6 Performance Goals and the Strategy Formation Process
KURT VERWEIRE AND LUTGART VAN DEN BERGHE
In many organizations, setting clear goals and objectives is the starting point for the strategy formulation and strategy implementation process.
Providing a sense of purpose plays an extremely important role in shaping the behaviours of people within an organization, and it is an important lever that top management can use in the Integrated Performance Management process (Chakravarthy and White, 2002). That is why many definitions of strategy and management pay explicit attention to the role of setting performance goals and objectives, often referred to as ‘planning’.
In this chapter, we tackle two major questions: (1) What are the performance goals for an organization; and (2) How are these goals set and how are strategies developed? The first question is tackled in the first and second sections of this chapter. We start with a discussion of the organizational purposes of the company as defined in its vision and mission. These can be considered as the performance goals at the corporate level. The mission and vision must then be translated into concrete strategies and actions, which serve as guidelines and benchmarks for the business unit and functional levels.
Given our interest in the process side of the performance management trajectory, we investigate the goal-setting and strategy formation process in the second part of this chapter. There, we also discuss the role of strategic planning in the strategy formation process.
purposes that are concerned with shaping society, and financial considerations are regarded as of secondary importance or as constraints.
Many companies fall somewhere in between and address the interests and expectations of (a larger or smaller number of) stakeholders.
Whatever perspective is chosen, it is very important that it is integrated into the organization’s ‘sense of purpose.’ Given the many different perspectives that can be adopted, we see that organizations formulate many different goals, ranging from ‘becoming the largest company in a particular industry’ to ‘delivering maximal shareholder value’ to ‘earning a living for the founder and his family.’ Goals can also be defined for different stakeholders. For example, the Co-operative Bank aims at
‘delivering value to all its Partners in an equitable manner’. The Co- operative Bank has identified seven partners and for each of them it has developed specific targets and appropriate performance measures.1
Many people see growth as one of the main goals of a business company. Clearly, growth is necessary to become the largest player in an industry, and profitable growth is necessary to increase shareholder value.
However, not all companies go for growth. For example, growth might be less of an issue when the purpose of the company is to provide financial (and possibly other) means to the founder or his family.
The ultimate goal of any organization should be reflected in the organization’s mission and vision. Traditionally, developing the mission and vision of the company is the starting point in the strategic management process. The missionoutlines the broad directions that the organization should and will follow and briefly summarizes the reasoning and values that lie behind them. These values are often rooted in the personal values of the founders and provide guidance about responsibilities to customers, employees, local communities, shareholders and other important stakeholders. Core values explicitly define top management’s view of trade-offs (such as short-term performance versus long-term responsibilities) and provide guidance to employees where rules and standard operating procedures alone cannot suffice (Simons, 2000).
In their book Built to Last, Jim Collins and Jerry Porras (1994) have demonstrated the role of an enduring guiding philosophy in achieving superior performance. They identified 18 ‘visionary companies’, which they define as companies that are premier institutions in their industries, widely admired by their peers, and having a long track record of making a significant impact on the world around them (e.g., Boeing, Ford, Motorola, Walt Disney). Collins and Porras have figured out why these companies have separated themselves into the visionary category. One of the striking characteristics that visionary companies share is that they all pursue a cluster of objectives, of which making money is only one and not necessarily the primary one. Equally important is that these companies are guided by a core ideology– or core values – and a sense of purpose beyond just making money. Yet, paradoxically, the visionary companies make more money than the purely profit-driven comparison companies. It is
not so much the content of this ideology that matters to the company,
‘but how deeply it believes its ideology and how consistently it lives, breathes, and expresses it in all that it does’ (Collins and Porras, 1995: 21).
Furthermore, visionary companies almost religiously preserve these core ideologies, and hardly ever change them. The values survive the trends and fashions of the day, and some of them have even remained intact for well over 100 years. At the same time, visionary companies display a powerful drive for progress which enables them to change and adapt without compromising their cherished goals.
Although there are no good or bad missions, there are good and bad mission statements. These are the formal statements in which the mission of a company is written down. A mission statement is a text containing the goals and objectives, the strategic choices and the values of an organization. They exist in all forms and formats and most of them are written in some awfully dreary corporate prose. But there are some exceptions – some mission statements prove to be very powerful and inspiring:
BancOne Corporation: ‘We’ll deal with you straight, no fluff and no excuses.
. . . We also know that was then and this is now.’
Microsoft Corporation: ‘One vision drives everything we do: a computer on every desk and in every home using great software as an empowering tool.’
Mission statements have become very popular; in some cases, they have even been considered as a cure-all for stuck-in-the-mud businesses. Of course, companies need more than just a good mission statement to achieve good performance. This has also been noted by Collins and Porras:
visionary companies have not become visionary through mision statements:
The visionary companies attained their stature not so much because they made visionary pronouncements (although they often did make such pronouncements). Nor did they rise to greatness because they wrote one of the vision, values, purpose, mission, or aspiration statements that have become popular in management today (although they wrote such statements more frequently than the comparison companies and decades before it became fashionable). Creating a statement can be a helpful step in building a visionary company, but it is only one of the thousands of steps in a never-ending process of expressing the fundamental characteristics we identified across the visionary companies. (Collins and Porras, 1995: 23)
Well-conceived mission statements make sense, as is also acknowledged by Peter Drucker, one of the most influential management gurus of the last decades. He acknowledges that defining the purpose and mission of the organization is difficult, painful and risky, but he considers it crucial to enable the organization to set objectives, to develop strategies and to manage an organization for performance (Drucker, 1974: 94). Good
mission statements, which are actively communicated, can give employees a sense of pride, purpose and direction. This sense of direction is often called the visionof the organization. It paints a picture of the future that clarifies the direction of the organization (‘a possible and desirable future state’) and helps individuals to understand why and how they should support the organization. C.K. Prahalad and Gary Hamel (1989) use the term ‘strategic intent’ to denominate the desired future state or aspiration of an organization. For Prahalad and Hamel, strategic intent is about creating an obsession to win at all levels within the organization, and then sustaining it over 10 to 20 years. One of the best examples comes from outside the business world: the ‘Apollo programme’ – landing a man on the moon ahead of the Soviets – was a real strategic intent for Americans in the 1950s and 1960s.2
In summary, the vision, the mission and the accompanying core values and beliefs can provide a compass for action and a sense of direction for employees. At the same time, these elements can also be considered part of the control system. In Levers of Control, Robert Simons (1995) develops the concept of beliefs systems, which he defines as the explicit set of organizational definitions that senior managers communicate formally and reinforce systematically to provide basic values, purpose, and direction for the organization. If expressed vividly and actively, beliefs systems motivate organizational participants to search for and create opportunities to accomplish the overall mission and vision of the firm. We come back to these beliefs systems and other levers of control in Chapter 9.
Influences on organizational purposes
Setting the goals and objectives of a company does not happen in a vacuum. Instead of being independent, self-standing entities, companies are part of a much larger network. We have identified four main influences on organizational purposes: (1) corporate governance; (2) stakeholders; (3) business ethics; and (4) the cultural context. These influences together shape the purposes of an organization at any given time.
According to Johnson and Scholes (1999), corporate governance tries to provide an answer to the following questions: (1) Who should the organization serve? and (2) How should the direction and purposes of an organization be determined? In its simplest definition, corporate governance is defined in terms of good and decent management. More complex definitions take into account the tasks directors should perform and pay attention to the ‘division of labour’ between shareholders, managers and the board of directors. Still others broaden the discussion and take all factors into account (e.g., environmental factors) that could influence the goals of the organization. Finally, the more normative definitions provide a framework that can be used to consider and balance the interests of various groups of stakeholders (Van den Berghe and Levrau, 2000).
Stakeholders are the second category of ‘influences’ on organizational goals. Companies are increasingly adopting a broader perspective, focusing on stakeholders rather than on shareholders. Managers are becoming aware that they need to understand the concerns of shareholders, employees, customers, suppliers, lenders, and society at large, when developing the objectives and the business strategies of the organization.
Only in this way will the firm be able to survive in the longer term. Such a stakeholder approach emphasizes actively managing the business environment, relationships and the promotion of shared interests.
Furthermore, the interests of key stakeholders must be integrated into the very purpose of the firm, and stakeholder relationships must be managed in a coherent and strategic fashion (Freeman and McVea, 2001). How this can be done has already been described in greater detail in Chapter 2, where we introduced the concept of stakeholder-driven management.
So far, we have viewed organizational purposes as being concerned with the expectations of stakeholders – in particular, those who have formal rights through the corporate governance framework and those stakeholders who are most interested and powerful in other ways. Johnson and Scholes (1999) complete their framework by providing answers to the following questions:
•
Which purposes shouldbe prioritized? And why?•
Which purposes areprioritized? Why?Ethical considerations are the main guidelines for answering the first question. Ethical issues can be found on several levels. On the macro level, ethics define the extent to which an organization will strive to exceed its minimum obligations to stakeholders. The concept of business ethics is also relevant on the individual level, where it can be applied to both employees and managers.
The question ‘Which purposes are actually prioritized above others?’ is related to a variety of factors in the cultural context of the organization.
Power and stakeholders are not the only influences on the mission and objectives: company culture – ‘the way we do things around here’ – is a more subtle, but equally important, issue. Therefore, it is important to understand an organization’s culture, since it is the filter and shaper through which all employees develop and implement their strategies (Lynch, 1997).