and the purpose it serves ‘Then give your employees time to read the Woek- book, Hold another meeting to alk them to ask specific questions. ‘The objectives and financial statements shonuld be updated on a monthly basis. You will reed to meet as a workgroup on a monthly basis, Go tHitough each objective and have the responsible person report on its status. Ifthe duc date is not appropriate, consider how this will affect others’ ‘work and how you will deal with this impact. Update the financial figures. Go through the Figures and show employes where there are differences, and discuss their impactPeojAMOp ° z Se/bie SLas suds yseo y jog atajduza5 « 0 ¢ seis da Haas EEA ¥LA <~ 91ng a}adwoD « £ 1 © selene dd ce) OMIA dv 0} aeponLy dojavag] & L #aeeeenee wrmoneg 0 z selfs 4a NI uoneaydde Burseysend yess « sséep ani) do SwumuNeIS yeUcUY AUG a>npeud o paumbay sMep yo saquany anpay (L SayDAgO Burma saupuny ee ayehurory on oo'OOTs §— OD O01 ons o0'0t o t F6/1/6 é o0'O0Zs =—-OD'0018 O0'OT o0'0s o 1 res 0 sysanbay Gopie> peu 2219, ¢ z ooroozs «OOS «oS aoOIS L welLle Da suogeys aseqauioy Z azyeuoriessdo » “gyet yo ood ese asuada Gupeado aanpas pur a2yias vaLworND anouduLy o} aZeNyos puE aleMpuEY sorncueDD apesbidly (1 saapatgo Buren 9 oooos o0'0s Oo'0nIs §=— OT HONS. 1 r r6/1/0L dd “607 af Gupiodas peusayuy DUD = ~ ovoNs ops = oS. oooors =o £ rolls anneal af wweuord ‘uisap pe aacuduy « tL ov0OZE DS TOL «= OTMOIS =o £ rel anne) af 6, es 92964 Aaoromposiiy 159) ¢ "ayy ano 1 SexLOFEN PPE ay (E102 weurUy JMG] “sop deuadsad 4jBIY) SpOYPAL SANDoHO 10> HOW THA] “sasuachea Bunerade ssapac wey 32np9s 01 9601 Aq JaMOLSNS paunbae Jad 1509 1807 (1 squpatgo Buryoyy pig HON 18 yi Avon Gwswg Cy) pusdsa (6) esuodsg G) esuadxy (p) ‘bay G) bay dwoy nq (a) -pru| (©) -dsoy Ig funy rude PuUetisg Bunendg eis eis. awa ea dag Sd pepeta 6) 599 eeopipPY PPY soyduneny peapapodsy— AEA aapaAgg— Iu] HOTEL § AVN os eave $3 on anu Jorn) sA0yy 3 © PaoExhibit 6 shows a Gantt chart showing the timing of the Workbaok Pracess for FY 199% Each month a reporting package was distributed 10 ail employees, This package included income and cash flow statements compared with objectives, It also in- chided a written commentary explaining trends and reasons for favorable and unfavorable variances, This commentary provided, for example, more detail on sales performance by line of business (e.g.. wholesale, ‘mail order, retail) and specific, major sourees and uses of cash. Employees who did not understand the infor. mation were encouraged to direct questions to-their su- periors or to accounting staff. During the year, the workgroups were supposed to hold one meeting each moh to review actual fi nancial and operating results and to moniter progress twward the achievensent of their specific objectives, Same workgroups actually scheduled two meetings, one focused on the Workbook-objectives-vs-actual- results comparison, the other a working session fo- cused on new of different actions that might be taken. Other workgroups met less frequently. FAVORABLE REACTIONS TO THE PROCESS Most employees’ reactions to the Workbook Process were fivorable, Here are some representative fivor- able reactions: Sharon McAlexander (Manager of Logistics): In the 1991 crisis, the company gathered everybody logether, and ideas started flowing. The Workbook Process kept the ideas flowing. It causes a backflow of information from the people doing the day-to- day work to the top, People were encouraged 10 want fo share their ideas, and they were given enough training that they could make educated sup gestions, This is good because a lot of people at the top don’t have a lot of knowledge as to how things work at the bottom. IW hard to attribute specific actions we took to the Workbook Process. Our group is very savvy, We're right on top of things. But maybe the Process made our people understand their jobs better, and maybe it made them care more, The main benefits of the Workbook. Process are intangible. It created am interest in what was going on. Last year, we achieved all of our objectives. That gave us a great deal of pride. Chapter 24 Strateric Plauning amd itedyeting 781 Julie Ringler (Production Department): There is benefit to having access to the information. it has allowed me to ask questions, such as why are mail order sales so good of retail sales not s0 good? ... Every month we talk about it. If'sales are down, want to know why. The Process gives you a teason for asking. Ifthe company is not doing well, maybe it's because I need to onder materials earlicr. Megan Montgomery (Manager of Marketing Services): We were all used to setting goals. But it was neat to be part of a team in setting goals, It's nice to have a plan, and it’s mice to have group goals (in addition iw individual goats), It's great for teamwork. . We got to see how all the pieces of the company work, to see how many “cooks it takes in the kitchen to get the meal made.” .. ‘Twice we discovered that we had the same goal as another department, such aS to streamline a process. In both cases, we decided to werk om the goal together. . Having 2 mocthly meeting keeps you focused, We ask the question, “How's that goal coming?”. .. Before the 1991 crisis, company’ finances and Most compary opefations Were a mystery to mc. After the crisis, everybody pitched im. I can now make suggestions, and [-can sec the effect on the bottom line. I feel good about that, Everybody here feels empowered because they feel they can make a difference. We don’t want to lose that, CONCERNS FOR THE FUTURE Senior Patagonia managers were generally pleased with the Workbook Process, but they recognized it could be improved. They identified three changes which should be made a3 soon as possible: I. Accelerate the preparation of the monthly financial figures. Currently, the numbers were reported only amonth or two after the month end. This frustrated some emplayees because, as onc said, “We're keyed, up about December, but we can Iook only at ‘October numbers.” 2. Computerize the Process. Too much paperwork was required. 3. Offer more training. There was evidence that some non-financially-oriented people, particularly, dida Pa sages 5 Bre [out [ean [same] HY Wh sarenJowan] ecu] wet [ecrvafoary * I pee EweA] ome ek SayPeMEL DOR HOMO M661 AA—OML HOY LISIH Anot understand all the needed-concepes. Some of their numbers were inconsistent, In addition, more training was needed to help employees understand how to spread their forecasts across the months, Most of the annual forecasts were reasonably accu- rate, but the monihly variances were sometimes large because employees had not previously been asked to forecast by month. Other issues: were more complex of more coniro- versial, One concern was that while a majority af em- ployees participated actively and well in the Workbook Process, same employees seemed not to want to par- ticipate. Some employees did not want to participate from the start. Most, however, were initially excited about the Process, and that cxcitement made it worth- while for them to participate. But for some the excite- ment faded as time passed. By the end of the year, fewer employees were taking the time to refer to the Workbooks and follow through as they were supposed to. It was hard to schedule meetings and to initiate theaningful discussions when some employees did not make the Process a priority. Employee participation was particularly poor where department heads did not believe in the Process. ‘Top-level managers estimated that perhaps 74 of the department heads were committed to the Process, but that /4 were mot, They held the required meetings, but they were just going through the motions. One man- ager thought the problem was just that some people, Particularly those in more creative positions, are not “qumbers-oriented and do mot like formal manage- sient structures. However, another manager said “It's hot a right brainleft brain issue. It's just am anitude, Some people seem not to understand the bencfits. They don’t think the Process is worth the time.” It is true that the Process was costly in time. The planning meetings were intensive; preparing the Work books required a lot of paperwork; doing a good job of reading other departments" Workbooks consumed a lot Of time; and then workgroups and subgroups were “Supposed to meet monthly to monitor progress. Was the Process too complex? Could it be simplified? If 0. how? Some employees even advised top management to discontinue the Process or, possibly, to use it only pe- “Fodically, perhaps every five years. They argued that Process was a useful one-time experience because H helped many employees understand better how the iny worked and Ihow their jobs interfaced with Chapter 24 Sowtogie Manning ams Busevtieg FEB others. However, they noted that most of the benefits had already been accrued, at least for the current work- force, while most of the costs af the Proves would continue unabated, A second concern was in the quality of the objec tives and plans that were set. It was easy to judge at the end of the year whether objectives in some areas wore accomplished, but it was not so easy in some other areas, For example, it was relatively easy to judge the ‘accomplishment of the following 1997 objectives: “Utilize tree-free paper in 80 percent of our non- catalog printed materials.” (An Environmental Focus objective for the Art Services workgroup) “Wentify five systems of values within the cons pany that are not good representatives of our image and sirive to correct them by suggesting alterna. tives.” (An Image Focus objective for the Logistics workgroup) “Transition [the company’s on-site corporate child- care center's} quality rating from an averall rating of *T to ‘9. (A Quality Focus objective for the Family Services workgroup) (On the other hand. it was difficult to judge the accom- plishment of the following objectives: = “Reduce amount of files here and off-site.” (An Environmental Focus objective for the Legal work- group) “Improve intemal processes to speed project com- pletion.” (A Quality Focus objective for the Infor nation Systems workgroup) + “Expand our racking system for worldwide inven- tory turn levels to better manage the planning and distribution of inventories.” (An Inventory Focus objective for the Logistes workgroup) Another issue im the quality-of-plans area con- cerned the number of objectives that were being set. Some workgroups identified only three objectives ‘Was that enough? Others did mot follow directions and identified 20 of more objectives mentioning the ac- complishment of specific projects and/or covering vir- tually all aspects of their operation, sometimes without any prioritization of those objectives. Was that 100 ‘many? And with any list of objectives, was prioritiza- tion necessary, or should all identified abjectives be considered equally important, or at least worthy of achievement?Za A third concern related to the timing of what was an Questions annual process. Should the company plan beyond a one-year horizon? Should the Process involve some we formal updates jo sGebrauiend 6 Puagonl ane a A final concern related to incentives. Does the eee Pecces) yey Onis a company have the right mix of employee incentives? 2. If you recommend continuing the process, Should some compensation be linked to the accom- changes would you suggest, if any? plishment of Workbook Process goals? 3. If you recommend discontinuing the process, would you substitute instead? >" |, Evaluate Patagonia’s Workbook Process.