Topic 3 Management by objectives

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D

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G

S

Stakeholder

theory

Ethics

Governance

CSR

Introduction to strategy

Vision/Mission

Management By Objectives

Expectation and Power

External Analysis

Strategic Analysis

Internal Analysis

PESTEL Industry CompetitorGeneric

Strategy

Value

Chain

Financial

Analysis

Portfolio AnalysisScale and

experience

Position Audit/Situational Analysis

Strengths

ThreatsOpportunities

Weaknesses Critical

Success

Factors

Balanced

Scorecard

The Resource

Based View of

Strategy

D

I

S

C

U

S

S

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Management by objectives(MBO)

Learning outcomes

After completing this topic you should be able to;

• Explain what is meant by Management by Objectives

• Understand how objective setting aids strategy development

• Know the key types of Objectives required and give examples of each type

• Know the benefits and limitations of Management by Objectives (MBO)

Management by objectives

“Objectives are the instrument panel by which to pilot the business enterprise. Without

them management flies by the seat if its pants” Peter Drucker

“You cannot manage what you cannot measure… And what gets measured gets done”

Bill Hewlett Chairman Hewlett Packard.

Master list of objectives

Economic

Financial Strategic Non - economic

Proximate Long term Flexible

Individual

Non economic

Institutional

constraints

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Management by objectivesSetting objectives converts the strategic vision to

performance targets.

“ companies whose managers set objectives for each key

result area and then press forward with actions aimed directly

at achieving these performance outcomes typically out

perform companies whose management exhibit good

intentions, try hard, and hope for the best.”

“If you want ho hum results have ho-hum objectives”Jack Welch GEC

Characteristics of objectives

1. Hierarchical - from the top down.

2. Consistent - groups of objectives internally

consistent.

3. Realistic - essential to motivate.

4. Quantitative - basis for performance

measurement.

5. Time frame - targets to be achieved within a

given time.

SMART

Specific

Measurable

Attainable

Realistic -results oriented

Time- bounded

Establishing Objectives

• Represent commitment to achieve specific performance targets by a certain time

• Should be stated in quantifiableterms and contain a deadline for achievement

• Spell-out how much of what kind of performance by when

Purpose of Objective-Setting

• Substitutes results-oriented

decision-making for aimlessness

over what to accomplish

• Provides a set of

benchmarks for judging

organizational performance

Two Types of Objectives Are Required

Outcomes that improve a firm’s financial performance

Outcomes that strengthen a firm’s competitiveness and long-term market position

Financial Objectives Strategic Objectives

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ABC

Ltd

2015

ABC Ltd 2020• Increase market share to 40%

• Have 30% of sales from new

products

• Have implemented CRM system in

all stores

Environment

Resources

The purpose of strategy is to enhance the long term profitability of an organisation.

Profit €15m

Profit €35m

Profit €18m

2017 2019

Profit €28m

Examples: Financial Objectives• Achieve revenue growth of 10% per year

• Increase earnings by 15% annually

• Increase dividends per share by 5% per year

• Increase net profit margins from 2% to 4%

• Attractive EVA performance

• Stronger bond and credit ratings

• A rising stock price (outperform the S&P 500)

• Attractive increases in MVA

• Recognition as a “blue chip” company

• A more diversified revenue base

Examples: Strategic Objectives• A bigger market share

• Quicker design-to-market times than rivals

• Higher product quality than rivals

• Lower costs relative to key competitors

• Broader product line than rivals

• Better e-commerce and Internet sales capabilities than rivals

• Better customer service than rivals

• Recognition as a leader in technology

• Wider geographic coverage than rivals

Examples: Corporate Objectives

Citigroup (strategic objective)

To attain one billion customers worldwide.

McDonald’s (strategic objective)

To achieve 100 percent total customer satisfaction . .

. everyday . . . in every restaurant . . . for every

customer.

Example: Corporate Objectives

• Become the most competitive enterprise in the world.

• Be number one or number two in each business we are in.

• Globalize every activity in the company.

• Embrace the Internet and become a global e-business.

General Electric (strategic objectives)

Example: Corporate Objectives

Self-funding revenue growth of 15% annually.

An average return on assets of 13% to 15%.

An average return on shareholders’ equity investment of

16% to 18%.

A strong balance sheet.

Motorola (financial objectives)

Strategic or Financial Objectives --Which Take Precedence?

• Pressures for better short-term financial performance become pronounced when– Firm is struggling financially

– Resource commitments for new strategic initiatives may hurt bottom-line for several years

– Proposed strategic moves are risky

• Otherwise strategic objectives merit top priority—a firm that consistently passes up opportunities to strengthen its long-term competitive position – Risks diluting its competitiveness

– Risks losing momentum in its markets

– Hurts its ability to fend off rivals’ challenges

Objectives Are Needed at All Levels

Objective-setting process is top-down, not bottom-up!

1. First, establish organization-wide objectives and performance targets

2. Next, set business and product line objectives

3. Then, establish functional and departmental objectives

4. Individual objectives are established last

Levels of Strategy

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Benefits of objectives

1. Provide people with sense of their role in the organisation.

2. Provide for consistency in decision making.3. Provide a basis for specific planning.4. Stimulate and motivate staff- improves

commitment.5. Managerial effort concentrated on most

important tasks.6. Basis for measurement of results and

corrective action.7. Facilitates staff appraisal -

performance / reward criteria.8. Organisational development programme

facilitated.9. Clarity of objective definition improves

effectiveness of managers10. MBO MBE cycle at all levels.

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Disadvantages of MBO

1. It takes time for the benefits of MBO to occur

2. The target are short-term, implying losing sight of long term implications.

3. Communication at all levels requires considerable effort.

4. Adequate staff consultation is necessary and introducing MBO may not be

rapid and simple as suggested by the textbooks.

5. Managers may be slow to modify their short term objectives, even though

these are no longer appropriate.

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Management by objectives works if you know the objectives. Ninety per cent of the time you don’t”

Drucker

How will this be helpful for your exam?

• In Q1 you can determine if the firm in question has clear Financial and Strategic objectives – if they do not it is an opportunity for you to specify what those objectives should be and how to achieve them!

• Understand how objective setting aids strategy development

• If you are able to set realistic objectives and put strategies in place to deliver the desired outcomes you will score well in your exam.

• This is a key requirement and recurring of Q1 on your exam paper.

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