INTERNAL FACTORS & LONG TERM GOALS:Strategies, Annual Objectives

<< KEY TERMS IN STRATEGIC MANAGEMENT:Adapting to change, Mission Statements

BENEFITS OF STRATEGIC MANAGEMENT:Non- financial Benefits, Nature of global competition >>

Strategic Management MGT603

Lesson 3

INTERNAL FACTORS & LONG TERM GOALS

Objectives:

After reading this lecture you will be able to know that:

What are Internal Factors?

1. Financial ratios

2. Performance levels

3. Industry averages

4. Survey results

What is the importance of strategies in achieving Long term objectives?

What are the Financial and Non financial benefits of Strategic Management?

Long-Term Objectives

Objectives can be defined as specific results that an organization seeks to achieve in pursuing its basic mission.

Long-term objectives represent the results expected from pursuing certain strategies. Strategies represent the

actions to be taken to accomplish long-term objectives. The time frame for objectives and strategies should

be consistent, usually from two to five years.

Objectives are essential for organizational success because they state direction; aid in evaluation; create

synergy; reveal priorities; focus coordination; and provide a basis for effective planning, organizing,

motivating and controlling activities. Objectives should be challenging, measurable, consistent, reasonable,

and clear. In a multidimensional firm, objectives should be established for the overall company and for each

division.

The Nature of Long-Term Objectives

Objectives should be quantitative, measurable, realistic, understandable, challenging, hierarchical,

obtainable, and congruent among organizational units. Each objective should also be associated with a time

line. Objectives are commonly stated in terms such as growth in assets, growth in sales, profitability, market

share, degree and nature of diversification, degree and nature of vertical integration, earnings per share, and

social responsibility. Clearly established objectives offer many benefits. They provide direction, allow

synergy, aid in evaluation, establish priorities, reduce uncertainty, minimize conflicts, stimulate exertion, and

aid in both the allocation of resources and the design of jobs.

Long-term objectives are needed at the corporate, divisional, and functional levels in an organization. They

are an important measure of managerial performance.

Clearly stated and communicated objectives are vital to success for many reasons. First, objectives help

stakeholders understand their role in an organization's future. They also provide a basis for consistent

decision making by managers whose values and attitudes differ. By reaching a consensus on objectives

during strategy-formulation activities, an organization can minimize potential conflicts later during

implementation. Objectives set forth organizational priorities and stimulate exertion and accomplishment.

They serve as standards by which individuals, groups, departments, divisions, and entire organizations can

be evaluated. Objectives provide the basis for designing jobs and organizing activities to be performed in an

organization. They also provide direction and allow for organizational synergy.

Without long-term objectives, an organization would drift aimlessly toward some unknown end! It is hard

to imagine an organization or individual being successful without clear objectives. Success only rarely occurs

by accident; rather, it is the result of hard work directed toward achieving certain objectives.

Strategies

Strategies are the means by which long-term objectives will be achieved. Business strategies may include

geographic expansion, diversification, acquisition, product development, market penetration, retrenchment,

divestiture, liquidation, and joint venture.

Strategies are potential actions that require top management decisions and large amounts of the firm's

resources. In addition, strategies affect an organization's long-term prosperity, typically for at least five

years, and thus are future-oriented. Strategies have multifunctional or multidivisional consequences and

require consideration of both external and internal factors facing the firm.

Strategic Management MGT603

Annual Objectives

Annual objectives are short-term milestones that organizations must achieve to reach long-term objectives.

Like long-term objectives, annual objectives should be measurable, quantitative, challenging, realistic,

consistent, and prioritized. They should be established at the corporate, divisional, and functional levels in a

large organization.

Annual objectives should be stated in terms of management, marketing, finance/accounting,

production/operations, research and development, and information systems accomplishments. A set of

annual objectives is needed for each long-term objective.

Annual objectives are especially important in strategy implementation, whereas long-term objectives are

particularly important in strategy formulation. Annual objectives represent the basis for allocating resources.

Policies

Policies are the means by which annual objectives will be achieved. Policies include guidelines, rules, and

procedures established to support efforts to achieve stated objectives. Policies are guides to decision making

and address repetitive or recurring situations.

Policies are most often stated in terms of management, marketing, finance/ accounting,

production/operations, research and development, and computer information systems activities. Policies

can be established at the corporate level and apply to an entire organization, at the divisional level and apply

to a single division or at the functional level and apply to particular operational activities or departments.

Policies, like annual objectives, are especially important in strategy implementation because they outline an

organization's expectations of its employees and managers. Policies allow consistency and coordination

within and between organizational departments.

The Strategic-Management Model

The strategic-management process best can be studied and applied using a model. Every model represents

some kind of process. The framework illustrated in Figure 1-1 is a widely accepted, comprehensive model

of the strategic-management process. This model does not guarantee success, but it does represent a clear

and practical approach for formulating, implementing, and evaluating strategies. Relationships among major

components of the strategic-management process are shown in the model.

A Comprehensive Strategic-Management Model

Source: Fred R. David, "How Companies Define Their Mission," Long Range Planning 22, no.

3 (June 1988): 40.

Strategic Management MGT603

Identifying an organization's existing vision, mission, objectives, and strategies is the logical starting point

for strategic management because a firm's present situation and condition may preclude certain strategies

and may even dictate a particular course of action. Every organization has a vision, mission, objectives, and

strategy, even if these elements are not consciously designed, written, or communicated. The answer to

where an organization is going can be determined largely by where the organization has been.

The strategic-management process is dynamic and continuous. A change in any one of the major

components in the model can necessitate a change in any or all of the other components. For instance, a

shift in the economy could represent a major opportunity and require a change in long-term objectives and

strategies; a failure to accomplish annual objectives could require a change in policy; or a major competitor's

change in strategy could require a change in the firm's mission. Therefore, strategy formulation,

implementation, and evaluation activities should be performed on a continual basis, not just at the end of

the year or semiannually. The strategic-management process never really ends.

Application of the strategic-management process is typically more formal in larger and well-established

organizations. Formality refers to the extent that participants, responsibilities, authority, duties, and

approach are specified. Smaller businesses tend to be less formal. Firms that compete in complex, rapidly

changing environments such as technology companies tend to be more formal in strategic planning. Firms

that have many divisions, products, markets, and technologies also tend to be more formal in applying

strategic-management concepts. Greater formality in applying the strategic-management process is usually

positively associated with the cost, comprehensiveness, accuracy, and success of planning across all types

and sizes of organizations.

Benefits of Strategic management

Following are the major benefits of Strategic management:

Proactive in shaping firm's future

Initiate and influence actions

Formulate better strategies (Systematic, logical, rational approach)

Financial benefits:

Improved productivity

Improved sales

Improved profitability

Non-Financial benefits:

Increased employee productivity

Improved understanding of competitors' strategies

Greater awareness of external threats

Understanding of performance reward relationships

Better problem-avoidance

Lesser resistance to change

Financial Benefits

Research indicates that organizations using strategic-management concepts are more profitable and

successful than those that do not. Businesses using strategic-management concepts show significant

improvement in sales, profitability, and productivity compared to firms without systematic planning

activities. High-performing firms tend to do systematic planning to prepare for future fluctuations in their

external and internal environments. Firms with planning systems more closely resembling strategic-

management theory generally exhibit superior long-term financial performance relative to their industry.

High-performing firms seem to make more informed decisions with good anticipation of both short- and

long-term consequences. On the other hand, firms that perform poorly often engage in activities that are

shortsighted and do not reflect good forecasting of future conditions. Strategists of low-performing

organizations are often preoccupied with solving internal problems and meeting paperwork deadlines. They

Strategic Management MGT603

typically underestimate their competitors' strengths and overestimate their own firm's strengths. They often

attribute weak performance to uncontrollable factors such as poor economy, technological change, or

foreign competition.

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