Chapter 5 entrepreneurship section 5.2 the business plan worksheet answers

Major Questions You Should Be Able to Answer

5.1

Planning & Strategy

Major Question: What are planning, strategy, and strategic management, and why are they important to me as a manager?

5.2

Fundamentals of Planning

Major Question: What are mission and vision statements, and what are three types of planning?

5.3

Goals & Plans

Major Question: What are the three types of goals, and what are different kinds of plans?

5.4

Promoting Goal Setting: SMART Goals & Management by Objectives

Major Question: What are SMART goals and MBO and how can they be implemented?

5.5

The Planning/Control Cycle

Major Question: How does the planning/control cycle help keep a manager’s plans headed in the right direction?

Page 135

the manager’s toolbox

Setting Big Goals: Is This the Road to Success?

What’s a big goal? A four-year college degree.

Worth it? Not getting a degree has been estimated at about half a million dollars in lost income over your lifetime!1 People with such degrees averaged 98% more an hour than those without them.2 College graduates ages 25–32 are more apt than non–college graduates (86% versus 57%) to say their job is a path to a career.3

Big Goals, Hard Goals

Getting a college degree is not only a big goal, it’s a hard goal—difficult, stressful, expensive, time consuming. Still, do you perform better when you set difficult goals? If goals are made harder, people may achieve them less often, but they nevertheless perform at a higher level.4

If you have outsize ambitions, you might set yourself a really hard goal (“Increase study time 50%)—what’s known as a stretch goal, “stretching yourself beyond what your mind might think is safe,” in one definition.5 Richard Branson, founder of Virgin Atlantic airlines, Virgin records, and many other enterprises, has done a lot of incredible things, in part because of setting stretch goals: “My interest in life,” he says, “comes from setting myself huge, apparently unachievable challenges and trying to rise above them.”6 However, in organizations, stretch goals may spur extraordinary efforts but may also lead to excessive risk taking, cheating, and interpersonal strife.7

Writing Out Your Goals

Research suggests that writing about two paragraphs outlining your goals will help you feel more confident and energetic when entering a new group.8 Some advice for writing out—and achieving—your biggest goals are as follows:9

• Make a concrete plan—which embeds your intentions firmly in your memory.

• Break your goals into manageable bites—and set out clear steps that you can use to record and track your progress.

• Put something of value on the line—such as money that will be forfeited if you’re unsuccessful. (You can deposit the money at stickK.com.)

• Bundle your temptations or rewards to your efforts—such as tying your reading of pleasurable trashy novels to when you do gym workouts.

• Seek social support—pursue your goal with the help of a mentor or fellow strivers.

If you fail, don’t give up entirely. Realize that you may have other opportunities to make a fresh start.

For Discussion One writer advises setting one somewhat “crazy” personal goal from time to time. This is a stretch goal, he suggests, “that if accomplished would create a new, different, and exciting future state, the kind of goal that if you can only get halfway there, you will still feel good about the progress you have made and will be better for the effort.”10 What would that goal be for you?

We describe planning and its link to strategy. We define planning, strategy, and strategic management and state why they are important. We deal with the fundamentals of planning, including the mission and vision statements and the three types of planning—strategic, tactical, and operational. We consider goals, action plans, and operating plans; SMART goals and management by objectives; and finally the planning/control cycle.

Page 136Planning & Strategy

What are planning, strategy, and strategic management, and why are they important to me as a manager?

THE BIG PICTURE

The first of four functions in the management process is planning, which involves setting goals and deciding how to achieve them and which is linked to strategy. We define planning, strategy, and strategic management. We then describe three reasons why strategic management and strategic planning are important and how they may work for both large and small firms.

The management process, as you’ll recall (from Chapter 1), involves the four management functions of planning, organizing, leading, and controlling, which form four of the part divisions of this book. In this and the next two chapters we discuss planning and strategy.

Planning, Strategy, & Strategic Management

Planning, which we discuss in this chapter, is used in conjunction with strategy and strategic management, as we describe in Chapter 6. Let’s consider some definitions.

Planning: Coping with Uncertainty As we’ve said (Chapter 1), planning is defined as setting goals and deciding how to achieve them. Another definition: planning is coping with uncertainty by formulating future courses of action to achieve specified results. 11When you make a plan, you make a blueprint for action that describes what you need to do to realize your goals.

Example: One important type of plan is a business plan, a document that outlines a proposed firm’s goals, the strategy for achieving them, and the standards for measuring success. Here you would describe the basic idea behind your business—the business model, which outlines the need the firm will fill, the operations of the business, its components and functions, as well as the expected revenues and expenses. It also describes the industry you’re entering, how your product will be different, how you’ll market to customers, how you’re qualified to run the business, and how you will finance your business.

EXAMPLE

Is Planning Necessary? Launching a Vending-Machine Business on $425

Brian Allman of Reno, Nevada, was 17 years old when he bought a simple vending machine at Sam’s Club for $425 and used it to start Bear Snax Vending, stocking the machine and four others he added later with Skittles, M&Ms, and Snickers to serve several small to midsize businesses, such as banks. Allman did this without apparently drawing up a business plan.12

Why Plan? Almost everyone starting a new business is advised to write a business plan. The reasons: Creating such a plan helps you get financing. (“If you want us to invest our money, show us your plan.”) It helps you think through important details. (“Don’t rush things; it’s best to get the strategy right.”) Finally, it better guarantees your firm will succeed. (A study of 396 entrepreneurs in Sweden found that a greater number of firms that failed never had a formal business plan.13)

“Going with What You’ve Got.” Even so, sometimes major decisions, including starting up companies, are made without much planning. Indeed, one study found that 41% of Inc. magazine’s 1989 list of fastest-growing private firms didn’t have a business plan and 26% had only rudimentary plans, percentages essentially unchanged in 2002.14 Planning of any sort, of course, requires time, and sometimes you need to make a quick decision and “go with what you’ve got”—with or without a plan.15

YOUR CALL

Nine years after founding Bear Snax Vending without a formal business plan, Brian Allman was still running it. (Allman was also working as a financial advisor for financial services firm Edward Jones.) If you had a few hundred dollars with which to launch a small business, do you think writing a business plan would help you or just be a waste of time?

Page 137Strategy: Large-Scale Action Plan A strategy is a large-scale action plan that sets the direction for an organization. It represents an “educated guess” about what must be done in the long term for the survival or the prosperity of the organization or its principal parts. We hear the word expressed in terms like “Budweiser’s ultimate strategy . . .” or “Visa’s overseas strategy . . .” or financial strategy, marketing strategy, and human resource strategy.

An example of a strategy is “Find out what customers want, then provide it to them as cheaply and quickly as possible” (the strategy of Walmart). However, strategy is not something that can be decided on just once. It needs to be revisited from time to time due to ever changing business conditions.

Strategic Management: Involving All Managers in Strategy In the late 1940s, most large U.S. companies were organized around a single idea or product line. By the 1970s, Fortune 500 companies were operating in more than one industry and had expanded overseas. It became apparent that to stay focused and efficient, companies had to begin taking a strategic-management approach.

Strategic management is a process that involves managers from all parts of the organization in the formulation and the implementation of strategies and strategic goals. This definition doesn’t mean that managers at the top dictate ideas to be followed by people lower down. Indeed, precisely because middle managers in particular are the ones who will be asked to understand and implement the strategies, they should also help to formulate them.

As we will see, strategic management is a process that involves managers from all parts of the organization—top managers, middle managers, and first-line managers—in the formulation, implementation, and execution of strategies and strategic goals to advance the purposes of the organization. Thus, planning covers not only strategic planning (done by top managers) but also tactical planning (done by middle managers) and operational planning (done by first-line managers).

Planning and strategic management derive from an organization’s mission and vision about itself, as we describe in the next section. (See Figure 5.1 .)

FIGURE 5.1 Planning and strategic management

The details of planning and strategic management are explained in Chapters 5 and 6.

Why Planning & Strategic Management Are Important

An organization should adopt planning and strategic management for three reasons: They can (1) provide direction and momentum, (2) encourage new ideas, and above all (3) develop a sustainable competitive advantage. 16 Let’s consider these three matters.

1. Providing Direction & Momentum Some executives are unable even to articulate what their strategy is.17 Others are so preoccupied with day-to-day pressures that their organizations can lose momentum. But planning and strategic management can help people focus on the most critical problems, choices, and opportunities.

If a broad group of employees is involved in the process, that can foster teamwork, promote learning, and build commitment across the organization. Indeed, as we describe Page 138in Chapter 8, strategy can determine the very structure of the organization—for example, a top-down hierarchy with lots of management levels, as might be appropriate for an electricity-and-gas power utility, versus a flat-organization with few management levels and flexible roles, as might suit a fast-moving social media start-up.

Unless a plan is in place, managers may well focus on just whatever is in front of them, putting out fires—until they get an unpleasant jolt when a competitor moves out in front because it has been able to take a long-range view of things and act more quickly. In recent times, this surprise has been happening over and over as companies have been confronted by some digital or Internet trend that emerged as a threat—as Amazon.com was to Borders; as digital cameras were to Kodak’s film business; as Google News, blogs, and citizen media were to newspapers.18

But there are many other instances in which a big company didn’t take competitors seriously (as Sears didn’t Walmart, IBM didn’t Microsoft, and GM didn’t Toyota). “We were five years late in recognizing that [microbreweries] were going to take as much market as they did,” says August Busch III, CEO of massive brewer Anheuser-Busch, “and five years late in recognizing we should have joined them.”19

Of course, a poor plan can send an organization in the wrong direction. Bad planning usually results from faulty assumptions about the future, poor assessment of an organization’s capabilities, ineffective group dynamics, and information overload.20 And it needs to be said that while a detailed plan may be comforting, it’s not necessarily a strategy.21

2. Encouraging New Ideas Some people object that planning can foster rigidity, that it creates blinders that block out peripheral vision and reduces creative thinking and action. “Setting oneself on a predetermined course in unknown waters,” says one critic, “is the perfect way to sail straight into an iceberg.”22

Actually, far from being a straitjacket for new ideas, strategic planning can help encourage them by stressing the importance of innovation in achieving long-range success. Management scholar Gary Hamel says that companies such as Apple have been successful because they have been able to unleash the spirit of “strategy innovation.” Strategy innovation, he says, is the ability to reinvent the basis of competition within existing industries—“bold new business models that put incumbents on the defensive.”23

100 Montaditos. Characterized as a “Spanish Starbucks for sandwiches” or “the dollar store of fast-food franchises,” 100 Montaditos is a hugely successful Spanish restaurant chain that has set its sights on the United States. Named for bargain-rate traditional 5-inch sandwiches (such as those stuffed with Serrano ham or duck mousse with crispy onions for only $1), the chain’s strategy emphasizes atmosphere combined with low prices. Starting with this Miami restaurant in 2011, it aimed to open 4,000 outlets from Canada to Argentina during the next five years—a growth rate that would exceed even that of Starbucks, which took three decades to achieve the same number of U.S. stores. Some business analysts say the Spanish company’s plans are too ambitious. Is there anything wrong with a strategy built on bold dreams?

Page 139Some successful innovators are companies creating new wealth in the food and restaurant industries, where Starbucks Coffee, Trader Joe’s, ConAgra, and Walmart, for example, developed entirely new grocery product categories and retailing concepts. Chili’s, the casual-dining chain, has installed table-top computer screens that take menu orders, accept payments by credit card, and let diners play videogames, changing how diners and wait staff interact.24 GrubHub Seamless, an online takeout and delivery company, serves customers armed with cell phones and delivery apps, delivering pizzas and other foods anywhere they want—at the gym, in the park, on the playground.25 Vending machines are now serving everything from salads to smoothies to caviar, and supermarkets are experimenting with personalized pricing, using complex shopping data to ascertain the unique needs of individual customers.26

3. Developing a Sustainable Competitive Advantage Strategic management provides a sustainable competitive advantage, which, you’ll recall (from Chapter 1), is the ability of an organization to produce goods or services more effectively than its competitors do, thereby outperforming them. Sustainable competitive advantage occurs when an organization is able to get and stay ahead in four areas: (1) in being responsive to customers, (2) in innovating, (3) in quality, and (4) in effectiveness. Today technology has made achieving a sustainable competitive advantage nearly impossible in many industries, so the advantage may well be fleeting.27

EXAMPLE

Developing Competitive Advantage: What’s the Best Strategy in an E-Commerce Age?

E-commerce has completely changed retail shopping, as more Americans skip going into stores and order via their tablets and smartphones instead.28 The result has severely impacted such chains as Staples, RadioShack, and Sears, which have reduced the number of stores, and forced other big retailers, such as Walmart, to ramp up their online buying and delivery operations.29

Adjusting to Online Competition. Other stores have shifted their focus and their services:30 J. Crew has gone to a new format (J. Crew Mercantile) to appeal to discount shoppers. Abercombie & Fitch is reaching out to teens with less nudity on its clothing dummies, more black apparel, and larger sizes. Sears, Saks, and Macy’s are instructing their clerks to encourage virtual customers by picking and packing items from the stores themselves (rather than the warehouses) and ordering a same-day UPS or FedEx pickup, to avoid losing shoppers to Amazon.

IKEA’S Advantage. However, 71-year-old Sweden-based IKEA, the world’s largest furniture retailer, with 345 stores in 42 countries (50 in North America), has a different strategy—add more physical stores, as well as competing online and with catalogs. “We see that Internet and e-commerce is growing,” says IKEA CEO Peter Agnefjäll, “but at the same time, when buying a new bed a lot of people want to try it first, and if you buy a sofa you may want to touch the fabric.”31

YOUR CALL

For what kinds of products is a visit to a physical store a more attractive shopping experience for consumers than buying online? How realistic is the prospect of the use of holograms (which could enable consumers to try clothes on at home) and 3-D printers (which could print out three-dimensional products remotely) in the shopping experience within the next 15 years?

Page 140Fundamentals of Planning

What are mission and vision statements, and what are three types of planning?

THE BIG PICTURE

Planning consists of translating an organization’s mission and vision into objectives. The organization’s purpose is expressed as a mission statement, and what it becomes is expressed as a vision statement. From these are derived strategic planning, then tactical planning, then operational planning.

“Everyone wants a clear reason to get up in the morning,” writes journalist Dick Leider. “As humans we hunger for meaning and purpose in our lives.”32

And what is that purpose? “Life never lacks purpose,” says Leider. “Purpose is innate—but it is up to each of us individually to discover or rediscover it.”

An organization has a purpose, too—a mission. And managers must have an idea of where they want the organization to go—a vision. The approach to planning can be summarized in the diagram below, which shows how an organization’s mission becomes translated into goals and action plans. (See Figure 5.2 .)

FIGURE 5.2 Making plans

An organization’s reason for being is expressed in a mission statement. What the organization wishes to become is expressed in a vision statement. From these are derived strategic planning, then tactical planning, and finally operational planning. The purpose of each kind of planning is to specify goals and action plans that ultimately pave the way toward achieving an organization’s vision.

Mission & Vision Statements

The planning process begins with two attributes: a mission statement (which answers the question “What is our reason for being?”) and a vision statement (which answers the question “What do we want to become?”).

The Mission Statement—“What Is Our Reason for Being?” An organization’s mission is its purpose or reason for being. Determining the mission is the responsibility of top management and the board of directors. It is up to them to formulate a mission statement, which expresses the purpose of the organization.

“Only a clear definition of the mission and purpose of the organization makes possible clear and realistic . . . objectives,” said Peter Drucker.33 Whether the organization Page 141is for-profit or nonprofit, the mission statement identifies the goods or services the organization provides and will provide. Sometimes it also gives the reasons for providing them (to make a profit or to achieve humanitarian goals, for example).

EXAMPLE

Mission Statements for Three Different Companies: Hilton, Amazon, & Patagonia

Mission statements answer the question, “What is our reason for being?” or “Why are we here?”

Here are the mission statements for three companies, drawn from their websites. The mission statement for Hilton Hotels, a large company, reads: “To fill the earth with the light and warmth of hospitality.”

Amazon’s mission statement is “Use the Internet to offer products that educate, inform, and inspire. We decided to build an online store that would be customer friendly and easy to navigate and would offer the broadest possible selection. . . . We believe that a fundamental measure of our success will be the shareholder value we create over the long term.”

Clothing maker Patagonia’s mission statement is to “Build the best product, cause no unnecessary harm, [and] use business to inspire and implement solutions to the environmental crisis.”

YOUR CALL

Do you think any of these mission statements could be adapted to different companies offering different products or services? Give an example.

The Vision Statement—“What Do We Want to Become?” A vision is a long-term goal describing “what” an organization wants to become. It is a clear sense of the future and the actions needed to get there. “[A] vision should describe what’s happening to the world you compete in and what you want to do about it,” says one Fortune article. “It should guide decisions.”34

After formulating a mission statement, top managers need to develop a vision statement, which expresses what the organization should become, where it wants to go strategically. 35

EXAMPLE

Vision Statements for Three Different Companies: Hilton, Amazon, & Patagonia

Vision statements answer the question, “What do we want to become?” or “Where do we want to go?”

Here is Hilton Hotels’ statement: “To be the first choice of the world’s travelers, building on the rich heritage and strength of our brands by consistently delighting our customers, investing in our team members, delivering innovative products and services, expanding our family of brands, and continuously improving performance.”

Amazon’s vision statement: “Our vision is to be earth’s most customer-centric company; to build a place where people can come to find and discover anything they might want to buy online.”

Patagonia’s statement: “We prefer the human scale to the corporate, vagabonding to tourism, and the quirky to the toned-down and flattened out.”

YOUR CALL

Do these vision statements work? Do they meet Fortune’s criterion of describing “what’s happening in the world you compete in and what you want to do about it. It should guide decisions”?

The concept of a vision statement also is important for individuals. Harvard professor Clayton Christensen believes that creating a personal life vision statement is akin to developing a strategy for your life. He finds that people are happier and lead more meaningful lives when they are directed by personal vision statements.36 Do you have a vision for your future career? Is it vague or specific? The following self-assessment was created to help you evaluate the quality of your career vision and plan.Page 142

SELF-ASSESSMENT 5.1

Assessing Your Career Vision & Plan

This self-assessment is designed to measure the quality of your personal vision statement and associated plan. Go to connect.mheducation.com and take the self-assessment. When you’re done, answer the following questions:

1. What is the qualitative status of your vision statement and plan? Are you surprised by the results?

2. Based on the three lowest rated survey items, what can you do in the near term to enhance your vision and plan?

Three Types of Planning for Three Levels of Management: Strategic, Tactical, & Operational

Inspiring, clearly stated mission statements and vision statements provide the focal point of the entire planning process. Then three things happen:

Strategic planning by top management. Using their mission and vision statements, top managers do strategic planning —they determine what the organization’s long-term goals should be for the next 1–5 years with the resources they expect to have available.“Strategic planning requires visionary and directional thinking,” says one authority.37 It should communicate not only general goals about growth and profits but also ways to achieve them. Today, because of the frequency with which world competition and information technology alter marketplace conditions, a company’s strategic planning may have to be done closer to every 1 or 2 years than every 5. Still, at a big company like Boeing or Ford or Amazon (see Example box below), top executives cannot lose sight of long-range, multiyear planning.

EXAMPLE

Strategic Planning by Top Management: Amazon Manages for the Future, to the Frustration of Short-Term Investors

One thing Amazon CEO Jeff Bezos is famous for is unconventional thinking (or, in that hackneyed expression, “thinking outside the box”). For instance, his early decision to allow customers to post their own book reviews, both negative as well as positive, on the Amazon website puzzled competing booksellers, who thought negative reviews would diminish sales. Bezos’s point of view—“We will sell more if we help people make purchasing decisions”—proved correct.38 (Some of his latest ideas involve same-day delivery and delivery via drones.)39

Talking Long Term. Similarly, Bezos has an unconventional opinion about profitability. With most publicly owned companies, which Amazon is (Bezos holds 18% of the stock, worth $25.4 billion; most of the rest is owned by institutional investors such as Capital World or mutual funds such as American Funds), shareholders constantly pressure management to produce profits that will boost the stock every quarter (3 months) or so.40 But back in 1997, Bezos warned stockholders that “it’s all about the long term. We may make decisions and weigh trade-offs differently than some companies.”41

Most top managers do strategic planning on a one- to three-year time line. Says Bezos, “If everything you do needs to work on a three-year time horizon, then you’re competing against a lot of people. But if you’re willing to invest on a seven-year horizon, you’re now competing against a fraction of those people, because very few people are willing to do that.” Actually, Bezos is very long term, operating on a 10- to 20-year time line.

Ambitions for the Future. The large time window and freedom from having to deliver immediate profits allow Amazon to pursue the powerful long-range strategy it has planned.42 It is spending money to open new airplane hangar–size storage and shipping facilities, bringing them to an expected 94 Page 143by the end of 2013.43 It continues to cut prices on its merchandise, which will undercut its retail competitors (Borders is gone; Barnes & Noble and Best Buy are struggling).44 It is realizing Walmart-like economies of scale, achieving enormous savings from buying supplies in huge quantities. It has been slashing prices on its Kindle e-book reader and its Fire tablet to get more units into more buyers’ hands, developing a future customer base for its e-books, apps, media, and other digital products.45

Profits? “Profits will come down the road,” says business writer James Stewart, “when Kindle [and Fire] users buy content through Amazon.”46 Says Bezos, “We’re willing to plant seeds, let them grow—and we’re very stubborn.”

YOUR CALL

If Amazon’s strategy hurts short-run profits, should your parents or grandparents invest in Amazon? Should you? What if Amazon’s strategic plan is wrong?

Tactical planning by middle management. The strategic priorities and policies are then passed down to middle managers, who must do tactical planning —that is, they determine what contributions their departments or similar work units can make with their given resources during the next 6–24 months.

Operational planning by first-line management. Middle managers then pass these plans along to first-line managers to do operational planning —that is, they determine how to accomplish specific tasks with available resources within the next 1–52 weeks.

The three kinds of managers are described further in the figure below. (See Figure 5.3 .)

FIGURE 5.3 Three levels of management, three types of planning

Each type of planning has different time horizons, although the times overlap because the plans are somewhat elastic.

Page 144Goals & Plans

What are the three types of goals, and what are different kinds of plans?

THE BIG PICTURE

The purpose of planning is to set a goal and then an action plan and an operational plan. Types of plans include standing and single-use plans.

Whatever its type—strategic, tactical, or operational—the purpose of planning is to set a goal and then to formulate an action plan.

Three Types of Goals: Strategic, Tactical, & Operational

A goal, also known as an objective, is a specific commitment to achieve a measurable result within a stated period of time.

As with planning, goals are of the same three types—strategic, tactical, and operational. Also, like planning, goals are arranged in a hierarchy known as a means-end chain because in the chain of management (operational, tactical, strategic) the accomplishment of low-level goals is the means leading to the accomplishment of high-level goals or ends.

Strategic goals are set by and for top management and focus on objectives for the organization as a whole.

Tactical goals are set by and for middle managers and focus on the actions needed to achieve strategic goals.

Operational goals are set by and for first-line managers and are concerned with short-term matters associated with realizing tactical goals.

As we will see later in Section 5.4, goals should be SMART—specific, measurable, attainable, results-oriented, and with target dates.

The Action Plan & the Operating Plan

The goal should be followed by an action plan, which defines the course of action needed to achieve the stated goal, such as a marketing plan or sales plan.

The operating plan, which is typically designed for a one-year period, defines how you will conduct your business based on the action plan; it identifies clear targets such as revenues, cash flow, and market share.

EXAMPLE

Strategic, Tactical, & Operational Goals: Southwest Airlines

Ranking No. 9 on Fortune’s 2014 Most Admired Companies list, Dallas-based Southwest Airlines has inspired a host of low-fare imitators—big ones like Alaska and JetBlue and small ones like Allegiant, Frontier, Spirit, Sun Country, and Virgin America—which have grown rapidly in recent years compared to mainline carriers such as United, Delta, American, and US Airways. It has continually achieved its strategic goals and as of 2014 had been profitable for 41 consecutive years.47

Strategic Goals. The goal of Southwest’s top managers is to ensure that the airline is highly profitable, following the general strategy of (a) keeping costs and fares down, (b) offering a superior on-time arrival record, and (c) keeping passengers Page 145happy. One of the most important strategic decisions Southwest made was to fly just one type of airplane—Boeing 737s. (Several dozen Boeing 717s, inherited when the company acquired AirTran, were leased to Delta. Southwest has about 680 jets overall.) Thus, it is able to hold down training, maintenance, and operating expenses.48

Lookalikes. One key to the success of Southwest Airlines is that all the planes in its fleet have been the same type, Boeing 737s, which saves on maintenance and training costs.

Another strategic decision was to create a strong corporate culture that, according to one former CEO, allows people to “feel like they’re using their brains, they’re using their creativity, they’re allowed to be themselves and have a sense of humor, and they understand what the mission of the company is.”49

Tactical Goals. Cutting costs and keeping fares low has traditionally been a key tactical goal for Southwest’s middle managers. For example, the organization cut costs in its maintenance program by doing more work on a plane when it’s in for a check instead of bringing it in three different times. In addition, it has tried to get more use out of its planes every day by limiting the turnaround time between flights to 20 minutes, compared to up to an hour for other airlines.

Although now it flies longer flights between bigger cities, which uses fuel more efficiently but is more subject to delays, until recently Southwest flew short-haul flights to midsize cities to save time and money by avoiding traffic. There is just one class of seating, doing away with the distinction between coach and first class. Originally, even the boarding passes were reusable, being made of plastic (most passengers print out their own passes now). Finally, the airline saves by not feeding passengers: it serves mostly peanuts, no in-flight meals.

How do you make arrival times more reliable? To achieve this second tactical goal, middle managers did away with guaranteed seat reservations before ticketing, so that no-shows wouldn’t complicate (and therefore delay) the boarding process. (It changed that policy slightly in 2007 to ensure that passengers paying extra for “business select” fares would be placed at the front of the line.)

In addition, as mentioned, the airline has tried to turn planes around in exactly 20 minutes, so that on-time departures are more apt to produce on-time arrivals. Although the airline is about 83% unionized, turnaround was helped by looser work rules, so that workers could pitch in to do tasks outside their normal jobs. “If you saw something that needed to be done,” said one former employee, “and you thought you could do it, you did.”50

Unfortunately, in 2013, in an attempt to offer more convenient flight schedules, the airline instituted a new system to reduce times it allowed for flights and compressed its turnaround times even further—the result of which sent its on-time performance reeling to last place among U.S. carriers. Its involuntarily denied–boarding rate and mishandled-baggage rate also increased slightly.51

Despite the delays, Southwest still retained its top ranking for having the lowest customer complaints.52 The difference lies in small things: the free peanuts (an emotional subject among travelers), switching of flights without charge, and no charge for checked-in luggage up to two pieces. (The airline does, however, charge for checking a third bag.)

Operational Goals. Consider how Southwest’s first-line managers can enhance productivity in the unloading, refueling, and cleaning of arriving planes. “One example [of productivity] customers mention all the time,” said former chairman Herb Kelleher, “is if you look out the window when the airplane is taxiing toward the jetway, you see our ground crews charging before the airplane has even come to rest. Customers tell me that with other airlines nobody moves until the airplane has turned off its engines.”53

The New Southwest. In January 2014, Southwest began venturing into the international market, marking a significant shift.54 Its initial flights are to the Caribbean, but other international routes may be attempted later. Some operations, such as fast turnaround times, may be difficult to implement because of departure restrictions.55 Southwest also faces costly upgrades to its computer systems and an antiquated phone system, its traditionally low fares are not so low anymore, and it is negotiating with workers to try to achieve more productivity and flexibility.56

YOUR CALL

Do you think recent changes will allow the company to continue to achieve its strategic goals?

Page 146Types of Plans: Standing Plans & Single-Use Plans

Plans are of two types—standing plans and single-use plans. (See Table 5.1 .)

TABLE 5.1 Standing Plans and Single-Use Plans

There are three types of standing plans and two types of single-use plans.

Standing Plans: Policies, Procedures, & Rules Standing plans are plans developed for activities that occur repeatedly over a period of time. Standing plans consist of policies, procedures, and rules.

A policy is a standing plan that outlines the general response to a designated problem or situation. Example: “This workplace does not condone swearing.” This policy is a broad statement that gives managers a general idea about what is allowable for employees who use bad language, but gives no specifics.

A procedure (or standard operating procedure) is a standing plan that outlines the response to particular problems or circumstances. Example: McDonald’s specifies exactly how a hamburger should be dressed, including the order in which the mustard, ketchup, and pickles are applied.

A rule is a standing plan that designates specific required action. Example: “No smoking is allowed anywhere in the building.” This allows no room for interpretation.

Single-Use Plans: Programs & Projects Single-use plans are plans developed for activities that are not likely to be repeated in the future. Such plans can be programs or projects.

A program is a single-use plan encompassing a range of projects or activities. Example: The U.S. government space program has had several projects, including the Challenger project, the Hubble Telescope project, and the space shuttle project.

A project is a single-use plan of less scope and complexity than a program. Example: The space shuttle project, one of several projects in the government’s space program, consisted of three shuttles: Discovery, Endeavour, and Atlantis.

Page 147Promoting Goal Setting: SMART Goals & Management by Objectives

What are SMART goals and MBO and how can they be implemented?

THE BIG PICTURE

This section discusses SMART goals—goals that are Specific, Measurable, Attainable, Results-oriented, and have Target dates. It also discusses a technique for setting goals, management by objectives (MBO), a four-step process for motivating employees.

Anyone can define goals. But as we mentioned earlier, the five characteristics of a good goal are represented by the acronym SMART.

SMART Goals

A SMART goal is one that is Specific, Measurable, Attainable, Results-oriented, and has Target dates.

Specific Goals should be stated in specific rather than vague terms. The goal “As many planes as possible should arrive on time” is too general. The goal that “Ninety percent of planes should arrive within 15 minutes of the scheduled arrival time” is specific.

Measurable Whenever possible, goals should be measurable, or quantifiable (as in “90% of planes should arrive within 15 minutes . . .”). That is, there should be some way to measure the degree to which a goal has been reached.

Of course, some goals—such as those concerned with improving quality—are not precisely quantifiable. In that case, something on the order of “Improve the quality of customer relations by instituting 10 follow-up telephone calls every week” will do. You can certainly quantify how many follow-up phone calls were made.

Attainable Goals should be challenging, of course, but above all they should be realistic and attainable. It may be best to set goals that are quite ambitious so as to challenge people to meet high standards. Always, however, the goals should be achievable within the scope of the time, equipment, and financial support available. (See Figure 5.4 .)

If too easy (as in “half the flights should arrive on time”), goals won’t impel people to make much effort. If impossible (“all flights must arrive on time, regardless of weather”), employees won’t even bother trying. Or they will try and continually fail, which will end up hurting morale. Or they will cheat. (An example was the unrealistic goal of cutting wait times for appointments by more than half at Veterans Affairs hospitals, as revealed in 2014 scandals in which VA administrators were found to have falsified figures.)57

FIGURE 5.4 Relationship between goal difficulty and performance

Source: Adapted from E. A. Locke and G. P. Latham, A Theory of Goal Setting and Task Performance (Englewood Cliffs, NJ: Prentice Hall, 1990).

Results-Oriented Only a few goals should be chosen—say, five for any work unit. And they should be results-oriented—they should support the organization’s vision.

In writing out the goals, start with the word “To” and follow it with action-oriented verbs—“complete,” “acquire,” “increase” (“to decrease by 10% the time to get passengers settled in their seats before departure”).

Some verbs should not be used in your goal statement because they imply activities—the tactics used to accomplish goals (such as having baggage handlers waiting). For example, you should not use “to develop,” “to conduct,” “to implement.”

Page 148Target Dates Goals should specify the target dates or deadline dates when they are to be attained. For example, it’s unrealistic to expect an airline to improve its on-time arrivals by 10% overnight. However, you could set a target date—3 to 6 months away, say—by which this goal is to be achieved. That allows enough time for lower-level managers and employees to revamp their systems and work habits and gives them a clear time frame in which they know what they are expected to do.

EXAMPLE

Setting Goals: Walmart Lays Out an Agenda for Environmental Change

Tired of criticism of Walmart’s business practices, its CEO at the time, H. Lee Scott Jr., in a 2008 speech laid out new environmental goals.58 Besides continuing to promote energy-saving products at low prices in its stores, such as fluorescent light bulbs, Scott said the company would also work with suppliers of high-energy-use products, such as air conditioners, microwave ovens, and televisions, to make such products 25% more energy efficient within three years. Later Walmart pledged to eliminate 20 million tons of carbon emissions from its global supply chain by 2015.59

More Milestones. At its 2013 Global Sustainability Milestone Meeting, the company listed the two following goals, to be achieved by the end of 2020: (1) a 600% increase (over 2010 levels) in power purchases of renewable energy globally every year, and (2) a reduction by 20% globally (compared to 2010) in kilowatts required to power Walmart buildings. The new commitments would avoid 9 million metric tons of greenhouse gas, taking the equivalent of 1.5 million cars off the road. Such efficiencies would be achieved by adding solar power to buildings and buying wind, hydro, and geothermal sources of energy, as well as increasing LED lighting in and around stores.60

Endgame. By 2014, the company had shot from 15th to 6th place in the Environmental Protection Agency’s rankings of the country’s top purchasers of green power—electricity produced by wind, solar, and similar means.61 However, some organizations, such as the Institute for Local Self-Reliance, produced studies that reported that Walmart’s greenhouse gas emissions had actually grown 14% because the company’s calculations had failed to account for major sources of pollution such as those of international shipping, new store construction, and product manufacturing.62

YOUR CALL

Whether or not Walmart has included all the sources of emissions in its calculation, as critics assert, how do the objectives outlined above reflect the criteria for SMART goals?

Better environmental objectives. Walmart aims to reduce its greenhouse gas emissions, using alternative sources of energy such as wind and solar.

Management by Objectives: The Four-Step Process for Motivating Employees

First suggested by Peter Drucker in 1954, management by objectives has spread largely because of the appeal of its emphasis on converting general objectives into specific ones for all members of an organization.63

Management by objectives (MBO) is a four-step process in which (1) managers and employees jointly set objectives for the employee, (2) managers develop action plans, (3) managers and employees periodically review the employee’s performance, and (4) the manager makes a performance appraisal and rewards the employee according to results. The purpose of MBO is to motivate rather than to control subordinates.

Page 149Before we begin discussing these four steps, you may want to consider the quality of the goal-setting process in a current or former employer. The following self-assessment was developed to provide insight into the quality of goal setting within an organization.

SELF-ASSESSMENT 5.2

What Is the Quality of Goal Setting within a Current or Past Employer?

This self-assessment is designed to assess the quality of goal setting in a company. Go to connect.mheducation.com and take the self-assessment. When you’re done, answer the following questions:

1. What are the strengths and weaknesses of goal setting in the company you selected?

2. Based on your results, what recommendations would you provide to senior management about improving the goal-setting process in this company? Explain.

3. What actions could you take to improve the goal-setting process in this company? Be specific.

1. Jointly Set Objectives You sit down with your manager and the two of you jointly set objectives for you to attain. Later you do the same with each of your own subordinates. Joint manager/subordinate participation is important to the program. It’s probably best if the objectives aren’t simply imposed from above (Don’t say, “Here are the objectives I want you to meet”). Managers also should not simply approve the employee’s objectives (“Whatever you aim for is okay with me”). It’s necessary to have back-and-forth negotiation to make the objectives practicable.64

One result of joint participation, research shows, is that it impels people to set more difficult goals—to raise the level of their aspirations—which may have a positive effect on their performance.65 The objectives should be expressed in writing and should be SMART. There are three types of objectives, shown in the following table. (See Table 5.2 .)

Jointly setting objectives. An important part of MBO is joint manager/subordinate participation in setting objectives. Have you ever held a job that featured this kind of process?

TABLE 5.2 Three Types of Objectives Used in MBO

Page 1502. Develop Action Plan Once objectives are set, managers at each level should prepare an action plan for attaining them. Action plans may be prepared for both individuals and for work units, such as departments.

3. Periodically Review Performance You and your manager should meet reasonably often—either informally as needed or formally every three months—to review progress, as should you and your subordinates. Indeed, frequent communication is necessary so that everyone will know how well he or she is doing in meeting the objectives.

During each meeting, managers should give employees feedback, and objectives should be updated or revised as necessary to reflect new realities. If you were managing a painting or landscaping business, for example, changes in the weather, loss of key employees, or a financial downturn affecting customer spending could force you to reconsider your objectives.

4. Give Performance Appraisal & Rewards, If Any At the end of 6 or 12 months, you and your subordinate should meet to discuss results, comparing performance with initial objectives. Deal with results, not personalities, emotional issues, or excuses.

Because the purpose of MBO is to motivate employees, performance that meets the objectives should be rewarded—with compliments, raises, bonuses, promotions, or other suitable benefits. Failure can be addressed by redefining the objectives for the next 6- or 12-month period, or even by taking stronger measures, such as demotion. Basically, however, MBO is viewed as being a learning process. After step 4, the MBO cycle begins anew.66

Cascading Objectives: MBO from the Top Down

For MBO to be successful, the following three things have to happen.

1. Top Management Must Be Committed “When top-management commitment [to MBO] was high,” said one review, “the average gain in productivity was 56%. When commitment was low, the average gain in productivity was only 6%.”67

2. It Must Be Applied Organizationwide The program has to be put in place throughout the entire organization. That is, it cannot be applied in just some divisions and departments; it has to be done in all of them.

3. Objectives Must “Cascade” MBO works by cascading objectives down through the organization; that is, objectives are structured in a unified hierarchy, becoming more specific at lower levels of the organization. Top managers set general organizationalobjectives, which are translated into divisional objectives, which are translated into departmental objectives. The hierarchy ends in individual objectives set by each employee.

The Importance of Deadlines

There’s no question that college is a pressure cooker for many students. The reason, of course, is the seemingly never-ending deadlines. But consider: Would you do all the course work you’re doing—and realize the education you’re getting—if you didn’t have deadlines?

As we saw under the “T” (for “has Target dates”) in SMART goals, deadlines are as essential to goal setting in business as they are to your college career. Because the whole purpose of planning and goals is to deliver to a client specified results within a specified period of time, deadlines become a great motivator, both for you and for the people working for you.

Page 151It’s possible, of course, to let deadlines mislead you into focusing too much on immediate results and thereby ignore overall planning—just as students will focus too much on preparing for a test in one course while neglecting others. In general, however, deadlines can help you keep your eye on the “big picture” while simultaneously paying attention to the details that will help you realize the big picture. Deadlines can help concentrate the mind, so that you make quick decisions rather than put them off. Deadlines help you ignore extraneous matters (such as cleaning up a messy desk) in favor of focusing on what’s important—realizing the goals on time and on budget. Deadlines provide a mechanism for giving ourselves feedback.

PRACTICAL ACTION

How to Achieve Your Important Goals: Don’t Keep Every Option Open

We’ve all been told that “It’s important to keep your options open.” But should we?

“You don’t even know how a camera’s burst-mode flash works, but you persuade yourself to pay for the extra feature just in case,” writes a journalist about this phenomenon. “You no longer have anything in common with someone who keeps calling you, but you hate to just zap the relationship. Your child is exhausted from after-school soccer, ballet, and Chinese lessons, but you won’t let her drop the piano lessons. They could come in handy.”68