Incentives and Consequences of the Shift to Zero-Based Budgeting in International FMCG Companies by the Case of the Kraft-Heinz Company and Mondelez Int.

Размещено на http://www.allbest.ru/

GOVERNMENT OF THE RUSSIAN FEDERATION

NATIONAL RESEARCH UNIVERSITY

HIGHER SCHOOL OF ECONOMICS

FACULTY OF WORLD ECONOMY AND INTERNATIONAL AFFAIRS

MASTER OF INTERNATIONAL BUSINESS PROGRAM

MASTER THESIS

Topic: Incentives and Consequences of the Shift to Zero-Based Budgeting in International FMCG Companies by the Case of the Kraft-Heinz Company and Mondelez Int.

Elisaveta Tikhonova

Moscow 2018



Table of Content

• Introduction
• 1. Theoretical Aspects of Budgeting in International Companies
• 1.1 Budgeting in International Companies
• 1.2 Zero-based Budgeting in International FMCG Companies
• 1.3 The Shift to Zero-Based Budgeting in International FMCG Companies
• 2. The Transition from Traditional to Zero-Based Budgeting in Unilever And Mondelez Int.
• 2.1 The Current State of the Global FMCG Market
• 2.2 The Case Study of The Transition to Zero-Based Budgeting by the Kraft Heinz Company
• 2.3 The Case Study of the Transition to Zero-Based Budgeting by Mondelez Int.
• 3. Practical Implications of the Shift to Zero-Based Budgeting by the Kraft Heinz Company and Mondelez Int.
• 3.1 Comparison of the Incentives and Consequences of the Transition to Zero-Based Budgeting by the Kraft Heinz Company and Mondelez Int.
• 3.2 Recommendations for the Companies
• 3.3 Recommendations for the Future Research
• Conclusion
• Bibliography


Introduction

Budgeting is universally applied in companies of different sizes and occupations all over the world and represents a strong management tool, which drives company's performance. According to researchers, budgeting goes hand in hand with planning and provides a detailed estimation of future transactions, helps to set realistic priorities and realizes the amount of resources required for its' successful implementation, monitors the progress towards them and warns in case variances occur (Heyel, 1982; Clowes & Scriven, 2006; Nugus, 2009). During the time of its existence, budgeting has undergone some modifications on the basis of the length of the period (long-term and short-term), rigidity of the budget (rolling and fixed), basis of the budget (incremental budgeting approach).

Therefore, the incremental budgeting approach is based on the extrapolation of historic numbers into the future taking into consideration the forecasted incremental growth, forecasted inflation and anticipated development of new projects. From one point of view, such an approach is beneficial as far as it is based on the experience, history and the forecasted growth rate. However, another angle on this debate suggests, that in reality, the prognosis for the new period will be achieved by the adjustment of the previous number by the forecasted growth and will eliminate the critical review of the expenses which have been made in the previous period.

As a result, there has been created an advanced way to critically review the obligation to take historic numbers as a foundation for the next period's budget - zero-based budgeting concept, which has its roots based on the idea to prepare a budget for each period from scratch. Thereby, each article of budget is reviewed in an in-depth manner, resulting into a more analytical and profound justification. This approach has been first introduced by Peter Pyhrr, an accountant at Texas Instruments in 1970s in an article in Harvard Business Review (R3 Worldwide, 2018). Further, the approach has seen its rise as the budgeting approach in the state of Georgia in the United States(Government Financial Officers Association, 2018).

Zero-based budgeting is assumed to scrutinize each project or activity before a new budgeting period in order to get a funding for the upcoming business cycle. Meanwhile, zero-based budgeting can be applied to any cost type, such as expenses on cost of goods sold, operating expenses, SG&A, and others. However, it finds its usage more frequently in overhead expenses.

There are without a doubt a handful of advantages of the zero-based budgeting approach. Namely, these include rationalization and alignment of budgeted activities to the strategy of the company, going further to a reduction of costs, improvement of the operational activities, better allocation of financial resources up to a justification of the entire budget and not just an incremental part of it.

Initially, such a budgeting approach has been associated with global FMCG companies as they are obtaining low margins and seek to seize diverse opportunities of cost reduction. Even though ZBB fits different types of companies, including big/small and international/local, it is more connected to global corporations, among which we can name Mondelez International, Unilever, Campbell Soup Company, Kraft Heinz, Anheuser-Busch InBev, Tesco and others.

Zero-based budgeting is especially crucial for the FMCG market, which requires the companies to be competitive, sustain higher margins and sales growth, while operating in a slowly-growing industry with a high level of competitiveness. In such conditions, companies seek for ways to improve their profitability and examine the costs, which could be eliminated.

International companies on their part of the deal, face plethora of external and internal factors, which have an impact on the budgeting process and its accuracy. Thus, in the current business environment, budgeting strives for an advanced level of planning due to a variety of forces influencing it such as foreign currency exchange rate fluctuation, interest rates, inflation and others.

Currently, the market situation takes a surprising turn. In particular, this certain turning point delineates, that consumer-packaged goods companies are adopting ZBB 22% more often than companies from other industries, allegedly due to changing consumer preferences, development of private labels, volatile raw materials prices (Johnson, 2017). international budgeting zero market

In the sphere of our interest the arousing question to stress at, would state to which extent ZBB is capable of improving the operational performance of the company, what are the incentives and consequences of the implementation of such an approach and how these actions can properly be realized.

The object of the paper is budgeting in international companies.

The subject is zero-based budgeting in international companies.

The hypotheses are the following:

1) Zero-based budgeting acts as a long-term sustainable strategy in international FMCG companies;

2) ZBB is an approach purely directed to cost-cutting initiatives;

The scope of the thesis is limited to two international companies operating in the FMCG industry.

The thesis comprises a qualitative methodology of a case study to illustrate the elements stirring the attention of the fiercely competitive landscape of FMCG companies.

The companies were chosen following the logic, that the Kraft Heinz Company is one of the good examples of the ZBB approach' successful followers being implemented by the 3G Capital. Even though 3G Capital implemented the same type of budgeting into Anheuser-Busch Inbev first, the Kraft Heinz Company relates better to the FMCG industry, which is in the sphere of interest of the paper's author. The second company, Mondelez Int., has been chosen due to its virtue being established, rather emerged out of the spin-off of the Kraft Foods Group, which eventually has been acquired by 3G Capital and merged with H.J. Heinz and finally, given the rise to the Kraft Heinz Company. Moreover, Mondelez Int. is of the particular interest of both, the author and the research advisor of the current thesis.

In the first chapter we focus first on the theoretical background of budgeting per se and an understanding of the basics provides the foundation for further sophisticated research on zero-based budgeting as a specific approach towards budgeting. Further, we investigate the international aspect of budgeting and its application in the FMCG sector.

In the second chapter, we examine the industry of the consumer goods and packaged food in particular. Afterwards, an investigation of the approach and further to the implementation of ZBB and the company's performance is taking place. First in the row is the Kraft Heinz Company and then Mondelez International.

In the third chapter, we compare the incentives and consequences of the shift to ZBB between two companies, come up with the recommendations for all the companies striving to implement ZBB and particular companies, which have been investigated in the current paper, and the suggestions for the future research.



1. Theoretical Aspects of Budgeting in International Companies

1.1 Budgeting in International Companies

In the first subchapter, we will put the emphasis on the fundamentals of budgeting, which will provide the groundwork for further research.

We will start with the explanation of the core term of the current paper - a budget. According to the definition from the Encyclopedia of Management(Heyel, 1982), budget is a “forecast of all the transactions of an organization for a stipulated period, organized in such a way as to bring to the attention of specific managers the financial results over which they have control and to enable the preparation of financial statements such as the budgeted income statement, balance sheet and cash-flow”. In such a way, from the one hand, budget is a detailed financial plancaptured in a form of a document, reflecting the strategy of management toward the achievement of the organization's strategies within a specific period of time; on the other hand, it is a management planning tool vital for the success of the company, which is serving as an alarm mechanism in case of variances to actual costs. A more comprehensible explanation of budget is provided by Harvard Business School as a “translation of strategic plans into measurable quantities that express the expected resources required and anticipated returns over a certain period”(Harvard Business School, 2005, p. 157). In such a way, a budget is serving the purpose of being an action plan and an organization's estimated future financial statements.

The intrinsic features of the budget are the cohesiveness to specific projects, time - boundness andplanned costs.In other words, budget is connected to the projects which have been prioritized by the management team to be carried out within the period of time with certain costs, which is implying that the money required during, for instance, a year, do not have to be available as a lump sum at the beginning of the period.Budget can be prepared for both long- and short- terms, depending on the company and the necessities. For example, a start-up company would build a one-two months budget to ensure the sufficiency of funds in short term, while a longstanding project worked out by a multinational corporation will requirea multiyear budget.

Budgetary control is applicable to both commercial and non-profit organizations, and for any facet of an organization such as income and expenditure budgets, capital budgets, R&D budgets, etc.Besides it, a budget can be classified as a master, departmental or a functional one, which will be covered further in the paper(Nugus, 2009).

Functions of budgeting are playing the key role in the process of the achievement of the company's strategic objectives. Functions, detached by Harvard Business School (2005), are the following: planning, coordinating and communication, monitoring progress and evaluating performance. Further, we will focus on those functions in depth.

The first stage, planning, consists out of several steps, including 1) choosing the goal, 2) reviewing options, 3) choosing the options. As a result of the first stage, companies match the resources available with the organizational goals, that is whyfirst of all, it is required to identifythe goals which will be pursued. Next, companies are searching for a variety of options which might lead to reaching the stated goals and assessing the prospective outcomes.After the analysis of pros and cons ofall the options, the most suitable preferences will be chosen.

Going further, the second stage is coordinating and communicating, which is focuses on putting together the pieces of budgeting which have been prepared by division/function/individually into a master budget. Master budget is a compilation of budgets from functional areas of the company, representing the total financial objectives and goals. Meanwhile, communication is essential in the process of gathering the information, as far as the information has to be reasoned out and passed further in the correct form at each level of the organizational hierarchy and be in line with the objectives of different divisions and departments.

The last stage, monitoring the progress and assessing the performance, happens as soon as the budget is accomplished and is set into work. In this case, monitoring the progress is possible through comparing the actual results to the budgeted forecast.As soon as there is no variance between expectations and reality, no adjustment to the plan is needed. However, when the variance is unfavorable (meaning that real-life results are worse than expected), the management should investigate the reasons and adapt the forecast to the actual situation. In such a way, a periodical assessment of the situation and the comparison to the stated budget aids to identify the problem at an early stage.

Throughout the literature, it is agreed that while being a financial contemplation of short-term and long-term planning in the organization, the role of budgeting in a company is quite versatile andseeks to:

- reinforce the communication between and within departments, functions,and businesses;

- rationalize and allocate financial resources among projects and departmental units;

- plan the set of actions for long-term and short-term projects;

- plan in advance the amount of money required for those projects and the sources of raising money;

- keep a company cost-efficient;

- keep those accountable for the preparation and following the budget(Clowes & Scriven, 2006), (Nugus, 2009).

Meanwhile, the conjunction of a well-reasoned budgeting with meeting the purposes tends to bring the benefits such as the obligation for management to think strategically instead of being absorbed by everyday operations; setting the key performance indicators on the basis of the forecastedbudget which is communicated to the employees of the company and aresought to be met. Furthermore, the budget can be represented in terms of the immediate forecasted future of the company which is guiding all the stakeholders in the direction of the established priorities(Clowes & Scriven, 2006).

Still, there exist certain constraints connected to budgeting,both internal (applicable to all types of budgeting) and external (connected tothe efficiency of the budget preparation process within an organization). First of all, due to the inevitable uncertainty connected to dealing with the future, the credibility of budgeting will depend on the quality of the assumptions and estimations.At the same time, it is necessary to take into consideration the fact that the budget should be flexible enough in order not to lose opportunities and follow the innovations which might occur within the stated period of time.

Secondly, the preparation of the budgetary documents requires both time and efforts from the high-ranked employees in order to gather the information, lay it out and reason it out in front of the committee. Moreover, even the most diligent preparation of the budget does not lead immediately to the success or the achievement of the forecasts. Instead, it is a plan which is recording the expectations, while the real outcome will depend on internal and external factors such as the performance of personnel and management,favorability of economic conditions,state of competition, achievement of the key performance indicators.

Going further, a logical question of who is responsible for the budget preparation arises. The choice of the approach is connected to the tradition in the company of the settlement of objectives in concordance with the organizational hierarchy, which is represented by the lower-, middle-, top-level managers and the board of directors. Objectives, meanwhile, ascend from individual objectives to department and unit objectives, division objectives, subsidiary, long-term strategic objectives of the organization and the mission, which anticipates just the socio-economic purpose. Finally, to each level of the organizational hierarchy, one can find the corresponding type of objectives (Figure 1).



Figure 1 -Relationship of Objectives and the Organizational Hierarchy

Source: (Koontz & Weihrich, 2008, p. 87)

Thus, there exist several approaches, which are bottom-up(participatory)and top-down. The bottom-upscheme implies that the initiative of budgeting stems from the middle-ranked management and goes further to the senior management, who is controlling the provided data. Inversely, the top-down approach is contained into the senior management communicating the operating and expenditure guidelines to each departmentbefore more detailed planning from the side of middle management occurs.Middle managementevaluates the ongoing and outlined projects for the stated period of time,costs them out, prepares alternative programs.Finally, budget proposals are scrutinized and finalized into the master budget by the senior management(Sennewald, 2011).

As it is stated in Harvard Business Review (2005), there are several significant benefits of the top-down approach which stem from the fact that the senior management possess more information and a clearer understanding of the goals. Thus, the advantages are the following:

1) Budget goals reflect the real company objectives for the period;

2) From the perspective of the company, more realistic budget goals can be set;

3) Budgets are not extended without a purpose.

Nevertheless, there are several disadvantages, which can be connected to the management being unaware about some department's realities - market situation, processes and costs. Thus, budgeting constrains can be too strict in order to achieve the required key performance indicators.In addition, middle management can be less likely to put the sufficient amount of efforts into achieving budgetary goals.

Participatory budgeting is convenient from the point of view that employees who are finally responsible for the goal achievement take part in the process of the budget preparation. Presumably, they as well possess more streamline information. However, there is a disadvantage which is inversely related to the advantage of the top-down approach - without having the strategic information, they might take wrong decisions. Moreover, taking into consideration the possible dependency between performance evaluation and budget achievements, employees have a stimulus to overestimate the expenses and underestimate the revenue.

In such a way, advocates of the top-down approach argue that the lower levels of the organizational hierarchy should be provided with the goals and objectives by the upper levels in order to keep abreast to the mission of the company and the socio-economic purpose. However, the proponents of the bottom-up approach contend that the top-level management should be getting the information and goals from lower levelsin order to be more motivated to achieve the goals which they have carried forward(Sennewald, 2011).

After budget is prepared by all the functional areas, all the parts are gathered together and summarized into a master budget, which is reflecting a more comprehensive picture of the financial forecast of the company. Master budget is compiled out of financial and operating budget. Operating budget (in the form of a budgeted income statement) includes budgets prepared by functions, such as production budget, R&D costs budget, marketing costs budget, distribution costs budget, customer service costs budget, administrative costs budget. Financial budget, meanwhile, consists of capital budget, cash budget, the budgeted balance sheet and the budgeted cash flows. Two parts together constitute the Master Budget(Harvard Business School, 2005).

On the figure 2 one can see the Master Budget Flowchart, which demonstrates the layout and the parts of the Master Budget.

Within the period of time when budgeting exists, it has been criticized for being time incorrect, too simplistic, susceptible to the changing economic and business environment. Due to the imperfections which have been found out, advanced ways to prepare a budget have been introduced. Furthermore, we will proceed with different types of budgeting, such as short-term and long-term; fixed and rolling; incremental and zero-based budgeting; Kaizen budgeting and others(Harvard Business School, 2005).



Figure 2 -Mater Budget Flowchart

Source: (Harvard Business School, 2005, p. 165)

Despite the fact that the major part of budgets is prepared for one year, the period covered might vary depending on the purpose of the budget and the company preparing it. As it has already been mentioned, a newly established start-up can have a short-term budget term with the focus on the month-to-month operations; whereas an already established company on the market can have a 5-year budget for a long-term capital-intensive project. Moreover, the period of time is highly dependent on the industry in which the company is operation. Thus, an FMCG company is a respectively stable business, while an Internet start-up is considered to be more vulnerable. Thus, budgets differ in terms of the planning horizon from short-term to long-term.

Another difficulty which companies were faced to is the rigidity of a budget, stemming from the fact that a budget is prepared for one year and despite the quarterly review and corrections, it stays fixed for the entire year before a new budget is prepared.In order to address such a complication, a rolling budget has been adopted. Rolling budget, in comparison to the fixed one, is continually updated with the time frame being fixed on a regular basis. It means that with each month passing, the budget is updated for one month - consequently, the information stays the most updated and current.

The next difference between budgeting approaches lies in the foundation which has been taken as a basis for the updated budget. Therefore, the incremental budgeting approach is based on the extrapolation of the historic numbers into the future by taking into consideration the forecasted incremental growth,anticipated increase in wages, forecasted inflation, development of new projects.From one point of view, such an approach is beneficial as far as it is based on the experience, history and the forecasted growth rate. However, another angle on this debate suggests that in reality, the prognosis for the new period will be achieved by the adjustment of the previous number by the forecasted growth and will eliminate the critical review of the expenses which have been made in the previous period. Moreover, the funds which have not been used within the period will be wasted in order to support a higher budget for the next year. The result will be that the budget of a company will continually increase notwithstanding the actual situation in the market.

In comparison to the incremental budgeting, discussed in the previous paragraph, there has been created an advanced way to critically review the obligation to take the historic numbers for the basis of the next period's budget. In such a way, a zero-based budgeting concept has been created, which was grounded on the idea to prepare a budget each period from scratch, as if the budget is being created for the first time. Thereby, each article of budget is reviewed in an in-depth manner, resulting into a more analytic and profound justification.

Having covered the general information about budgeting in a company, we will attempt to extend the idea about budgeting by focusing on its specific features inmultinational companies. In comparison to a one-country based company, a multinational company is susceptible not only to internal, but as well to external risks. Such risks can be expressed majorly in a form of foreign currency exchange rates, interest rates and inflation, which is considered to be a “Bermuda Triangle” of a budget(Rivera & Milani, 2011, p. 1).Still, even though there are certain ways to mitigate the stated external risks, it is necessary to first acknowledge risks, measure them and come up with a management strategy, responding to the risks under the consideration.

External risks, stated above, are rooted in the macroeconomic conditions of each and every country, state policesand political situation, monetary and financial systems. As far as foreign exchange currency is concerned, it might influence an international corporation through translation, transaction and economic exposure types, each of which will be covered further.

According to Investopedia, translation risk is the risk that a company's income, assets, liabilities and equity will change in value because of the exchange rate fluctuation(Investopedia, 2018). Such a risk is essential for multinational companies, divisions of which are located in regions with a different currency but the home one; as well as to the companies selling or acquiring merchandise for currency.As a matter of fact, translation exposure means that without an actual change in assets, a company achieves financial gain or lost as a result of the changed value.In terms of budgeting, it means that in the process of its preparation and control, results might be influenced by the changed exchange rate. Due to the gap between the forecasted and actual exchange rates,the budget performance review can be influenced by the movements of the exchange rate. In addition, as a result of foreign exchange rate fluctuations, some products of domestic or foreign production might become more price-competitive, pouring into a failure to achieve the sales goals and, consequently, revenue and profit.As a result, pricing policies can be modified with the purpose to be in the same price segment with the competitors, which might mean a decreased margin(Rivera & Milani, 2011).

Moving to the next risk which an international or transnationalcompany is facing, transaction exposure, we can say that it results from the fluctuation of the exchange rate after a company, involved into international operations, has already undertaken some liabilities in a transaction. While dealing with large transactions, even a small change in the currency exchange rate can lead to a significant loss or gain for the company(Investopedia, 2019).In budgeting this risk occurs due to unhedged contracted cash flows, acquisition or disposal of foreign assets, and others.Transaction risk can be both short-term and long-term. Short-run exposure occurs on an everyday basis, when an international company is dealing with contractual agreements to buy or sell merchandise in currency.In the long run, as it is stated in Fundamentals of Corporate Finance, “a foreign operation can fluctuate because of unanticipated changes in relative economic conditions”, meaning that because of some shifts in economic conditions, company can lose or gain money(Ross, Westerfield, & Jordan, 2010).

In comparison to the translation and economic risks, transactional risk can be mitigated by hedgingtechniques.Hedging occurs either naturally or artificially. Natural hedging is a means of risk mitigation which appears due to some natural operational procedures, for example, obtaining income and carrying expenses in the same country. While being free of charge, natural hedging is considered to be less reliable as it does not allow to eliminate the risk completely.Natural hedging usually offsets long-term transactional risk. Meanwhile, decision to make an artificial hedging involves such instruments as options and swap futures.

Economic exposure stems from the impact of the unexpectedly changed exchange rate on uncontracted future cash flows. In order to make the budgetary process leaner, some policy decisions in different directions are required, such as marketing, production. Strategic mitigation activities can include:

1) Pricing strategy should be based on either gaining market share of the products with a high price elasticity or profit margin of the products with a low-price elasticity;

2) Segmentation of the market in a way to minimize the effect of the foreign currency fluctuations;

3) In case of currency devaluation, adjust promotional budgets in order to take advantage of improved price positioning;

4) Think through sales strategies for both situations of currency evaluation and devaluation;

5) Have a pool of domestic and foreign suppliers and vary them in order to decrease costs;

6) Shift production to the production sites in the countries where the currency has been devalued with the purpose to achieve lower costs;

7) Raise capital in the local currency and not in the currency of the parent company.(Rivera & Milani, 2011, p. 3)

Going further, budgeting in multinational companies can be affected byinterest rates through Fisher effect, International Fisher effect, and interest rate parity relationships, thus it is important to take interest rate's influence into consideration. In the first place, we will focus on Fisher effect, which is connecting nominal and real interest rates to inflation in a particular country. We can investigate this effect either in the amounts of cash flows or the difference in the interest rates. According to Fisher effect, the real interest rate is approximated to the difference between nominal rate and inflation, meaning that when the inflation rate exceeds the nominal rate, the real rate is negative, which results into a loss for the company(Investopedia, 2019). However, mathematically the formula looks like (Brealey, Myers, & Allen, 2011, p. 61):



In terms of budgeting, when the future cash flows are forecasted, it is necessary to take into consideration the fact that the nominal cash flow in the future will be adjusted by inflation in order to get the real cash flow in current terms, following the formula(Brealey, Myers, & Allen, 2011, p. 61):

International Fisher effect is based on Fisher effect which has been described earlier and depicts that the difference in nominal interest rates in two countries is proportional to the changein their currencies(Brealey, Myers, & Allen, 2011, p. 682):

It is important to obtain the understanding of the real interest rates and inflation in the past, present and future in order to be able to forecast the future interest rates and changes in spot and forward exchange rates(Rivera & Milani, 2011). Precise forecasting of forward exchange rates is essential for international companies in the process of budget creation because of the necessity to determine the value of international transactions in local currency (transaction exposure of a company, as we have stated above) and being ready for the change in the evaluation of the company in the short and long run (translation exposure).

By the same token, prediction of inflation rate is important in order to estimate the required real rate of return on investment via Fisher's effect, which will be useful for comparing investment opportunities inside and between countries. In addition, in the flexible budgeting it is necessary to apply the inflation rates while comparing forecasted and real budget, which might significantly influence the variance.

To sum everything up, in the first subchapter of the theoretical chapter we have been focusing on the process of budgeting in international companies. We have found out the intrinsic features of budgeting such as project boundness, time-specificity and planned costs and revenues. While being project-related, budgeting applies to both commercial and non-for-profit organizations and deeper to a specific department, project, facet of economic activity. The main aim of budgeting is contribute into achievement of strategic company goals by planning, coordinating, monitoring progress and evaluating performance of each and every department of the company in order to move in the stated direction.

Further, we have talked about benefits, limitations and the hierarchy of goal settlement, in which we have discussed pros and cons of bottom-up and top-down approaches. Special attention has been paid to types of budgeting such as incremental and zero-based budgeting approach, short-term and long-term budgeting, fixed and rolling. Finally, we have focused on internal and external risks to budgeting such as translation, transaction and economic risks, and discussed the ways how interest rates and inflation can affect budgeting.

In the next subchapter we will focus on the features of zero-based budgeting.

1.2 Zero-based Budgeting in International FMCG Companies

In the subsequent chapter we will first focus on zero-based budgeting as an efficient approach for planning and budgeting, and further, adopt this concept to international companies in the field of fast-moving consumer goods.

Zero-based budgeting is usually considered to be an alternative to other types of budgeting approaches such as incremental, or traditional, with the main distinction lying in the basic period of budgeting. Thus, in incremental budgeting, the previous period is considered to be the foundation for the next one, while inzero-based budgeting, each period is examined separately. In the same way, no budget line is automatically included in the next-period budget(Wetherbe & Dickson, 1979).

Historically, zero-based budgeting has been proposed in 1968 at the Annual Summit Meeting of the Tax Foundation for implementation in governmental agencies with the major purpose of boosting savings, examination of all the activities as if they were new and ranking them within budget limits. During the 1970s, a new federal budgeting system showed itsefficiency, however, due to its excessive time consumption and complexity, it had been abandoned a decade later. Though, such an approach to budgeting transferred to the private sectorwhich has been facing with an economic downturn of 2009 andraised in popularity once again.

Thus, we can define zero-based budgeting as a special budgeting process that “allocates funding based on program efficiency and necessity rather than budget history” (Deloitte Development LLC, 2015, p. 1). As we can see it from the definition of the term, zero-based budgeting is assumed to scrutinize each project or activity before a new budgeting period in order to get funding for the next business cycle. Meanwhile, zero-based budgeting can be applied to any cost type, such as expenses on cost of goods sold, operating expenses, SG&A, overheads, and others.

Further, we will focus on the main features of zero-based budgeting in comparison to the traditional one.

1. First of all, budget is created irrespective to the prior year expenses with no basewith the costs being rationally justified. It means primarily that each budget line is examined, requiring a better understanding of the amount of costs devotedto it during this period. In the same manner, a level of expenses is set depending on certain activities of thisperiod, instead of just historical data.

In comparison, incremental budgeting is built upon the previous period's amount with a forecasted growth and an introduction of new projects with a certain level of justification of only the incremental part of the budget.

2. A change in budget, both positive and negative, is distributed unequally, depending on the project, which is helping to allocate resources more efficiently. In addition, justification of the amount of funds required for a certain budget line is done for the whole amount and not just the incremental part.

While talking about traditional incremental budgeting, when required a cut in the budget, this amount is equally distributed among functions or departments, which might pour into lack of financial resources for prioritized projects.

3. Connected to the previous point, ZBB helps to align expenses to those activities and projects which are aligned with strategic plans of the company or targets of a specific function. In this case prioritization of projects allows to visually realize how the budget is divided among the most and less prioritized activities.In addition, an extension of each program is questioned with the purpose to discontinue old projects which bring less value than new ones.

In traditional budgeting, however, long-term projects are not questioned which might not let new projects get a higher level of financing.

4. An important association which is connected to ZBB, is "do the right things with the right amount" instead of "do more with less", meaning that with a traditional cost cutting, the company is assumed to provide the same quality level, while in ZBB there is a change in the activities the company is occupied with.

5. An important feature of zero-based budgeting is that cost cutting is a by-side product, while the real value lies in a better allocation of resources and getting rid of less profitable and prospective activities and projects. Traditional budgeting mostly does not take this point into consideration as the previous activities are not examined.

(Deloitte Development LLC, 2015), (Wetherbe & Dickson, 1979), (A.T.Kearney, Inc., 2016).

Further, we will discuss advantages and disadvantages of zero-based budgeting for commercial organizations.

Table 1 - Advantages and Disadvantages of ZBB in commercial Organizations

Advantages	Disadvantages
Sufficient rationalization and alignment of budgeted activities to the strategy of the company / KPIs of a department	An extensively time consuming and costly process of budget preparation with justification of the whole amount of finances required
Contributes to cost reduction due to an absence of automatic increase	Might hinder development of innovations or long-term projects with no certain cost justification
Improves operational performance as it gives an insight into all the details of operations	Requires specialized staff training
Contributes to a better allocation of financial resources	Hesitation of managers to state the amounts lower than for the previous year
Engages people at all organizational levels to consider the whole budget and not just an incremental part of it	Time to realize the benefits of ZBB is required
Trade-off between the budget amount and the level of services
Analysis of alternative activities
Less opportunities to inflate budget for no reason
"Forced" regular review of activities

Source: compiled by the author

Overall, the major advantage of ZBB is its ability to challenge the current state and traditional resource allocation of the company, and even though it is usually perceived to be an aggressive way of cutting costs, it serves its mission in terms of a better allocation of different types of resources, such as people and funds. However, as we can see, there is a substantial amount of both advantages and disadvantages of thisapproach, thus the decision to follow implement it into the companyshould be justified separately for each commercial entity.

Zero-based budgeting process is built upon several steps such as an identification of decision units, decision packages and prioritizing themin regard to the importance. We will now examine each step in-depth.

Simply stating, decision unit is a team of people taking responsibility for the expense, profit and investment parts of the budget, with a manager of decision center being in charge of justification of the budget proposal. Decision packages, in its turn, are documents which are developed by managers for their decision unit, containing the information about:

- Activity and its purpose;

- Consequences of not performing the activity;

- Alternative ways to perform the activity;

- Costs and benefits associated to the activity;

- Performance metrics(Bragg, 2017, p. 227).

Thus, for each business activity a decision package is created, which is comprehensively showing the alignment of the activity to the company business goals. An important point discussed in the decision package is the alternatives to the activity, which is encouraging managers to think about conventional actions in a different perspective. Activities and alternatives are as well provided with the explanation of the level of effort with different levels of expenditures. For instance, it might delineate what will be the consequences in case the activity will be disposed entirely, at a minimum level (goals of the company associated with the exact function will not be achieved), at a current level of activity (it does not have to be the same level of cost, as inflation or an improved productivity can have an impact) and at an increased level (the highest possible level of performance). Meanwhile, there can be no alternatives, and in this case, there should be explained the reason.

Before coming up with a decision package, department managers are provided with the forecasted general information about the business, such as a preliminary number of customers being served in the new period, number of new shops being opened, additional geographical areas being entered, and others.

At the next stage, decision packages are ranked by senior management basing their decision on the preliminary ranking by lower-level management, which is considered to know the specifics of their department or function, and the generalgoals of the company. Besides it, decision packages might be combined into groups which are representing different scenarios.Afterwards, senior management is choosing decision packages or their groups at different funding levels and a budgeted statement is created.

After having discussedgeneral and technical features of zero-based budgeting, we will narrow it down to fast-moving consumer goods companies (FMCG) operating on an international level.

Initially, this budgeting approach has been associated with global FMCG companies as they are obtaining low margin and seek for diverse opportunities of cost reduction. Even though ZBB fits different types of companies, including big and small ones, it is more connected to global corporations, among which we can name Mondelez International, Unilever, Campbell Soup Company, Kraft Heinz, Anheuser-Busch InBev, Tesco and others. In addition, consumer-packaged goods companies are adopting ZBB 22% more often than companies from other industries, allegedly due to changing consumer preferences, development of private labels, volatile raw materials prices(Johnson, 2017).

While being applicable for each possible expense line, Deloitte highlights that commercial spending can be the most appropriate candidate for the employment of zero-based budgeting due to several reasons: 1) commercial spending accounts to around 15-20% of gross sales in FMCG industry; 2) has a measurable return on investment such as trade promotions, discounting and advertising; 3) spending is fragmented by types of customer, advertising activities and others(Johnson, 2017).

In case we look at the example of how some FMCG companies are implementing zero-based budgeting in their operations, we can see that what we named as decision package is divided into simple packages and complex packages. The difference between two types of packages lies in the possibility to reduce costs, so that a complex package signifies that it is possible to cut some costs, while complex packages represent the most fundamental areas in which it is more difficult to reduce costs. In order to represent in detail a package, each of them is divided into sub packages, which are later on examined with the purpose to eliminate, reduce, combine or even increase. Moreover, packages are analyzed per se so that they are not mutually exclusive or crossover(Innovation Enterprise Channels , 2018).

Next, in an FMCG company, there are two owners of a cost package, connected by a vertical hierarchy - an entity owner and a directcost owner. In ZBB, a package owner is ensuring that the money which has been devoted to this package is spent according to planning.

Important, that the cost reduction targets should be always taken into consideration at each line of expense, including travelling costs and others. In order to be set aside from surprises, every possible expense line should be standardized in global polices with a simple way of reporting the results at each level of hierarchy. Moreover, the same reporting system should be established for all the regions where the company operates, in order to standardize it.

Zero-based budgeting in international companies is usually universally implemented on different levels - at the local, regional and global ones. For this reason, global policies,governing this process are required with the purpose to support consistency of the implementation and compliance at different levels.

Zero-based budgeting is especially crucial for the FMCG market, which requires the companies to be competitive, sustain higher margins and sales growth, while operating in a slowly-growing industry with a high level of competitiveness. In such conditions, companies seek for the ways to improve profitability and examine the costs which could be eliminated.

All in all, in this sub-chapter we have looked at the specificities of the zero-based budgeting in international FMCG companies, compared ZBB to traditional budgeting approach, looked at advantages and disadvantages of ZBB, and discussed the features of ZBB per se. In the next sub-chapter, we will focus on the shift to ZBB from the traditional budgeting system by international FMCG companies.

1.3 The Shift to Zero-Based Budgeting in International FMCG Companies

In the previous subchapter we have talked about zero-based budgeting in international fast-moving consumer goods companies and found out the incentivesto shift to ZBB by this type of companies. In this subchapter, we will focus on the process of the shift from traditional budgeting approach to a new one by companies.

First of all, it is necessary to state the fact that it is not required that the entire company from top to bottom in all the countrieschanges its budgeting style towards ZBBsimultaneously. Conversely, this point of view is considered by McKinsey to be the major myth and they extend this opinion by highlighting that the CEO of the company makes the decision to whether disperse the budgeting approach to the whole company or start with some functions and businesses in certain regions, and create an expertise which can contribute to an efficient proliferation of the approach later on in the entire company. In any case, the decision depends on the amount of savings required to be attained and the pace of budgeting approach adoption(Hawke, Jochim, Mignerey, & Watson, 2017).

International FMCG companies are operating in different markets, including advanced and developing ones. However, there have been noticed such a dependency that even though developing markets are growing at a faster pace, advanced markets sustain higher costs due to commonly higher expenses. As a result, international FMCG companies are targeting advanced markets to consistently follow ZBB in order to free up financial resources for the development of emerging countries.

While decreasing costs remains to be the main incentive to implement zero-based budgeting, the profound reason behind it is an increase in the efficiency of the company due to the overall situation on the markets, including an increased pressure from the side of competitors, difficulty to obtain capital funding, necessity to grow both the bottom and top lines of the company(Chehade, Clark, & Biscardini, 2010). Moreover, according to Accenture Strategy, which has conducted research on global companies implementing ZBB, has found out three major reasons behind changing the budgeting system: 96% out of 85 largest global companies implement ZBB with the purpose to improve profitability; 48% of the companies are influenced by the competition, and 40% seek to combat a slow growth of the company(Timmermans & Chandra, 2018).

However, some companies are following a traditional cost-cutting initiative such as mere fixed percentage overall cost cut, suspension of investment, overall dismissal and in other ways, pouring into short-term results with a long-term inefficiency. Zero-based budgeting, on the other hand, is stimulating a long-term tracking of the level of expenses and does not allow both unjustified cost growth and counterproductive cut of costs.Instead, a periodical examination of all the activities hold in the company is allowing to stay on track with the necessity of those which deliver profit and withdraw others which avert funds from them. In addition, as we have already stated it, contemplation of alternatives expands the opportunities to consider.

In its white paper regarding ZBB, Price Waterhouse Coopers is suggesting a 4-step holistic approach tothe shift to successfullyimplement zero-based budgeting, namely 1) reexamination of the vision; 2) bringing activities to a zero base; 3) assessment of the outcomes, and 4) implantation of the change into operations(Chehade, Clark, & Biscardini, 2010). Further we will dig deeper into each step.

So, at the first step, it is suggested to rapidly review the current business strategy and operating model in order to understand, that all the assumptions are still valid in the current environment and stay updated in the future. This realistic assessment of the company's priorities will help to tune the company to the process of the shift and make sure that priorities are held in focus. Even though some companies decide to move to a new budgeting approach when the overall market situation is not favorable and some cost-cutting is required, it is worth embarking on changes already in advance in order to have even higher results.

...