Setting corporate goals and measuring organizational effectiveness—A practical approach

Setting corporate goals and measuring organizational effectiveness—A practical approach

70 Long Range Planning, Vol. 16, No. 1, pp. 70 to 76, 1983 Printed in Great Britain 0024-6301/83/01007&07$03.00/0 Pergamon Press Ltd. Setting Corpo...

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70

Long Range Planning, Vol. 16, No. 1, pp. 70 to 76, 1983 Printed in Great Britain

0024-6301/83/01007&07$03.00/0 Pergamon Press Ltd.

Setting Corporate Goals and Measuring Organizational Effectiveness-A Practical Approach Aubrey L. Mendelow,

University

of Pittsburgh

The 1980s will require organizations to be effective in more than just the shareholder dimension. For an organization to achieve effectiveness, its management has to know who will be judging effectiveness, and the criteria on which this judgment will be based. This article suggests that an analysis of the needs of an organization’s stakeholders fulfils this requirement. The stakeholder needs, and the power bases from which they derive these needs, are useful inputs to the strategic planning process.

effectiveness does not Organizational happen, it is earned by the organization, through the implementation of policies and guidelines during the strategic planning process. This paper considers the nature or organizational effectiveness. In addition, it considers the parties who demand effectiveness and goes on to describe some of the additional factors that have to be taken into account during strategic planning, in order to achieve acceptable levels of effectiveness. Arising from these considerations, extensions to some of the phases of strategic planning are discussed.

Effectiveness

vs Efficiency

Organizations, irrespective of whether they are formed to make a profit or not, are part of our

At the time of writing this article the author was Senior Lecturer at the School of Business Leadership, University of South Africa at Pretoria. He is now at the Graduate School of Business, University of Pittsburgh, Pittsburgh, PA 15260, U.S.A.

society, and as such have to earn their existence by producing results in society.’ Now, the production of results in society, by organizations, implies that organizations have successfully to meet societal demands. Viewing efjciency in the traditional terms of the ratio of output to input, it is seen that efficiency bears no relationship to societal demands-efficiency is introspective. Thus, for example, the most efficient slide-rule manufacturer would be out of business today assuming it had not adapted its product line to meet the onslaught of hand-held electronic calculators. Effectiveness is thus outward looking. Effectiveness thus deals with the extent to which organizations are able to meet societal demands. Following Hofer and Schendel,2 effectiveness may be defined as the ratio of outputs produced by the organization, to the societal outputs desired from the organization. . . . But what are the societal outputs desired from the organization?

The Stakeholder

Concept

At the outset it is clear that the societal outputs desired from the organization can only be anticipated by those sectors of society who come into contact with it-shareholders, customers, suppliers, lenders, the community, government and regulatory agencies and employees-in short, the organization’s stakeholders. Stakeholders are thus the claimants of organizational effectiveness-it is they who are the judges of organizational effectiveness. Thus, in order to be effective, an has first to determine who its organization stakeholders are, and then to determine the outputs desired by its stakeholders. This process soon

Setting

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Effectiveness-A

Practical

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71

highlights the problem of conflicting demands made by the different stakeholder groups. It is at this point that the task of strategic planning in respect of an organization’s stakeholders comes to light.

Finally, it is important to identify the communal stakeholders-the ecologists, the consumer unions etc. These parties are also capable of mobilizing other stakeholder groups to punitive action-take for example the ecologists who were able to impose anti-pollution legislation via the governmental agencies.

The Task

Analysing

of Strategic

Planning

Anthony’s3 definition of strategic planning as ‘the process of deciding on the objectives of the organization, on changes in these objectives, on the resources used to attain these objectives, and on the policies that are to govern the acquisition, use and disposition of these resources’ provides a point of departure. Traditionally, the objectives of the organization have been set to meet shareholder needs-the ubiquitous ROI, and ROE objectives are evidence of this. The growth of competition has led to the inclusion of marketing objectivesgrowth in market share, growth in sales. However, the increasing demands of the remaining five stakeholders are having to be recognized at strategic planning level. Moreover, decisions have to be taken as to which of the demands are to be met, bearing in mind that some of these stakeholder demands may be in conflict. Finally, strategic planning has to be invoked to determine the mumer in which these demands will be met. Identifying

Stakeholders

It is insufficient merely to recognize that an organization’s stakeholders may belong to one of seven categories. The key individual stakeholders have to be identified in order to establish the effectiveness criteria, by which they, individually, judge the organization’s effectiveness. For even within stakeholder categories disagreement may exist as to what constitutes organizational effectiveness. Clearly it is important to identify the essential stakeholders of the organization-stakeholders without whom the organization would cease to exist-the key employee, the sole supplier, the major customer. These are groups of people who are irreplacable. These are groups of people for whose goods or services there are no substitutes. Clearly great attention has to be paid to their criteria of effectiveness; violation of these criteria occurs at the organization’s peril. It is also important to recognize those stakeholders who occupy a judicial position in relation to the organization. These people include governmental agencies, industrial bodies and so on. Failure to meet their effectiveness criteria may result in some sort of legislative action, aimed not only at the offending organization, but at certain of its key stakeholders. In the latter case the aim would be to bring the offending organization back into line through the impact of third party action.

Stakeholder

Effectiveness

Criteria

Once the stakeholders have been identified, it is important to determine explicitly the criteria by which each stakeholder will ultimately judge the organization’s effectiveness. The explicit formulation of stakeholder effectiveness criteria is crucial for several reasons. any underlying (I) It will aid in exposing assumptions which might influence the organization’s relationship with its stakeholders. Thus the organization may find that it is striving to produce outputs in which its stakeholders have little or no interest. At worst, these outputs, produced on the assumption of achieving effectiveness for the organization, may be having exactly the opposite effect. of stakeholder effective(2) Explicit formulation ness criteria will enable the prioritization of outputs for the achievement of effectiveness. Clearly the prioritization of outputs is desirable, in order to determine those areas in which effectiveness is most readily attainable, or where it is most crucial. (Appendix A demonstrates a prioritization matrix.) explicit formulation of stakeholder (3) Finally, effectiveness criteria is necessary to determine the effects which alterations in stakeholder outputs will have on existing or future strategies of the organization. But, how are stakeholder criteria for effectiveness determined? Several methods present themselves. The most direct is to approach the stakeholders themselves, to ascertain from them the criteria which they deem to be important. This approach has the advantage of directness-the criteria are clearly stated and the possibilities of inaccuracies creeping in through any deductive processes is minimized. Moreover the stakeholder’s requirements are determined with certainty. However, the direct approach may give rise to a large collection of conflicting effectiveness criteria. The priorities of these conflicting criteria may then be difficult to determine. The deductive approach is a further method for determining stakeholder effectiveness criteria. Typically a literature survey is conducted, experts consulted or representatives of each stakeholder category are polled, to ascertain the relevant stakeholder effectiveness criteria. This will give rise to a generalized list of effectiveness criteria for each

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stakeholder category. The specific effectiveness criteria for each of the focal organization’s stakeholders have then to be deduced from the generalized list. This deductive process requires that assumptions be made concerning the requirements of each of the stakeholders. Erroneous assumptions may at best give a wrong indication of priorities, and at worst, criteria considered vital by specific stakeholders, may be dropped from further consideration. In practice however, a combination of the methods could be used. Having deduced a generalized list of effectiveness criteria for each stakeholder group, the individual stakeholders comprising the group may be approached to rate the relative importance of the generalized effectiveness criteria. By combining the individual stakeholder ratings, a composite set of effectiveness criteria may be derived for each stakeholder category. Appendix B shows a generalized list of effectiveness criteria which may be used for stakeholder ratings. Now, the analysis of stakeholder effectiveness criteria may be taken a step further. The concept of the Critical Success Factor (CSF) is not a new one to strategic planning. IBM concentrates on customer service, McDonalds on quality, cleanliness and value and at H-P the concentration is on new product development. The CSF concept provides organizations with an ideal on which to focus-the principal focus-an aspect of the business which, if well executed will enable the organization to achieve its objectives. There is no problem in expanding the CSF concept to stakeholder effectiveness criteria, with the identification of the crucial effectiveness criteria (CEC) for each stakeholder category. CECs will pinpoint those effectiveness criteria which are crucial to a high effectiveness rating, by each stakeholder category. It will then require a strategic decision to determine whether or not to pursue theCECs, bearing in mind the possibility of conflicting requirements. At least, however, in the event that certain CECs are not adopted, the strategic apex will be clear as to whom they are NOT trying to please! Change

of Stakeholder

Criteria

It goes without saying that stakeholder effectiveness criteria are capable of change. For strategic planning purposes, it is important to understand the dynamics of this change, so that it may be anticipated. It is thus important to delve more deeply into the stakeholders’ relationship with the organization. The relationship between stakeholders and the focal organization may be considered to be a symbiotic one. As MacMillan5 points out, a symbiotic relationship implies an interchange between the organization and its stakeholders, of outputs upon which they are mutually dependent. Thus the

organization provides an inducement (effectiveness) to the stakeholder in order to secure the stakeholder’s contribution. His mutual dependency requires co-operation, although there is inevitably conflict between the organization and its stakeholders over the nature of this co-operation. Most organizations need employees. The organization thus exchanges wages and working conditions (inducement) in return for the employees’- labour (contribution). The conflict that arises occurs over the magnitudes of the organization’s rewards per unit of work.

The resolution of this conflict is dependent on the relative power, possessed (or perceived to be possessed) by the organization and the stakeholder concerned. This means that, from the organization’s point of view, changes in a stakeholder’s effectiveness criteria (organizational inducements) arise primarily from issues which could influence the balance of power between the organization and its stakeholders. Hence the determinants of power have first to be identified before the issues which influence these determinants of power may be isolated. Determinants

of Stakeholder

Power

MacMillan5 points out that power provides its possessor with the ability to restructure situations. This ability may arise from several sources.

(i)

Possession of resources. The fact that stakeholders may possess resources which organizations may require, gives them power over the organization. This power arises from the fact that the stakeholders may refrain from supplying the organization with much needed resources. Labourers resort to strike action. Where the organization does not have the ability to employ replacements, and where the costs of lost production are prohibitive, the labourers are in a powerful position to assert their demands for increased inducements in return for their contribution.

In the last (ii) The dictation of alternatives. example, the reservation was made that the organization would not have the ability to employ replacements. Had this not been the case, the labourers would have lost their power base. The organization would have been able to employ alternative resources. Hence the use of picket lines, to prevent employees from entering their employer’s premises, is an attempt by the strikers to reinforce their power base by reducing the alternatives open to the organization. In a similar manner the sole supplier derives his power from the fact that the organization does not have any alternative source of supply. It should be clear by now that power is situation specific. Should a substitute source of supply become available, the originally powerful sole supplier loses his power base.

Setting

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Organizational

(iii) Authority. Authority is the right to enforce obedience. Clearly the power of government and regulatory agencies is derived from their authority. Authority may also be accorded to an industrial body to enforce standards, to which those organizations comprising the industry, must adhere. (iv) Influence. A basis of power may be derived through the use of influence. Thus, an organization may decide to have one of its executives appointed to the industrial body governing its industry. This would enable the executive to influence the industrial body to pass legislation which may favour the organization’s position. Yet a further example could be the ecological body’s use of influence over senators and congressmen to use their rooted in authority, to pass antipower, pollution legislation. Issues irq‘luencing stakeholders’ effectiveness criteria. An issue is a condition or pressure, which, if it continues, will have a significant effect on the power of an organization’s stakeholders. This in turn would influence the effectiveness criteria by which stakeholders would judge the the organization’s effectiveness. Two issues may be: The progress of legislation aimed at regulating the organization’s industry-an issue which could result in the alteration of the effectiveness criteria espoused by government and regulatory agencies. Emerging technology resulting in the availability of substitute raw materials-this might reduce the supplier’s power base and hence alter the effectiveness criteria which he would demand. In each case, however, an issue must be related to an aspect from which a stakeholder derives its basis of power. Thus the identification of issues requires a prior analysis of the bases from which stakeholders derive their power. Issues may be categorized in various ways. GE uses a framework which portrays issues as progressing from (i) societal expectations to (ii) political issues then to (iii) legislated requirements and finally to (iv) punitive action. The consumer movement is an example of this-the need for product safety was widely discussed, then politicians took up the cudgels of the consumer, making the need for product safety part of their election manifestos. Once the politician was elected, legislation pertaining to product safety was passed, and then, after an interim period during which manufacturers were given the opportunity to comply with legislated requirements, punitive action was taken against those who broke the law.

Effectiveness-A

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73

Another framework for categorizing issues is that used by Shell Oil. In their view, issues progress from strategic issues to emerging issues and finally to current issues. The postwar baby boom may be used as an illustration. The swelling of teenage ranks could be forecast at least 5 years ahead of the time that it actually occurred-a strategic issue. As the needs of the newly increased teenage ranks became more defined the issue entered its emerging phase, and finally a current issue became the means of satisfying teenage needs. On the basis of the above descriptions, it can be seen that the question of issues, related to stakeholder effectiveness criteria, forms a useful basis for environmental scanning. In this way, the organization does not have to waste resources on undirected scanning. Environmental scanning is directed towards issues which will affect crucial stakeholder effectiveness criteria (Appendix C). Changes in stakeholder effectiveness criteria can thus be anticipated, so that the effects of these changes may be taken into account during the various stages of the strategic planning process.

Impact on Phases of Strategic Planning In$uence on Objective Setting At strategic planning level, the organization’s objectives may be viewed as being the statement of effectiveness criteria, towards which the organization should strive. Argenti introduces the concept of the purpose objective as being ‘the reason why the organization was first formed or why it now exists’.(j The purpose objective is thus inflexible, independent of existing economic conditions and organizational performance. The purpose objective represents the ideal state--the state towards which organizational operations should be aimed. In terms of Argenti’s definition of a purpose objective, the shareholders would have an overriding influence on its setting-it is after all the shareholders who brought the organization into being in order to take advantage of some entrepreneurially-perceived opportunity. However, there is widespread agreement that, in general, the other stakeholders will wield an increasing influence on the organization’s affairs. The incorporation of stakeholder requirements into the purpose objective, as defined above, would violate the terms of the definition in all organizations other than those formed to achieve a goal other than profits. But provision does have to be made to incorporate at least some objectives relating to stakeholder requirements at strategic planning level. The above problem could be resolved by the development of second order purpose objectives. These would focus on those stakeholder effective-

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ness criteria which were deemed crucial during the stakeholder analysis phase. In this manner the dominance of shareholder needs would be reduced. To be sure, to survive in the long-term organizations have to make a profit. But profit is not the alpha and omega of an organization’s existence, just as breathing, a pre-requisite to human survival, is not the sole purpose of human existence! Position Audit In the traditional strategic planning model, this phase often takes the form of an analysis of the organization’s strengths, weaknesses, threats and opportunities. The results of this analysis give a pointer as to which strategic alternatives should be adopted-the idea being to lead from strength, to take advantage of opportunities, while at the same time minimizing or eliminating threats. In most instances, the frameworks adopted for the position audit are marketand resource-based, and the strategic alternatives which are adopted are aimed at protecting the market and securing a continuing supply of resources. This approach is twodimensional, concentrating on contributions from the resource providers and on inducements to the market. The stakeholder approach provides another dimension to the position audit, stemming from the symbiotic nature of the relationship of the organization with its stakeholders. Stakeholders provide resources in return for the organization’s inducements. Thus the strengths/weakness portion of the position audit may be viewed as answering the question ‘why do each of our stakeholders provide US, rather than our competitors, with their resources’? This question ‘forces’ the organization to concentrate on the inducements it provides its stakeholders. Adequate inducements represent inadequate inducements, weaknesses. strengths, Alternative strategies may then be generated to provide the necessary stakeholder inducements. Extending this approach to threats and opportunities, the former may be viewed as those environmental factors which will increase the level of the inducements anticipated by the stakeholders, in return for their contributions. The first step in overcoming these threats requires an examination of the sources from which the stakeholder concerned will derive the increased power to enable it to demand increased inducements. Once these sources of power have been exposed, strategic alternatives may be generated to reduce the impact of this power, thereby reducing the inducements which the organization will be expected to provide. Following this line of reasoning, opportunities may be viewed as those instances in which the organization is providing inducements above the stakeholder’s expectations. The aim of the alterna-

1983

tive strategies to be adopted in this instance is obvious, with the proviso that particular care should be taken to evaluate the broad and not-soobvious impact of the alternative selected. Selection of Alternatives The inclusion of the stakeholder concept adds to the tools available to management for the selection of alternative strategies for the organization. At the outset, alternatives should be examined to determine whether they breach any effectiveness criteria which have been opted for by the organization. In the event that no breaches of effectiveness the usual criteria are apparent, alternative selection procedures may be applied. Conversely, where the proposed strategy shows the potential for breaches of effectiveness criteria, the possible outcome of such a breach will have to be weighed up before the alternative may be further considered. The implications of a breach of specific stakeholder effectiveness criteria are varied and situationallydependent, specifically as far as the relative power of the organization and the stakeholder is concerned. In essence a breach of effectiveness would imply that the organization is reducing its inducement to the stakeholder while the latter’s original contribution would remain unchanged. Except in the event of an opportunity having been detected, it is highly unlikely that the stakeholder will be prepared to maintain the existing levels of contribution in the face of a reduced inducement. Strategy formulators would have to determine the impact to the organization of the reduced stakeholder contribution, in order to conclude whether they would be prepared to live with it or not. In the event that a reduced stakeholder contribution strategy formulators have two is unacceptable, The first is trivial-drop the further options. alternative under consideration. The second option, from the definition of however, arises effectiveness-the stakeholder may be persuaded to accept a lower inducement for the existing levels of contribution, through the process ofnegotiation. In this way the organization would attempt to reduce the denominator of the effectiveness ratio (the desired outputs) in proportion to the anticipated reduction of actual outputs which would occur as a result of the implementation of the alternative. The use of the negotiated option carries with it the inherent risk that the negotiations may fail to provide the anticipated results, in which case contingency planning would have to be resorted to. Implementation Consideration The final phase of a strategic planning model is the implementation phase. Successful implementation

Setting Corporate

Goals and Measuring Organizational

of strategic alternatives requires stakeholder cooperation, especially in those areas in which the stakeholders are affected. It seems that the recipe for successful implementation requires adherence to an open policy in respect of stakeholder communication. This will enable the bargain to be defined so that the inducement/contribution ratio would be well determined. Thus each symbiont would know exactly what is required of him.

Appendix

Matrix for Effectiveness

Criteria

outputs 0,

Criteria 1. 2.

4. 5.

As the 1980s progress, many people are of the opinion that the various stakeholders of an organization will gain increasing influence over the manner in which organizations operate. This view, if has to be looked upon accepted, positively-no good can be served by quietly acquiessing to the stakeholders’ steadily increasing demands for increased inducements for their goods and services.

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A

A Prioritization

3.

Conclusions

Effectiveness-A

6. 7.

0,

0,

D,

0,

0,

0,

9=Low 0= High 9= First Precedence 0 = Last 9 =Very easy Ease of implementation 0= Difficult 9 = Low requirement Resource requirement 0= High requirement 9=High Penalties for not producing O=Low 9=High Degree of imperativeness O=Low Match with existing strategiesg=High O=Low Risk

Totals: The higher the total, the higher the priority

Appendix Generalized

This article has explored some of the key organization’s characteristics of an stakeholders. It has shown how these characteristics may be integrated into existing models of the strategic planning process. Arising from this integration, the organization’s management will become more sensitive to changes in inducements required by their organization’s stakeholders. This is a first step. It is then up to management to gain as much as they can, in terms of organizational effectiveness, from this increased knowledge of their stakeholders effectiveness criteria. Finally, the fact that professional managers need to be aware of the basis of power of their organization’s stakeholders, has been highlighted.

B List of Stakeholdev Effectiveness Criteria

Lenders: The liquidity of the company. The character and standing of the borrowing company’s management. The quality of the borrowing company’s assets available for security. The existence of budgets indicating the proposed use of borrowed funds. The borrower’s potential to repay interest and capital on due date. The extent to which the company is already using borrowed funds. Previous transactions with the company. Shareholders: Growth in dividend payments. Growth in share price. Consistent dividend payments. Growth in net asset value. Adequate dividend cover. Full reporting disclosure. Degree to which borrowed funds Efficiency of current asset usage.

have been used.

Supplier5:

References (1)

P. F. Drucker, Entrepreneurship in businessenterprise, Business Policy, 1, 3-l 2 (1971)

(2)

C. W. Hofer and D. E. Schendel, Strategy FormulationtAnalytical Concepts, West Publishing, St. Paul (1978).

(3)

R. N. Anthony, Planning and ControlSystems-A Analysis. Harvard University, Boston (1965).

(4)

A. L. Mendelow, The stakeholder approach to organizational effectiveness. Paper delivered at the Joint National Meeting of CORS, TIMS, ORSA, Toronto, May (1981).

(5)

I. C. MacMillan, Strategy Formulation: Publishing, St. Paul (1978).

(6)

J. Argenti, (1974).

Systematic

Corporate

Political

Planning,

Journalof

Framework

Degree to which the company is seen to be professionally managed. Timeous payment of debt by the company. Assurance that the company will be able to make purchases into the future. Adequate liquidity. Integrity and public standing of the directors. Negotiating ability of the purchasing manager.

for Employees

Concepts,

p. 39. Nelson,

West

London

:

A sense of meaning or purpose in the job. Opportunities for personal development. The amount of interesting work. The challenge in the work. The power and responsibility in the job. Recognition and approval for good work. The status and prestige in the job.

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The friendliness of the people, the congeniality of the work group. Salary. The amount of structure in the environment (general practices, discipline, regimentation). The amount of security in the job. Advancement opportunities. The amount and frequency of feedback and evaluation. Customers: Existence of return and replacement policies. Existence of warranty/guarantee provisions. Availability of post-sale service. Existence of complaint handling policies. The existence of a consumer affairs department. Staff training facilities in consumer affairs. Price always competitive. Availability of research and development products. Ease of company dealings. Emphasis on quality.

1983

Providing employment. Sponsoring welfare programmes. Sponsoring sport. Improving the general living environment inhabitants. Support of charities. Support of communal activities.

Appendix The Impact Criteria

of the country’s

C of Issues on Stakeholdev

Effectiveness ISSUES

EFFECTIVENESS

to

CRITERIA

‘I

I2

I”

improve

X'

Cl C2

Government: Being an efficient user of energy and natural Contributing to the state’s security. Adhering to the letter of the country’s laws. Adhering to the spirit of the country’s laws. Paying taxation. Not engaging in unfair trade practices. Provision of employment. Society: Minimizing the effects environment.

of technological

X

resources.

innovation

C”

on the

‘X indicates an issue which will affect a stakeholder criterion. This implies that the issue will have to be tracked to enable the company to timeously change its strategy relating to the particular effectiveness criterion.