As indicated earlier, the four elements of the formal planning process involve setting objectives, charting a course of action to meet the objectives, allocating resources to carry out the planned activ-ities, and implementing the activities (see again Figure 5.1). Each of these steps is discussed in turn.
Setting Objectives
Objectives are the performance targets set during the planning cycle. Objectives provide the answer to the question: What are we trying to accomplish? Inappropriate or poorly defined objectives invalidate the rest of the planning process since there is no clear guide for organiza-tional efforts.
Objectives are set at every level in an organization. The goals established at higher levels direct and constrain the objectives set at lower levels. In general, objectives are more general at the top and become more specific at lower organizational levels. Some people refer to this as a cascading of objectives. DuPont stated an overall corporate objective in which one-third of sales would come from products introduced in the last five years (up from 24 percent during the past decade). To achieve this goal, DuPont’s finance department set as its objective to increase the research and development (R&D) budget by 10 percent and to devote 65 percent of this budget to new product development (up from 33 percent in recent years). The objective of DuPont’s 75 R&D centers distributed across 12 countries, was to identify 75 projects (an average of one per center) to launch new products that have the highest revenue potential. For one particular team, called the Suprel Group, the objective became much more specific: to develop a lightweight and puncture-resistant fabric to be used in gowns for surgeons and nurses.16In other words, DuPont’s product introduction goal that began at the top of the organizational pyramid filtered down to lower echelons, where they became more specific. The goals at each level should support the goals established at the next higher level.
The overall objectives of the organization reflect its mission, which is a statement of the organization’s reason to exist (more on this in Chapter 7 regarding strategic management).
DuPont’s objectives were consistent with the mission of being “a science company, delivering science-based solutions in markets such as food and nutrition, health care, apparel, home and construction, electronics, and transportation.”17
Specific and measurable objectives motivate behavior more than general and ambiguous ones. It is important to give employees a clear sense of direction. Unambiguous objectives allow managers to determine whether key outcomes are being reached and to take corrective action if they are not. By knowing exactly where the firm is trying to go, managers and employees can focus on the most important activities, thereby concentrating on achieving the best results.
Worthwhile objectives include:
䊏 Profitability targets, such as return on investment, return on assets, and earnings per share.
䊏 Quality goals such as percentage of rejects, customer complaints relative to number of orders, or quality certification standards.
䊏 Marketing objectives, such as market growth, market share, and international sales.
䊏 Innovation outcomes, such as number of patents, percentage of sales attributed to new products, and return on R&D investments.
Further, managers should make sure that objectives are challenging and will “stretch“
employees to work harder to use their full potential. Difficult goals must be achievable; other-wise employees will not believe that their efforts will lead to success.
Objectives should specify a timetable or deadline. This can serve to motivate individuals. A timetable can cause individuals to organize tasks, prompting them to monitor work to ensure that completion is on time. It also helps management evaluate individuals or units on the extent to which work was done in a timely fashion.
Finally, managers and employees are more likely to devote time and effort to the accom-plishment of objectives that they perceive as more critical and whose achievement is associated with greater prestige, rewards, and future career opportunities. Deciding which objectives should have highest priority is an integral part of the planning process.
When firms have multiple objectives, scarce resources preclude pursuing them all with the same zeal. Frequently, desired objectives may work at cross purposes. For example,
䊏 Managers may increase short-term profits by cutting back on capital expenditures, reduc-ing R&D investments, and layreduc-ing off employees. This may decrease future profits because of lost technological superiority, the introduction of fewer products into the market, and less employee commitment.
䊏 A firm may reduce its overall level of risk by diversifying into different market areas so that downturns in one market segment may be counterbalanced by upturns in other seg-ments. However, the overall profitability of the firm is likely to be lower, because it loses the competitive advantage of applying a core set of knowledge and skills to a focused prod-uct niche. For example, in the mid-1990s, Altavista began as an Internet search engine. By the late 1990s the company had decided to diversify its scope and to explore new market
segments. Company executives invested $100 million to build the site into a multifaceted portal along the lines of Yahoo!. In the 2000s Altavista realized that expanding beyond its core knowledge had been a mistake and decided to return to its original mission.18
䊏 A firm may pursue rapid growth to expand market share overseas, but company profits may suffer because it has to contend with diverse cultural milieus, is exposed to currency fluctu-ations, and is required to develop a management structure to deal with the complexities of a global operation (see Chapter 2).
䊏 A firm may reduce costs by moving its manufacturing operations to a developing country where environmental regulations are lax. This would conflict with corporate social respon-sibility objectives.
As discussed in Chapter 3, a firm has many stakeholders, including employees, sharehold-ers, consumsharehold-ers, and regulatory bodies. Each group may have different objectives. The plan-ning process should identify the wishes of each of these groups and develop objectives that are clear, achievable, measurable, and prioritized so that they contribute to overall organizational performance.
One planning technique that is widely used in the United States and abroad is Management by Objectives (MBO). MBO is a program in which objectives are mutually set between the employee and supervisor. The employee is held accountable for the accomplishment of those objectives at various intervals which are normally part of an annual performance appraisal. MBO programs are popular because they combine planning (through participatively set objectives) and control (employees are responsible for the attainment of measurable goals).
Figure 5.3 shows the key steps of a typical annual MBO cycle. In step 1, objectives are agreed to between the superior and subordinate, and put in writing. Objectives such as company-wide profitability targets are first established at the top of the organizational pyramid. These more general objectives then filter down through successively lower layers. For instance, overall profitability targets are broken down into objectives for divisions and product lines. While nor-mally these objectives are established annually, it is possible to use a longer or shorter time hori-zon. In step 2, managers at each level develop action plans to accomplish the objectives set for them by their immediate superiors in step 1. As the plans are implemented in step 3, there are fre-quent checkups to ensure that things are on track and make any necessary adjustments. In step 4 (which normally takes place a year after objectives were set in step 1), the pairs of superior and subordinate who established the mutually agreed-upon objectives in step 1 meet to discuss the extent to which objectives were met. This feedback is normally put in writing in a formal docu-ment called the performance appraisal form. In the words of a human resource planning consult-ant, “Many managers struggle with feedback precisely because of a lack of planning. Without front-end planning, feedback has no context...the outcome of effective feedback is clarity—clar-ity regarding the performer’s recent performance against previously agreed-upon criteria”.19
Establish Mutually Agreed Objectives between Employee and Supervisor
Formally Evaluate Extent to Which Objectives Were
Met or Exceeded
Monitor Progress toward Achievement of Objectives (Ongoing) Develop Action Plan
to Accomplish Objectives
2 1
3 4
FIGURE 5.3
Key Steps of the Typical Management by
Objectives Cycle