Applying Strategic Management in Public Sector Budgeting

By : Garry Yeremia S.

1401180074

Abstract
In recent years, the use of private sector management techniques in the public sector, as well as private
sector provision of public goods, has blossomed. Governments in many countries participate in public-private
partnerships (PPPs), outsource or contract out to private sector suppliers, or use publicly-funded vouchers for
supplying public goods (Blondal, 2005). Certain functions and monopolistic-type activities, which were previously
thought to be reserved for public sector provision, are now either furnished by the private sector, though funded
publicly, or have been transferred to the private sector, through partial or full disengagement of the government
from state-owned enterprises. In addition, private sector financial accounting standards have influenced changes
in public sector accounting methodologies, with increasing use of accrual accounting for preparing government
financial statements (Chan, 2002). More generally, the private sector is being looked at as the “model” for good
and public financial management practice including budgeting process.

Introduction Governments and all publicly controlled

or publicly funded agencies, enterprises, and
In general terms, the public sector
other entities as part as the public sector face a
consists of governments and all publicly
big problem every year to make an annual
controlled or publicly funded agencies,
budgeting to run the job providing public goods
enterprises, and other entities that deliver public
and services. It’s no secret that the public
programs, goods, or services. It is not, however,
sector’s annual budgeting processes are time-
always clear whether any particular
consuming, add little value and prevent
organization should be included under that
government from responding quickly to
umbrella. Therefore, it is necessary to identify
changes in today’s public sector environment.
specific criteria to help define the boundaries
It is widely accepted that good budgeting
(Sikhungo, 2011). The concept of public sector
systems in both the public and private sectors
is broader than simply that of core government
have a common purpose in helping to plan,
and may overlap with the not-for-profit or
control, organise, communicate and motivate.
private sectors. For the purposes of this
Public sector budgets historically have played
guidance, the public sector consists of an
an even more important role. Ultimately those
expanding organizations, with core government
holding political office must account to the
at the center, followed by agencies and public
electorate for their stewardship of public funds.
enterprises.
According to (Wildavsky, 1974) a public sector
budget essentially records the outcome of the
struggle between politicians as to whose views
will ultimately prevail in the determination of
policy.

In Local Government the annual budget

cycle has historically, not only determined the
policies, plans and objectives, but also acted as
the principle method by which the sector
implemented organisational and structural
accountability (Goddard, 2004). An
incremental approach to budgeting has
traditionally been used in Local Government as
well as the wider public sector with the primary
focus being on the control of inputs to the
system rather than the level of services
provided which led organisations to place little
emphasis on the results achieved. However,
worsening economic conditions in the 1970's
made reform of the budget process a political
priority in light of sustained fiscal pressure.
Using the most suitable tools for strategic
planning is very important in achieving good
public sector’s budgeting. This paper presents
the use the strategic management theories that
could be useful in its application towards
providing good public sector’s budgetin. The
theory is Porter’s strategic positioning model
(Porter, 1985) which focuses on choice of
strategy and position in the market, so as to
exploit market imperfections, and the other one
is the beyond budgeting (Hope & Fraser, 2003)
which focuses on developing a way the public
sector can break free from the annual
performance in making annual budgeting.
These theories are mostly used in private
business, but there are possibilities that they
could be applicably used in public sectors as
well.
Literature Review
The traditional approach to public sector
budgeting has been incremental where the
existing foundation for the budget is laid from
the previous year, with any analysis restricted
to relatively small adjustments to this base.
Incremental budgets re-enforce the status quo
but do not reflect the fact that most public sector
organisations face a complex set of ever
changing needs and problems
(Coombs & Jenkins, 2002). Worsening
economic problems, coupled with growing
public deficits, made reform of the budget
process a political priority, and led to a search
for “new modes of control in the public service”
(Hoggett, 1996, p9), and a shift in focus from
the concentration on inputs, to one which linked
inputs with outputs and outcomes. This
efficiency is forced on private sector companies
by the need to maximise return on investment,
but there is little comparable requirement in the
public sector.
The traditional budgeting process is a
deeply embedded annual ritual. It absorbs huge
amounts of time for an uncertain benefit.
Typically, it starts with a mission statement that
sets out the aims of the business followed by a
group strategic plan that sets the direction and
high-level goals of the firm. The typical budget
make contract provides a fixed target, an
incentive, a statement of resources available, a
commitment and a reporting scheduled. One
problem with this typical budget method is that
it may lead to fraud. Fear of failure (to meet the
goals specified from above) is often the
underlying cause.
To solve this problem, public sector
organizations need to adapt to a more
competitive and changing business
environment with a new method and the way
they create the budgeting. The use of NPM is
meant to make public sector organizations
become a lot more like private businesses, in
which considering performance, cost,
efficiency, and how audit- oriented. It is hoped
to increase efficiency, effectiveness, and
productivity, as well as cost- effectiveness.
Strategic Management Theories
1. Porter’s Generic Competitive
Strategies
There are two basic types of competitive
advantage a government or public sector can
possess: low cost or differentiation. The two
basic types of competitive advantage combined
with the scope of activities for which a firm
seeks to achieve them, lead to three generic
strategies for achieving above average
performance in an industry: cost leadership,
differentiation, and focus. The focus strategy
has two variants, cost focus and differentiation
focus.
The generic strategy of focus rests on the
choice of a narrow competitive scope within an
industry. The focuser selects a segment or
group of segments in the industry and tailors its
strategy to serving them to the exclusion of
others. The focus strategy has two variants. (a)
In cost focus a firm seeks a cost advantage in its
target segment, while in (b) differentiation
focus a firm seeks differentiation in its target
segment.
Porter’s theory can be applied in public
organizations while they are planning to decide
the budgeting. To improve efficiency and
effectiveness in the implementation of
budgeting, the public sector can implement a
focus strategy where plans, objectives and costs
in the budget are handed over to the smallest
unit in government that directly implements the
budget activities. Focus in this case means that
the budget is adjusted to the small, detailed and
more specific targets that will realize the big
goals of government in the future. The
implementation of budgeting in terms of
determining the planning, targets and costs
must also consider the characteristics and
uniqueness of each unit. For example, the basic
needs for the tax office in Jakarta to provide an
excellent services must be very different from
the needs of the tax office in Papua. Flexibility
in determining the budget by the smallest unit
needed to achieve the government's main
objectives in the provision of public services
and services.
However it is not possible to use Porter
strategic management tools in all of
government agencies and departments such as
police departments or Ministry of Law and
Human Rights where it is not feasible to
choose dan change the plans and objectives to
run their responsibilities. Porter’s theory is
good to be applied to public sector companies
that provide public goods and services.
2. Beyond Budgeting ( Performanced
Based Budgeting ) Model
The principles of Beyond Budgeting
offer a new coherent management model. It
assumes that front-line managers are able to
regulate their own performance. Senior
executives provide a supportive role. They
challenge and coach, but decisions are taken
locally within a clear governance framework
based on principles, values and boundaries. In
the new coherence, relative improvement
contracts, strategic models, rolling forecasts
and service-level agreements make sense
(Hope, 2003).
There are two ways that are carried out
beyond budgeting in the budgeting process. The
first one is The Adaptive Process Opportunity.
The Adaptive Process Opportunity means
managers now can focus on medium-term
strategy rather than short-term fixed targets
(annually budgeting). The contrast between the
old and new way of doing things is dramatic. It
looks like this: Targets: Instead of setting a
fixed sales/profit target, the organization trusts
everyone to maximize profit potential by
continuously improving against an agreed upon
benchmark and remaining in the top of the
industry peer group. Rewards: Instead of a fixed
reward, managers are rewarded by a peer
review panel based on performance and with
“hindsight” at the end of each year. Plans:
Instead of an agreed action plan, the
organization trusts everyone to take whatever
action is needed to meet medium-term goals.
Coordination: Instead of an imposed-from-
above coordination of activities, the
organization trusts that everyone will work
together according to periodic agreements and
customer requirements (Hope, 2003).
We can also apply the first step in this
adaptation process in budgeting in the public
sector. For example in targeting, the
government must begin to trust the smallest
units in government institutions to maximize
their potential in achieving agreed goals and do
continuously improving. Trust from the central
government level must also be given to the
smallest unit by delegating responsibility. the
central government mandates the smallest unit
to make the decisions needed to fulfill medium-
term goals. Estimates of existing problems,
strategies chosen, plans to be made and costs
needed to resolve these problems must arise
from the smallest unit not from the central
government.
The second way that are carried out
beyond budgeting in the budgeting process is
Principles of Radical Decentralization. One of
the Radical Decentralization principle is place
responsibility for value-creating decisions on
front-line teams. Decentralizing allows teams to
respond to local opportunities in ways that
create a more adaptive organization. Changing
functional mindsets to team-based mind-sets is
a major cultural challenge.
Public sector governments can also
implement decentralization of authority to the
smallest units. The central government as the
largest part of the budget maker may not have
enough experience to see every problem and
capability possessed by the smallest parts of the
public sector. Budget determination and
problem solving can be resolved in each
responsible unit. the central government in this
case is only responsible in the event that there
are activities that exceed the prescribed
boundaries or norms.
Conclusions
The strategic management theories that is
Porter’s generic competitive model and beyond
budgeting can be applied in public sector
organizations related to the budgeting policies
under certain conditions. In Porter’s generic
competitive model which emphasizes in
achieving competitive advantages, it can be
applied to public sector to focus. Focus means
the budget is adjusted to the small, detailed and
more specific targets that will realize the big
goals of government in the future. Beyond
budgeting The Adaptive Process Opportunity
and Radical Desentralization can be implied by
government by giving trust to the smallest units
in government institutions to maximize their
potential in achieving agreed goals and do
continuously improving.
References
Blondal, J. R. (2005). Market-type
Mechanisms and the Provision of
Public Services. OECD Journal on
Budgeting, 79-106.
Chan, J. (2002). Models of Public Budgeting
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Coombs, H., & Jenkins, D. (2002). Public
Sector Financial Management.
Goddard, A. (2004). Budgetary Practices &
Accountability Habitus. Accounting,
Auditing &, pp 546-577.
Hope, J., & Fraser, R. (2003). Beyond
Budgeting. Boston: Harvard Business
School Press.
Lienert, I. (2009). Where Does the Public
Sector End and the Private Sector
Begin?
McArthy, G., & Lane, A. (2009). One Step
Beyond: Is the Public Sector Ready to
Let Go of Budgeting?
Porter, M. E. (1985). Competitive Advantage.
Sikhungo, D. (2011). Public Sector Definition.
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Wildavsky, A. (1974). The Politics of the
Budgetary Process.