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In organizations, strategy is important.Yet, organizations will not follow the strategy simply because it is set out or published; at least, large and complex organizations will not.1 The strategy and the budget must be linked if the organization is to sail the course it intends.
This article addresses linking the strategic plan to the budget and establishing methods to assess whether an organization's financial management adheres to the strategic plan.
The concepts underlying strategic budgeting are:
- Organizations that do not learn do not adapt, and become inefficient and obsolete.
- Effective use of the strategic plan is essential to organizational learning.
- Priorities established in the budget and executed must be compared to the planned priorities.
- Resource projections in strategic plans must be compared to the realized resource projections.
Strategic budgeting advances strategy by:
- Comparing long-run strategic resource plans to realizations.
- Relating budget priorities and actions explicitly to strategic priorities.
- Assessing how the strategic priorities are affected by the planned budget and the executed budget.
Large and Complex Organizations
Federal departments and agencies are large and complex organizations. In the last two decades, we have gained considerable insight into complexity and into the characteristics of such organizations.2 Organizations and organisms learn from experience. Those that learn well survive tough times and evolve to better fit the evolving demands of their environment.3
The behavior or capabilities of the large and complex organization cannot be fully comprehended by analyzing its individual parts.4 Because of its complexity, the organization or system, displays emergent behaviors and capabilities: capabilities and behaviors arising from the relationships among the parts. Understanding those emergent behaviors requires studying the organization as a whole, and that is part of what is done in strategic budgeting.
The usual assumption is that an organization will behave as is expected from knowledge of its parts. Managers, therefore, neither anticipate nor look for emergent behaviors. Changing such behaviors is difficult and costly because solutions designed without understanding the causes of the problems succeed only by chance.
Strategic budgeting analyses are conducted in a top-down sequence in recognition of emergent behaviors and to assess adherence, first, to top-level strategy and, subsequently, to lowerlevel strategic initiatives.
Because budgets in government organizations constrain both...