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R
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D
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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
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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
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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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