Question

Purpose: Why is The Coca-Cola Company using zero-based budgeting?

In recent years, The Coca-Cola Company (KO) is facing decreased global demand for its soft drinks due to customer health concerns about the sugary drinks. It has responded to decreased demand with a variety of ways, including cost cutting measures.(Trivia: Coke sells Coca-Cola in every country in the world except for Cuba and North Korea.)

In January 2015, Mike Esterl of the Wall Street Journal reported that Coke is using zero-based budgeting throughout its organization. In addition, Coke is standardizing operations across its business units. It expects to complete the cost-cutting by 2019.

Your post must respond to the following in your own words:

What is zero-based budgeting?

Why might Coca-Cola want to use zero-based budgeting?

Do you expect that managers at Coca-Cola would embrace zero-based budgeting? Why or why not?

Answer 1

Zero-based budgeting (ZBB) is a method of budgeting in which all expenses must be justified for each new period. The process of zero-based budgeting starts from a "zero base," and every function within an organization is analyzed for its needs and costs. Budgets are then built around what is needed for the upcoming period, regardless of whether each budget is higher or lower than the previous one.

ZBB allows top-level strategic goals to be implemented into the budgeting process by tying them to specific functional areas of the organization, where costs can be first grouped and then measured against previous results and current expectations.

Because of its detail-oriented nature, zero-based budgeting may be a rolling process done over several years, with a few functional areas reviewed at a time by managers or group leaders. Zero-based budgeting can help lower costs by avoiding blanket increases or decreases to a prior period's budget. It is, however, a time-consuming process that takes much longer than traditional, cost-based budgeting. The practice also favors areas that achieve direct revenues or production, as their contributions are more easily justifiable than in departments such as client service and research and development.

Example of Zero-Based Budgeting

Suppose a company making construction equipment implements a zero-based budgeting process calling for closer scrutiny of the expenses in its manufacturing department. The company notices that the cost of certain parts used in its final products and outsourced to another manufacturer is increasing 5% every year. The company has the capability to make those parts in-house and with its own workers. After weighing the positives and negatives of making the parts in-house, the company finds that it can make the parts cheaper than the outside supplier.

Instead of blindly increasing the budget by a certain percentage and masking the cost increase, the company can identify a situation in which it can decide to make the part itself or buy the part from the external supplier for its end products. With traditional budgeting, cost drivers within departments may not be identified, while zero-based budgeting is a more granular process that aims to identify and justify expenditures. Zero-based budgeting is more involved, however, so the costs of the process itself must be weighed against the savings it may identify.

Since Coca-Cola’s revenue experienced sharp downfall this year, decision makers decide to cut costs in marketing sector. Accordingly, Coke marketers will have to face tougher cost control measures in expanded efficiency drive. Which means they will to justify spending on all new brand activity rather than budgets based on the previous year spend.

Muhtar Kent, Coke’s media investment Chairman and Chief Executive admitted: “underperformed compared to the opportunities” such as the world Cup. He said it would implement the zero-based budgeting initiative to marketing as well as across the rest of the business at the start of 2015 and added it would take time for the marketing investments “to flow back into benefits”. It is part of series of operational changes being prepped for next year to cut $3bn in annual expenses by 2019 after attempts to drive growth this year stalled. Changers include streamlining it operational model and launching more targeted brand investments alongside an “aggressive expansion of the company’s productivity model and clearer roles for each market. Kent said:” The changes will bring complete clarity to the roles and responsibilities on a geographical basis. We are not going to be throwing volume out the door. It will be a more balanced approach towards how we generate revenue and how it flows into bottom line”, said Kent. “There is a clear line of sight in terms of how we invest and how we get returns from investment. It’s a transparent line of sight in terms of how we look at the segmented approach”.

The approach will work toward maximising value sales through innovation in mature markets such as Great Britain and the US, while prioritising value sales through deeper segmentation in developed countries. Meanwhile, emerging markets including China and Indonesia will focus on growth through volumes.

As part of the segmented approach, Kent said the company would scale global investments faster through a networked marketing model. The approach is currently being put in practice in the company’s search for a successor to the “Share a Coke” campaign. It is understood the business had grouped together some of its big agencies earlier this year to try and come up with a successor to the personalisation promotion. The raft of changes builds on Coke’s initial cost cutting plan, which it outlined earlier this year around a five-point marketing-led plan.

The plan will remain unaffected in light of the announcements, said Kent, but its execution in various markets could be improved, notably Europe. Coke hopes the upcoming overall will relieve pressure after it was forced to revise financial targets for the rest of the year. The company’s sales have failed to pop in recent quarters as consumers shun big fizzy drinks brands in favour of healthier alternatives. Sales fell to 11.98bn in the three months to September from $12 bn a year earlier, while volumes climbed just 1%.

The minute that you introduce zero-based budgeting, it’s a code word for lay-offs. Brent Hastie, vice president of strategy and planning, said in a recent interview that Coca-Cola is embracing zero-based budgeting as part of a plan unveiled in October 2014, with hopes to cut $3 billion in costs by 2019. However, the company is calling its process “zero-based work” because of negative perceptions of the technique. In addition, companies like chicken processor Pilgrim’s Pride Corp., who adopted zero-based budgeting a few years ago, scrutinized how much paper the company used to print documents, the amount of soap that employees used to wash their hands, and how much Gatorade hourly employees at one processing facility drank during breaks. Companies need to decide where the line is drawn before morale starts chipping away. The technique can trigger sweeping cost cuts, from eliminating hundreds of management jobs to eliminating corporate jets, but when it simply creates more work along with decreasing efficiency and morale, companies need to define parameters.

Overall, major U.S. food and beverage brands have a steep road ahead of them. These brands have over-extended themselves in a category that may be shrinking over time as consumers move away from processed foods. Quick-fix solutions may not be the answer, either. Recently, Kraft tried to strike a deal to put the Academy of Nutrition and Dietetics “Kids Eat Right” logo on its single-slice American cheese products, which prompted ridicule from The Daily Show host Jon Stewart and criticism from health professionals, who said that it shouldn’t have endorsed the product. The deal is said to be ending early as the Academy of Nutrition and Dietetics is withdrawing its support.

While zero-based budgeting is disruptive thinking for many consumer goods companies, brands need to go beyond budgeting. And if this budgeting approach is right for your brand, then you must clearly define objectives, provide appropriate training to staff and consider the wider implications before implementing the technique. The bottom line is that zero-based budgeting will provide the necessary cost cuts and savings if implemented correctly, but it will not address larger brand problems.