How a firm allocates resources is one of the key factors that determine its success. On the one hand, firms that fail to allocate adequate resources to priority areas struggle in their attempt to become competitive. Such firms waste resources on endeavors that do not enhance the bottom line. On the other hand, when a firm invests heavily in operations that make significant contributions to the bottom line, it will undoubtedly achieve growth. Given the vital role that it plays in driving organizational growth, firms should adopt strategic budgeting. Through strategic budgeting, organizations ensure that adequate finances and other resources are available to drive key processes and functions.
How Capital Budgeting Deters Innovation
In How Capital Budgeting Deters Innovation- and what to do about it, Baldwin (1991) adopts a position that would surprise many leaders. He cautions that as they embrace strategic budgeting, firms may be forced to engage in cannibalizing. Baldwin observes that as part of their efforts to remain competitive, firms invest in projects with guaranteed results. They do this at the expose of projects which are rather risky but hold the promise of good returns. In addition to issuing this warning, Baldwin also sheds light on the concepts of capital budgeting and innovation. According to Baldwin, capital budgeting is the process that a firm applies as it determines if an investment is justifiable through an analysis of its returns. Baldwin uses this concept to illustrate how firms invest in new products. He notes that before deciding to set aside funding for research and development of the product, a firm considers such issues as the returns that the product will deliver. Moreover, capital budgeting also involves making predictions about the moves of competitors and determining how these moves will affect the product development process. Essentially, according to Baldwin, capital budgeting is concerned with ensuring that a product offers returns that justifies allocation of resources. As regards innovation, Baldwin contends that it is concerned with the development of new products, technologies and approaches. As part of his discussion, Baldwin introduces various key terms. They include research and development (R&D), cannibalizing, present value and capital budgeting. The definitions of these terms are provided below:
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Research and development: the different process and functions that go into the design and release of a new product or service.
Present value: the worth of a future product in today’s terms. The present value accounts for the effect that time has on the value of a product.
Cannibalizing: phenomenon involving a firm’s products undercutting the performance of other products by the same firm.
The key message that Baldwin conveys in his article is that strategic budgeting stifles innovation. I fully support this message. Baldwin observes that strategic budgeting makes it difficult to focus on smaller issues while ignoring the bigger questions that affect the performance of a product. For example, as it develops a product, a firm could give too much focus to how the product is received in the market while failing to recognize the effect that a competitor’s products will have on how the product performs. Essentially, strategic budgeting pushes companies to invest in safe projects instead of overhauling their processes through the integration and new and better approaches. I agree with Baldwin’s call for companies to be bolder when making investment decisions.
Planning and Budgeting for Effective Retail Merchandise Management
Strategic budgeting is the subject of an article that William Staples and Robert Swerdlow (1978) authored. Whereas strategic budgeting is the general subject of the article, Staples and Swerdlow give particular focus to seven issues that constitute retail merchandise management. These issues are sales forecasting and planning, merchandise planning, merchandise budgeting, inventory analysis, purchase activity, selling activity and merchandise analysis and control. Sales forecasting and planning is concerned with using data to make predictions about future sales volumes. On the other hand, merchandise planning and budgeting involve the acquisition of stock. These processes enable firms to ensure that adequate funds are available to purchase stock. Inventory analysis refers to ensuring that the stock that a firm has is sufficient to meet customer demand. Purchase and selling activity refer to the functions that a firm engages in as it acquires stock and avails products to customers. Lastly, merchandise analysis and control involve monitoring stock levels to determine if new purchases are necessary.
The article by Staples and Swerdlow address the same issue of strategic budgeting as that authored by Baldwin. However, the two articles discuss different methodologies. On the one hand, Staples and Swerdlow discuss the 7-step methodology outlined above. On the other hand, Baldwin focuses on using present value to calculate the returns from investments. Given that they discuss different aspects of strategic budgeting, the two articles are not comparable. The only similarity that they share is that they both acknowledge that firms can leverage strategic budgeting to achieve success. By incorporating the insights that the authors share in their respective articles, firms can gain a deeper understanding of the impact that strategic budgeting has on their operations.
The Role and Importance of Strategic Budgeting for Competitiveness
Bojan Savic, Zorica Vasiljevic and Nikola Popovic (2016) joined forces to pen an article that examines the role and significance of strategic planning for firms in the agribusiness industry. They give special focus to the impact of strategic budgeting on enhancing supply chain and promoting competiveness. These authors begin with an exploration of the agribusiness industry in Serbia. That farmers in this industry are faced with challenges that force them to rethink their strategies is one of the messages that they convey. Next, they discuss the structure of the supply chain in the Serbian agribusiness industry. Here, they recognize that the supply chain is composed of different actors who facilitate the operations of farmers in Serbia. Another issue that their article explores is the role of strategic budgeting. They note that as they adopt strategic planning, companies in the agribusiness industry are able to motivate employees, better coordinate functions, ensure adequate funding for projects, communicate effectively and promoting accountability. The various functions of strategic budgeting show that this process is an indispensable tool for firms that wish to achieve success. In selecting the article by Savic and his colleagues, motivation came from a desire to understand the impact of strategic budgeting. Furthermore, this article echoes the issues that the two articles described above address. For example, Baldwin discusses how strategic budgeting affects innovation whereas Staples and Swerdlow focus on the link between strategic budgeting and merchandise management. In essence, all the articles agree that strategic budgeting is essential for success in business.
In conclusion, to thrive in the highly competitive environment of today, firms need to be innovative and adopt new approaches. Strategic budgeting is one of the approaches that are fueling business growth. Thanks to this process, firms are able to streamline their merchandize operations. Moreover, strategic budgeting allows firms to improve their supply chain while ensuring that projects do not stall due to inadequate funding. If they are truly committed to the effective implementation of projects, firms should embrace strategic budgeting. However, they should exercise caution so that strategic budgeting does not stifle innovation.
References
Baldwin, C. Y. (1991). How capital budgeting deters innovation – And what to do about it. Research Technology Management, 34(6), 39-45.
Savic, B., Vasiljevic, Z., & Popovic, N. (2016). The role and importance of strategic budgeting for competiveness of the agribusiness supply chain. EP, 63 (1), 295-312.
Staples, W., & Swerdlow, R. (1978). Planning and budgeting for effective retail merchandise management. Journal of Small Business Management, 54(3), 1-6.
