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Thursday, February 23, 2017
Why is an organization created? What is its purpose? How best can it achieve that purpose? What methods and means will it employ to achieve the purpose? Various terms and concepts of mission, objectives, strategy, policy, programmes and procedures which will help you understand the management of organizations.
The mission is the very reason and justification for the existence of a firm. Mission is always defined in terms of the benefits the firm provides to its customers and not in terms of any physical dimensions of the firm or its products.
A firm exists and functions only in relation to the customer whose need(s) it satisfies.. If there were no customers there would be no firm. Thus the starting point for, defining the mission of any business is its customer. Since the customer exists outside the business, the mission must be defined from the outside. The firm must ask the questions "What is our business?" and "What should it be?" but seek the answer from the customer's viewpoint.
The important thing is to identify the not-so-obvious, but the perceived benefit or value which the customer is actually seeking when buying the product. Correct identification of the real benefit or value to the customer will help the firm to answer the question "What is our business?"
A retail outlet may view its business as merely selling ready-made garments, but the customers buying these garments may in reality be buying convenience, high fashion, status or any other value they perceive in the garments.
Further, mission' is always concerned with the future. "What should our business be?" The mission should be so described that it remains valid for at least some years to come. Sometimes the mission may be so intelligently described, anticipating future opportunities so well, that the concept may remain valid for even as long as 15 to 20 years. Drucker gives the classic example of the American Telephone and Telegraph Company which in 1890 defined its mission as "our business is service". This definition stood the company in good stead right up to late 1960s spanning almost 70 years.
However, long a definition of mission may remain valid without any change, it must be remarked that the concept of mission is dynamic and not static. It must change over time with changes occurring in the environment. These may relate to changes in technology, social structure, tastes, fashion, etc. A firm which wants to grow and ensure its future must keep pace with these environmental changes and, if need be, accordingly change its definition of business. But the critical factor which the firm must remember is that its future is determined by the way it defines its business today. There can be many descriptions of the business mission and there is no one right or correct answers. The firm has to make a choice as to how it wants to define what its business is. Making a choice is never easy. It involves examining and evaluating the various alternatives available and finally choosing that which is consistent with top management's perception about the benefits they are providing to the customers today and their aspirations for the future. Thus the mission has to seek a balance between the present and the future, and avoid being defined too narrowly or too broadly.
Too narrow a definition will prevent a firm from availing many new and profitable opportunities that may come its way. A firm involved in distributing films for screening in cinema theatres had defined its business as "seeking to fulfill the entertainment needs of customers through distributing films to theatres for exhibiting to actual customer". With the increasing popularity of videos and the subsequent decrease in earnings from theatres this firm was soon faced with the prospect of dwindling business. On the other hand, if the firm had defined its business as "fulfilling the entertainment needs through distributing means of audio-cum-visual entertainment", it could have undertaken the distribution of video films along with films and continued to grow. The key words are 'entertainment', the specific need of the customers that the firm is seeking to fulfill, and `audio-cum-visual', describing the type of entertainment.
Suppose this same firm had, instead, defined its business as "distributing means of entertainment". What would be the outcome? The field which the firm had identified is far too broad to be meaningfully able to concentrate on any workable opportunity. Consider that books, magazines, records, music cassettes also constitute means of entertainment. For many people both indoor and outdoor games are a way of entertainment. Should this firm then include hockey sticks, badminton rackets footballs, and chess boards also?
The scope of a firm's business flows from its definition of mission but is described in more specific rather than generic terms. Scope refers to the choice of the specific products and markets in which a firm wishes to operate. The definition of product/ market scope has a direct bearing on the subsequent decisions regarding choice of objectives and strategy.
A shipping company may describe its mission as fulfilling the transportation needs of its customers. It may, if it so chooses, further qualify the scope by defining whether the transportation is meant for goods (cargo) or for passengers.
Once the mission and scope of a firm have been defined by the top management the next logical step is to translate them into action. This can be done by breaking down the business mission into smaller, workable objectives for managers down the line. These objectives relate to the long-run and are described as open ended attributes (described in terms of maximizing or optimizing or minimizing rather than in any specific quantitative terms) which a firm seeks to fulfill in pursuance of its mission.
Objectives reflect the `action' orientation of the mission which, in contrast, is expressed in relatively abstract terms. Objectives form the basis for work and provide a yardstick for measuring performance.
A firm can have a number of objectives. Sometimes there may be a conflict between objectives, such as between the objectives of profit and sales growth. To overcome this, the firm has to set priorities. It must decide which objective is more important and first seek to fulfill that before pursuing the second.
Objectives may be set for different levels: for the corporate level, business level, divisional level and individual level. Obviously, objectives set for one level will not be identical with those set for another level, but they must certainly be compatible with each other and seek the fulfillment of the firm's mission.
While setting objectives it is important to leave room for the unexpected, the unforeseen occurrence which can prevent achievement of objectives. To the extent that it is not possible to plan for such events, objectives are at best only statements of expected and not actual outcomes.
There is much difference of opinion amongst management thinkers on the role of profit in a firm. Some view profit as the only reason for a firm's existence. On the other hand, many thinkers, notable among them Peter F. Drucker, are of the opinion that profit is not the rationale for a firm's existence, but rather the test of its validity and performance.
Drucker's reasoning is that profit is a vitally integral part and need of business activity and there can be no long-term business without profit. Only that firm which makes sufficient profit has the means of survival. A firm which cannot generate profit has an endangered future. Thus to survive and grow a firm must generate profits.
In certain government and public sector undertakings, profit is sometimes ignored and the emphasis is laid on providing an essential service at a subsidized rate. Most transport corporations providing bus and train facilities within a city usually run at a loss. Similarly, power and electricity are supplied to individual customers at highly subsidised rates. Though in some cases it may be important to relegate profits to the backseat there is every reason to provide the maximum service at the minimum cost. Whatever be the mission of the organisation and criteria of decision making there is no justification for tolerating commercial inefficiency.
Goals are derived from the objectives and are intermediate time-bound targets which are necessary for the achievement of objectives. Goals are expressed in very specific quantitative or qualitative terms. All goals have four components: i) derived from the objective which seeks to fulfill, ii) an index or standard for measuring progress and performance, iii) a target or hurdle to be achieved, and iv) a time limit within which has to be achieved.
Thus goals are time-bound and work-oriented and they are important because they provide a path for converting plans into individual tasks and action, and for motivating people.
Some samples of typical business goals are shown in exhibit-1.
Some Typical Business Goals
1. Percentage market share (by product and/or market).
2. Percentage increase in sale and/or an absolute sales figure.
3. Minimum number of units to be ,produced (per worker/per hour/day/ week, per machine, per
4. Maximum number of `rejects' per hour of machine operation.
5. Maximum number of man-days lost in strikes, go-slow and other industrial conflicts.
6. Minimum contribution percentage per branch/per unit of production.
7. Cost reduction target.
8. A time limit which certain event(s) must occur (e.g. a new machine to be installed).
To obtain optimal performance the objectives and goals of the firm must be:
a) consistent with achievement of the mission;
b) balanced between the requirements of the present and the future;-
c) balanced against each other and priorities established wherever there is scope for conflict; and
d) consistent with the firm's resources and the market opportunities.
Let us look at the concepts of objectives and goals with the help of the following illustration.
One of the objectives of the Sixth Five Year Plan was to create maximum employment opportunities. Some of the goals towards fulfillment of this objective related to:ii) number of training programmes per year for teaching vocational skills to uneducated unemployed; and
i) specific amounts per year to be disbursed as loans to unemployed graduates for starting enterprises;
iii) number of new Industrial Training Institutes and Polytechnics to be opened in each state and the time limit within which these must be established, etc.
Having set objectives the firm now has to work to achieve them. The specific path of action chosen by the firm to achieve its objectives is referred to as its strategy. It is the fundamental means a firm uses to try and achieve its objectives. Any strategy, thus defined, has the following components:
i) A product/market scope: The specific products and markets in which a firm operates and which define its limits of activity.
ii) Growth vector: The changes the firm plans to make in its product/market scope for ensuring its future growth.
iii) Competitive advantage: Those specific properties of individual product/market that give the firm its unique position vis-a-vis its competitors.
iv) Distinctive competence: The specific organizational strengths of a firm which help in achieving its objectives.
v) Synergy: The overall or joint effects that are sought from the firm's various product/market scopes.
Thus strategy seeks to achieve the firm's objectives in the context of a specific product/market scope with a future orientation, based on its internal strengths and the unique market position that it enjoys.
As an illustration let us review the strategy of a medium-sized company involved in manufacturing and marketing electronic entertainment products. In terms of product/market scope the company has restricted itself to marketing of television sets in the Northern and Eastern regions of the country. In terms of future areas of growth, the company's R&D division is involved in designing video cassette players and personal computers to be marketed in either Northern or East region markets. The company has evolved a competitive advantage in terms of an excellent after sales service not easily matched by any of its close competitors. Most of the key personnel in marketing and sales have been deployed in such a way that they contribute their maximum in various regions with high degree of autonomy and constitute the company's distinctive competence. By seeking entry in the video cassette players and personal computers in the future the company would be using its existing distribution network thus creating marketing synergy.
PROCESS OF STRATEGY FORMULATION
Strategy is concerned with choosing, from the various alternatives open to it, that path which will best help the firm achieve its objectives. There are specific steps involved in the process of strategy formulation. These are:
i) External-Internal Analysis: This analysis helps identify the really meaningful opportunities and threats which can affect the firm in the light of its own strengths and weaknesses.
ii) Generate Strategy Alternatives: The next step is to generate all the possible strategy alternatives which can fulfil the objectives. One way or generating and analysing strategy alternatives is presented in Figure II:
There are four strategies available here:
a) Current products in current markets: Strategies which help improve the firm's' position in this area should be the first concern of the firm before moving into new, unknown and often risky areas. All those strategies which aim to increase brand share and increase profitability of existing operations should. be implemented;
b) New products in current markets: The firm is already incurring costs of marketing, distributing and sales operations. Adding on new products is thus a logical way of getting benefits of economy of scale and. cutting. Overhead costs;
c) Current products in new markets: The firm's experience in a specific market would come in handy when it wants to launch the same product in new markets. New markets may be defined in terms of geographical areas or new customer segments; and
d) New products for new markets: This is by far the most risky strategy alternative which a firm can choose and it involves high risk. Diversification is the strategy alternative.
iii) Evaluating the Strategy Alternatives: All the strategy alternatives identified (in step II) may lead to achievement of objectives but not all may be realistic or feasible. The firm has to evaluate them in the context of its own aspirations, internal strengths and weaknesses, and the environmental opportunities and threats, and short list all possible strategies for consideration.
iv) Choice of Strategy: The selection of one strategy that best satisfies the objectives of the firm.
So far we have discussed the concepts of mission, objectives and strategy in the context of a firm. Now we shall turn our attention to policies, programmes and procedures. Before we get into a detailed discussion it would be helpful if we differentiate these two sets of concepts on the basis of their distinguishing characteristics:
Mission, objectives and strategy are mainly the concern of top management while policies, programmes and procedures are concerned primarily with the middle and operating management level. While formulation of the mission is an exclusively top management function, the formulation of secondary objectives and strategy may imply some involvement of the middle management too.
The time horizon for mission, objectives and strategy is long-term and their formulations have far-reaching consequences affecting the very survival and growth of the firm. On the other hand, policies, programmes and procedures. have a shorter time horizon, are easier to change without much adverse impact and do not have a very critical bearing on the firm.
The formulation of mission,"objectives, and strategy imply interaction with the environment and their concern is with improving the effectiveness of the firm. (Effectiveness being defined as the degree to which actual outputs of the firm correspond to its desired output. Its concern is with doing the right things, right in the context of the inter-relationship between the firm and its. environment)
On the other hand, policies, programmes and procedures affect the internal structure and operational activities of the firm. Their concern is with improving the efficiency of the firm. (Efficiency being defined as the ratio of actual outputs to actual inputs: Its concern is with doing things in the right manner.)
Once the firm has set its objectives and designed an appropriate strategy to meet these objectives it h a s to gear up its internal operations to provide all the backup support and input in the most efficient manner.
Setting objectives and framing strategies require decisions to be made only once in a while, but many other operations involve frequent, often periodic decision-making; To facilitate such recurrent decision making a firm may lay down guidelines. Such guidelines are known, as policies.
Policies may pertain to either the internal operations of a firm or to those decisions hitch have to be taken internally but vitally affect the implementation of the strategy and achievement of objective. A policy for the write-off of damaged stocks affects only the internal operations of the firm. A policy on credit terms to its dealers is decided internally but affects the firm's ability to attract and retain the desirable type and number of dealers, thus impinging on the effective implementation of its marketing strategy.
To ensure that policies act as an aid and not an obstacle in the implementation of strategy, it is important that they be derived from the design of the strategy itself.
In a one-man enterprise there is no need for having any policies, since the entrepreneur is both the `thinker' and the `doer.’ But with physical expansion, increased complexity of tasks and emergence of various levels of decision makers, the need to have well-thought out and clearly specified policies becomes imperative.
While framing the policies the top management must take into account the following considerations:
i) While objective setting and strategy design are `outward directed' (they involve active interaction with the environment), policies, programmes and procedures are more '`inward-directed''. Their concern is how best to utilize the available resources in achievement of the mission. While the former is concerned with finding the right match between the environment and the firm's objectives, the latter's concern is to provide the right infrastructural support to achieve the stared objectives;
ii) Policies must evolve from past experiences, facts and participation of people who are going to be. affected by them
iii) Policies must change with change in the characteristics of the operations or decisions which they are meant to govern and change in the environment;
iv) Policies must be flexible enough to allow for the exceptional situation, which may call for unconventional or exceptional solutions;
v) Policies are best implemented only when they are fully accepted by the people responsible for their implementation. The best way of ensuring acceptance is to involve the concerned people in the process of framing policies; and
Too many policies governing every aspect of decision making would only retard the achievement of objectives. Instead of acting as an aid, policies may become an obstacle.
IMPORTANCE OF POLICIES
Policies are an important tool for management for ensuring the smooth running of the firm's day-to-day activities. Policies are needed:
a) to ensure consistency of individual decisions taken by different branches and departments. Amongst different departments or within the same department, specific decisions are recurrent, but the situation, in which the decision has to be taken may be different in each case. Therefore, the need for policies which provide for a set of common parameters and criteria for decision making in different situations;
b) to ensure compatibility of individual decisions with the mission and strategy;
c) to ensure consistency of decisions over time;
d) to facilitate delegation of work and authority; and
e) to avoid ad hoc and arbitrary decisions.
TYPES OF POLICIES
Policies are framed in accordance with the nature of the strategy being pursued: Detailed policies may be framed for each functional area or depending on the relative importance of the different areas, they may be framed for only certain areas. Some sample policies in various functional areas are described in Exhibit-2.
Exhibit-2 : Some Sample Policies In Functional Areas Marketing
1. Percentage mark-up allowed to retailers on manufacturer's price
2. Parameters for selection and appointment of distributors and dealers
3. Types of promotion to be undertaken by branch offices or subsidiaries
1. Norms for expenditure limits on different activities
2. Treatment of bad debts
1. Minimum educational qualifications and experience required for recruitment at different levels
2. Recruitment of women
Production and Purchase
1. Make-or-buy decisions for non-critical, low value components
2 Selection of vendors
3 Minimum quality standards of raw materials to be purchased
4 Mode and terms of payment to suppliers.
Fun Fizz Company manufactures and markets a popular carbonated drink `Fizzy' which is bottled at a continuous production plant. In the four peak months of summer the plant is run 24 hours, everyday of the week. To prevent against breakdown, policy on maintenance has been laid down which states that in the summer each machine and each section of the plant must be subject to preventive maintenance once every fortnight but one-fourth of the usual output level must be maintained. Thus each fortnight an elaborate exercise has to be undertaken. The dealers selling Fizzy have to be informed to buy more stock and also keep with them the empties for that day since the delivery van would not be visiting them. Within the plant the time involved in cleaning each machine and section has to be calculated, keeping in mind the tolerable limits of raw material that can wait at each work-station without being spoilt and the minimum production level that has to be maintained. This entire exercise of preparation involving certain steps to be taken is known as a programme.
ABC Company was faced with the problem that none of the marketing executives and sales representatives they recruited would stay with them for more than 6 to 8 months. Investigation revealed that the executives felt very frustrated that though there was a specific policy on promotions, there was no way of reviewing and evaluating the performance of individuals, as a result of which promotions were made for personal rather than professional reasons. To overcome this, the management drew up a plan for evaluating individual performance. This involved collecting, confirming, reviewing and evaluating feedback on the individual performances to take a decision about their future progress in the company. This exercise involves carrying out certain actions, within a specific time, and. to be repeated every year. Since it is a repetitive exercise it is important to find the most efficient way of doing it rather than
experimenting each year with a new approach. The most efficient way would involve listing of steps and the sequence in which these steps have to be taken to complete the entire work which constitutes a programme.
The concern of programmes is to organize and schedule repetitive activities which constitute a complete set or work assignment in the most efficient manner. Programmes relate to activities rather than decisions: They may help in making strategic decisions but are not concerned directly with operating decisions. The factor which characterises a programme is that all the activities involved constitute a complete work-set.
A programme must be derived from the policy which it seeks to help.
Programmes relate to scheduling of activities while procedures refer to the specific method and sequence by which an activity has to be performed. A company initiates a. programme of fire fighting at its factory premises.
This programme consists of activities such as evacuating the premises, using the fire extinguishing equipment, transmitting information to the fire station, etc. Within each activity the steps to be taken are the procedures. For instance, in the matter of evacuating the building the procedure may specify that people on the second floor will be the first to leave followed by those on the first floor and so on. It may specify which doors or staircases are to be used.
To go back to the case of Fizzy, policy on general maintenance of the plant has been specified and programme for carrying out and coordinating the various activities that constitute the maintenance has been evolved. Procedures refer to the sequential steps by which each section or machine of the plant will be dismantled, cleaned, serviced, and put back into operation.
The way of calculating depreciation by a firm is an accounting procedure. The manner in which a company has to file information for its claim for compensation from the insurance company for goods lost in transit constitutes a procedure. A. branch office of a public sector company has to follow a certain procedure for requesting for extra salesmen during the peak season.
Procedures are meant to aid the implementation of a programme by ensuring that each activity is fully completed and within the shortest possible time. Procedures should:
a) evolve from knowledge of past experiences and facts;
b) be as precise as possible; and
c) have the concurrence of the people who have to use them.
The idea of following procedures is to avoid disorderly and arbitrary ways of doing those tasks which are essential to the operations of the firm. To be really useful, procedures should be laid down for only those activities which are critical to the overall plan of strategy, policy and programmes. Having too many procedures can hamper the working style of individuals while their total absence would lead to chaos. Generally government organizations, public sector companies and bureaucratic set-ups have more procedures in every area of activity than private' sector companies. Procedures are what we usually refer to as `red-tapeism' in government. Often all of us, at one time or the other has experienced the futility of having too many procedures, while getting our ration card, renewal of driving licence or payment of road tax, etc. Thus to be useful, procedures must:
i. be laid down in critical activity areas;
ii. serve a specific purpose
iii. facilitate achievement of the programme or output toward which it is geared;
iv. follow a certain logical process; and
v. be balanced in terms of being too many or too few.