The experience of companies such as BellSouth Telecommunications, Ocean Spray and the Japanese DRAM industry serve as illustrations of what happens when short-term goals penalize risk-taking, pre-empt long-run innovation, and blind corporations to critical paradigm shifts in the industry. Properly prepared and administered, the financial budgetary process can support both short-run efficiency and long-run effectiveness by enhancing management awareness of the external economic environment, inculcating prescience, along with coordinating and evaluative benefits. However, it may also lead to shifting the corporate focus internally towards short-run cost reductions and efficiency gains to the detriment of long-term organizational goals. This paper examines specific case studies of organizations related to this issue and proposes recommendations that may allow organizations to take advantage of new opportunities, continue emphasizing innovation, and have a financial performance review process that stresses and rewards both short-run operational efficiency and long-run effectiveness.
Theoretical Base: The study may be viewed theoretically as illustrating the potential incongruity of short-term organizational efficiency (economic optimization of resources) with long-term organizational effectiveness (innovation and sustainability).
Background and Rationale: Earnings forecasts, and the subsequent budgets built to meet them, are a control mechanism and a tool to measure efficiency improvements. Budgets are also used to judge the performance of managers. Bonuses, salary increases, and promotions are affected by a manager's ability to achieve or exceed budgeted goals. Because a manager's financial status and career can be affected, budgets can have a significant behavioral effect.
Whether that effect is positive or negative depends to a large extent on how budgets are used. Positive behavior occurs when the goals of individual managers are aligned with the goals of the organization, and the manager has the drive to achieve them. The alignment of managerial and organizational goals is often referred to as goal congruence. Forecasts of lower revenues or higher expenses, however, pressures corporate executives to make short-term decisions in order to satisfy these expectations and as a result, in many cases, long-term strategic innovation suffers.
Sarkees and Hulland (2010, p.43) indicate that “internal battles for resources often tip the scales in favor of efficiency over innovation, but rarely both. Organizational inertia pushes firms down a particular path, while short-term thinking crowds out longer-term goals”.
Reference: Sarkees, M. & Hulland, J. (2010). Innovation and efficiency: It is possible to have it all. Business Horizons, 52 (1), 45-55.
Research Questions & Methodology: The research question that guided this study was whether an excessive emphasis on short-term internal financial controls may have a significant impact on long-term corporate innovation and sustainability. Data was collected from the extant literature and various corporate reports of organizations, and then analyzed for relevance and significance.
Contribution: This paper may assist organizations to recognize that an overly myopic financial focus could potentially negatively impact long-term innovation and sustainability, and to suggest methods for achieving both short-run operational efficiency and long-run effectiveness.
Keywords: Strategy, budget, innovation, corporate culture, goal congruence
