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Edinburgh Business School MBA Strategic Planning Module 3 Company Objectives Instructor: Moataz Darwish, MBA
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Contents 1. Setting Objectives 2. From Vision to Mission to Objectives 3. The Gap Concept 4. Credible Objectives 5. Quantifiable and Non-Quantifiable Objectives 6. Aggregate Objectives 7. Disaggregated Objectives 8. The Principal / Agent Problem 9. Means and Ends 10. Behavioural versus Economic and Financial Objectives 11. Economic Objectives 12. Financial Objectives 13. Social Objectives 14. Stakeholders 15. Ethical Considerations 16. Are Objectives SMART? 2
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Setting Objectives • Any strategic plan is based on the achievement of specified objectives; devising a plan without objectives is a meaningless exercise. • Confusion between plans and objectives pervades many areas of activity. • Some managers become so involved in the planning process that they overlook what it is meant to achieve; • There is a danger that managers confuse the means by which ends are to be achieved with the ends themselves. • What is to be achieved ought to be differentiated from How it is to be achieved; 5
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Setting Objectives • Since strategy is at least partly concerned with confrontation with competitors, it may not always be advisable for a company to be explicit about its objectives. • Ex: a company may identify an increased market share in a particular market segment as a major policy objective. • However, if competitors became aware of this they could preempt the company’s moves by reducing prices, with the result that the company becomes worse off than before. • There is clearly a balance to be struck between informing managers about objectives and ensuring that competitors cannot preempt strategic moves. • It is also likely that in the early stages of strategy formulation it is not possible to identify more than the general thrust of strategy, and at this stage it is not possible to be specific. 6
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From Vision to Mission to Objectives 1) Defining the Business of the Organization 2) Deriving the Mission Statement 3) Disaggregating the Mission 4) Setting Objectives 7
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From Vision to Mission to Objectives Vision Long term view of what the company is about and the markets within which it should be operating (broad thrust). Mission Definition of the business. Clearly understood by employees. Provide focus for activities. More tangible Objectives What has to be achieved for the mission to be successful. 8
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From Vision to Mission to Objectives • Defining the Business of the Organization • What business the company is actually in? • Ex: What business is the Football club in??? Sport business? Entertainment business? 9
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From Vision to Mission to Objectives • Defining the Business of the Organisation • Ex: What business is the Soft Drinks Company in??? Soft drinks business? Beverages business? Cola vs. Pepsi or vs. Juice or vs. Beer or vs. Tang or vs. Gatorade or vs. tonic water or vs. coffee / tea…… 10
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From Vision to Mission to Objectives • Defining the Business of the Organization • Ex: What business is the Soft Drinks Company in??? • Few questions reveal potentially significant differences in business definition: 1- Does the company control all stages of production or does it purchase all ingredients and merely mix and bottle? • productive scope of the company, i.e. the extent to which it buys in its inputs and hence how it perceives its own supply chain (make vs. buy bottles) • Skills set of employees differ; 2- Does the company control distribution and marketing channels? • market positioning of the product (brand vs. private label); 3- Does the company compete in the soft drinks or beverage market? • breadth and focus of the business definition; 4- Is the drink a stand alone or is it also intended as a mixer? • target markets (restaurants, health market, supermarkets…). 11
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From Vision to Mission to Objectives • Deriving the Mission Statement • how the company intends to operate within that business area. • factors such as: • quality • degree of differentiation; • geographical area • segment of targeted consumers • Ex: soft drinks company’s mission could be: • To deliver high energy drinks to energetic individuals who care about their health. • To service the soft drink needs of supermarket chains who need a high quality dependable product to market under their umbrella brand. • To target teenage consumers who want a brightly colored effervescent drink in an unusually shaped container. 12
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From Vision to Mission to Objectives • Disaggregating the Mission • modified and applied to individual parts of the organization to ensure, as far as possible, that the focus of functional departments is aligned with the vision of the senior managers. • Disaggregating the mission to company objectives. • Setting Objectives • what has to be achieved for the mission to be successful. • necessary to state the objectives in terms of measurable performance targets; • Objective setting introduces accountability into the business of pursuing the company vision, 13
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Contents 1. Setting Objectives 2. From Vision to Mission to Objectives 3. The Gap Concept 4. Credible Objectives 5. Quantifiable and Non-Quantifiable Objectives 6. Aggregate Objectives 7. Disaggregated Objectives 8. The Principal / Agent Problem 9. Means and Ends 10. Behavioural versus Economic and Financial Objectives 11. Economic Objectives 12. Financial Objectives 13. Social Objectives 14. Stakeholders 15. Ethical Considerations 14
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The Gap Concept • Performance gaps shows what has to be accomplished in order to achieve. • The gap concept is concerned with the difference between expected and desired future states. • Two steps: 1- desired future state (new products, market shares, profitability…). 2- the state the company is likely to be in at that time if no changes to strategy are made. The difference between the expected and the desired state is the Performance Gap 15
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The Gap Concept Goal Gap Outcome profits, growth… Current Path TODAY Time • Outcome is on the vertical axis. It could be anything, profits, growth, etc. • Time is on the horizontal axis. Strategy starts by determining where we are today relative to where we have been. Given this current path you can anticipate where you will be in the future. • Strategic planning defines the goal of where you want to be and determines the path to get you there. It answers how you close the gap. 17
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The Gap Concept • The gap can be determined once objectives have been set in terms of desired future states. • Since the gap has to be closed in order to achieve the objective, or the future desired state of the company. • The closing of the gap could be defined as the company objective. • This is not quite consistent with the definition of an objective, since the closing of the gap is a means to an end, not the end itself. • It may turn out that identification of the gap results in a modification of the company objective • because it transpires that the gap cannot be closed; • there is continual feedback between objective setting and gap analysis. 18
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The Gap Concept • The problem facing planners is to make projections of total company performance; this can be complicated, and is typically carried out by using the scenario approach. • A scenario comprises a series of ‘what if’ projections, and should not be confused with a forecast. • For example, if the desired future state involved achieving a 3 per cent higher market share in two years, • a scenario could be investigated whereby marketing expenditure would be increased by 30 per cent during the next two years. The resulting scenario would include the impact on: • cash flow, • the likely effect on market share, • the reaction of competitors, • and the identification of what additional measures might be required, such as a price reduction and increased productive capacity. 19
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The Gap Concept • A scenario is actually a carefully argued narrative about a particular way in which the future might take shape. • It is therefore a story about what could happen if particular assumptions hold true. • It is not an attempt to say what will happen. • Instead, the idea is to: • compare the scenario’s implications with the implications of rival scenarios • and then examine the costs of being prepared to cope with these possible futures. • The approach is usually associated with Shell International Petroleum Company…1973 oil price. 20
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