6
Planning and Setting Goals

Learning Objectives

By the end of the chapter you should be able to:

• Describe the strategic planning process and four generic strategy types.

• Explain how operational planning is used to achieve strategic goals.

• Describe the function of control plans.

• Outline the characteristics of effective goals and how to formulate them.

As stated earlier in this course, one of the basic functions of management is planning. Effective planning begins with organizational goals and moves progressively through strategic planning, operational planning, and planning for control, as shown in Exhibit 6-1.

Goals for an organization represent its top-level aspirations—for example, to dominate its market and provide a 15 percent return on shareholder equity, or to be the leading provider of software solutions for financial institutions. The choice of top-level goals cannot be pulled out of a hat; goals must be based on a realistic understanding of two things:

1. The external environment: competition, customer demand and expectations, the larger economy, and so forth.

2. The internal environment: the firm’s financial resources, business allies, core competencies, employee skills, and weaknesses.

Notice the feedback loop in the exhibit between the “control” box and strategic and operational planning. If actual results are contrary to plan, control sends a signal to management that it must revisit its strategic and/or operational planning.

STRATEGIC PLANNING

Strategic planning defines how the organization will achieve its highest goals. Again, planning must be informed by a realistic grasp of the external and internal environments, which strategic planners often analyze in terms of “SWOT”: strengths, weakness, opportunities, and threats.

Strategy describes how the business will differentiate itself from competitors in a way that imparts a competitive market advantage. Differentiation is only effective if customers appreciate the difference, and it is usually the only way to achieve above-average returns over the long run. Southwest Airlines, for example, didn’t try to copy the plans of United, Delta, Northwest, and other air carriers with full service, a variety of aircraft, and hub-and-spoke routing. It differentiated itself with a no-frills, low-price strategy that flew the same model aircraft from point to point. Thanks to that strategy, and Southwest’s attention to its human resources, the airline grew from a small, regional firm to a major carrier, the most profitable firm in its industry.

Strategic planning is carried out at the top of the organization, typically by a team that includes the CEO, a board member (often the chairman), key stakeholders, such as the chief financial officer and VP of Marketing, and staff. Large corporations employ vice presidents of planning (or development), who take de facto leadership of the planning process.

A company can choose from an unlimited number of strategies. However, most of those strategies can be lumped into one or another of the strategies described in the following sections.

Low Cost Leadership

To succeed, practitioners of this strategy must build an organization and operations that can deliver goods or services at the lowest available cost. And they must work continually to reduce their operating costs through greater internal efficiencies and distribution effectiveness, cost and salary controls, lower cost of materials, and increased productivity.

Solid Customer Relationships

While some customers will always opt for the lowest price, others appreciate and will maintain relationships with sellers they know and trust, and with sellers who go to great lengths to please them. This explains why some small town retailers manage to stay in business when most people are driving out to Walmart to get lower prices. This strategy succeeds when a company personalizes its contacts with customers and learns how customers want to be served.

Product/Service Uniqueness or Quality

Some strategies aim to succeed in a special niche. The chosen niche may be small, but it allows a small producer to exercise some market leadership and command a high price. For example, most acoustic guitars are built today in factories and sell for between $500 and $3,000. Competition is stiff and requires mass market producers to be highly efficient and accept modest profit margins. A small number of artisans survive and prosper, however, by custom-building fine instruments using premium woods and decorative inlays that guitar aficionados will gladly pay $5,000 to $12,000 to own and play. The growth of the “micro-brew” beer industry is another example of strategy based on product uniqueness or quality. If a significant number of people didn’t value the quality or uniqueness of locally brewed brands, the beer market would be totally dominated by three or four national producers.

Geographic Expansion

Since the ultimate end of strategy is to reap greater sales revenues and, eventually, profits, one common strategy is to cast one’s nets more broadly. Consider Staples, Costco, Home Depot, Starbucks, Dunkin’ Donuts, Whole Foods, and McDonalds. Revenues and profits for these companies grow to a small degree through year-over-year store operations. They might crank out another 5 percent or 8 percent growth by attracting more people to existing stores, but to get the larger revenue/profit number these companies aim for, they must expand geographically. Thus, we see companies creating new outlets at a breakneck pace. Sometimes companies expand too quickly, as Starbucks did when it increased its reach to encompass more than 8,500 company-owned stores and another 6,500 licensed outlets in 2007. The global recession of 2008 reduced the number of people willing to spend $3.50 for a cup of coffee. Starbucks’ response to the changes in the external environment was a retreat to a smaller number of outlets—effectively a change to a cost-cutting strategy.

OPERATIONAL PLANNING

Operational planning is a process that engages both senior and unit level managers in answering these questions: What must we do to make our strategy work? Who will do what and when will they do it?

You might think of operational planning as a process for assuring strategy implementation. Taking strategy as its starting point, operational planning determines the concrete activities that the company’s different operating units—marketing, product development, manufacturing, logistics, and so forth—must implement to make the strategy a success. For example, if a low-cost leadership strategy is adopted, operational planning would likely include the following activities:

• Product developers will design products to minimize the cost of materials and assembly.

• Manufacturing will seek lower-cost suppliers and outsource some or all production to low-wage assemblers.

• Finance will seek new opportunities to reduce the company’s cost of capital.

• Marketing will create customer communications that emphasize price and value.

• The human resources department will develop compensation, training, and early-retirement programs that will reduce people costs from current levels while maintaining production.

Each of those activities will be broken down still further into their component parts—what some people call action plans, as shown in Exhibit 6-2. Managers, supervisors, and employees are then assigned responsibility for these activities as part of operational planning.

In conducting operational planning, it is very important that supporting activities be closely aligned with the strategy. Thus, if the strategy is to win customers though low-cost leadership, every major activity must be cost-conscious, and the culture of the organization must encourage and reward thinking and action that, for example, eliminates unnecessary costs and finds ways to do things faster, cheaper, and better. Likewise, if the strategy is focused on winning through technological leadership, operational planning and the culture of the organization must emphasize activities that encourage innovation, speed the product development process, and keep personnel at a high level of technical proficiency.

CONTROL PLANS

Control represents the last of the formal planning activities. Control involves mechanisms that monitor activities and compare them to previously set plans. Management intervenes when it observes variances between plans and actual performance. Standards, schedules, and budgets are key control tools. These provide the feedback that help managers understand how well or how poorly their plans are being implemented. For example, the marketing department’s schedule of strategy implementing activities may call for completion of its annual marketing plan by November 1, and implementation of a product promotion campaign by January 31. If marketing personnel don’t meet those dates, the control system sends a signal to management that something’s gone wrong and that corrective measures are needed.

GOALS

The plan processes we’ve described began with high-level organizational goals. To executives, managers, and employees, those goals should be what the North Star is to the terrestrial navigator: a reference point that keeps people properly oriented and heading in the right direction. Whenever they ask, “Are we doing the right thing?” the large goals of the organization will help them answer the question correctly and keep them on the right course.

The Characteristics of Effective Goals

Top-level goals are broadly stated: to earn a 15 percent return on invested capital; to be the market-share leader; and so forth. Though these broadly stated goals provide guidance for top management and a company’s directors who are concerned with the big picture, they are not particularly useful as one travels down the chain of command where the everyday work of the enterprise is done. The supervisor in the parts stockroom, for example, may understand and appreciate the top-level goal, but is not going to see a clear connection between what he does every day and its percentage impact on the business’s rate of return. For that supervisor, and for mid- and lower-level managers and their subordinates, goals must be restated in practical, concrete terms that support top-level goals but that are clearly related to their own work. To a field salesperson, for instance, any of these might be suitable goals:

• Increase unit sales by 10 percent in the next calendar year.

• Increase sales revenue by 12 percent in the next calendar year.

• Open two new accounts each month.

• Submit complete activity reports to the district sales manager within one week of a customer site visit.

• Hold travel and entertainment outlays at last year’s level.

For the salesperson, those goals are more actionable, measurable, and within his or her control than are a broadly stated organizational goal such as “to earn a 15 percent return on invested capital.” Effective goals, then, are:

• Measurable—for instance, increase unit sales by 20 percent.

• Time-defined—for instance, add two new customers each month.

• Challenging but achievable—they make managers and employees stretch, but are not so difficult that people will dismiss them as unattainable.

• Clearly important to the organization—they focus on key matters, not the trivial.

• Connected to higher-level strategy and goals—people can see a relationship between their personal goals and higher organizational goals.

• Linked to the incentive structure—positive outcomes are encouraged and rewarded.

• Written—goals and their measurement metrics and are part of the performance management system; managers use them in appraising employee performance.

Alignment with Higher Goals

The goals of each unit should support—that is, should be aligned with—the goals of the unit above it, as described in Exhibit 6-3. In this organizational chart for a multinational enterprise, Fred, a salesperson in the Northeast sales region, is assigned goals that support those of his region. The Northeast region’s goals, in turn, support the goals of the national sales unit, which support those of the U.S. division of which it is a part. Finally, the U.S. division, like its European counterpart, supports the highest goals of the corporation. If management has done a good job, goals up and down the organization will be in alignment, a condition in which all operating goals and activities of the organization are linked in support of top-level goals.

Alignment is a catalyst of organizational power, effectiveness, and success because it focuses attention, energy, and effort on key goals. For an organization to reach its full potential, however, simply linking goals in the manner described here is insufficient. Alignment must operate at other levels. Management must assure, for example, that people have the resources they need to achieve their goals (resource alignment). The company’s rewards structure must also be aligned with goals; people must see that they will receive better compensation and career opportunities if they do the right things (alignment of interests).

The culture of the organization must also be aligned with its goals (or vice versa). There must be harmony between the two; it is the job of senior management to assure that harmony. For an organization, culture is defined by attitudes, beliefs, values, and norms. Some companies have strongly identifiable cultures that persist for decades, if not for generations. Minnesota-based 3M Corporation, for example, has a culture that encourages and supports inventiveness. That culture goes back to the 1920s. Its unofficial “15 percent” rule gives technical and scientific personnel the opportunity to spend up to 15 percent of their time tinkering with ideas that interest them. Many new and profitable products have emerged from that program. Hewlett Packard is a company that honors engineering excellence and know-how. Its culture continues, to a large extent, to follow the “HP Way” established by its founders William Hewlett and David Packard in the late 1930s.

Within the larger culture of the company, your department or work unit has its own culture. This local culture is at least as important to your employees as the broader corporate culture. A positive culture plays a critical part in employee motivation and engagement. As manager, you have a key role in defining the culture of your workgroup. Remember, actions speak louder than words! Your behavior will set the example and drive your employees’ perception of the group’s culture.

Organizations approach planning and set goals by starting with a strategic plan. Strategy describes how the business will differentiate itself from competitors in a way that imparts a competitive market advantage. The planning process typically starts at the top of the organization with a team including the CEO, a board member, key stakeholders, and staff. Most strategic plans fall into one of four categories: low cost leadership, solid customer relationships, product/service uniqueness or quality, or geographic expansion.

Once a company’s strategic direction is set, specific objectives are established and managers begin the operational planning that will allow the organization to reach its goals. This defines what will be done, by whom, and how, to reach the company goals. Action plans that define the roles of managers, supervisors, and employees are part of operational planning.

Control plans are created to monitor progress. Key tools of control plans are standards, schedules, and budgets. These provide feedback to help managers evaluate how well or poorly their plans are being implemented.

While top-level organizational goals should be broad and visionary, objectives for individuals should be “SMART”: Specific, Measurable, Achievable, Realistic, and Time-bound. It is critical that goals be aligned throughout the organization, so that individual goals support department goals, which in turn support divisional and finally company-wide goals. Management contributes to this effort by assuring that people have the necessary resources to succeed and by building a corporate culture that encourages and supports the organization’s strategic goals.