PERFORMANCE HIERARCHY

By the end of this lesson, students should be able to:

i. Discuss how the purpose, structure and content of a mission statement

impacts on business performance.
ii. Discuss the ways in which high level corporate objectives are developed.
iii. Explain the performance 'planning gap' and evaluate alternative strategies to fill that
gap.

Mission Statements, Vision Goals And Objectives.

Underlying the behaviour and management processes of most organisations are one or two
guiding
ideas, which influence the organization’s activities. Management writers typically analyse
these into two categories: mission and vision.

Vision.
Vision is orientated towards the future, to give a sense of direction to the organization.
- Vision: Where is the business going?
A vision for the future has three aspects.
a) What the business is now.
b) What it could be in an ideal world.
c) What the ideal world would be like.

A vision gives a general sense of direction to the company. A vision, it is hoped, enables
flexibility to exist in the context of a guiding idea.

EXAMPLE
KRC: a state-owned Chisomian energy company vision statement can be;
‘To be a world class national energy company’
Mission
Mission 'describes the organisation's basic function in society, in terms of the products and
services it produces for its clients'.
Mission describes an organisation's basic purpose, what it is trying to accomplish.
- Mission: What is the business for?

An expanded definition of mission includes four elements.of mission Detail

i. Purpose: Why does the company exist?
 To create wealth for shareholders?
 To satisfy the needs of all stakeholders (including employees, society at large, for
example)?

ii. Strategy: Mission provides the commercial logic for the company, and so defines
the following.
 Nature of its business.
 Products/services it offers; competitive position.
 The competences and competitive advantages by which it hopes to prosper, and
its way of competing.

iii. Policies and standards of behavior: The mission needs to be converted into
everyday performance. For example, a firm whose mission covers excellent customer
service must deal with simple matters such as politeness to customers, speed at which
phone calls are answered and so forth.

iv. Values and culture: Values are the basic, perhaps unstated, beliefs of the people
who work in the organisation

Mission statements will address some of the following aspects:

a) The organisation’s reason for existence.
 b) The identity of the stakeholder groups for whom the organisation exists (such as
shareholders, customers and employees).
c) The nature of the firm's business (such as the products it makes or the services it
provides, the markets it produces for, or the business areas in which it will operate).
d) Ways of competing (such as reliance on quality, innovation, technology and low prices;
commitment to customer care; policy on acquisition vs organic growth; and geographical
spread of its operations).
e) Principles of business (such as commitment to suppliers and staff; social policy, eg, on
nondiscrimination or environmental issues).
f) Commitment to customers

A number of questions need to be considered when a mission statement is being

formulated.
a) Who is to be served and satisfied?
b) What need is to be satisfied?
c) How will this be achieved?

There is no standard format, but they should possess certain characteristics:

a) Brevity – easy to understand and remember.
b) Flexibility – to accommodate change.
c) Distinctiveness – to make the firm stand out.
d) Open-ended – not stated in quantifiable terms.

A mission does not have to be internally orientated. Some of the most effective focus outwards –
on customers and/or competitors. Most mission statements tend to place an emphasis on serving
the customer.
Example
ACCA's mission statement.
ACCA's mission is to:
(i) Provide opportunity and access to people of ability around the world and support our
members throughout their careers in accounting, business and finance
(ii) Achieve and promote the highest professional, ethical and governance standards
(iii) Advance the public interest
(iv) Be a global leader in the profession

Mission and planning

Although the mission statement might be seen as a set of abstract principles, it can play an
important role in the planning process:
a) Inspires planning. Plans should develop activities and programmes consistent with the
organisation's mission.
b) Screening. Mission also acts as a yardstick by which plans are judged.
c) Mission also affects the implementation of a planned strategy, in the culture and
business practices of the firm.

Goals and objectives

Goals and objectives are set out to give flesh to the mission in any particular period.
Definitions/Distinctions:
- (Shorter-term) objectives are the means by which (longer-term) goals can ultimately be
achieved.
- Goals are based on an individual's value system whereas objectives are based on
practical needs.
- Goals are therefore more subjective than objectives.
In particular, operational goals can be expressed as quantified (SMART) objectives: Specific,
Measurable, Attainable, Relevant (to the organisation’s mission), and Time-bounded.

So the goals and objectives for a high-tech manufacturer could be:

- Goal: enhance manufacturing quality
- Objectives: over the next 12 months, reduce the number of defects to 1 part per million

Non-operational goals or aims cannot be expressed as objectives.

a) A university's goal might be to 'seek truth'. This cannot really be expressed as a
quantified objective. To 'increase truth by 5% this year' does not make a great deal of
sense.
b) Customer satisfaction is a goal, but satisfying customers and ensuring that they remain
satisfied is a continuous process that does not stop when one target has been reached.

In this context, it is very important to recognise that the different layers in the hierarchy are
fundamentally interconnected.

If we reduce strategic management to its most simplistic level we could suggest that, in essence,
executives set strategy and goals, managers develop plans and budgets to achieve the goals, and
staff execute the plans. Then, everyone monitors their progress towards meeting the goals, using
reports and other analytical tools; and, where necessary, they make the adjustments needed to
stay on course to achieve the goals.

Obviously, this illustration is very simplistic, but it highlights the key point that all three levels of
the hierarchy need to work together in order for an organisation to be successful.

Features Of Goals And Objectives In Organisations

a) Goal congruence. Goals should be consistent with each other:
i. Across all departments. There should be horizontal consistency. In other words,
the goals set for different parts of the organisation should be consistent with each
other.
 ii. At all levels. Objectives should be consistent vertically, in other words at all
levels in the organisation.
iii. Over time. Objectives should be consistent with each other over time.
b) An objective should identify the beneficiaries as well as the nature and size of the
benefit.

Types of goal, how they are developed and set

Goal Comment
- Ideological goals: These goals focus on the organisation's mission. They are shared sets
of beliefs and values.
- Formal goals: These are imposed by a dominant individual or group such as
shareholders. People work to attain these goals as a route to their personal goals.
- Shared personal goals : Individuals reach a consensus about what they want out of an
organisation (eg a group of academics who decide they want to pursue research).
- System goals: Derive from the organisation's existence as an organisation, independent
of mission.

Organisations set goals in a number of different ways.

Method Comment
- Top-down: Goals and objectives are structured from 'top to bottom', a cascading process
down the hierarchy, with goals becoming more specific the 'lower' down the hierarchy.
- Bottom-up : People in individual departments set their own goals, which eventually
shape the overall goals of the organization.
- By precedent: Some goals are set simply because they have been set before (eg last
year's sales targets plus 5%)
- By 'diktat': A few key individuals dictate what goals should be.
- By consensus: Goals and objectives are achieved by a process of discussion amongst
managers –reputedly, Japanese companies employ this approach.
The setting of objectives is very much a political process: objectives are formulated following
bargaining by the various interested parties.
a) Shareholders want profits.
b) Employees want salaries and good working conditions.
c) Managers want power.
d) Customers demand quality products and services.

These conflicting requirements make it difficult to maximise the objectives of any one
particular group.

Corporate Objectives

- Corporate objectives concern the firm as a whole.

- Unit objectives are specific to individual units of an organisation.

Corporate Objectives Vs Unit Objectives

Corporate objectives should relate to the key factors for business success.
 Profitability
 Customer satisfaction
 Market share
 Quality
 Growth
 Industrial relations
 Cash flow
 Added value
 Return on capital employed
 Earnings per share
 Risk

Similar objectives can be developed for each strategic business unit (SBU).
An SBU is a part of the company that for all intents and purposes has its own distinct products,
markets and assets.)

Unit objectives, on the other hand, are specific to individual units of an organisation.es
Examples
Commercial.
- Increase the number of customers by x% (an objective of a sales department)
- Reduce the number of rejects by 50% (an objective of a production department)
- Produce monthly reports more quickly, within 5 working days of the end of each month
(an objective of the management accounting department)

Public sector
- Introduce x% more places at nursery schools (an objective of a borough education
department)
- Respond more quickly to calls (an objective of a local police station, fire department or
hospital ambulance service)

General
- Resources (eg cheaper raw materials, lower borrowing costs, 'top-quality college
graduates')
- Market (eg market share, market standing)
- Employee development (eg training, promotion, safety)
- Innovation in products or processes
- Productivity (the amount of output from resource inputs)
- Technology

Ranking objectives and trade-offs

Where there are multiple objectives a problem of ranking can arise:
a) There is never enough time or resources to achieve all of the desired objectives.
 b) There are degrees of accomplishment. For example, if there is an objective to achieve a
10% annual growth in earnings per share, an achievement of 9% could be described as a
near-success.

When it comes to ranking objectives, a target ROI of, say, 25% might be given greater
priority than an EPS growth of 10%.

When there are several key objectives, some might be achieved only at the expense of others.
- For example, attempts to achieve a good cash flow or good product quality, or to
improve market share, might call for some sacrifice of short-term profits.

For example, there might be a choice between the following two options.
- Option A 15% sales growth, 10% profit growth, a $2 million negative cash flow and
reduced product quality and customer satisfaction
- Option B 8% sales growth, 5% profit growth, a $500,000 surplus cash flow, and
maintenance of high product quality/customer satisfaction.

If the firm chose option B in preference to option A, it would be trading off sales growth and
profit growth for better cash flow, product quality and customer satisfaction. It may feel that the
long-term effect of reduced quality would negate the benefits under Option A.

One of the tasks of strategic management is to ensure goal congruence. Some objectives may
not be in line with each other, and different stakeholders have different sets of priorities.

Departmental plans and objectives

Implementation involves three tasks:
a) Document the responsibilities of divisions, departments and individual managers.
b) Prepare responsibility charts for managers at divisional, departmental and subordinate
levels.
c) Prepare activity schedules for managers at divisional, departmental and subordinate
levels.
Responsibility charts
Responsibility charts can be drawn up for management at all levels in the organisation, including
the board of directors. They show the control points that indicate what needs to be achieved and
how to recognise when things are going wrong. For each manager, a responsibility chart will
have four main elements:
a) The manager's major objective.
b) The manager's general programme for achieving that objective.
c) Sub-objectives.
d) Critical assumptions underlying the objectives and the programme

Example: responsibility charts for marketing director

a) Major objective and general programme: to achieve a targeted level of sales, by
selling existing well-established products, by breaking into new markets and by a new
product launch.
b) Sub-objectives: details of the timing of the product launch; details and timing of
promotions, advertising campaigns and so on.
c) Critical assumptions: market share, market size, competitors' activity and so on

Activity schedules
Successful implementation of corporate plans also means getting activities started and
completed on time. Every manager should have an activity schedule in addition to his
responsibility chart, which identifies what activities he must carry out and the start up and
completion dates for each activity.

Consequently, to ensure co-ordination, the various functional objectives must be interlocked:

a) Vertically from top to bottom of the business.
b) Horizontally, for example, the objectives of the production function must be linked with
those of sales, warehousing, purchasing, R&D and so on.
c) Over time. Short-term objectives can be regarded as intermediate milestones on the road
towards long-term objectives.
A Hierarchy Of Objectives
The hierarchy of objectives which emerges is this.

Objectives are normally established within this hierarchical structure. Each level of the hierarchy
derives its objectives from the level above, so that all are ultimately founded in the organisation's
mission. Objectives therefore cascade down the hierarchy so that, for example, strategies are
established to achieve objectives and they, in turn, provide targets for the purposes of tactical
planning.

The Short Term and Long Term

The S/L trade-off refers to the balance of organisational activities aiming to achieve long-term
and short- term objectives when they conflict or where resources are scarce.

Long-term and short-term objectives

Objectives may be long term and short term.
 For example, a company's primary objective might be to increase its earnings per share
from 30c to 50c in the next 5 years. A number of strategies for achieving the objective
might then be selected.
i. Increasing profitability in the next 12 months by cutting expenditure.
ii. Increasing export sales over the next 3 years.
iii. Developing a successful new product for the domestic market within 5 years.
iv. Secondary objectives might then be re-assessed to include the following.
v. The objective of improving manpower productivity by 10% within 12 months.
vi. Improving customer service in export markets with the objective of doubling the
number of overseas sales outlets in selected countries within the next 3 years.
vii. Investing more in product-market research and development, with the objective of
bringing at least three new products to the market within 5 years.

Targets cannot be set without an awareness of what is realistic. Quantified targets for achieving
the Primary objective, and targets for secondary objectives, must therefore emerge from a
realistic 'position audit'.

Trade-offs between short-term and long-term objectives

The S/L trade-off refers to the balance of organisational activities aiming to achieve long term
and short-term objectives when they are in conflict or where resources are scarce.

Some decisions involve the sacrifice of longer-term objectives.

a) Postponing or abandoning capital expenditure projects, which would eventually
contribute to growth and profits, in order to protect short-term cash flow and profits.
b) Cutting R&D expenditure to save operating costs, and so reducing the prospects for
future product development.
c) Reducing quality control to save operating costs (but also adversely affecting reputation
and goodwill).
d) Reducing the level of customer service to save operating costs (but sacrificing goodwill).
 e) Cutting training costs or recruitment (so the company might be faced with skills
shortages).

Steps that could be taken to control S/L trade-offs, so that the 'ideal' decisions are taken, include
the following.
a) Making short-term targets realistic. If budget targets are unrealistically tough, a
manager will be forced to make S/L trade-offs.
b) Providing sufficient management information to allow managers to see what trade-offs
they are making. Managers must be kept aware of long-term aims as well as shorter term
(budget) targets.
c) Evaluating managers' performance in terms of contribution to long-term as well as
short-term objectives.

The planning gap and strategies to fill it

Forecasts based on current performance may reveal a gap between the firm's objectives and the
likely outcomes.

New strategies (e.g. market penetration, market development, product development,

diversification, withdrawal) are developed to fill the gap.

Strategic planners need to consider the extent to which new strategies are needed to enable the
organisation to achieve its objectives. One technique whereby this can be done is gap analysis.

Gap analysis.
Gap analysis involves comparing an organisation's ultimate objective (most commonly
expressed in terms of demand, but may be reported in terms of profit, ROCE and so on) and the
expected performance of planned and current projects.

Purpose of gap analysis

a) Determine the organisation's targets for achievement over the planning period.
b) Establish what the organisation would be expected to achieve if it 'did nothing' (did not
develop any new strategies, but simply carried on in the current way with the same
products and selling to the same markets)