Unit 7.

Planning and Goal Setting

7.1 Levels of Goals and Plans

7.2 Management by Objectives
7.3 Strategic Management
a) SWOT Analysis
b) Boston Consulting Group matrix
c) Porter`s Five Competitive Forces

7.1 Levels of Goals and Plans

Of the four management functions—planning, organizing, leading, and controlling—

planning is considered the most fundamental. Everything else stems from planning. Yet planning
is also the most controversial management function. The economic, political, and social turmoil
of recent years has sparked a renewed interest in organizational planning, particularly planning
for crises and unexpected events, yet it also has some managers questioning whether planning is
even worthwhile in a world that is in constant flux. Planning cannot read an uncertain future.
Planning cannot tame a turbulent environment. No plan can be perfect, but without plans and
goals, organizations and employees flounder. However, good managers understand that plans
should grow and change to meet shifting conditions.
A goal is a desired future circumstance or condition that the organization attempts to
realize. Goals are important because organizations exist for a purpose, and goals define and state
that purpose. A plan is a blueprint for goal achievement and specifies the necessary resource
allocations, schedules, tasks, and other actions. Goals specify future ends; plans specify today’s
means. The concept of planning usually incorporates both ideas; it means determining the
organization’s goals and defining the means for achieving them.
Exhibit 1 illustrates the levels of goals and plans in an organization. The planning process
starts with a formal mission that defines the basic purpose of the organization, especially for
external audiences. The mission is the basis for the strategic (company) level of goals and plans,
which in turn shapes the tactical (divisional) level and the operational (departmental) level. That
is, a broad higher-level mission, such as “Improve the lives of families by providing consumer-
preferred paper products for kitchen and bathroom,” provides the framework for establishing
more specific goals for top managers, such as “improve company profits by 5 percent next year.”
This might translate into “increase sales by 10 percent next year” for the manager of the
Northwest sales division,” and an individual salesperson might have a goal of calling on 10
percent more customers. Top managers are typically responsible for establishing strategic goals
and plans that reflect a commitment to both organizational efficiency and effectiveness. Tactical
goals and plans are the responsibility of middle managers, such as the heads of major divisions
or functional units. A division manager will formulate tactical plans that focus on the major
actions that the division must take to fulfill its part in the strategic plan set by top management.
Operational plans identify the specific procedures or processes needed at lower levels of the
organization, such as individual departments and employees. Frontline managers and supervisors
develop operational plans that focus on specific tasks and processes and that help meet tactical
and strategic goals. Planning at each level supports the other levels.

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 Exhibit 1. Levels of Goals and Plans

Organizational Mission
At the top of the goal hierarchy is the mission—the organization’s reason for existence.
The mission describes the organization’s values, aspirations, and reason for being. A well-
defined mission is the basis for development of all subsequent goals and plans. Without a clear
mission, goals and plans may be developed haphazardly and not take the organization in the
direction it needs to go. One of the defining attributes of successful companies is that they have a
clear mission that guides decisions and actions
The content of a mission statement often describes the company’s basic business
activities and purpose, as well as the values that guide the company. Some mission statements
also describe company characteristics such as desired markets and customers, product quality,
location of facilities, and attitude toward employees. An example of a short, straightforward
mission statement comes from State Farm Insurance:
State Farm’s mission is to help people manage the risks of everyday life, recover from the
unexpected, and realize their dreams. We are people who make it our business to be like a good
neighbor; who built a premier company by selling and keeping promises through our marketing
partnership; who bring diverse talents and experiences to our work of serving the State Farm
customer. Our success is built on a foundation of shared values—quality service and
relationships, mutual trust, integrity, and financial strength.
Our vision for the future is to be the customer’s first and best choice in the products and
services we provide. We will continue to be the leader in the insurance industry and we will
become a leader in the financial services arena. Our customers’ needs will determine our path.
Our values will guide us.
Because of mission statements such as that of State Farm, employees as well as
customers, suppliers, and stockholders know the company’s stated purpose and values.

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 Goals and Plans
Strategic goals, sometimes called official goals, are broad statements describing where
the
organization wants to be in the future. These goals pertain to the organization as a whole rather
than to specific divisions or departments. Samsung, for example, set a new strategic goal to
become a “quality-based” company rather than a “quantity-based” company. The shift in
strategic direction, with its focus on creativity and innovation rather than making inexpensive
knock-off products, has led to amazing results. Samsung is now a leader in the electronics
industry, including threatening Apple in the smartphone market.
Strategic plans define the action steps by which the company intends to attain strategic
goals. The strategic plan is the blueprint that defines the organizational activities and resource
allocations—in the form of cash, personnel, space, and facilities—required for meeting these
targets. Strategic planning tends to be long-term and may define organizational action steps from
two to five years in the future. The purpose of strategic plans is to turn organizational goals into
realities within that time period.
After strategic goals are formulated, the next step is to define tactical goals, which are the
results that major divisions and departments within the organization intend to achieve. These
goals apply to middle management and describe what major subunits must do for the
organization to achieve its overall goals.
Tactical plans are designed to help execute the major strategic plans and to accomplish a
specific part of the company’s strategy. Tactical plans typically have a shorter time horizon than
strategic plans—that is, over the next year or so. The word tactical originally comes from the
military. In a business or nonprofit organization, tactical plans define what major departments
and organizational subunits will do to implement the organization’s strategic plan. Tactical goals
and plans help top managers implement their overall strategic plan. Normally, it is the middle
manager’s job to take the broad strategic plan and identify specific tactical plans.
The results expected from departments, work groups, and individuals are the operational
goals. They are precise and measurable. In the human resources department, an operational goal
might be to keep turnover of product development personnel to less than 5 percent a year so that
there are longtime employees who have close relationships with suppliers who contribute ideas
for new products.
Operational plans are developed at the lower levels of the organization to specify action
steps toward achieving operational goals and to support tactical plans. The operational plan is the
department manager’s tool for daily and weekly operations. Goals are stated in quantitative
terms, and the department plan describes how goals will be achieved. Operational planning
specifies plans for department managers, supervisors, and individual employees. Schedules are
an important component of operational planning. Schedules define precise time frames for the
completion of each operational goal required for the organization’s tactical and strategic goals.
Operational planning also must be coordinated with the budget because resources must be
allocated for desired activities.
Research has identified certain factors, shown in Exhibit 2, that characterize effective
goals. First and foremost, goals need to be specific and measurable. When possible, operational
goals should be expressed in quantitative terms, such as increasing profits by 2 percent, having
zero incomplete sales order forms, or increasing average teacher effectiveness ratings from 3.5 to
3.7. Not all goals can be expressed in numerical terms, but vague goals have little motivating
power for employees. By necessity, goals are qualitative as well as quantitative. The important
point is that the goals be precisely defined and allow for measurable progress. Effective goals
also have a defined time period that specifies the date on which goal attainment will be
measured. When a goal involves a two- to three-year time horizon, setting specific dates for
achieving parts of it is a good way to keep people on track toward the goal.

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 Exhibit 2. Characteristics of Effective Goals

The measurements are sometimes referred to as key performance indicators. Key

performance indicators (KPIs) assess what is important to the organization and how well the
organization is progressing toward attaining its strategic goal, so that managers can establish
lower-level goals that drive performance toward the overall strategic objective. Managers should
set goals that are challenging but realistic. When goals are unrealistic, they set employees up for
failure and lead to a decrease in employee morale. However, if goals are too easy, employees
may not feel motivated. Goals should also be linked to rewards. The ultimate impact of goals
depends on the extent to which salary increases, promotions, and awards are based on goal
achievement. Employees pay attention to what gets noticed and rewarded in the organization.

7.2 Management-by-Objectives (MBO )

Described by famed management scholar Peter Drucker in his 1954 book, The Practice
of
Management, management-by-objectives has remained a popular and compelling method for
defining goals and monitoring progress toward achieving them. Management-by-objectives
(MBO) is a system whereby managers and employees define goals for every department, project,
and person and use them to monitor subsequent performance. A model of the essential steps of
the MBO system is presented in Exhibit 3. Four major activities make MBO successful:
1. Set goals. Setting goals involves employees at all levels and looks beyond day-today activities
to answer the question, “What are we trying to accomplish?” Managers heed the criteria of
effective goals described in the previous section and make sure to assign responsibility for goal
accomplishment. However, goals should be derived jointly. Mutual agreement between
employee and supervisor creates the strongest commitment to achieving goals. In the case of
teams, all team members may participate in setting goals.
2. Develop action plans. An action plan defines the course of action needed to achieve the stated
goals. Action plans are made for both individuals and departments.
3. Review progress. A periodic progress review is important to ensure that action plans are
working. KPIs often provide the data for the review. These reviews can occur informally
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between managers and subordinates, where the organization may wish to conduct three-, six-, or
nine-month reviews during the year. This periodic checkup allows managers and employees to
see whether they are on target or whether corrective action is needed. Managers and employees
should not be locked into predefined behavior and must be willing to take whatever steps are
necessary to produce meaningful results. The point of MBO is to achieve goals. The action plan
can be changed whenever goals are not being met.
4. Appraise overall performance. The final step in MBO is to evaluate whether annual goals
have been achieved for both individuals and departments. Success or failure to achieve goals can
become part of the performance appraisal system and the designation of salary increases and
other rewards. The appraisal of departmental and overall corporate performance shapes goals for
the next year. The MBO cycle repeats itself annually.

Exhibit 3. Model of the MBO Process

Benefits and Limitations of Planning

Some managers believe that planning ahead is necessary to accomplish anything, whereas
others think that planning limits personal and organizational performance. Both opinions have
merit because planning can have both advantages and disadvantages. Research indicates that
planning generally positively affects a company’s performance. Here are some reasons why:
●● Goals and plans provide a source of motivation and commitment. Planning can reduce
uncertainty for employees and clarify what they should accomplish. The lack of a clear goal
hampers motivation because people don’t understand what they’re working toward.
●● Goals and plans guide resource allocation. Planning helps managers decide where they need
to allocate resources, such as employees, money, and equipment.
●● Goals and plans are a guide to action. Planning focuses attention on specific targets and
directs employee efforts toward important outcomes. It helps managers and other employees
know what actions they need to take to achieve goals.
●● Goals and plans set a standard of performance. Because planning and goal setting define
desired outcomes, they also establish performance criteria so that managers can measure whether
things are on- or off-track. Goals and plans provide a standard of assessment.
Despite these benefits, some researchers also think planning can hurt organizational
performance in some ways. Thus, managers should understand the limitations to planning,
particularly when the organization is operating in a turbulent environment:
●● Goals and plans can create a false sense of certainty. Having a plan can give managers a
false sense that they know what the future will be like. However, all planning is based on
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assumptions, and managers can’t know what the future holds for their industry or for their
competitors, suppliers, and customers.
●● Goals and plans may cause rigidity in a turbulent environment. A related problem is that
planning can lock the organization into specific goals, plans, and time frames, which may no
longer be appropriate. Managing under conditions of change and uncertainty requires a degree of
flexibility. Managers who believe in “staying the course” will often stick with a faulty plan even
when conditions change dramatically.
● Goals and plans can get in the way of intuition and creativity. Success often comes from
creativity and intuition, which can be hampered by too much routine planning. For example,
during the process of setting goals in the MBO process described previously, employees might
play it safe to achieve objectives rather than offer creative ideas. Similarly, managers sometimes
squelch creative ideas from employees that do not fit with predetermined action plans.

7.3 Strategic Management

Strategic management refers to the set of decisions and actions used to formulate and
execute strategies that will provide a competitively superior fit between the organization and its
environment so as to achieve organizational goals.
The first step in strategic management is to define an explicit strategy, which is the plan
of action that describes resource allocation and activities for dealing with the environment,
achieving a competitive advantage, and attaining the organization’s goals. Competitive
advantage refers to what sets the organization apart from others and provides it with a distinctive
edge for meeting customer or client needs in the marketplace. The essence of formulating
strategy is choosing how the organization will be different. Managers make decisions about
whether the company will perform different activities or will execute similar activities
differently than its rivals do.
Strategy formulation includes the planning and decision making that lead to the
establishment of the firm’s goals and the development of a specific strategic plan. Strategy
formulation includes assessing the external environment and internal problems to identify
strategic issues, then integrating the results into goals and strategy. This process is in contrast to
strategy execution, which is the use of managerial and organizational tools to direct resources
toward accomplishing strategic results. Strategy execution is the administration and
implementation of the strategic plan. Managers may use persuasion, new equipment, changes in
organization structure, or a revised reward system to ensure that employees and resources are
used to make a formulated strategy a reality.

SWOT Analysis
Formulating strategy begins with understanding the circumstances, forces, events, and
issues that shape the organization’s competitive situation, which requires that managers conduct
an audit of both internal and external factors that influence the company’s ability to compete.
SWOT analysis (in which “SWOT” stands for “strengths, weaknesses, opportunities, and
threats”) includes a careful assessment of the strengths, weaknesses, opportunities, and threats
that affect organizational performance.

Internal Strengths and Weaknesses

Strengths are positive internal characteristics that the organization can exploit to achieve
its strategic performance goals. One strength for interactive video game publisher, for example,
is a highly creative staff that consistently produces innovative and powerful video game
franchises. Weaknesses are internal characteristics that might inhibit or restrict the organization’s
performance. Managers perform an internal audit of specific functions, such as marketing,
finance, production, and R&D. Internal analysis also assesses overall organization structure,
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management competence and quality, and human resource (HR) characteristics. Based on their
understanding of these areas, managers can determine their strengths or weaknesses compared
with other companies.

External Opportunities and Threats

Threats are characteristics of the external environment that may prevent the organization
from achieving its strategic goals. Opportunities are characteristics of the external environment
that have the potential to help the organization achieve or exceed its strategic goals.
The task environment sectors are the most relevant to strategic behavior and include the
behavior of competitors, customers, suppliers, and the labor supply. The general environment
contains those sectors that have an indirect influence on the organization but nevertheless must
be understood and incorporated into strategic behavior. The general environment includes
technological developments, the economy, legal-political and international events, the natural
environment, and sociocultural changes. Additional areas that might reveal opportunities or
threats include pressure groups, such as those opposing Walmart’s expansion into urban areas,
interest groups, creditors, and potentially competitive industries.

The BCG Matrix

One coherent way to think about portfolio strategy is the BCG matrix. The BCG matrix
(named for the Boston Consulting Group, which developed it) is illustrated in Exhibit 4. The
BCG matrix organizes businesses along two dimensions—business growth rate and market
share. Business growth rate pertains to how rapidly the entire industry is increasing. Market
share defines whether a business unit has a larger or smaller share than competitors. The
combinations of high and low market share and high and low business growth provide four
categories for a corporate portfolio.

Exhibit 4. The BCG Matrix

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 The star has a large market share in a rapidly growing industry. It is important because it
has additional growth potential, and profits should be plowed into this business as investment for
future growth and profits. The star is visible and attractive and will generate profits and a
positive cash flow even as the industry matures and market growth slows.
The cash cow exists in a mature, slow-growth industry but is a dominant business in the
industry, with a large market share. Because heavy investments in advertising and plant
expansion are no longer required, the corporation earns a positive cash flow. It can milk the cash
cow to invest in other, riskier businesses.
The question mark exists in a new, rapidly growing industry, but has only a small market
share. The question mark business is risky: It could become a star, or it could fail. The
corporation can invest the cash earned from cash cows in question marks with the goal of
nurturing them into future stars.
The dog is a poor performer. It has only a small share of a slow-growth market. The dog
provides little profit for the corporation and may be targeted for divestment or liquidation if
turnaround is not possible.
The circles in Exhibit 4 represent the business portfolio for a hypothetical corporation.
Circle size represents the relative size of each business in the company’s portfolio. Most large
organizations, such as IBM, have businesses in more than one quadrant, thereby representing
different market shares and growth rates.

Diversification Strategy
The strategy of moving into new lines of business, as Google did by purchasing
YouTube, is called diversification. The purpose of diversification is to expand the firm’s
business operations to produce new kinds of valuable products and services. When the new
business is related to the company’s existing business activities, the organization is
implementing a strategy of related diversification.
Unrelated diversification occurs when an organization expands into a totally new line of
business, such as General Electric (GE) entering the media industry. With unrelated
diversification, the company’s lines of business aren’t logically associated with one another;
therefore, it can be difficult to make the strategy successful. Most companies are giving up on
unrelated diversification strategies, selling off unrelated businesses to focus on core areas.
A firm’s managers may also pursue diversification opportunities to create value through a
strategy of vertical integration. Vertical integration means that the company expands into
businesses that either produce the supplies needed to make products and services or that
distribute and sell those products and services to customers. In recent years, there has been a
noticeable shift toward vertical integration, with large corporations getting into businesses that
will give them more control over materials, manufacturing, and distribution.

Porter’s Five Competitive Forces

Exhibit 5 illustrates the competitive forces that exist in a company’s environment. These
five forces help determine a company’s position vis-а-vis competitors in the industry
environment. Although such a model might be used on a corporate level, most large companies
have separate business lines and do an industry analysis for each line of business or SBU
(strategic business units). Porter regarded understanding both the competitive forces and the
overall industry structure as crucial for effective strategic decision-making. In Porter's model, the
five forces that shape industry competition are:
1. Competitive rivalry
This force examines how intense the competition currently is in the marketplace, which is
determined by the number of existing competitors and what each is capable of doing. Rivalry
competition is high when there are just a few businesses equally selling a product or service,
when the industry is growing and when consumers can easily switch to a competitor's offering
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for little cost. When rivalry competition is high, advertising and price wars can ensue, which can
hurt a business's bottom line.
2. Bargaining power of suppliers
This force analyzes how much power a business's supplier has and how much control it
has over the potential to raise its prices, which, in turn, would lower a business's profitability. In
addition, it looks at the number of suppliers available: The fewer there are, the more power they
have. Businesses are in a better position when there are a multitude of suppliers.
3. Bargaining power of customers
This force looks at the power of the consumer to affect pricing and quality. Consumers
have power when there aren't many of them, but lots of sellers, as well as when it is easy to
switch from one business's products or services to another. Buying power is low when
consumers purchase products in small amounts and the seller's product is very different from any
of its competitors.
4. Threat of new entrants
This force examines how easy or difficult it is for competitors to join the marketplace in
the industry being examined. The easier it is for a competitor to join the marketplace, the greater
the risk of a business's market share being depleted. Barriers to entry include absolute cost
advantages, access to inputs, economies of scale and well-recognized brands.
5. Threat of substitute products or services
This force studies how easy it is for consumers to switch from a business's product or
service to that of a competitor. It looks at how many competitors there are, how their prices and
quality compare to the business being examined and how much of a profit those competitors are
earning, which would determine if they can lower their costs even more. The threat of substitutes
are informed by switching costs, both immediate and long-term, as well as a buyer's inclination
to change.
To find a competitive edge within the specific business environment, Porter suggests that
a company can adopt one of three strategies: differentiation, cost leadership, or focus.
Cost leadership - Your goal is to increase profits by reducing costs while charging
industry-standard prices, or to increase market share by reducing the sales price while retaining
profits.
Differentiation - To implement this strategy, make the company's products significantly
different from the competition, improving their competitiveness and value to the public. It
requires both good research and development and effective sales and marketing teams.
Focus - A successful implementation means the company selects niche markets in which
to sell their goods. It requires intense understanding of the marketplace, its sellers, buyers and
competitors.
Managers should think carefully about which strategy will provide their company with a
competitive advantage. In his studies, Porter found that some businesses did not consciously
adopt one of these three strategies and were stuck with no strategic advantage. Without a
strategic advantage, businesses earned below-average profits compared with those that used
differentiation, cost leadership, or focus strategies.

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Exhibit 5. Porter`s Five Forces

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