Strategic Objectives Setting 101

Categories of Objectives
In addressing strategic planning's second key question, "Where do we wish to arrive, and when?," your management team will develop a set of quantified Objectives. And when developing objectives for your organization, you've got six categories to consider:

1. Financial
2. Marketing/Sales
3. Products/Services
4. Operations
5. Human Resources
6. Community

Within each of these six categories, you can select from a number of specific measurements for each objective. For example, you can set your financial objective to measure profitability. Like gross profit; or operating profit; or net profit, either before or after tax. Or you can write your financial objective in terms of return on assets, return on investment, or cash on hand.

You might write your marketing or sales objective in terms of sales volume, sales growth rate, or market share – and your product and service objective as quality of products and services, new products and services introduced, or customer satisfaction. And your operational objective might measure efficiency, productivity or cost reduction.

Your objective dealing with human resources – the people side of the business – can measure employee benefits, employee satisfaction, employee training or employee turnover. Finally, your social objective – your non-economic or community-related objective – might deal with non-pollution of air and water; equal opportunity employment; being a good corporate citizen.

Prioritizing Your Objectives

The order in which we've listed the categories of objectives is not arbitrary. This order – beginning with financial and ending with community – is referred to as the "Hierarchy of Objectives."

It's the order in which senior managers generally prioritize their objectives. When you arrive at the step in the planning process where you're ready to set your objectives, the first suggestion you'll likely hear is "Let's make a profit." Even the not-for-profit institutions – governmental, educational, charitable – jump to develop their financial objective first. Like their for-profit cousins, they too have financial needs and constraints. And their financial needs are first on the minds of management when setting objectives

And if the financial objective is so important, how can management attain that objective? In the jargon of for-profit firms, "How can we make a buck?"

The way you do it is you sell something to somebody. Simple as that. All businesses must exchange a product or a service for money. And since its selling something that produces a profit, the marketing or sales objective must support the financial objective.

And what is it you're going to sell to somebody? You need a product or service, don't you? So now the product or service objective supports the marketing/sales objective. Just as the marketing/sales objective supports the financial objective. Do you see how we're working our way down the hierarchy?

Operationally, you have to build your product or deliver your service. And it takes people to run the operation. And so you evolve the "Hierarchy."



Balance Your Objectives

Be careful though. Don't take the hierarchy too seriously. Don’t assign too much weight to the categories nearest the top of the list. Avoid ending up with all of your objectives in the top two categories – finance and marketing.

For if you do, you'll have a problem. Here's why. Employees outside of the executive planning group care a whole lot more about the categories in the middle and bottom of the list than they do those near the top. That's simply a fact of life. After you get a level or so down from the top of your organization, you find a lot less interest in the financial and marketing objectives, and a lot more interest in operations and in people. So if your objectives focus on profit and sales only, your employees will wonder, "What's in it for me?" If they ask that question out loud, you've got a problem. If they ask it silently to themselves, you've got an even more serious problem.

And don't forget – to successfully accomplish your objectives, you'll need the help of all the people in your organization. So balance your objective list. Consider including objectives in each of the six categories. Not that you must necessarily have an objective in each category. But at least consider each. Try to develop a balanced list of objectives. So you'll gain the commitment of employees who might otherwise ask, "What's in it for me?"

If you'll benefit from developing more than one objective in a particular category – do it. For example, you may write an objective for total sales; another for sales of a particular product line; or sales to a specific market segment.

Limit Your Objectives

But again, caution. Be careful not to set too many objectives. If you do, you'll lose focus. You won't be able to use your objectives in managing day-to-day. Consider this – If you can't memorize your objectives, you've probably got too many. For the memories of most of us, that's about six.

Some years ago, I worked with a high-tech manufacturing client in Los Angeles. On the second day of that company's planning retreat, the executive management team developed its list of objectives. I opened the objective setting session with a brief discussion on the categories of objectives, spoke for a few moments on the criteria of objectives, and asked for suggestions on the first objective we might consider.

After a lengthy discussion, the group agreed on a financial objective – pre-tax profit. From there, they moved ahead nicely, developed four or five well-quantified, challenging (yet achievable) objectives. So far, so good. But they kept going. There were another three or four suggested objectives still "alive." I stood up and gave my first little "mini-speech" about the hazards of setting too many objectives.

Just the same, the group continued developing objectives. When they completed writing their eighth objective, I delivered my second mini-speech. My third warning came between their tenth and eleventh.

In all, the group set thirteen objectives. About twice the number they should have. Knowing they couldn't possibly focus on all thirteen, I then had the group prioritize their objectives.

And I'm glad I did. Because within six months, the company's managers had abandoned their "C" priority objectives. They were working on all of the "A" and a couple of the "B" objectives. But they had spent nearly six months scrambling in an unfocused attempt to accomplish all thirteen. Efficient use of resources? Hardly.

Keep your objective lists short.

Criteria for Objectives

For an objective to be useful, it has to meet certain criteria. First, it must carry a single theme. It should tell you to do one thing only, not two or more. Example: If you decided to increase sales by 15% next year, you might write an objective that said exactly that.

But let's imagine you'd also like to increase net profit by 1%. Couldn't you write one objective that said "do both." Let's suppose you do. Suppose you write an objective that said, "We will increase sales by 15% next year and, at the same time, improve net profit by 1%." If by the end of the year you achieved the 15% increase in sales but missed the 1% increase in profit, have you made or missed the objective? You could argue it either way. At best, it's ambiguous.

Worse however, is that the objective does not provide you with guidance in operating your business. Here's why ... Imagine that six months after you write your objective calling for 15% increase in sales and 1% increase in net profit, your sales manager comes running in with the "golden opportunity of the month."

"Here's the deal," he says. "We have a grand opportunity to land a really sizable order. And if we get it, this order should be enough to put us over the top – to give us the 15% increase in sales we're shooting for." "Oh yeah," continues your sales manager. "There's some bad news. Since the market is so fiercely competitive, and since our competitors know about this large potential order, we're really going to have to sharpen our pencils to land the order. We'll have to shave our price just as far as we can."

So while the "golden opportunity" will go a long way toward achieving the 15% increase in sales volume, it will actually detract from the 1% increase in profit. Should you go after the big order, or not? Notice that your objective statement hasn't provided you any guidance in this decision. Why? Because in the same statement, you've bundled together the sales revenue increase and the profitability increase. The objective leaves you to debate which of the two (sales or profit) is the more important.

Wouldn't it be better to pull the objective statement apart? To have one statement that addresses the increase in sales revenue; another, the increase in profit. And then be sure to do one more thing – give a different priority to each of the two potentially conflicting objectives. During your planning sessions, you can argue all you like about whether sales volume or profit is more important. But when your sales manager appears with his "golden opportunity," you'll know how to respond.

Eliminate "Why" and "How"

In writing objectives, you should eliminate the "why" and the "how." If you need to discuss "why" you're interested in increasing sales by 15% next year, you'll have that conversation during your planning sessions. You won't explain "why" in your objective statement, and you won't attempt to justify your objective to those who read your plan.

Neither will you describe "how" you'll accomplish the objective. At least not at this point in the process. You won't write an objective that says, "We'll increase sales volume by 15% next year by implementing the following three programs...." The answer to "how" is really a strategy. You'll develop your strategies during the next step in the planning process.

You should establish results-oriented objectives whenever possible. There are two kinds of objectives you can develop – results-oriented and activities-oriented. Results-oriented objectives are stronger. Use them.

Example: "We will increase dollar sales by 15% next year." That's a results-oriented objective. "We will increase the number of sales calls by 15% next year." That's an activities- oriented objective. Obviously, the first is a stronger statement. Whenever possible, write your objectives in terms of a result, rather than an activity.

There are times when you simply can't write a results-oriented objective, and if so, write your objective as an activity. But these are the exceptions. "Install the new computer system by the end of the year," "Hire a manager of human resources by June 15th," "Launch the new product by the third quarter." Each is an activity-oriented objective. Each is used because no result (other than the completion of the activity) can be measured. Each, however, is an exception. Generally, your objectives should be results-oriented.

Quantify Your Objectives

Objectives must be quantified. When your objective is due for accomplishment, you've got to be able to measure it to figure out whether or not you've succeeded. More importantly, everyone in your organization has to know how hard to "push to go get it."

Sometimes quantifying an objective is easy. Sometimes it's not. It all depends on the category of the objective. Financial objectives are the easiest to quantify. After all, the world of finance is a number on a piece of paper. And marketing objectives are usually easy also. Certainly you can quantify sales volume. And market share too, if you can agree on a measurement for industry sales.

But how about something like customer satisfaction? A pretty gray area isn't it? Some say customer satisfaction is so difficult to quantify, that you can't do it. Or can you?

Sure you can! You can count complaints. You can measure defective product. You can count referrals to new accounts. Or repeat business. Or warranty costs. In every case – in all of these suggested ways to measure customer satisfaction – You've taken the same approach. You've decided that customer satisfaction is so difficult to measure directly, that you'll measure something else. Something which you believe parallels customer satisfaction. In effect, you’ll measure customer satisfaction indirectly.

So when warranty cost gets below 1.5%; or when the reorder ratio goes over 75%; or when referrals to new accounts reaches 25% of total billings – then you'll believe that customer satisfaction is where you want it to be. The point is, you quantify your objectives even if you have to "force" your measurement.

Managers often attempt to use market share as a measurable objective. But we discourage their doing so. here's why...

It's difficult to get agreement on the total market size used in calculating market share. And even if you could agree on total market size, data on market size is never available right now. This lack of timely information means you can't use a market share objective to manage your business day-to-day. For these reasons, market share is most often viewed as an approximate, rather than an exact measurement. It makes for a poor objective.

But suppose market share is important to your organization, as it is to many. If so, you can write your objective in terms of sales volume. Then you can estimate total market size, and put that estimate in your list of "planning assumptions." Finally, in an appendix to your plan, you can divide your sales objective by your estimated market size to arrive at your intended market share. That way, you'll have an objective (sales volume), whose measurement is familiar to, and accepted by, those who must accomplish it. And just as important, it's a measurement that's available right now. So you can use it as a day-to-day tool in managing your business.

Keep Your Objectives "in Concert"

Objectives should be "in concert." It's one thing to write down an objective and say "Yes, that's fine. I think we can do it. Let's commit to it." Then go on to the next objective and do it again. And again. It's one thing to take each objective one at a time. And it's quite another to write all of your objectives on a piece of paper, tack them up at the front of the room, take a long hard look at them, and ask, "Can we do this whole bunch of objectives all at the same time?"

Example: Let's imagine your industry is enjoying very fast growth. During your objective setting session, you decide, because you're in a fast-growth industry, to set an objective that says "We will build sales revenue by 35% next year." O.K., you write it down, and you've got your first objective.

A bit later, you remember that cash was tight last year. "Recall that in April we had trouble meeting payroll. Why don't we set an objective that deals with our cash position? Let's set an objective that says, 'During next year, we'll have, on average, 30% more cash in the bank than we had last year.'"

See what you've done? You wrote a set of objectives calling for growing by 35% in one year and, at the same time, having more cash laying around. But the two are conflicting objectives, aren't they? Because growth doesn't produce cash. To grow fast, you'll use cash to fuel your way up the growth curve.

My point is obvious – look at your objectives all together to make sure they're in concert. If not, make a choice. Choose among conflicting objectives. Cross out one or the other. Or modify one or the other. Either way. So when you're all finished writing your list of objectives, everyone on your planning team believes you can accomplish them all at the same time.

Both Challenging and Attainable

Finally, an objective – any objective – should be challenging and, at the same time, attainable. People in your organization should understand that accomplishment of the objective requires that they "reach." But given that reach, they should expect they can accomplish the objective. That the objective is achievable.

The analogy I like is that of the basketball hoop. The hoop is ten feet above the floor of the gymnasium. At that ten foot level, the game is both challenging and also attainable. If the hoop were four feet above the floor of the gymnasium, it wouldn’t be challenging. Your players wouldn’t work too hard at playing the game. If it were thirty feet above the floor of the gymnasium, it wouldn’t be attainable. Again, your players wouldn’t too hard at playing the game.

It's your job, as a manager, to keep your players working hard at playing the game. You‘ll need to find that "ten foot level" for each objective. So that each of your objectives is both challenging and, at the same time, attainable.


Article adapted from Bill Birnbaum's new book, Strategic Thinking: A Four Piece Puzzle