Friday Business Feature: Corporate Budgeting Should Be a Tool for Strategic Focus

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New York — August 26, 2010 —

Cesare Mainardi Harvard Business Review The Essential Advantage: How to Win with a Capabilities-Driven Strategy

  • "Way to Play": Make a clear choice about how the company creates value in the market — i.e., a considered strategy for attracting and holding chosen customers. The company's way to play forms the basis of its core value proposition and organizational mission: the ways in which what it does, and delivers, are different from others.
  • "Capabilities System": Identify the differentiating capabilities, those three to six things that the company does uniquely better than anyone else and that support the way to play — and how these capabilities fit together into a mutually reinforcing system that can be leveraged over and over again to build scale and pursue new opportunities.
  • "Product & Service Portfolio": Make a clear decision about the "sweet spot" in the market, and choose a product and service portfolio that provides an optimal fit between the company's unique capabilities and the demands of its chosen customers.

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  • Reinforces strategic advantage. Line managers know how and where to budget in order to reinforce the company's strategic advantage: they support the way to play instead of veering away from it; they strengthen differentiating capabilities to be even more efficient and effective; and they drive product development toward closer alignment with the first two.
  • Drives investment, not just cost-cutting. With a clear idea of coherence — i.e., how the company is positioned in the market, which capabilities are critical to supporting it, and what products and services are best suited to it — budgeting becomes a strategic investment exercise, one that's focused on growth and naturally eliminates irrelevant and wasted expense.
  • Is faster and leaner. Because line managers know what's important, they also know what to ask for — and what not to ask for. They are more likely to come up with realistic budget requests that need less guidance from senior management, and less pruning and juggling in the review and approval stages.
  • Is more transparent. When people have a clear framework for setting priorities, they are more likely to understand why something gets cut from the budget. Decisions feel less arbitrary, less personal, and budgeting can be used to model "coherence" up and down the line.