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Tempest, Inc.

(The balanced scorecard)
Planned changes to capital spending
In mid-july, Tempest’s board, which prided it self on its ability to make quick
decisions, responded. It was decided that, given market conditions, price must
remain flat. The heavy capital investment programmes had resulted in explosive
growth of depreciation expenses. In order to sustain income growth targets (which
had to be maintained as a separate issue from sales growth), costs of production
would have to be reduced. Simultaneously, return on investment targets was raised
to strengthen overall financial performance. Given this ‘get better’ versus ‘get
bigger’ philosophy, it was agreed that capital investment should be focused on
improvement rather than expansion. Capital investment should be focused on
improvement rather than expansion. Capital investment had to decrease as a
percentage of sales. Allowing continued growth of capital spending at current rates
would lead to depreciation charges which would significantly erode the bottom line.
The board hoped that this new focus would yield results in two ways : first, projects
that did not yield solid benefits would not be implemented and second, projects that
held the promise of very good returns would be implemented without excessive
spending. This new focus would allow ‘more to get done with less’ (capital).
Many people asked bill what all this meant. Would capital projects already
begun be stopped? Were there particular types of projects that would not be funded
in the future? What was the target for the new capital budget? Bill was concerned. A
storm seemed to be brewing.
Cost-cutting teams were deployed throughout the company. A few examples
of the new focus were widely discussed in the company. In one instance, the
number of engineers scheduled to visit the USA to evaluate new equipment was
reduced from 14 to four. Some managers complained that instead of cutting ‘fat’,
‘muscle’ was being sliced away (translation : their budget had the biceps and should
not be cut). However, this was an expected reaction to the new lean focus.
Many agreed that this new cost-consciousness was appropriate. It stood in
conflict, however, with a major motivator for many managers. Many of Tempest’s
directors liked the power of having a substantial capital budget. Indeed, at times, it
seemed that the size of your capital budget, along with the number of staff in your
department, signalled your importance to the rest of the organisation. Thus much
attention became focused on the capital budget.
By the end of August, two camps had emerged. The first group consisted of a
stream of anxious visitors to Bill Jennings’ office. They (and their representatives)
had questions about how much would be ‘cut’ out of the total budget. They

He wore a hunted look and took to ducking into the nearest empty office when he saw a director approach. ‘strategic Intent’. Joe Smith noticed Bill’s pain. Bill was glad the camera crew did not know who “Joe’s team” was. When they returned. The chairman said he would have Joe Smith report to the board in November on how the process redesign was progressing and how he intended cutting $65 million from the capital budget. The waves were higher than he had ever seen them.’ Bill felt sick. The chairman was ‘confident that this revised capital strategy would re-energise the company by allowing it to concentrate on only those opportunities that could deliver the best results. ‘Delighting the Customer’ and ‘Empowerment’. He wished for the old days when he facilitated teams in their pursuit of performance improvement. ‘some of those performance improvement principles could be applied to the capital budgeting process. the chairman referred to ‘your chief financial officer. as were ‘Cycle Time’. especially in the face of the emerging competitive threats.’ In no way would the new capital plan impair Tempest’s ability to compete.emphasised how important their projects were to the success of the company. This wasn’t an easy time for Bill. who are working on a solution’. They also wanted to know how their obviously superior projects could be guaranteed inclusion in the capital budget. they assembled the company’s 6. to avoid painful discussions of why a particular projects just had to be funded. Directors noted this and commented on it. . Strategy and capital planning In late August the board hired a consultant for advice on issues of strategic importance. This was a change from previous strategy meetings where the board would retire for a week to the sumptuous surrondings of a luxury resort. Joe Smith and his team. Bill felt the waves batter at him as he sank under the surface. The second camp seemed to have decided that the power of their influence with the board and the obvious superiority of their projects would make them guaranteed inclusion in the budget. Cycle time would improve and manufacturing processes would become more nimble as a result of this new focus. The waters were decidedly choppy. ‘Competitive Advantage’ and ‘Critical Capabilities’ were addressed. When the issues came around to ‘refocusing’ capital spending. Joe Smith smiled as the camera zoomed in on him. He grew thin and pale. Perhaps there could be two tiers of projects : an ‘A’ list (which would presumably include many of their own projects) and a ‘B’ list of inferior projects (of which many seemed to be in a variety of departments other than their own). The directors were a formidable group of people with power to impact his career and they all expected that he could recognise the unique value of their projects.000 employees in five cities for a satellite broadcast of a meetings at which the chairman discussed the competitive challenges facing Tempest. ‘Surely’ said joe. She had the board attend a senior management course on ‘Competitive Strategy’. Bill was unhappy.

How would they manage the expectations of the directors with ideas for capital investments? They had to overcome the ‘squeakiest wheel gets his/her project funded’ syndrome. Joyce had perhaps the best cross-functional overview of how things should work in the company. It began with a list of all the performance measures. Bill recalled an approach he had read about. The measure with the highest average scores became part of a final set of 25 measures. but second and as important. Bill was amazed at how much he had contributed to the tool. There were too many to use effectively and Bill referred to research papers for a method that would help narrow the list down to a few key performance factors. the capital budgeting process. . was a must on two fronts – first. to test how sound their ideas were. they dcided. Each member of the cross-functional team ‘voted’ for each measure by circling a number on a scale from 1 to 7 where ‘7’ was most important. The waves were rough. This brainstorming process ended with close to a hundred such factors. the director of strategic planning. 2 The method was a democratic.That evening Joe and Bill had a long discussion. which may have some application here – the balanced scorecard model. How would they deliver results to the board? How could they be sure that they could select the ‘best’ capital investment ideas and reject the rest? Should the value of a capital project be measured only by a discounted cash flow? Should an attempt be made to reflect what value the project could deliver to customers. Over the next few weeks Bill led Joe. The three worked late into the night and when the meeting ended they had a plan. He was happy. but he was riding them well. to test the ‘political’ ramifications of a new approach. He found one that worked : the Performance Measurement Questionnaire. He was back in a mode of improving the performance of a process – in this case. the trade and the employees? How did these issues relate to each other? Were some more important than others? Were there other issues they were missing? Would this new process take too long to implement? What if it didn’t succeed? Should they work with a group of directors to validate their thoughts? Validaton. 1 They called in Joyce Shu. Joyce and a small cross-functional team of managers in two meetings where they identified a series of performance factors that capital investments should impact. consensus-oriented way to distil a wide variety of potential measures of performance into a shortlist of the few mos important to Tempest.