A goal is something your business aims to be, as described in words. An objective is a target that helps to measure whether that goal is achieved, and is typically set out in numbers. The following are the tools that help in building goals and objectives as part of your strategy.
1) Setting long-term goals
The Tool: Goal setting is the cornerstone of business strategy. Goals should underpin each of your company's main strategic initiatives over the next five years or so. Goal setting should also prove motivational. Goals can enhance employee performance in four ways:
- They focus attention towards goal-relevant activities
- They have an energizing effect
- They encourage persistence
- They help staff cope with task to hand.
When to use it: Always
When to wary: Don't have too many goals.
2) Setting SMART objectives:
The Tool: Objectives are intimately linked to goals. Your firm aims towards a goal, a destination typically articulated in words. Objectives are targets, whether along the route or at the final destination, and are typically set out in numbers.
How to use it: You should set objectives that are:
- Specific - a precise number against a particular parameter
- Measureable - that parameter must be quantifiable - for example, a market-share percentage in a segment rather than a woolly target such as 'best supplier'
- Attainable - there is no point in aiming for the improbable - disappointment will be the inevitable outcome.
- Relevant - the objective should relate to the goal.
- Time-limited - you should specify the deadline for the objective to be achieved.
When to wary: As with goal setting, keep it simple.
3) Maximizing shareholder value
The Tool: A firm's purpose is to maximize shareholder value and that, since only people can have social responsibilities, firms are responsible solely to their shareholders and not to society as a whole.
How to use it: This tool references shareholder value maximization and not profit. Value and profit are not the same thing. The value of an enterprise is defined strictly as the value of the equity plus the value of the long-term debt. Value is a measure not of profit but of cash. And its a measure of future cash flow.
The goal of shareholder value maximization, as opposed to profit maximization, forces the strategist to give priority to:
- The medium to long term, rather than the short term.
- The building of sustainable competitive position, rather than temporary profit.
- Cash flow, rather than profit.
When to wary: There is an omnipresent trade-off between this goal and the next balancing stakeholder interest.
4) Balancing stakeholder interests
The Tool: The goal of balancing stakeholder interests need to be treated with care. If you give too much weight to the interests of those other than shareholders, you wont remain in business too long.
How to use it: The goal of balancing stakeholder interests has become more formalized in the past two decades through the promotion of corporate social responsibility, sometimes referred to as 'corporate conscience', and the advent of 'social accounting'
Three of the most common qualifier to a simple goal of maximizing shareholder value come in the areas of employment, sourcing and the environment.
When to use it: Always
When to wary: A firm's prime goal might be to maximizing shareholder value, albeit balanced, as appropriate to your firm's culture and circumstances, by the interests of specified stakeholders. But should the latter interests gain precedence over those of shareholders, your firm may be destined for trouble.
5) Creating shared value (Porter and Kramer)
The Tool: "The concept of shared value... recognizes the societal needs, not just conventional economic needs, define markets. It also recognizes that social harms or weaknesses frequently create internal cost for firms - such as wasted energy or raw materials, costly accidents, and the need for remedial training to compensate for inadequacies in education. And addressing societal harms and constraints does not necessarily raise costs for firms, because they can innovate through using new technologies, operating methods, and management approaches - and as a result, increase their productivity and expand their markets." - Porter and Kramer, 'Creating shared value', Harvard Business Review, Jan-Feb 2011
How to use it: The companies have been aiming at maximizing shareholder value, albeit by cleverly targeting innovative niche opportunities which also happen to improve the public good.
When to use it: Consider using it as an alternative to the tools set out above maximizing shareholder value.
When to wary: Conflicts will arise and decisions will need to be taken on sharing the value created. Should the value accrue to the public, in social or environmental benefits, or to shareholders? Trade-offs will be no less difficult to resolve whether the goal is creating shared value or a blend of goals of maximizing shareholder value and balancing stakeholder interests.
6) Economic value added (Stern Stewart)
The Tool: Evaluating the health of the company based on return on capital depends on two factors:
- The element of risk in investing in the company
- The extent of long-term debt carried by the company.
How to use it: A ranking based on EVA return is a better indicator. It tells you how companies are performing relative to the sector risk and financial risk each is exposed to. The top-ranking companies will be outperforming investor expectations and 'creating shareholder value'. The lowest, where EVA returns are negative, falling below WACC, are underperforming against investor expectations and are 'destroying shareholder value'
EVA is also useful in ranking divisional or business unit performance in your firm.
Detailed EVA: http://www.sternstewart.com.br/publicacoes/pdfs/EVA_and_strategy.pdf
When to use it: Us it when you feel comfortable about the theory and calculations and where you want to set a challenging objective for investor returns over and above the usual.
When to wary: Take care if you find the concept and mathematics difficult.
7) Balanced scorecard and strategy map (Kaplan and Norton)
The Tool: The balanced scorecard is a means of translating corporate goals and strategy into a series of define, measurable objectives, spanning key departmental functions, has become the most commonly used framework od management by objectives.
How to use it: It is essentially putting information about resources available and how to use them to reach to the goal. The following are few of the areas which generally used in building a balanced scorecard:
- Financial perspective: revenues, gross and operating margins, return on capital employed, cash flow.
- Customer perspective: market share, customer satisfaction, quality performance, delivery performance, customer retention
- Internal business processes perspective: productivity, process measures such as bottlenecks.
- Learning and growth perspective: job satisfaction, training as a share of operating costs, employee turnover.
When to use it: When used effectively in strategy implementation, a balance scorecard should help in streamlining processes, information and motivating employees, begetting greater customer satisfaction and demonstrably improving financial results emanating from the strategy.
When to wary: The danger is self-evident: too many objectives with too little prioritization in the balanced scorecard, and too much information with too many boxes and arrows on one strategic mapping page, can blue the landscape and hinder coherent strategy development.
8) Core ideology (Collin and Porras)
The Tool: "Successful companies set 'big, hairy, audacious goals. They also possess a core ideology and create cult-like cultures" - Jim Collins.
How to use it: Break core ideology down into core purpose and core values. Core purpose is your firm's 'fundamental reason for being'. Core values are your firm's 'essential and enduring tenets - timeless guiding principles that require no external justification.
Set highly challenging big, hairy, audacious goals ('BHAG') to align ambition and enhance team spirit. Besides the goals a focused leader is key to long-term success.
When to use it: The concept of BHAG is memorable, stimulating and can motivate the complete organization.
When to wary: Core ideology as the cornerstone of success may seem a stretch to many firms. They may see purpose and values as less crucial to successful strategy development than goals and objectives.
9) Business as a community (Handy)
The Tool: "I think many people assume, wrongly, that a company exists simply to make money. While this is an important result of a company's existence, we have to go deeper and find the real reasons for our being. As we investigate this, we inevitably come to the conclusion that a group of people get together and exist as an institution that we call a company so that they are able to accomplish separately - they make a contribution to society, a phrase which sounds trite but its fundamental" - David Packard.
How to use it: You should see your business as a community. Neglecting the environment may drive away customer but neglecting your workforce may drive away employees. You should see yourself as a community, of people striving for the betterment of that community, including its wealth, welfare and the environment.
Companies become imperiled when managers focus too much on producing goods and services and forget that they are a community, a company of people. He shows that long-living companies possess that sense of community, as we as a distinct identity, a learning culture and an appreciation of the society and environment in which they operate.
