The link between budgeting and strategy: Case a Finnish energy company

Abstract

The aim of this study is to examine the link between budgeting and strategy. More specifically, this study seeks to deepen the knowledge on the role of budgeting in both strategy formulation and implementation in organizations. Historically, academic literature has presented budgeting and other formal control mechanisms as useful tools in implementing planned organizational strategies by translating organizational strategy into financial targets. However, more recent studies suggest a two-way relationship between strategy and budgeting as budgeting has been found to be used both in strategy formulation and implementation.

The framework used in the analysis is the work of Simons (1990, 1991, 1994 and 1995) considering the use of Management Control Systems (MCS) as a way to control strategy in organizations. Specific emphasis is given to the concept of the use of budgeting as an interactive/diagnostic control system (Simons, 1991).

As the design, use and effectiveness of budgeting depend largely on organizational specific factors, this research was carried out as a case study. The case study method enables going behind the statistics and examining the role of budgeting and analyzing how it really contributes to strategy processes. The chosen company is a Finnish energy company, which requested to remain anonymous. The focus was limited to the Finnish operations of the company. The research data was gathered by interviewing the directors and managers of the case company that contribute to strategy and budgeting processes, a total of 8 interviews.

The results indicate that there is a two-way link between budgeting and strategy in the case company. Budgeting is used both in an interactive and diagnostic manner, which supports the earlier findings but also makes the addition that the same control system can be used interactively and diagnostically simultaneously in an organization. Thus, the results suggest that interactive and diagnostic systems should not be considered as control systems as such, but rather as descriptions of how controls are used. In addition, the findings were further analyzed by examining the organizational specific factors that affect the budget use of the company. Business strategy, organizational structure and the nature of environment seem to support the important role of traditional budgeting as a MCS in the case company.