HK Case Study

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HK Case Study

HK's current budgeting system is failing the company. Most departments struggle to meet their budget targets, and are forced to scramble to cut costs in order to meet budget. Success in the organization is defined almost entirely by the budgets, and has become very difficult for managers to achieve. Company performance is suffering as a result.

There are two key reasons why the budgeting process at HK contributes to the failure to meet the target sales and profits. One reason is because the budgeting process is not directly tied to these results. The second reason is that the budgeting process is not conducted in a manner that views the organization as a system, but rather as a set of small, competing and relatively independent systems.

The budget process is conducted on a top-down basis. The budget begins with sales and net income targets and flows down from there. This contributes to failure in two ways. First, the targets are not tied to market conditions, spending levels or any other aspect of the firm's operations. There may be a system for deriving these targets, but they are not based on much more than the estimates and hunches of the managing director. Targets this arbitrary are difficult to meet under any circumstance, much less the one under the current budgeting regime.

The second reason that the top-down budget contributes to failure is that it provides no incentive for innovation or pressure. With set targets, employees are disinterested in developing high achievement -- meeting targets is the height of achievement. Yet, it is innovation that drives high achievement in modern organizations. The budgeting system fails because it does not support high levels of achievement. Although the conflict between innovation and the budget can be resolved if there are systems in place to dovetail formal and informal procedures to support organizational objectives (Marginson & Ogden, 2005), there is no evidence of this within HK. As a result, top-down budgeting fails to adequate account for innovation, thereby stifling it.

The budgeting also fails because it views the organization as a set of competing systems, rather than as a whole system. An annual rite of the budgeting process is production complaining that its allocation is too low, thereby taking allocation away from other departments. While it is true that in a fixed resource environment some departments will invariable need to sacrifice performance for the betterment of the organization, this should be dictated by market forces (i.e. need) rather than through a debate prior to the fiscal year even beginning.

2. HK's budgeting process needs a major overhaul in order to address these problems. The budgeting process needs to incorporate the departments during the process, not after. This is important so that the goals are driven by both organizational objectives and capabilities. If managers have ideas for innovative projects, they can pitch the projects ahead of time to ensure that they receive budget allocation for them.

The budget should also be set up with respect to the entire organization. The budgeting process at present goes through the divisions in succession, so that there is little integration between the divisions, their goals and their budgets. The department heads should work together on the budget.

Another improvement will be to utilize benchmarks in order to encourage superior performance. The targets are less defined, which means that the organization will need to demonstrate more creativity in reaching them (Hope & Fraser, 2003). In addition, targets based on competitor performance serve two other key purposes. They are forward-looking, because they are not based on past performance but potential future performance. Additionally, they represent realistic targets, whereas the current budgeting process is arbitrary.

3. Functional areas should not be expected to cut costs when sales fall short of budget. This approach is antithetical to building success and growth in a company. Reducing budgets also reduces capacity in the organization. As a result of reduced capacity, the organization will be even less capable going forward of building sales. It is understandable that the organization does not wish to "reward" missing targets by increasing budgets, but this apparent paradox exemplifies just how deficient the HK budgeting system is. A properly run organization has systems in place to drive superior performance without resorting to such primitive carrot-and-stick approaches. The organization needs to measure the functional budgets based on total firm profitability, market share gains and other non-budgetary metrics.

4. The lack of… [END OF PREVIEW]

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HK.  (2009, December 10).  Retrieved December 13, 2019, from https://www.essaytown.com/subjects/paper/hk-case-study/9795

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"HK."  10 December 2009.  Web.  13 December 2019. <https://www.essaytown.com/subjects/paper/hk-case-study/9795>.

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"HK."  Essaytown.com.  December 10, 2009.  Accessed December 13, 2019.
https://www.essaytown.com/subjects/paper/hk-case-study/9795.