It was a difficult year for the company. The actual profit for the year is almost half of what was estimated. The variance analysis clearly indicates that production manager is not able to work as per the estimated consumption of raw material. In addition, to boost the sales of the company, initiatives are required from the table of sales director. The management should also start preparing budgets on monthly basis instead of quarterly basis to keep a check on various operational areas.
There are certain games in which managers have a maestro and they play it very proficiently at the time of budgeting to get the personal maximum benefit (Johnson, 2005). A marketing plan which does not have any aspiration by marketing manager, bogus defects by a division manager to get more funds for his unit and a warning by product developer that if his idea is not implemented then the company will not be able to face the challenge etc. are few examples of budgetary games that managers play.
Broadly there are five visages of devious budgetary games that are played by managers. Each one has been explained below with examples.
- 1. The Sandbagger game: In this trick, managers propose the plans that are less aspiring than the one they can achieve. In other words they set the targets which are easily achievable. These types of tricks are generally used during difficult time when availability of resources is stiff. Usually, the sandbaggers try to portray themselves as a hero in the eyes of top management by exceeding their targets and expect a good sum of rewards in the form of promotion and bonuses from the company.
For example, take the case of a$700 million worth of North American brokerage business whose president was always unwilling to accept the earning-growth target which the CEO of the company used to proffer. Though the president knew that the business has the potential to achieve the target which CEO had proposed but still he was not willing to take any kind of risk of not achieving the target and losing his job.
These kinds of tricks lead to ineffective and inefficient utilisation of resources (Johnson, 2005). Most of the time management ends up rewarding the inappropriate person which leads to dissatisfaction among managers with more realistic approach.
- 2. The Magic game:
The manager who is playing this game knows some internal aspects of the business which will impact the working of a company substantially in the future. But they do not bring these points in the notice of the top management while presenting their budget, moreover they try to divert the focus on more luminous perspective of their modus operandi to get more sources.
For example, in case of Lehman Brothers, the managers of its mortgage loan division never brought forward its mortgage – backed portfolio of $85 billion which was four times its shareholder’s equity from the year 2005 to 2007 when company was reporting record profits.
These types of games can influx a dreaded detriment on a company as resources which should be used to solve the basic problems of a business are wasted on less important issues and may even lead to a bankruptcy type of situation for a company.
- 3. The Lone Agent game: In this trick managers assert that their function is allegedly unique and they shouldn’t be abiding by the praxis laid down for the company (Johnson, 2005). They claim for a special treatment and in case of any failure on that front, they may also act as a barricade in the functioning of a business.
For example, during the financial crisis a furniture manufacturing company undertook various cost cutting measures, but the marketing manager stonewall during the meeting claiming that his operations are different and they are the lifeline of the business and did not accept any kind of compromise as far as commission on sale was concerned.
These types of tricks leads to mistrust and differentiation in an organisation. These types of managers also weaken the top managements’ ability to discuss key strategic issues.
- 4. The Visionary game: In this trick, managers on their failure to achieve the expected results start boasting about a “breakthrough” technologies or services that will “revolutionize” the industry. They try to show that their underperformance is temporary in nature and is insignificant and can be easily digested by the company. On the contrary they try to pretence that if adequate sources are made available to them then they will be able to bring substantial and quick proficiency in their performance. These types of tricks are more common during boom times or in rapidly changing industries. These tricks lead to deployment of resources in extravagant activities.
For example, an accountant manager was not able to prepare proper books of accounts on time, instead of admitting his fault during the meeting with top management, he proposed to buy a new accounting software claiming that it will save the time and efforts and will deliver more accurate results.
Budgeting games are part of a business, but it is the art of top management to familiarize themselves with some of the more common and destructive forms and enforce effective measures to counter them and deplete the damage they can bring on the business.
Availability of capital for additional investments, an efficient manufacturing unit comprising of team of experts with specialised skills and an established brand name; these are the key strengths of Medicaid. On the other hand, inefficiency on the part of managers is somewhere weakening the working of the company. However, the rising medical industry is also giving boost to the medical equipment industry and company can take benefit of the various opportunities. One cannot ignore the threat of rising competition from the eastern countries specially China and the declining market share. To tackle these two challenges, the company is required to adopt two different set of strategies. Let us first discuss about the strategies that company can implement to bring back its hospital bed division in proper shape.
Cost Leadership Strategy: Cost leadership strategy is meant for the customers who are cost-conscious or show great sensitivity towards prices of a product. A company sells its product either at average price prevailing in an industry or a price which is less than the average industry price. When a company sells its product at an average industry price its aim is to earn high profit. But sometimes a company has to sell its product below the average industry prices to establish itself in market or get back the lost market share. In case of Medicaid, the company has a good reputation in the market but now in order to get back their lost market share and wipe out its competitors they need to follow cost leadership strategy. Flimsiness in changing marketing condition is a point of weakness as far as cost leadership strategy is concerned. Production of large volume will lead to slow mobility and company will be able to respond to changing market conditions slowly. On the other hand, big order of a standardized product will provide them an opportunity to achieve economies of scale. However, low customer loyalty will always remain a major threat in this strategy. But in the present situation Medicaid is forced to follow this strategy to get back its market share.
Differentiation Strategy: Medicaid can also follow differentiation strategy by focusing on hospitals and medical institutions which require differentiated products with some special features. Through their specialised products they will not only win the customers’ loyalty but will be able to charge premiums of uniqueness.
Focus Strategy: In this strategy Medicaid is expected to focus on a particular segment of customers to achieve cost leadership through differentiation. They have best of skilled labour with them, through their research and development they introduce a new range of hospital beds depending upon the need of some specific hospitals.
Apart from rising competition, budgetary games are another threat which Medicaid is facing. The variance analysis clearly shows that various tricks are being played by the managers at various levels. Now it is the duty of managing director to use his top-level strategies to admonish these games in the company. Following are some suggestions for Medicaid to face the challenge of budgetary games:
Create decision support units: Create a team who will assist top level management in taking strategic decisions. This team will be responsible for creating parallel plans keeping in mind the market situations and competitors’ strategies. Managers will be under the impression that there is someone to keep a check on their decisions and proposals.
360 degree performance review: Another strategy entails revising the peer portion of a 360-degree performance review to help signal any tendencies toward questionable budgeting practices (Johnson, 2005). Steele suggests posing peer-review questions such as, Top management should develop a habit of having questionable budgeting sessions. Some questions like “Does this person accept and contribute to our corporate goals as he should?” “Does he accept and respond to peer challenge?” “Does he lay out plans that are ambitious relative to competitors’?” “Are his alternatives credible?” “What causes you to draw these conclusions about him?” will lead to peer-review process thereby helping management in developing much more powerful perspective.
Formulate standards to approve budgets: Medicaid’s top management can create a checklist of standards that each manager is required to follow before presenting the budget in meeting or getting it approved. Some examples are: “Have we identified resource bottlenecks?”, “Have we explored enough alternatives for high-stakes opportunities?” “Have we prioritized ideas according to the value they generate for customers and our company?”, “Can our available resources accommodate our competitors’ countermoves and our customers’ responses to the plan?” etc.
Johnson, K, L., 2005. Debriefing Richard Steele: Stamp Out Budget Shenanigans. [online] Available at: <http://www. MUOpinion@hbsp.harvard.edu.> [Accessed 11 May 2012].
Steele, R., & Albright, C., 2004. Games Managers Play at Budget Time. [online] Available at: < http://sloanreview.mit.edu/the-magazine/2004-spring/45314/games-managers-play-at-budget-time/> [Accessed 11 May 2012].
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