Guidelines: Business Goal
Topics
Introduction
Traditionally, business activities have been planned and measured with a very
strong focus on financial performance. On the one hand, managers may define
both financial and nonfinancial objectives, while on the other hand they might
be interested only in the outcome of the financial measures. This misalignment
between objectives and measures leads, sadly, to undesirable yet predictable
behavior.
The modern enterprise does not only have to be competitive financially, but
to be so on a variety of different fronts. Business goals must define more than
just financial measures. They must also focus on, for example, employee satisfaction
or customer success. Simply defining different business goals is not enough
to ensure success, because certain goals might be measured or enforced more
than others.
Modeling business
goals provides a technique for considering how the business strategy should be
implemented in the short- and long-term and for defining a balanced set of
measures to ensure that business processes support the strategy.
The question that arises from this issue is: How do you implement strategy,
particularly one that could require radical change?
Business Strategy and
Business Goals
Business strategy defines the manner in which the organization should interact
with its environment, so as to fulfill its purpose. As such, business strategy
is essentially focused on the external perspective of the organization, rather
than internally managing the organization. Business strategy and business goals
are closely related: Business goals define what needs to be achieved to realize
a higher-level goal, while business strategy provides the boundaries within
which these goals will be defined. Strategy does not, however, prescribe specific
goals.
Strategy is about positioning. In military terms, strategy organizes
the preparation for battle and the results of the battle, and ensures that results
of a battle contribute to achieving the purpose of the war [CLA97].
The battle itself is a tactical affair. In business, strategy describes the
desired competitive position of the organization. The organization can fulfill
its purpose once it finds itself in a sustainable competitive position. Business
goals describe what must be achieved to reach that desired competitive position.
Both business strategy and business goals are concerned with what must
be achieved and not how it will be achieved.
Kenichi Ohmae defines strategy as being anything that gives an organization
sustainable competitive advantage [OHM91].
Business goals should therefore focus on what provides competitive advantage
to the organization, for only this is strategic. We can conclude that business
goals must define what must be achieved in order to reach a sustainable competitive
position.
Business Goal Hierarchy
Business goals are usually high level and have a long-term focus. However,
business goals need to be translated to a concrete, measurable level before
they can be used to manage the activities of the business. Such a measurable
and time-constrained business goal is often referred to as an objective. Business
goals therefore need to be arranged in a hierarchy, with each business goal
(or objective) traced back to the higher level goals it supports. In [KAP96]
Kaplan and Norton explain, "Without such linkage, individuals and departments
can optimize their local performance but not contribute to achieving strategic
objectives."
While Kaplan and Norton introduce the concept of linkage, they do not supply
any further notions or methods to support their concept. It is imperative
to obtain clear insight into this hierarchy of business goals and how it is
supported by the activities of the business (as described in the Business Use
Cases). This allows for rapidly propagating changes in direction from the strategic
level downward. This ability to rapidly change the direction of the entire operation
is called strategic agility, and it allows the organization to react
to changes faster than its competitors.
Here is an example of a business goal hierarchy in a payment services organization:
The high-level business goal Customer Intimacy
has been translated to business goals at a lower level, which
are more recognizable to individual departments within the organization. By defining
these more concrete business goals, the problem of objectively measuring
customer intimacy is solved. Sometimes it may be necessary to translate one or
more of these lower goals further.
Business Processes and
Business Goals
Goals are useless in themselves. They must be translated into action in order
to be meaningful. Every business goal should be directly supported by at least
one business process, or should be further defined in terms of more concrete
subgoals.
It has always been difficult to define a business strategy and then derive
objectives in support of this strategy for different parts of the organization.
Business processes in the modern enterprise are integrated and cross-functional,
and this actually makes the process of allocating business goals easier than
before. Business goals are allocated to parts of the organizational in terms
of these integrated business processes, which add value to stakeholders of the
business. The contribution of one particular part of the organization to customer
satisfaction, for example, can be defined and measured.
Balanced Scorecard
The answer to the question posed above must be sought in a method that gives
the user insight into the course of action taken. The method must also indicate
to the user the consequences of any action taken. One such method is the Balanced
Scorecard (BSC) by Kaplan and Norton [KAP96].
The BSC defines a technique for translating business strategy into business
goals and measures, thereby ensuring a balanced focus on achievement of all
goals.
Kaplan and Norton write: "Front-line employees must understand the financial
consequences of their decisions and actions; senior executives must understand
the drivers of long-term financial success. The objectives and measures of the
Balanced Scorecard are ... derived from a top-down process driven by the mission
and strategy of the business."
The theory behind the
BSC is quite logical:
- Know
where you want the organization to be in the future (desired competitive position).
- Know
the business and the sort of organization required to reach that position
(purpose, or mission).
- Define
the relationship between the mission and the activities of the business (business
goals).
- Define more precisely what is to be achieved and when the results are to be
accomplished (operational objectives).
Business goals are scored using four perspectives. It could be concluded that
there are only four types of business goals. However the method of scoring and
thus the types of business goals is arbitrary. An organization is free
to define more types as they are required.
Financial Perspective-Indicates what has happened in the past and measures
what should be done to achieve the financial objectives and check the performance.
Customer Perspective-Looks at the present and indicates what should
be done to improve customer relationship.
Learning and Growth Perspective-Looks at the future and what needs to
be done to maintain growth and achieve further improvement.
Internal Process Perspective-Looks at the present and indicates which
internal processes should be performed with excellence for customer and shareholder
satisfaction.
An important feature of the BSC is that there should be a cause-and-effect
relationship between all the perspectives and hence also between all the identified
business goals. The following simple but effective example illustrates this.
Perspective |
Goal |
Learning and Growth
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Have sufficient qualified staff.
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Internal Process
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Adequately execute processes.
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Customer
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Satisfy the right customer.
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Financial
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Maintain or improve business profitability.
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This is an iterative process, because maintaining or improving profitability
will enable the organization to keep employing sufficient qualified staff. As
Kaplan and Norton indicate, "If you cannot measure it, you cannot manage
it." It is imperative therefore that business goals can be measured objectively,
either quantitatively or qualitatively. (See the next section.)
Measuring Goal Achievement
Just the intention to achieve goals is not enough to ensure that the business
strategy will be executed. People must receive feedback on their actions in
order to learn and improve. By measuring the achievement of business goals,
business activities can be increasingly aligned with strategy. In [ERI00],
Eriksson and Penker identify quantitative goals and qualitative goals. Quantitative
goals are easy to measure, because some attribute must have a particular value
at some point in time. Qualitative goals, however, are more subjective ,and
human judgment is needed to determine whether the goal has been achieved.
Measurements are useful for a number of reasons. First, measurements provide
an indication of how successfully the business strategy is being implemented
at various levels of the business. Second, measurements give insight into the
effectiveness of goals. Finally, measurements provide a feedback mechanism with
which minor adjustments can be made to the strategy based on operating conditions.
This feedback can also be accumulated and aggregated over a long period with
which the strategy can be adjusted more significantly.
If business goals are not translated to sufficiently
measurable levels within the organization, they may remain too abstract for
employees to relate to, which will make it very unlikely that people will strive
to achieve the goals in their daily activities.
Resolving Goal Conflicts
Due to the diverse nature of business goals, they may appear to conflict with
one another. A typical example is for call-center employees to service many
customers in a specific time (throughput), yet deliver high quality of service
to each customer (which takes time). If the call-center manager rewards the
employee with the most calls, the service level will drop. On the other hand,
if the manager rewards the employee with the most satisfied customers, the throughput
will drop. Volume versus time or quality versus cost are recognizable goal-conflict
patterns to which Eriksson and Penker refer. They also described a technique,
using an association stereotyped <<contradictory>>, for explicitly
modeling conflicts between business goals.
Managers must be aware of this very common dilemma when setting business goals.
However, the strategy of an organization does not stand or fall on any single
business goal, much the same as a war is not won or lost by a single battle.
The direction of the organization is derived from the sum of all actions taken.
It may therefore seem that a business goal is counter-productive, but when the
goal is measured as one part of the whole, the sum is actually positive. This
means that localized inefficiencies may actually contribute indirectly to the
business strategy. Nonetheless, not performing a minor "course correction"
(because for example, somebody is more interested in the bonus as a result of
the performance of his or her own department) can put the organization as a
whole at a disadvantage.
Example
Imagine a large furniture store that sells reasonable quality furniture at
a reasonable price to the very large middle-market. The store's showrooms border
on a warehouse at which customers can directly pick up the item they have purchased
and take it with them. Alternatively, customers can arrange to have large items
delivered. A business goal hierarchy for this company may look as follows:
Note that the business goal Reasonable Quality is sufficient to retain existing
customers but will not serve to attract new customers. People will not go to
shop somewhere because the quality is no less than competitors. People will
be attracted to shopping there because prices are lower and it is convenient.
It may have been determined that product quality meets customers' expectations
and that no quality improvements are therefore necessary. However, facilities
may need to be improved. The business goal Improve Facility Quality may be further
divided into things like Sufficient Parking, Clean Restrooms, and Multilingual
Signs.
Remember that it should be possible to measure business goals; otherwise they
may need to be refined further. Prices can be objectively compared to competitors'
prices, whereas convenience for customers is very difficult to measure. Therefore,
customer convenience has been subdivided into Accessibility, Immediate Availability,
and Opening Times, which are more concrete ways to measure customer convenience.
Opening Times can be optimized, for example, by measuring the number of people
in the store during every hour of the day. Accessibility can be (partly) determined
by the number of payment methods available to customers. The immediate availability
of products is defined by the stock-on-hand, which can be measured by the percentage
of back orders directly requested by customers, and the delivery time, which
can also be objectively measured.
Conclusion
An organization has a vision, which is translated into a strategy. The
strategy should be met by the business goals that are ultimately measured in
the operations of the organization. The vision is implemented by business workers
and business actors interacting to realize the business use cases. Business
goals are the "glue" between the business strategy and business use cases. If
they are correctly defined, they will give the organization the required insight
to keep on course or to change course as required.
Business goals must be defined at a sufficiently high level in order to focus
the entire organization on the vision. Objectives and measures must be defined
at a sufficiently low level within an organization in order that employees can
identify themselves with them. Business goals must be measurable to be effective,
either quantitatively or by the sum of subgoals (qualitatively).
There are a number of techniques for defining and measuring business
goals, one of which is the Balanced Scorecard. Whatever technique is used,
however, it should be applied as a management tool and not solely as a measurement instrument.
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