How to set organizational goals and objectives
While many times managers believe that it is easy to set organizational goals and objectives, it is easier said than done. Goals and objectives are not as easy to set as they look. Often there is a lot of confusion surrounding the setting of goals and objectives. Many times the managers do not know what to cover as a part of the organizational goals and objectives. Moreover, several times they make the mistake of setting too many goals and objectives in the hope that they will be able to cover all the bases. What happens in various cases that organizations either have too many goals and objectives or managers end up setting conflicting goals and objectives making the situation complex for themselves. If organizations have too many goals, measuring and monitoring performance becomes too difficult.
According to Kathleen Eisenhardt, Management Professor at Stanford University - There must be a certain balance to the numbers and types of goals and objectives. While having too many goals and objectives can be paralyzing for organizational performance, having too few of them can be confusing. Mark Graham Brown has also listed several important factors that can help managers at taking a different approach to setting and managing goals and objectives or what can be more broadly called the organization’s measurement system.
Following are the eight characteristics of appropriate goals and objectives:
Less is more.
In terms of setting organizational goals and objectives, less is more or fewer is better. It is better for managers to keep things as simple as possible when setting organizational goals and objectives. Eisenhardt suggests that organizations should have between only two and seven key goals. Having more or less can be paralyzing or confusing. These goals do not just guide the operations of the firm but also help at identifying the opportunities to pursue, setting priorities, managing the timing of actions as well as informing business exit decisions.
Now, the question that arises is that if organizations have only two to seven goals, then what about the objectives. Metric Guru Graham Brown suggests using no more than 20 measures of performance when measuring performance on objectives. When managers use two to seven goals only and no more than 20 measures of performance, they will most likely have objectives whose number will be somewhere between the number of goals and that of the measures of performance. There is a valid reason behind applying this limit. According to Graham Brown, managers cannot monitor and control more than 20 variables on a regular basis.
Tie Measures to Drivers of Success.
One litmus test of appropriate goals and objectives as well as measures that managers can use when setting them is to find out if they are in some way linked to the key factors driving the organization’s success or competitive advantage. It means that the path from the goals, objectives, and measures to the organizational strategy and mission must be clear and straightforward which also means that the application of the goals and objectives should not be complex for managers or the organization.
It is an important characteristic of effective goals, objectives, and measures, and one of the leading reasons that several managers use some form of balanced scorecard in their business. Using a balanced scorecard, managers can have a framework that they can use to evaluate the overall measurement system in terms of the strategic objectives that they contribute to. However, verifying and validating the link between the measures and success factors is the biggest challenge before the business managers. It is why managers must thoroughly search for the fundamental factors that drive the success of their business unit. If they do not do so, potential problems might arise. Such managers often end up measuring too many things in an attempt to fill every measurement gap that they can discover.
Don’t Just Measure the Past.
Measuring the past may be important for so many reasons. The stakeholders including customers, investors as well as suppliers, and regulators make key decisions regarding a firm keeping in mind the past performance and how successful the company has lived to its obligations in the past. You cannot just rely solely on the rearview mirror when driving forward. Robert Kaplan, the co-creator of Balanced Scorecard has echoed this observation in his book. The best systems instead track the past, present, and future. The goals, objectives, and measurements together act as a dashboard like a dashboard in your car tells you that the car is running and you can see through the windshield you can see where you are going. For example, if you are watching the economic indicators, they will tell you how well your business will perform in terms of sales. Another similar important indicator is customer satisfaction. For example, how satisfied your existing customers are with your business will determine how much positive word of mouth you can gain. Many online businesses run surveys to know if their existing customers are satisfied with their products and services and if they are willing to refer others to the business. When the level of customer satisfaction is higher customers become advocates for the business. This measure is commonly used by both physical and online businesses. It helps them forecast future demand for the entire business as well as individual business units.
Take Stakeholders into Account
The satisfaction of stakeholders is also highly important when you are trying to form goals, objectives, and measurements. It is because you are trying to track the goals and objectives that are most relevant to the needs of the business. When you are trying to understand the needs of the business, you cannot keep the key stakeholders including internal and external stakeholders aside. It is why the business managers should consider it important to analyze the stakeholders so that stakeholder satisfaction can be maximized when forming goals and objectives. Generally, it is not -possible for business managers to satisfy all the stakeholders since some of the stakeholder groups can remain dissatisfied despite you doing your best. For example, environmental groups may continue to criticize your moves and your environmental impact but they can still be placated with the use of more transparent reporting. Similarly, there are other stakeholders with social concerns whose concerns regarding your social impact can be satisfied through the use of more transparent reporting on your corporate social responsibility efforts.
Cascade goals into objectives
Managers should take a cascade approach to set goals and objectives. It means goals can cascade into objectives and then objectives can cascade into measures. When you tie goals and objectives to drivers of success, it means that vision, mission and strategy, cascade down to goals, and so on. An important benefit of the cascade method is that strategy, vision and mission are consistent with the goals and objectives. Moreover, there is a second benefit of the cascade approach which is that the goals and objectives at the lower levels of the organization are more likely to be vertically and horizontally consistent since they have to be designed in a manner to achieve the higher-level goals and objectives and finally the overarching organizational strategy.
Business managers need to focus on a few things rather than on several things since focusing on many things at once will lead to failure. All managers face the challenge of information overload where too much information from too many sources hinders the decision-making process. It is why managers must try simplification. Simplification means the use of fewer metrics, goals, and objectives. It also means that several measures should be distilled into one like an index or a simple coverall question. For example, how likely is a customer is to refer his friends to the business is an effective metric. However, if an organization wants to measure customer satisfaction along several dimensions then it can use a questionnaire of multiple questions. Many times when having completed an online purchase, we are asked to complete surveys measuring customer satisfaction. There are several questions included in those surveys. However, determining which one is the most important question is the most difficult task. A simple average of the customer survey scores, while it offers a simple indicator does not reveal several key indicators that may be hidden under the average score. Therefore, organizations may need to experiment a bit with the various ways of simplifying the measures so as to provide the one that best reflects the achievement of the key objective.
As the circumstances change, businesses need to change their business strategies in order to remain competitive and retain their market position. Apart from a hypercompetitive industry environment, businesses are also dealing with evolving technological trends as well as changing consumer preferences. All these things require businesses to remain abreast of the changing business environment. Moreover, since the goals, objectives, and measures have to be tied directly with the business strategy, they need to change according to the changing business strategy. For example, with time the importance of a certain feature in the market may grow. If fuel prices rise, people tend to focus more on the fuel efficiency of the vehicle. To adapt to the changing market environment and customer needs, auto companies may need to set aggressive objectives for their future models. However, adapting does not mean introducing new measures. If managers are introducing a new measure, they must try to remove another one in order to keep things simpler.
Base objectives on facts
Finally, goals may be quite simple at times as a manager can say that the business must grow its profit by 10%. However, despite the goal being simple, the objectives and metrics that measure them should be quite specific and set on the basis of facts and information. Basing the objectives and metrics on intuition only can bring negative results. A fact-based decision-making process begins with the compilation of data about the specific goal. It is why organizations must invest in information and information gathering capabilities.
For example, when Jack Welch was the CEO of GE, he set out a financial goal for the company to improve its ROA (Return On Assets). ROA is a measure of financial efficiency. One of the underlying determinants of ROA is inventory turn. It means how many times a year can the company sell its stock of inventory. So, if a firm wants to improve its ROA, it will also likely have to improve its inventory turn. One of the business divisions at General electric used to manufacture refrigerators and its inventory-turn was seven times a year. The question before Jack Welch was what objective should he set for the refrigerator division’s inventory turn? Jack Welch did not depend on intuition. Instead, he sent managers to another firm in a different industry to learn about their inventory turn. The managers found out that the other firm was achieving an inventory turn of 12-17 times a year. Once Jack had the information he needed, he set out a fact-based and clear inventory turn objective for the firm. This objective in turn supported the overarching financial goals, he had set for GE. Fact-based objectives can be clearer and more precise with shorter relative time to their achievement. For example, it is easier for a firm to predict the next week’s sales than to predict the next year’s sales. It also implies that the goals and objectives will be relatively more precise when they are fairly current, However, down the road, they will turn out to be less precise.
There is also a challenge associated with fact-based objectives. Many times companies end up finding a market where no customers exist today. For example, before Apple released the iPhone, one could not estimate the market size for the product. In such a case, firms must conduct experiments to learn about market characteristics. The first goals and objectives will be related to learning and growth and the next goals and objectives that will follow will be more precise and fact-based. If firms do not act in this manner they will take action only in the areas where there is an availability of data and facts and this clearly creates a paradox for managers if the future in their industry is shrouded in uncertainty.