Tuesday, September 27, 2011

Which Comes First—Goals or Strategies? (Part 2)

In the last blog, we looked at why it can be a mistake to set financial goals prior to setting the action strategy. More specifically, we saw that setting financial goals prior to setting a strategy can increase the risk of:

1) Setting the Wrong Goal (wrong metric and/or wrong level)
2) Taking the Wrong Actions (if the goal is inappropriate than it will lead to doing inappropriate actions)
3) Increasing Undesirable Risks (Unrealistic goals can lead to desperate behaviors)
4) Sacrificing the Long-term to hit Short-term Goals (Sub-optimal Trade-offs)
5) Perpetuating Failed Strategies (Rather than shutting them down)

In this blog, we will look at suggestions for reducing these risks.

Before moving on, I’d like to make a clarification. Thanks to some feedback, I realize that I may have given the false impression that I am against having goals. On the contrary, I like goals. I’m reminded of an old Pogo cartoon. Pogo and his buddy Albert are running through the woods as fast as they can. Pogo asks his buddy Albert if there is any particular destination they are running towards. Albert says no. So Pogo replies, “Then why are we running so fast?”

The idea is that if you have no idea of where you are going, there is no reason to run. Strategy is like that. Strategic planning is the task of finding the best path to a goal/mission/objective. If you do not know where you want to go, you cannot design a path to get there.

My concern is that most of the goals I see are merely financial numbers, like a goal for sales, profits, etc. These are not destinations, they are hoped for outcomes. They provide little to no insight into what the company must become to be successful.

These financial “destination-less” goals are the ones which lead to the five problems listed above (if they are set prior to setting the strategy). In this blog, we will look at alternatives.

Here are four suggestions for how to avoid these problems.

Suggestion #1: Set Non-Financial Goals
There is no law that says all goals need to be a financial number. Successful financials do not magically appear out of nowhere. No, they are typically an outcome of a combination of the following actions:

a) Owning the right position in the marketplace.
b) Maintaining/Strengthening the core competencies, capabilities and capacities needed to hold/strengthen a winning position.
c) Leveraging a winning position in the marketplace.
d) Having enough productivity in order to profitably afford to the position.

If good numbers depend on first achieving these types of actions, why not set up goals around these types of issues? For example, you could have a goal of achieving a particular position in the mind of the targeted customer. You can measure this goal via consumer research. Or, if your strategy is centered around quality, you can set a quality level goal (which can also be measured). If success requires international expansion, then set that as a measurable goal.

The point here is that there are a lot of ways to achieve a financial target. These approaches may or may not have any correlation to the desired strategic actions listed above. In fact, some of those approaches can disastrous to a strategy.

For example, I know an executive who hit his financial target by completely ignoring the strategic mandate to invest in a repositioning of his business. Instead of taking cash flow and putting it into repositioning, he let the money fall to the bottom line as near-term profits. He made a great bonus that year because he hit the financial target. Soon thereafter, however, the business was sold at a great loss, because the strategic repositioning never occurred. The business was destroyed, because the leader took the wrong path to achieve the near-term financial goal.

The point is that if you want that repositioning to occur, then make the repositioning the goal, not a financial number that can be achieved while ignoring the strategy. In other words, if you want certain strategic behaviors or conditions to occur, than make these behaviors and conditions the goal. The only way to ensure that the right actions get done is to set the goal around the action. Reward doing the right thing rather than hitting a financial goal the wrong way.

And, of course, you cannot set these types of behavior or condition goals until you have an understanding of the proper strategy. That is why strategy work needs to be done before setting the goal.

Suggestion #2: Separate Planning Cycle From the Budget Cycle
Many companies intermingle the timing of the planning cycle with the budgeting cycle. I think this is usually a mistake.

Budgets tend to be very financial in their focus and goal orientation. And this is not necessarily a bad thing. But by formulating strategy at the same time as budgets are set, one tends to end up with strategies which are often little more than a budget with a slightly longer time frame (a sort of 3-year budget). And this can be a bad thing, leading to all the problems mentioned earlier.

If you want people to think more strategically and create more strategic (less financial) long-term goals, it seems to work better if that process is not done simultaneously with annual budgeting. For example, if you do your budgeting in the fall, then do your primary strategy formulation in the spring. Not only does the separation allow for a better focus on strategy, it provides time between the two processes to understand the true ramifications of the strategy, so that strategy can better drive what is an appropriate budget.

Some of the intermingling is a result of placing strategic planning groups inside of finance or budgeting departments. Finance departments have a natural financial orientation, which can lead to goals that are too financial. If you want to reduce that bias, then you might want to consider taking strategic planning out of the finance group (if that is where it is today).

Suggestion #3: Just Don’t Do It
If setting a financial goal up front gets in the way of making great strategy later, then stop setting a financial goal first. It could be just that simple.

Suggestion #4: Add A Feedback Loop
If your company still insists on looking at financial goals first, then reply by insisting that the company also looks at these goals last. In other words, add a feedback loop to the end of the process to determine whether the original goal is still the most appropriate goal. If it isn’t, then reserve the right to change the goal at the end.

It may be that, after the strategic analysis, you conclude that some of your original assumptions during the goal-setting phase are no longer valid. Perhaps the best strategic path leads in a different direction from where your goal lies. If so, change the goal so that it fits your new reality.

Many companies use a strategic process where financial goals are set before the strategy is chosen. This approach increases the likelihood of bad results and missed opportunities. Four suggestions for reducing this problem are to:

a) Set Non-Financial Goals
b) Separate Planning Cycle From Budgeting Cycle.
c) Stop Setting Goals First
d) Add A Feedback Loop

Before running off to operate your business, be like Pogo and ask what the destination is. And don’t settle for a mere financial number. Ask for a real destination that is based on prior strategic analysis and rooted in specific activities.

1 comment:

  1. Gerald Nanninga,

    This post answers my comment on your preious post very well. Yes, I agree with this post. I believe that financial goals are the result of achieving other goals. Financial goals are lagging behind other goals. So, I am in total agreement with this post