CHAPTER
ONE:
INTRODUCTION
1.1 Background to the Study
Traditional budgeting has been
criticized for a long time now for its inadequacy as a means of management
control. Criticisms concerning its inadequate practices in a changing business
environment emerged as early as the mid 1980’s with Johnson and Kaplan (1987)
seminal book Relevance Lost.
We could also
note from the work of Allen (1998) who stated that the rapid changes in today’s
business environment renders a rigid approach to budgetary control obsolete. It
is no longer helpful, in his opinion, to compare actual results to that
forecasted anything up to 15 months previously. He argues that amongst the
requirements of a more appropriate system, would be the building in of
accountability to explain the differences between actual and planned
performance. This demands a more immediate time frame of information reporting.
Thus, there is a need to integrate strategic management and budgeting. We could
point out the works of C. Adams et al (2003) to this regard.
These authors conceptualized that to be
effective, budgets must be aligned with the organization’s strategies,
appropriate strategic planning, and performance management processes
introduced, and must involve processes that are value based, consequential and
continuous.
The work of Tim Blumentritt (2006) could
be viewed as further contributions to the above stand point as he recognizes
the need for organizations to integrate strategic management and budgeting.
What seems rather unfortunate according to Tim Blumentritt (2006) is the fact
that most organizations still treat the budgeting and strategic management
processes separately and also, a significant portion of small- and medium-sized
enterprises do not engage in strategic planning (Tim Blumentritt 2006, p.74).
Hence, the reason for this research work
which is to investigate the question; “what is the budgeting practice in
Nigerian manufacturing company?” The motivation for this study also comes from
the work of Herath and Indriani (2007) who investigated on the “roles of
Budgetary Control System (BCS) as a component of the Management Control System
(MCS) in creating and sustaining competitive advantage” and came up with a
positive conclusion.
They concluded that though BCS could
play a leading role in establishing an efficient MCS for creating a sustainable
competitive advantage, budgeting will not function in isolation (p.79).
“Instead, it can be used more effectively by strategically joining it with
emerging strategic oriented knowledge enterprise” (Herath and Indriani, 2007,
p.79).
We intend to
investigate the budgetary control practice of GUINNESS Nigeria Plc a
manufacturing company and make suggestions of what seems to be the best
practice based on literatures, articles and emperics.
Our choice for Guinness Nigeria Plc is
related to the fact that it is a manufacturing company in a very competitive
industry and lots of challenges faces Nigerian manufacturing companies as they
struggle with economic depression and high inflation resulting from the
IMF/World Bank led structural adjustment plan (SAP) implemented by the Nigerian
government. These programs were initiated to promote the liberalization of the
domestic economy, operations efficiency, productivity growth, privately owned
enterprises development, economic growth, trade and investment. The economic
liberalization policies have nurtured an open economy and have minimized the
hurdles that the manufacturing companies need to clear in order to obtain raw
materials and inputs, and other resources for productive activities. However, it
has created an unprecedented change in their business environment through
increased competition both in the domestic market and from imports into the
country. Thus, manufacturing companies need to develop and implement a
well-conceived strategic plan in order to be competitive in the business
environment.
We will present
a Management Control System model at the end of the research work. The logic
behind this model is the need to integrate in a management framework strategic
management and budgeting within the Manufacturing Industry. We believe that a
management framework built on this principle will be a source of creating and
sustaining competitive advantage which is translated as high performance. Thus,
we will present a model including five dimensions.
However this paper will be presented as
follows; chapter 1 covers the introduction, chapter 2 deals with literature
review, chapter 3 treats the research method, chapter 4 deals with empirical
data, chapter 5 will be the analysis and chapter 6 conclusions, findings and
further research.
1.2 Objective of the Study
The aim of this study is to investigate
the management control practice (budget being the tool for management control)
in Guinness Nigeria Plc and to suggest what seems to us the most appropriate
practice based on findings from literatures and empirics. As stated in the
introduction, there is a need for manufacturing companies in Nigeria to develop
and implement a well-conceived strategic plan in order to be competitive in the
business environment.
Budgeting could be used to verify that
the company is on the trajectory for reaching the strategic breakthroughs as it
is set as the year one of the strategic plan (long-term plan).
We will present a model at the end of the study to show how better a management
control could look like in our opinion.
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