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  • The three strategy-making task two: setting objectives

    TEACHER: Hello, Student. In the previous Module we discussed the definition of a strategic vision. Now we will start our discussion on "setting objectives".

    Setting objectives converts the strategic vision and directional course into concrete expected results and performance targets.

    Now please tell me: how would you describe what business "objectives" are?

    STUDENT: I'd say that objectives represent a commitment to producing specified results in a specified time frame.

    TEACHER: Good. Objectives specify how much of what kind of performance is to be reached by when. They are a specific commitment by management, and direct attention and energy to what needs to be accomplished.

    The Managerial Value Of Setting Objectives

    Unless an organization's long-term direction and business mission are translated into measurable performance targets and managers are pressured to show progress in reaching these targets, statements about direction and mission will end up being no more than wishful thinking.

    STUDENT: I know of many managers who think that objectives are always little more than wishful thinking. They say that all managers can and should do is have good intentions, try hard, and hope for success. Sure, they go along with what is expected from them and write down vision statements and set objectives. But they do not actually believe in them. They feel that they will always find good excuses to justify eventual shortcomings.

    TEACHER: I am sure that there are good reasons to dispute such thinking. The experiences of many firms show us that companies whose managers set objectives for each key result area and then aggressively pursue actions calculated to achieve their performance targets typically outperform companies whose managers have good intentions, try hard, and hope for success (or for finding good excuses!)

    STUDENT: I agree, but the fact that many managers do not sincerely believe in the usefulness of setting objectives explains why in many cases they state generalities like "maximize profits," "reduce costs," "become more efficient," or "increase sales," and specify neither how much or when.

    TEACHER: You made a very good point. For performance objectives to have value as a management tool, they must be stated in measurable terms and they must contain a deadline for achievement. Objective-setting is a call for action -what to achieve, when to achieve it, and who is responsible.

    STUDENT: I read that Bill Hewlett, co-founder of Hewlett-Packard, once observed, "You cannot manage what you cannot measure . . . And what gets measured gets done."

    TEACHER: Mr. Hewlett was right. Spelling out organization objectives in measurable terms and then holding managers accountable for reaching their assigned targets within a specified time frame is the one and only correct way to do it.

    In this way the company is actually defining purposeful strategic decision-making.

    STUDENT: And you are implying that firms that don't do this correctly are promoting aimless actions and confusion over what to accomplish.

    TEACHER: Correct.

    What Kinds Of Objectives To Set

    Objectives are needed for each key result managers deem important to success. Two types of key result areas stand out:

    1. those relating to financial performance and

    2. those relating to strategic performance.

    * Achieving acceptable financial performance is a must; otherwise the organization's survival is at risk.

    * Achieving acceptable strategic performance is essential to sustaining and improving the company's long-term market position and competitiveness.

    STUDENT: Examples, please?

    Specific kinds of financial objectives are, among many other possible ones:

    * Faster revenue growth
    * Faster earning growth
    * Larger profit margins
    * Increased cash flow

    As for strategic performance objectives, we can mention:

    * A bigger market share
    * Higher product quality
    * Lower costs
    * Superior customer service
    * A broader product line

    STUDENT: So we have Strategic Objectives and Financial Objectives. Which take precedence?

    TEACHER: Both financial and strategic objectives are equally important. However, sometimes companies under pressure to improve near-term financial performance elect to kill or postpone strategic moves that hold promise for strengthening the enterprise's business and competitive position for the long haul.

    STUDENT: I understand that this type of problem is more frequent in the USA due to the legal requirement to publish very comprehensive quarterly financial reports. A single quarter with less than stellar results may cause a substantial fall in the price of the firm's stock.

    TEACHER: Right, European and Asian companies are not required to publish the same detailed information as the US companies are.

    The pressures on managers to opt for better near-term financial performance and to sacrifice at least some strategic moves aimed at building a stronger competitive position are especially pronounced when

    (1) an enterprise is struggling financially,

    (2) the resource commitments for strategically beneficial moves will materially detract from the bottom line for several years, and

    (3) the proposed strategic moves are risky and have an uncertain market and competitive payoff.

    STUDENT: Aren't you forgetting the very important fact that managers are often compensated based on the current price of shares? Obviously they will try to get the best results in the short-run and worry about the long-run... well, later, if they are still working for the same company?

    TEACHER: Good point. Whatever the reason, there are dangers in management's succumbing time and again to the temptation of immediate gains in margins and return on investment when it means delaying strategic moves that would build a stronger business position.

    A company that consistently passes up opportunities to strengthen its long-term competitive position in order to realize better near-term financial gains risks diluting its competitiveness, losing momentum in its markets, and impairing its ability to stave off market challenges from ambitious rivals.

    STUDENT: Paraphrasing a very well known saying, it appears to me that "The road to bankruptcy is paved with ex-market leaders who put more emphasis on boosting next quarter's profit than strengthening long-term market position".

    TEACHER: Yes indeed. The danger of trading off long-term gains in market position for near-term gains in bottom-line performance is greatest when a profit-conscious market leader has competitors who invest relentlessly in gaining market share in preparation for the time when they will be big and strong enough to out-compete the leader in a head-to-head market battle.

    STUDENT: As you say this I am reminded of the Japanese companies' patient and persistent strategic efforts to gain market ground on their more profit-centered American and European rivals.

    TEACHER: You are correct. The surest path to protecting and sustaining a company's profitability quarter after quarter and year after year is to pursue strategic actions that strengthen its competitiveness and business position

    The Concept of Strategic Intent

    A company's strategic objectives are important for another reason -they indicate strategic intent to stake out a particular business position.

    * The strategic intent of a large company may be industry leadership on a national or global scale.
    * The strategic intent of a small company may be to dominate a market niche.
    * The strategic intent of an up-and-coming enterprise may be to overtake the market leaders.
    * The strategic intent of a technologically innovative company may be to pioneer a promising discovery and open a whole new vista of products and market opportunities -as did Xerox, Apple Computer, Microsoft, Merck, and Sony.

    STUDENT: I guess that the time horizon of a company's strategic intent is long-term, right?

    TEACHER: Yes. Companies that rise to prominence in their markets almost invariably begin with strategic intents that are out of proportion to their immediate capabilities and market positions. But they set ambitious long-term strategic objectives and then pursue them relentlessly, sometimes even obsessively, over a 10 - to 20-year period.

    In the 1960s, Komatsu, Japan's leading earth-moving equipment company, was less than one-third the size of Caterpillar, had little market presence outside Japan, and depended on its small bulldozers for most of its revenue.

    Kornatsu's strategic intent was to "encircle Caterpillar" with a broader product line and then compete globally against Caterpillar. By the late 1980s, Komatsu was the industry's second-ranking company, with a strong sales presence in North America, Europe, and Asia plus a product line that included industrial robots and semiconductors as well as a broad array of earth-moving equipment

    Often, a company's strategic intent takes on a heroic character, serving as a rallying cry for managers and employees alike to go all out and do their very best. Canon's strategic intent in copying equipment was to "Beat Xerox." Komatsu's motivating battle cry was "Beat Caterpillar."

    The strategic intent of the U.S. government's Apollo space program was to put a person on the moon ahead of the Soviet Union. Throughout the 1980s, Wal-Mart's strategic intent was to "overtake Sears" as the largest U.S. retailer (a feat accomplished in 1991).

    In such instances, strategic intent signals a deep-seated commitment to winning -unseating the industry leader, remaining the industry leader (and becoming more dominant in the process), or otherwise beating long odds to gain a significantly stronger business position. A capably managed enterprise whose strategic objectives exceed its present reach and resources can be a more formidable competitor than a company with modest strategic intent.

    Long-Range versus Short-Range Objectives

    An organization needs both long-range and short-range objectives. Long-range objectives serve two purposes.

    * First, setting performance targets five or more years ahead pushes managers to take actions now in order to achieve the targeted long-range performance later.

    * Second, having explicit long-range objectives prompts managers to weigh the impact of today's decisions on longer-range performance.

    Without the pressure to make progress in meeting long-range performance targets, it is human nature to base decisions on what is most expedient and worry about the, future later. The problem with short-sighted decisions, of course, is that they put a company's long-term business position at greater risk.

    Short-range objectives spell out the immediate and near-term results to be achieved. They indicate the speed at which management wants the organization to progress as well as the level of performance being aimed for over the next two or three periods.

    STUDENT: Can short-range objectives be identical to long-range objectives?

    TEACHER: Yes. Anytime an organization is already performing at the targeted long-term level. For instance, if a company has an ongoing objective of 15 percent profit growth every year and is currently achieving this objective, then the company's long-range and short-range profit objectives coincide.

    The "Challenging But Achievable" Test

    Objectives should not represent whatever levels of achievement management decides would be "nice." Wishful thinking has no place in objective-setting. For objectives to serve as a tool for stretching an organization to reach its full potential, they must be challenging but achievable. Satisfying this criterion means setting objectives in light of several important "inside-outside" considerations:

    * What performance levels will industry and competitive conditions realistically allow?

    * What results will it take for the organization to be a successful performer?

    * What performance is the organization capable of when pushed?

    To set challenging but achievable objectives, managers must judge what performance is possible in light of external conditions as well as what performance the organization is capable of achieving.

    The tasks of objective-setting and strategy-making often become intertwined at this point. Strategic choices, for example, cannot be made in a financial vacuum; the money has to be there to execute them. Consequently, decisions about strategy are contingent on setting the organization's financial performance objectives high enough to

    (1) execute the chosen strategy,

    (2) fund other needed actions, and

    (3) please investors and the financial community.

    Objectives and strategy also intertwine when it comes to matching the means (strategy) with the ends (objectives). If a company can't achieve established objectives (because the objectives are set unrealistically high or the present strategy can't deliver the desired performance), the objectives or the strategy need adjustment to produce a better fit.

    The Need For Objectives At All Management Levels

    For strategic thinking and strategy-driven decision-making to permeate organization behavior, performance targets must be established not only for the organization as a whole but also for each of the organization's separate businesses, product lines, functional areas, and departments.

    Only when every manager, from the CEO to the lowest-level manager, is held accountable for achieving specific results and when each unit's objectives support achievement of company objectives is the objective-setting process complete enough to ensure that the whole organization is headed down the chosen path and that each part of the organization knows what it needs to accomplish.


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