For many years, business managers believed that you could have near-term profits (with steady quarterly gains to please Wall Street) or longer-term strategic growth (with gains in market share) but that you could not meet both goals simultaneously. They argued that growth required a "hockey stick" shape in the business's financial performance – particularly when growth investments, such as product development, are expensed and reduce operating profit in the near term.
The typical approach to try to resolve this paradox was to slow down the rate of strategic reinvestment to an "affordable" level while still assuring sustained near-term profitability improvement. This is really no solution and is strategically dangerous because growth leadership requires moving faster than the competition.
We use two approaches to strategic budgeting:
Micro-portfolio management: The business is divided into business segments for which the strategic opportunity and competitive position are different. Our approach is to rank micro-segments of the business in terms of strategic importance. It is critical that these micro-segments are aligned with external market realities, not internal organizational structure. We then make a zero-based assessment of resources applied to each segment. The less attractive segments for strategic growth are driven for near-term profit, while more aggressive reinvestment is made in segments where the growth race must be won. The business does not try to compete on all fronts simultaneously.
Reinvesting a restructuring dividend: Another method to generate current profit and strategic growth simultaneously is to use the cost improvements of a major process or structural re-engineering program in yesterday's business infrastructure to make profitability improvements that more than offset the costs of strategic growth reinvestments. The advantage of this approach is that the realignment of expense spending can be sustained year after year. Thus, strong growth businesses also work hard at lowering their unit costs to fund aggressive reinvestment in growth.
This approach illustrates a fundamentally different philosophy of budgeting – one that is driven by the changing marketplace, not by the historic performance trend. Budgeting becomes a balancing of growth ambitions and funding availability – the greater the growth goal, the greater must be the development of profit and cash flow sources.
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