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CHAPTER 5

PLANNING AND GOAL SETTING

CHAPTER OUTLINE

New Manager Self-Test: Does Goal Setting Fit Your Management Style?

I. Goal-Setting and Planning Overview

A. Levels of Goals and Plans

B. The Organizational Planning Process

II. Goal-Setting in Organizations

A. Organizational Mission

B. Goals and Plans

New Manager Self-Test: Your Approach to Studying, Part 1

III. Operational Planning

A. Criteria for Effective Goals

B. Management-by-Objectives (MBO)

IV. Benefits and Limitations of Planning

V. Planning for a Turbulent Environment

A. Contingency Planning

B. Building Scenarios

C. Crisis Planning

VI. Innovative Approaches to Planning

A. Set Stretch Goals for Excellence

VII. Strategy

VIII. Thinking Strategically

IX. What Is Strategic Management?

A. Purpose of Strategy

B. SWOT Analysis

X. Formulating Business-Level Strategy

XI. Formulating Business-Level Strategy

A. The Competitive Environment

B. Porter’s Competitive Strategies

ANNOTATED LEARNING OUTCOMES

After studying this chapter, students should be able to:

1. Define goals and plans and explain the relationship between them.

2. Explain the concept of organizational mission and how it influences goal setting and

planning.

3. Discuss the benefits and limitations of planning.

The benefits of planning include:

• Goals and plans provide a source of motivation and commitment. Planning can reduce

4. Describe contingency planning, scenario building, and crisis planning, and explain the

importance of each for today’s managers.

Contingency plans define company responses to be taken in the case of emergencies, setbacks, or

5. Identify innovative planning approaches that managers use in a fast-changing environment.

• Set stretch goals for excellence. Stretch goals get people to think in new ways that can lead

to bold, innovative breakthroughs.

6. Define the components of strategic management and discuss the three levels of strategy.

Strategic management is the set of decisions and actions used to formulate and implement

7. Explain the strategic management process.

The strategic management process begins when executives evaluate their current position with

8. Summarize how SWOT analysis can be used to evaluate a company’s strengths, weaknesses,

opportunities, and threats.

The SWOT analysis reviews the strengths (S), weaknesses (W), opportunities (O), and threats

9. Describe Michael Porter’s competitive forces and strategies.

Porter proposed that business-level strategies are the result of competitive forces in the

10. Explain organizational dimensions that managers use to execute strategy.

LECTURE OUTLINE

NEW MANAGER SELF-TEST: DOES GOAL SETTING FIT YOUR MANAGEMENT STYLE?

Most organizations have goal setting and review systems that new managers use. Not everyone

thrives under a disciplined goal-setting system, but setting goals and assessing results are tools

that can enhance a new manager’s impact. This exercise helps students determine the extent to

which they have already adopted the disciplined use of goals in their lives and in their work.

I. GOAL-SETTING AND PLANNING OVERVIEW

A goal is defined as a desired future state that the organization attempts to realize. Goals are

important because they define the purpose of an organization. A plan is a blueprint for goal

achievement and specifies the necessary resource allocations, schedules, tasks, and other actions.

Goals specify future ends; plans specify today’s means. The word planning usually incorporates

both ideas; it means determining the organization’s goals and defining the means for achieving

them.

A. Levels of Goals and Plans Exhibit 5.1

Planning and Goal Setting •

Top managers are responsible for establishing strategic goals and plans that reflect a

commitment to both organizational efficiency and effectiveness. Tactical goals and plans are

the responsibility of middle managers. Operational plans identify the specific procedures or

processes needed at lower levels of the organization. Frontline managers and supervisors

develop operational plans that focus on specific tasks and processes and that help meet

tactical and strategic goals. Planning at each level supports the other levels.

Discussion Question #3: A new business venture must develop a comprehensive business plan to

borrow money to get started. Companies such as FedEx and Nike say they did not follow the

original plan closely. Does that mean that developing the plan was a waste of time for these

eventually successful companies?

NOTES________________________________________________________________________

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B. The Organizational Planning Process Exhibit 5.2

The overall planning process prevents managers from thinking merely in terms of day-to–

day activities. The planning process includes five steps: (1) develop the plan; (2)

translate the plan into action; (3) lay out operational factors needed to achieve goals; (4)

execute the plan; and (5) monitor and review plans to learn from results and shift plans as

needed.

II. GOAL-SETTING IN ORGANIZATIONS

A. Organizational Mission Exhibit 5.3

At the top of the goal hierarchy is the mission—the organization’s reason for existence—

that describes the organization’s values, aspirations, and reason for being. The formal

mission statement is a broadly stated definition of purpose that distinguishes the

organization from others of a similar type. The content often focuses on the market and

customers, and identifies desired fields of endeavor. Some mission statements describe

company characteristics such as corporate values, product quality, location of facilities,

and attitude toward employees.

B. Goals and Plans

1. Strategic goals are broad statements describing where the organization wants to be in

the future. Sometimes called official goals, they pertain to the entire organization

rather than to specific divisions or departments. Strategic plans define the action

steps by which the company intends to attain strategic goals. A strategic plan is a

blueprint that defines organizational activities and resource allocations. Strategic

planning tends to be long term.

2. Tactical goals are the results that major divisions and departments within the

organization intend to achieve. Tactical goals apply to middle management and

Planning and Goal Setting •

describe what major subunits must do for the organization to achieve its overall goals.

Tactical plans define what major departments and organizational subunits will do to

implement the organization’s strategic plan. They tend to be for a shorter time

period.

3. Operational goals are the specific results expected from departments, work groups,

and individuals. Operational plans are developed at the lower levels of the

organization to specify action plans toward achieving operational goals and to support

tactical plans.

NEW MANAGER SELF-TEST: YOUR APPROACH TO STUDYING, PART 1

A student’s approach to studying may be a predictor of his or her planning approach as a new

manager. An important part of a new manager’s job is to plan ahead, which involves grasping

the bigger picture. This exercise helps students identify their approaches to studying as being

focused on either the current details or the big picture.

III. OPERATIONAL PLANNING

A. Criteria for Effective Goals Exhibit 5.4

1. Specific and measurable. When possible, goals should be expressed in quantitative

terms. Vague goals tend not to motivate employees.

2. Defined time period. Goals should specify the time period over which they will be

achieved. A time period is a deadline on which goal attainment will be measured.

3. Cover key result areas. Key result areas are those items that contribute most to the

company’s performance. Key result areas should include both internal and external

customers.

4. Choice and clarity. A few carefully chosen, clear, and direct goals can focus

organizational attention, energy, and resources more powerfully.

5. Challenging but realistic. The best quality programs start with extremely ambitious

goals that challenge employees to meet high standards. When goals are unrealistic,

they set employees up for failure and lead to decreasing employee morale. If goals

are too easy, employees may not feel motivated. Stretch goals are extremely

ambitious but realistic goals that challenge employees to meet high standards.

6. Linked to rewards. The impact of goals depends on the extent to which salary

increases, promotions, and other rewards are based on goal achievement. People who

attain goals should be rewarded.

B. Management by Objectives (MBO) Exhibit 5.5

1. Management by objectives (MBO) is a method whereby managers and employees

define objectives for every department, project, and person and use them to monitor

Planning and Goal Setting •

subsequent performance. Four major activities must occur in order for MBO to be

successful.

a. Set goals. Setting goals is the most difficult step in MBO and should involve

employees at all levels. A good goal should be concrete and realistic, provide a

specific target and time frame, and assign responsibility. Mutual agreement

between employee and supervisor creates the strongest commitment to achieving

goals.

b. Develop action plans. An action plan defines the course of action needed to

achieve the stated goals. Action plans are made for both individuals and

departments.

c. Review progress. A periodic progress review is important to ensure that action

plans are working. This review allows managers and employees to see if they are

on target and if corrective action is needed.

d. Appraise overall performance. The final step in MBO is to evaluate whether

annual goals have been achieved for both individuals and departments. Success

or failure to achieve goals can be part of the performance appraisal system and the

designation of salary increases and other rewards.

2. The benefits of the MBO process can be many. Corporate goals are more likely to be

achieved when they focus on manager and employee efforts. Problems with MBO

occur when the company faces rapid change. The environment and internal activities

must have some stability for performance to be measured against goals.

3. In contrast to MBO, which focuses on objectives, management by means (MBM) is

a new systematic approach that focuses on the methods and processes used to achieve

those objectives. MBM is based on the idea that when managers pursue their

activities in the right way, positive outcomes will result.

IV. BENEFITS AND LIMITATIONS OF PLANNING

A. Benefits of Planning

1. Goals and plans provide a source of motivation and commitment. Planning can

reduce uncertainty for employees and clarify what they should accomplish.

2. Goals and plans guide resource allocation. Planning helps managers decide where

they need to allocate resources, such as employees, money, and equipment.

3. Goals and plans are a guide to action. Planning focuses attention on specific targets

and directs employee efforts toward important outcomes.

4. Goals and plans set a standard of performance. Because planning and goal setting

define desired outcomes, they also establish performance criteria so managers can

measure whether things are on or off track.

B. Limitations of Planning

1. Goals and plans can create a false sense of certainty. Having a plan can give

managers a false sense that they know what the future will be like.

2. Goals and plans may cause rigidity in a turbulent environment. A related problem is

that planning can lock the organization into specific goals, plans, and time frames,

which may no longer be appropriate.

3. Goals and plans can get in the way of intuition and creativity. Success often comes

from creativity and intuition, which can be hampered by too much routine planning.

V. PLANNING FOR A TURBULENT ENVIRONMENT

A. Contingency Planning

Contingency plans define company responses to be taken in the case of emergencies or

setbacks. Contingency plans cover such situations as catastrophic decreases in sales or

prices, and loss of important managers.

Discussion Question #4 Assume that Southern University decides to do two things: (1) raise its

admission standards and (2) initiate a business fair to which local townspeople will be invited.

What types of plans might it use to carry out these two activities?

NOTES________________________________________________________________________

______________________________________________________________________________

B. Building Scenarios

1. Scenario building involves looking at current trends and discontinuities and

imagining possible alternative futures to build a framework with which unexpected

future events can be managed.

2. With scenario building, a broad base of managers mentally rehearses different

scenarios based on anticipating the varied changes that could impact the organization.

Scenarios are like stories that offer alternative vivid pictures of what the future will

look like and how managers will respond. Typically, two to five scenarios are

developed for each set of factors, ranging from the most optimistic to the most

pessimistic view.

C. Crisis Planning Exhibit 5.6

1. Crisis Prevention

Although unexpected events and disasters will happen, managers should do

everything they can to prevent crises. A critical part of the prevention stage is

building trusting relationships with key stakeholders such as employees, customers,

suppliers, governments, unions, and the community. By developing favorable

relationships, managers can often prevent crises from happening and respond more

Planning and Goal Setting •

effectively to those that cannot be avoided. Good communication helps managers

identify problems early so they do not turn into major issues.

2. Crisis Preparation

a. Preparation includes designating a crisis management team and spokesperson,

creating a detailed crisis management plan, and setting up an effective

communications system. Some companies are setting up crisis management

offices, with high-level leaders who report directly to the CEO.

b. The crisis management team is a cross-functional group of people who are

designated to swing into action if a crisis occurs. They are closely involved in

creating the crisis management plan they will implement if a crisis occurs. A

spokesperson should be designated.

c. The crisis management plan is a detailed written plan that specifies the steps to be

taken, and by whom, if a crisis occurs. The plan should include the steps for

dealing with various types of crises, such as natural disasters like fires or

earthquakes, normal accidents like economic crises or industrial accidents, and

abnormal events such as product tampering or acts of terrorism. The plan should

be a living, changing document that is regularly reviewed, practiced, and updated

as needed.

VI. INNOVATIVE APPROACHES TO PLANNING

A. Set Stretch Goals for Excellence

1. Stretch goals are reasonable yet highly ambitious goals that are so clear, compelling,

and imaginative that they fire up employees and engender excellence. They are

typically so far beyond the current levels that people have to be innovative to find

ways to reach them.

2. An extension of the stretch goal is the big hairy audacious goal or BHAG. A BHAG

is any goal that is so big, inspiring, and outside the prevailing paradigm that it hits

people in the gut and shifts their thinking.

VII. STRATEGY

The following sections explore components of strategic management and the purposes and levels

of strategy, models of strategy formulation, and tools that managers use to execute

strategic plans.

VIII. THINKING STRATEGICALLY

Strategic planning in for-profit organizations pertains to competitive actions in the marketplace.

In nonprofit organizations, strategic planning pertains to events in the external environment.

Strategic thinking means to take the long-term view and to see the big picture of the organization

and its environment to achieve organizational goals. Understanding the strategy concept, the

levels of strategy, and strategy formulation versus implementation is an important start toward

strategic thinking.

Planning and Goal Setting •

IX. WHAT IS STRATEGIC MANAGEMENT? Exhibit 5.7

Strategic management is the set of decisions and actions used to formulate and implement

strategies that provide a superior fit between the organization and its environment to achieve

organizational goals. It helps managers answer questions such as: What changes and trends are

occurring in the competitive environment? What products or services should we offer? How

can we offer those products and services most efficiently? Answers to these questions help

managers make choices about how to position their organization in the environment with respect

to rival companies.

A. Purpose of Strategy

1. Strategy is the plan of action that describes resource allocation and activities for

dealing with the environment, achieving a competitive advantage, and attaining the

organization’s goals.

2. Competitive advantage refers to what sets the organization apart from others and

provides it with a distinctive edge in the marketplace. The essence of formulating

strategy is choosing how the organization will be different. To remain competitive,

companies develop strategies that focus on targeting specific customers, core

competencies, provide synergy, and create value for customers.

a. Target Customers. An effective strategy defines the customers and their needs

that are to be served by the company. Managers define target market

geographically, demographically, or by other means. Some firms target people

who purchase primarily over the Internet whereas others aim to serve people who

like to shop.

b. Exploit Core Competence. A company’s core competence is something the

organization does especially well in comparison to its competitors. A core

competence represents a competitive advantage because the company acquires

expertise that competitors do not have. A core competence may be in the area of

superior research and development, expert technological know-how, process

efficiency, or exceptional customer service.

c. Build Synergy. Synergy is achieved when organizational parts interact to

produce a joint effect that is greater than the sum of the parts acting alone. The

organization may attain special advantage with respect to cost, market power,

technology, or management skill.

d. Deliver Value. Value is defined as the combination of benefits received and

costs paid. Managers can help their companies create value by devising strategies

that exploit core competencies and attain synergy.

B. SWOT Analysis Exhibit 5.8

1. SWOT analysis includes strengths, weaknesses, opportunities, and threats that affect

organizational performance. External information about opportunities is obtained

from customers, government reports, professional journals, suppliers, bankers,

Planning and Goal Setting •

friends, and consultants. Internal information comes from reports, budgets, financial

ratios, surveys of employee attitudes, and meetings.

a. Internal Strengths and Weaknesses

Strengths are positive internal characteristics organizations can exploit to achieve

strategic performance goals. Weaknesses are internal characteristics that may

inhibit or restrict the organization’s performance. The information sought

pertains to specific functions such as marketing, finance, production, or R&D.

b. External Opportunities and Threats

Opportunities are characteristics of the external environment that have the

potential to help the organization achieve or exceed its strategic goals. Threats

are characteristics of the external environment that may prevent the organization

from achieving its strategic goals. The task environment sectors are the most

relevant to strategic behavior and include the behavior of customers, competitors,

suppliers, and the labor supply. The general environment includes technological

developments, the economy, legal-political and international events, and

sociocultural changes.

Discussion Question #9: Perform a SWOT analysis for the school or university you attend. Do

you think university administrators consider the same factors when devising their strategy?

NOTES________________________________________________________________________

______________________________________________________________________________

X. FORMULATING CORPORATE-LEVEL STRATEGY

A. The BCG Matrix Exhibit 5.9

1. The BCG (Boston Consulting Group) matrix organizes businesses along two

dimensions—business growth rate and market share. Business growth rate pertains to

how rapidly the entire industry is growing. Market share defines whether a business

unit has a larger or smaller market share than competitors. The combination of

market share and business growth rate provides four categories to judge SBUs within

a corporate portfolio.

a. Star. The star has a large market share in a rapidly growing industry. The star is

important because it has additional growth potential and profits should be

reinvested for future growth and profits. It will generate a positive cash flow as

industry matures and market growth slows.

b. Cash Cow. The cash cow exists in a mature, slow-growth industry but has a large

market share. The cash cow has a positive cash flow and can be milked to feed

riskier businesses.

c. Question Mark. The question mark exists in a new, rapidly growing industry but

only has small market share. The question mark is risky. It could become a star

or it could fail.

d. Dog. The dog is a poor performer with small market share in a slow-growth

industry. A dog provides little profit and may be targeted for divestment or

Planning and Goal Setting •

liquidation.

NOTES________________________________________________________________________

______________________________________________________________________________

XI. FORMULATING BUSINESS-LEVEL STRATEGY

A. The Competitive Environment

The competitive environment is different for different kinds of businesses. Most large

companies have separate business lines and do an industry analysis for each line of business

or SBU.

B. Porter’s Competitive Strategies

Porter proposed that business-level strategies are the result of competitive forces in the

company’s environment. To find a competitive edge within the specific environment, Porter

suggests that a company can adopt one of three strategies. Exhibit 5.10

1. Differentiation. The differentiation strategy is an attempt to distinguish the firm’s

products or services from others in the same industry. The organization may use

advertising, distinctive product features, exceptional service, and new technology to

achieve a product perceived as unique. The differentiation strategy can be profitable

because customers are loyal and will pay high prices for the product. Companies that

pursue differentiation need strong marketing abilities, a creative flair, and a reputation

for leadership. This strategy can reduce rivalry with competitors if buyers are loyal.

2. Cost Leadership. With a cost leadership strategy, the organization seeks efficient

facilities, pursues cost reductions, and uses tight cost controls to produce products

more efficiently than competitors. A low-cost position means the company can

undercut competitors’ prices and still offer comparable quality and earn a reasonable

profit.

3. Focus. With a focus strategy, the organization concentrates on a specific regional

market or buyer group. The firm may use a differentiation or cost leadership

approach but only for a narrow target market.

Discussion Question #10: Harley-Davidson, which once boasted that it made “big toys for big

boys,” is trying to lure more women to the brand to make up for declining sales in a slow

economy. How do you think this move will complement or confound the company’s

differentiation strategy, which has long been based on a macho image?

NOTES________________________________________________________________________

______________________________________________________________________________

Planning and Goal Setting •

SUGGESTED ANSWERS TO END–OF-CHAPTER DISCUSSION

QUESTIONS

1. What strategic plans could the college or university at which you are taking this management

course adopt to compete for students in the marketplace? Would these plans depend on the

school’s goals?

2. From the information provided in the chapter example, identify how Western Digital

Thailand used both the prevention and the preparation stages of crisis planning.

• Crisis prevention stage involves activities that managers undertake to try to

prevent crises. A critical part of the prevention stage is building open, trusting

3. A new business venture must develop a comprehensive business plan to borrow money to get

started. Companies such as FedEx and Nike say they did not follow the original plan closely.

Does that mean that developing the plan was a waste of time for these eventually successful

companies?

4. Assume that Southern University decides to do two things: (1) raise its admission standards

and (2) initiate a business fair to which local townspeople will be invited. What types of

plans might it use to carry out these two activities?

5. LivingSocial started with one “daily deal,” a $25 voucher for $50 worth of food at a

Washington D.C., area restaurant. Since then, the company has grown at breakneck speed,

has 46 million members in 25 countries, and has acquired a dozen companies that offer

related deals and services. Why and how might a company such as LivingSocial want to use

scenario building? Discuss.

6. Some people say an organization could never be “prepared” for a disaster such as the

shooting at Sandy Hook Elementary School, the Japan nuclear disaster, or the huge BP oil

spill in the Gulf of Mexico. Discuss the potential value of crisis planning in situations like

these, even if the situations are difficult to plan for.

7. Goals that are overly ambitious can discourage employees and decrease motivation, yet the

Planning and Goal Setting •

idea of stretch goals is proposed as a way to get people fired up and motivated. As a

manager, how might you decide where to draw the line between a “good” stretch goal and a

“bad” one that is unrealistic?

8. Netflix has successfully adapted to a number of challenges in its industry. What do you see as

some engineering opportunities and threats for the company?

9. Perform a SWOT analysis for the school or university you attend. Do you think university

administrators consider the same factors when devising their strategy?

The following is a brief example of how SWOT analysis might apply to a specific university.

The university’s strengths are the loyalty of former students who contribute millions of dollars

10. Harley-Davidson, which once boasted that it made “big toys for big boys,” is trying to lure

more women to the brand to make up for declining sales in a slow economy. How do you

think this move will complement or confound the company’s differentiation strategy, which

has long been based on a macho image?

Students can have a lively debate about how to lure more women to the brand which has a

APPLY YOUR SKILLS: SELF-LEARNING

Business School Ranking

This exercise enables students to brainstorm about how to improve their own business schools.

Students should develop ten-point plans to improve their schools, then meet in small groups of

three or four to share their ideas and select the most helpful action steps that will be part of a

final action plan that could be recommended to their deans.

APPLY YOUR SKILLS: GROUP LEARNING

SWOT Analysis

This exercise asks each student to select a local eating establishment and write a statement of

what the student believes is the business’s current strategy, key strengths and weaknesses, and

opportunities and threats. Students should then interview the store managers or owners of their

selected establishments to get those persons’ perspectives on the elements of SWOT. Students

then set goals two years out and what steps they recommend to achieve those goals.

Planning and Goal Setting •

APPLY YOUR SKILLS: ETHICAL DILEMMA

Inspire Learning Corporation

1. Donate the $1,000 to Central High, and consider the $10,000 bonus a good return on your

investment.

2. Accept the fact you didn’t quite make your sales goal this year. Figure out ways to work

smarter next year to increase the odds of achieving your target.

3. Don’t make the donation, but investigate whether any other ways are available to help

Central High raise the funds that would allow them to purchase the much-needed

educational software.

APPLY YOUR SKILLS: CASE FOR CRITICAL ANALYSIS

Central City Museum

1. What goal or mission for the Central City Museum do you personally prefer? As director,

would you try to implement your preferred direction? Explain.

2. How would you resolve the underlying conflicts among key stakeholders about museum

direction and goals? What action would you take?

3. Review Director’s Toolkit on coalitions earlier in the chapter on page 190. Do you think that

building a coalition and working out stakeholder differences in global preferences is an

important part of a manager’s job? Why?

ON THE JOB VIDEO CASE ANSWERS

Mi Ola Swimwear: Managerial Planning and Goal Setting

1 1.Based on how this business owner describes her business, write a one- or two-sentence

organizational mission statement for Mi Ola Swimwear.

2. Pick four of the following six categories: strategic goal, strategic plan, tactical goal, tactical

plan, operational goal, and operational plan. Then, in the video, find one example to

represent each of the four categories you’ve chosen. Describe your four examples and how

they fit their respective categories in your answer.

3. What did you learn about some of the real benefits and limitations of planning by watching

this video?

• Benefits of Planning

Planning and Goal Setting •

Goals and plans guide resource allocation. By planning the inventory and deciding how

many swimsuits will be produced in each of the four sizes, Mi Ola’s founder can decide