4 Building a business case Flashcards
Which criteria can be used in order to rate the success of an innovator? which types of innovators exist?
How is the strategic planning, the business plnan and the budget interrelated?
Between which two basic ways for R&D budgeting can be distinguished?
- Top-Down budgeting: strategic goals, performance-indicator-oriented
- takes less time, promotes upper-level commitment, involves no multilevel participation, lower management understands what upper management expects, presented down the ladder
- Bottom-Up budgeting: r&d program, projec-oriented
- takes more time, involves cross-section of the organization, presented up the ladder, seeks participation at all levels, encourages commitment to the plan
What are methods of top-down r&d budgeting?
- sustainable r&d budgeting
- r&d budgeting as percentage of sales
- gap-oriented r&d budgeting
- r&d budgeting regarding the innovation rate
- updating r&d budgeting
- competition-oriented r&d budgeting
What is sustainable r&d budgeting and how does it work? What are its advantages and disadvantages?
- the budget is chosen as percentage of the rest of earnings after dividend payout has been done, preferably the r&d budget is also a high percentage of the gross margin
- advantages:
- signals high relevance
- considers company’s resources
- application of medium complexity
- disadvantages:
- targets maximum not optimal budget
- if margin is negative it sets budget = 0, but debt financing might be meaningful for the company’s future
- high variation possible, nevertheless continuous fixed costs
- complex definition of target ROS
What is r&d budgeting as percentage of sales budgeting and how does it work? What are its advantages and disadvantages?
- R&D budget is chosen as fixed percentage of the sales volume
- advantages:
- easy application
- common in practice
- r&d budgets increase automatically with company’s success
- disadvantages:
- complex definition of percentage
- r&d budget reduction in times of low sales can stop good innovations and cause low sales in future
- companies tend to look at industry standard/ competitiors in order to choose the percentage of sales
What is gap-oriented r&d budgeting and how does it work? What are its advantages and disadvantages?
- r&d budget is defined as a function of the innovation gap
- r&d budget = f(revenue target - expected revenue)
- advantages:
- high orientation on company’s target
- signals high relevance of r&d budget
- disadvantages:
- dependence on the used forecast methods and the regarded timeline
- comple definition of percentage for r&d budget
- no consideration of company’s resources
What is r&d budgeting regarding the innovation rate and how does it work? What are its advantages and disadvantages?
- innovation rate = (sales new products in last 5 years/ total sales in last 5 years)
- management has to define a target innovation rate
- r&d budget = f(target innovation rate - adapation strength)
- advantages:
- orientation on company’s targets
- relative continuous, because five years are considered
- disadvantages:
- comple definition of target innovation rate
- innovation rate increases with the share of innovations but also with decreasing sales
What is r&d budgeting as updating r&dd budgeting and how does it work? What are its advantages and disadvantages?
- the r&d budget of the previous year is adjusted by the inflation rate
- advantages:
- easy application and adoption
- common in practice
- continuous r&d budgets
- disadvantages:
- orientation on past indicators
- no consideration of company targets
What is r&d budgeting as competition-oriented r&d budgeting and how does it work? What are its advantages and disadvantages?
- r&d budget is chosen according to the competitors r&d budgets
- in case of several competitors an average can be chosen or the competitor which fits the best to the own company and its strategy is chosen
- advantages:
- easy application if information exists
- possibility to consider one strong competitor or several relevant competitors
- disadvantages:
- r&d budgeting is shifted to competitors
- no clear strategy if there are several relevant competitors
- information is hard to get
Compare all 6 top-down budgeting methods using the criteria “target orientation” and “complexity of application”
What are methods of bottom-up budgeting?
- zero-based budgeting
- scratch line budgeting
What is r&d budgeting as zero based budgeting and how does it work? What are its advantages and disadvantages?
- projects are evaluated (quali- and wuantitave) every year
- projects are prioritized by the r&d section
- top management decides about the budget cut (top-down element)
- advantages:
- definition and allocation of r&d budget at the same time
- effective allocation of existing resources regarding the companies targets
- budgeting method regards all hierarchical levels, activities and projects
- includes not only cost reduction, but also new allocation of existing resources over important activities
- integration of r&d employees in budgeting process increases motivation
- disadvantages:
- high effort
- low willingness to use ZBB in practice
What is r&d budgeting as scratch line budgeting and how does it work? What are its advantages and disadvantages?
- important and repeating projects are fixed
- scratch line is decided by management and means that xx% of existing resources are not regarded in the annually ZBB process
- advantages:
- pros of ZBB
- less effort than ZBB, because imprtant projects are not controlled annually
- r&d employees are integrated and motivated and their know-how is used
- disadvantages:
- definition of the scratch line
- risky if budget responsible sets the line, because he could raise the line to avoid conflicts
- no market orientation
If Bottom-up and top-down budgeting are combined - what are possible implications and outcomes?
- bottom-up budgeting results in a requested budget
- top-down budgeting results in a set budget
- if set => requested budget: all projects are realized
- if set < requested budget: budget is cut
- iterative process, every step there are two possibilities:
- further budget cut
- increase “set” budget
- iterative process, every step there are two possibilities:
