STRATEGIC BUDGETING

A Strategic budget is an essential element for any organization. It provides a long-term road
map for the success of the company
Strategic Budgeting is a budget prepared by the companies that takes into consideration long
term objectives and costs that take more than one year to achieve. This involves preparing
multiple budgets and forecast for short term costs that are aligned with the long term. And
thereafter allocating and categorizing funds depending on the activities.
 A long-term strategic plan usually spreads out the 5-year plan to set goals. There are annual
operating short-term plans to achieve a long-term goal eventually.
 Similarly, Strategic Budgeting manifests the details of the annual plan and allotment of funds
to specific areas.
 Spending and the areas have to be in sync. Otherwise, the company might end up spending on
short term projects yielding no results or unaligned with long term goals.
 If the company modifies the long-term strategic plan, then it can accordingly change the
strategic budget to meet the needs.
 It can be very crucial to the company for effective planning and prioritizing. The costs have
to be prioritized to satisfy the stakeholders. Usually, the areas with the highest amount of
dollar allocation come in high priority tasks

Examples of Strategic Budget

 Product Development – This is the department that works on years of research and
development to design a product and finally launch the product. So having a long term budget
in place helps the product team to allocate their resources wisely.
 Programs – As discussed earlier short-term programs and steppingstone to achieve the long
term goals, a strategic budget plays a vital role here for both. For instance, an aeronautics
company takes ten years to develop a rocket. So in this long tenure, this budget helps them to
achieve their end goal.
 Infrastructure Budgets – These are the projects which can develop a nation, city, or any
organization. If the projects are long term and may take several years to complete, like
railways or national highways, long term budget always helps to function.
 Productivity and Capability – Most of the organizational goals are long term. However,
midway, if there are any process-centric changes like an adaption of new technology, risk
management, and many more, the strategic budget allocates for such needs too.

Strategic Budgeting Process

There are four dimensions we need to look for when we are in the process of converting the
goals into a budget. That is, Objectives, Strategies, Measures, and Targets. Let us define these
step by step, which helps in designing the strategic budget.
 Objectives – This defines what exactly we are trying to achieve, which are our goals.
 Strategy – The second step would be to develop a strategy to achieve a set goal.
 Measures – After implementing the strategy, we need to track and evaluate its performance
using relevant standards.
 Target – Finally, the goal is the place where we aim to be by the end of the period.
In the whole process, we need to allocate funds to all the functional departments and help
them achieve their objective to achieve the final target.

Strategic Budgeting Process

 There are four dimensions we need to look for when we are in the process of converting the
goals into a budget. That is, Objectives, Strategies, Measures, and Targets. Let us define these
step by step, which helps in designing the strategic budget.

 Objectives: This defines what exactly we are trying to achieve, which are our goals.
 Strategy: The second step would be to develop a strategy to achieve a set goal.
 Measures: After implementing the strategy, we need to track and evaluate its performance
using relevant standards.
 Target : Finally, the goal is the place where we aim to be by the end of the period.

Budgeting resides in presenting in a scheduled form the data that make up the budget.
Budgeting is characterized by:
 Planning and coordination: Budgeting works within the framework of a long term, overall
objectives to produce detailed operational plans for different sectors and facets of the
organization. This is expressed in the form of a Master Budget, which summarizes all the
supporting budgets. The budget process forces managers to think of the relationship of their
function or departments with others and how they contribute to the achievement of
organizational objectives;
 Authority and responsibility: Budgeting makes it necessary to clarify the responsibilities
of each manager who has a budget. The adoption of a budget authorizes the plans contained
within it so that the management by exception can be practiced, meaning that a subordinate
is given a clearly defined role with the authority to carry out the tasks assigned to him and
when activities are not proceeding to plan, the variations are reopened to a higher level;
 Communication: Budgetary process includes all levels of management. Accordingly, it is
an important avenue of communication between top and middle management regarding the
firm’s objectives and the practical problems of implementing these objectives and, when the
budget is finalized, it communicates the agreed plans to all the stuff involved;
 Control: Control of budgeting is the most well- known and is the aspect most frequently
encountered by the ordinary stuff member. The process of comparing actual results with
planned results and reporting on the variations, which is the principle of budgetary control
sets a control framework which helps expenditure to be kept within agreed limits;
 Motivation: Involvement of lower and middle management with the preparation of
budgets and the establishment of clear targets against which performers can be judged have
been found to be motivating factors.
Budgeting makes necessary the establishment of budgets that allow the presentation in
figures of all forecasts on the activity of the firm.

Integrating the Functional Areas Further

All functional areas must be executed in perfect co-ordination to implement the generic
strategy successfully. However, strategy issues depend upon the tight integration of all
functional strategies discussed so far. Tight integration requires the perfect interweaving of
one functional area/strategy with all functional areas/strategies. Companies can achieve a
competitive advantage by accomplishing complete functional co-ordination and
collaboration. Companies achieve superior efficiency, superior quality, superior product
design, superior speed and superior guarantee through functional coordination.
Efficiency means doing things right. It is the ability to avoid wasting materials, energy,
efforts, money, and time in doing something or in producing a desired result .In other words,
efficiency is achieving a higher output for a given input. Prime activity of business
organisations is conversion of inputs into output. Efficient business produce more for a given
input compared to other businesses. In other words, the efficient businesses achieve higher
productivity. Higher productivity indicates that the companies produce more for a given input
compared to other firms. This in turn results in reduction in cost of production per unit. Thus,
higher efficiency or higher productivity leads to reduction in cost of production per unit of
output. Economies of scale are the major factor that contributes for the lower cost of
production per unit.

Economies of Scale: Economies of scale are the cost advantages that enterprises obtain due
to their scale of operation, and are typically measured by the amount of output produced. A
decrease in cost per unit of output enables an increase in scale. Increase in the volume of
production up to a certain stage would be possible without the increase in the investment in
fixed assets. Therefore, the fixed cost per unit of production is reduced up to that stage. This
reduction in the fixed cost per unit of production is a source of large scale economies.
Reliance Petroleum produces larger volumes and enjoys lower cost of production per unit of
output.

Factors that contribute to Economies of Scale

Division of labour and specialisation contribute for increased efficiency, higher

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productivity, better quality and lowest breakage and spoilage of the production process. Thus,
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they contribute for lowering the cost of production
specialisation contribute for the large-scale economies.
per unit. Thus, division of labour and

Merger Strategy
Companies select the merger strategy in order to increase the volume of their business
operations and enjoy the economics of scale. This in turn helps them to achieve the low cost
leadership strategy. The merger of PNG Banking Corporation with the South Pacific Bank
helped the bank to open more number of branches, reduce the costs of human resource, rent,
equipment, etc., per unit and serve the customer at a less cost and at the same time increased
its total profits.

Diseconomies of Scale:
Diseconomies of scale are the cost disadvantages that economic actors accrue due to an
increase in organizational size or in output, resulting in production of goods and services at
increased per-unit costs. The concept of diseconomies of scale is the opposite of economies
of scale Companies enjoy the economies of scale up to a certain stage as increase in
production beyond that stage results in disappearance of economies. This is due to the fact
that production starts increasing after that stage as the company invests in additional
capacities. This increase in cost of production per unit is due to the association of
diseconomies. Companies should know the stage of operation up to which they earn
economies of scale and beyond which the diseconomies associate.

Learning Effects and Efficiency

Today, most of organisations prefer to be learning organisations. Organisations become
learning organisations when their employees learn continuously. In fact, change and
competition drive organisations and the individuals to be the life long learners. Individual

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employees exert superior performance when they learn higher level knowledge and acquire
upper level skills, which in turn reduces the cost per unit of output. In fact, the impact of
learning along with economies of scale would reduce the cost of production/operation more
than that of economies of scale alone . Therefore, organisations become efficient when they
develop a learning culture.

Experience Curve and Efficiency

When the employees do the same work continuously for quite a long period, they acquire
experience, which in turn enhances the employee’s efficiency. Similarly, when firms produce
the same product continuously for a quite longer period, their efficiency increases along with
the increase in experience. Thus, the increase in efficiency along with increase in experience
result in reduction in cost per unit. The firms enjoying the benefits of experience curve along
with learning curve effects and scale of economies reduce the cost much more than that of
other organisations which enjoy the scale of economies along with learning curve effects and
those enjoy only scale of economies.

Superior Efficiency vs. Customisation

Globalisation, liberalisation and privatisation led to severe competition, which in turn
resulted in customisation of production and services.
Customisation is the action of modifying something to suit a particular individual or task.
Customization allows a firm to produce a product or service that fits the needs of the
customer.Customization is a new strategy to deal with changing customer demands, which
enables firms to enhance their interaction with customers. In this approach, both
interactional and operational aspects must be flexible in order to allow products to be
customized. Readily available information technology and flexible work processes permit
organisations to customize goods or services for individual customers in high volumes and
at a relatively low cost. Research suggests that low unit cost of production like that of
standardised and mass production could be achieved with customisation. As such, the term
mass customisation has been coined. Customisation also contributes to the low unit cost as
the firms can reduce inventory handling and maintenance cost, breakage and spoilage of
material and cost of maintenance of market intermediaries and logistics as customisation
eliminates market intermediaries.

Superior Efficiency and Marketing

Companies adopt different kinds of marketing strategies in order to retain customers as the
cost of attracting a new customer is four times more than that of retaining an existing
customer. In addition, companies prefer DebS
to eliminate the market intermediaries to the
greatest extent possible in order to reduce the cost of marketing. In addition to cost
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reduction, companies prefer to introduce innovations in product design, pricing, place of
market and promotion in order to achieve efficiency in customer convenience and
acceptance.

Human Resource and Superior Efficiency

Different human resource strategies contribute to enhance employee contribution to
organisational efficiency and also for the reduction in cost of human resource per unit.
 Employee referrals and online recruitment enhance recruitment effectiveness and
reduce the cost.
 Self managed teams would result in synergy which contributes to the higher
 productivity, lowering unit cost, quality improvement and reduction in the need for
supervision and control.
 Employer branding inspires the best of the prospective employees to seek
employment in the company, which in turn results in the employment of more
qualified and competent human resources.
 Employee empowerment enables the employers to make use of the best
potentialities, reduce the organisational hierarchies, speed up the decision-making
and implementation process.
 Employee training strategies enable the employees to develop their skills and
knowledge in tune with organisational strategies. This in turn makes the skills
readily available for implementation of strategies.
 Online training strategies as well as collaborative efforts for training reduces cost,
increases benefits and conveniences and augment the fit between organisational
training needs and performance.
 Variety of benefits improves employee’s sense of belongingness, enhances
employee’s commitment to the jobs and organisation, which in turn contributes for
the cost reduction and quality improvement.
 The strategies of flextime, flexi-workplace and flexible work provide convenience to
employee, enhance innovation and reduce cost.

Information System and Efficiency

Information technology including Internet brought paradigm shifts
in all functional areas of businesses like manufacturing, marketing,
finance and human resources. Information technology enables the
companies to locate the manufacturing facilities in a number of
locations across the world. These enabled DebSthe companies to increase
productivity and reduce the cost.
Total Quality Management oc
Total Quality Management (TQM) is a continuous process of improvement for
individual, groups and the total organisation. TQM works horizontally across functions and
departments, involving all employees from top to bottom and extends backwards and
towards to include the supply-chain and customer-chain. TQM is an integral part of an
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organisation and encompasses all the functional areas and levels in an organisation
including input suppliers. oc
The primary element of TQM are leadership, employee involvement, products/process
excellence and customer focus. TQM in its turn enable for achieving all-round superior
quality.
Leadership: TQM process involves vision, mission, and strategy communication which
are the functions of an efficient leadership. A leader can formulate and implement quality
strategy with full commitment by involving and inspiring the employees and suppliers.
Employee Involvement: Employee involvement is the entire TQM process. The employees
should be involved in data and information gathering, decision-making, problem
identification, idea generation, development of viable solutions and the like.
Product/Process Excellence: Product or process excellence includes quality in product
design, analysis of field failures, statistical process quality and other analytical tools.
Customer Focus: Customer focus is in Quality, which means conformance to the customer
needs. Therefore, customers’ demand and views should be taken into account in quality
design and maintenance.
Superior Customer Service
Pre-sales and post-sales customer service assume greater significance in an integrated
approach of all functions and in formulating overall functional strategies. Customer service
differentiates the product from that of the competitor. Customer service also includes
product serviceability. Therefore, product features, durability, conformance, and technical
compatibility in terms of availability of spare parts and technical skills, competence of
service employees and courtesy of the service employees to carry out the maintenance
activities of the product functioning.
Company should focus on customer’s current and prospective needs, design and
develop products based on such needs. Customers, themselves may not know their
needs in most cases. Therefore, company based on its innovations, research and
development efforts should identify such needs. Company leadership should also focus on
customer needs. In addition, leader should inspire employees to develop positive attitude
and mindset of employees towards customer focus.