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Planning and Goal-Setting for Small Businesses

 Management and Planning Series

_________________________________________________________________

While we consider the contents of this publication to be of general merit, its sponsorship by the U.S. Small Business Administration does not necessarily constitute an endorsement of the views and opinions of the authors or the products and services of the companies with which they are affiliated.

All of SBA's programs and services are extended to the public on a nondiscriminatory basis.

 

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TABLE OF CONTENTS

 

 

 

INTRODUCTION 

 

 

 

MANAGEMENT BY OBJECTIVES    

 

 

 

PREPARING FOR THE MBO PROGRAM

 

     Understanding the Requirements of an MBO Program

 

     Defining Your Business 

 

     Setting Goals

 

     Devising a Work Plan   

 

     Reporting Progress

 

     Evaluating Performance 

 

 

INSTALLING THE MBO PROGRAM  

 

THREATS TO AN MBO PROGRAM   

 

 

 

SUMMARY         

 

 

 

APPENDIX: INFORMATION RESOURCES  

 

_______________________________________________________________

 

 

 

INTRODUCTION

 

 

 

Many authorities on business management identify the five major functions of management as

 

  • Planning.

 

  • Organizing.

 

  • Directing.

 

  • Controlling.

 

  • Coordinating.

 

 The planning and controlling functions of management often receive less attention from the small business owner-manager than they should. One way to more effectively fulfill these two functions is through effective goal setting.

The success of a business will depend on its long-range goals for sales, profits, competitive position, development of personnel and industrial relations. To accomplish these goals, the company will need to identify intermediate goals that it can work toward each year.

 

MANAGEMENT BY OBJECTIVES

 

Traditionally, people have worked according to descriptions that list the activities or functions of the job. The management by objectives (MBO) approach, on the other hand, stresses results.

Let's look at two examples.

 

Suppose a credit manager's job description states that he or she will supervise the credit operations of the company.  This description simply lists the functions of the credit manager. Under the MBO approach, the owner-manager and the credit manager would identify five or six goals covering important aspects of the manager's work. For example, one goal might be to increase credit sales enough to support the 15 percent increase in sales expected by the sales department.

The traditional job description for a personnel specialist

 

     may include conducting a recruiting program for the company. 

 

    Under the MBO approach, the personnel specialist would

 

     identify five or six appropriate goals, one of which could

 

     be, Recruit ten new employees in specified categories by

 

     July 1.

 

 

 

With MBO, jobs are viewed in terms of achievements rather than

 

simply functions. Activity alone is not enough; each activity

 

must bring the worker closer to achieving his or her goals.

 

_________________________________________________________________

 

 

 

PREPARING FOR THE MBO PROGRAM

 

 

 

Understanding the Requirements

 

of an MBO Program

 

 

 

Management by objectives has been used by all kinds of

 

organizations, but not every business has had the same degree of

 

success. From examining MBO programs that have worked, it is

 

clear that all met the following minimum requirements:

 

 

 

  *  Goals were expressed in specific and measurable terms.

 

 

 

  *  Each employee proposed 5 to 10 goals to cover those aspects

 

     of his or her job crucial to successful performance.

 

 

 

  *  A final written statement of each goal was prepared,

 

     including a statement of the goal, method of evaluating the

 

     goal, work steps needed to complete the goal and an

 

     estimated time needed to complete the steps.

 

 

 

  *  Progress was evaluated at regular intervals (at least

 

     quarterly) and compared with the original goals.

 

 

 

  *  Problems that hindered progress were identified and

 

     corrected.

 

 

 

  *  Goals were related to each level of management, both those

 

     above and those below.

 

 

 

 Defining Your Business

 

 

 

The first step in developing an effective MBO program is to

 

define your business. Ask yourself the following questions:

 

 

 

   *  What business am I in?

 

 

 

   *  Is my definition right for today's market?

 

 

 

   *  Do I need to change my business to meet emerging customer

 

      needs?

 

 

 

A clear vision of your business is crucial for planning your

 

marketing, product development, buildings and equipment, and

 

financial and staff needs. For example, a drop in sales caused a

 

small business manufacturer of metal trash cans to reexamine its

 

product. To regain lost sales, the owner decided to redefine the

 

product as metal containers and to develop a new marketing plan.

 

 

 

Setting Goals

 

 

 

Long-range business goals will be the cornerstone of your

 

company's MBO program. To achieve these goals, you must have a

 

method to communicate them to your managers and employees. One

 

way is to bring managers and employees into the process by asking

 

them to help formulate the company's short- and long-range goals.

 

If they have a role in establishing the goals, they will be more

 

committed to achieving them.

 

 

 

All goals should relate to and support the long-range objectives

 

for the company. In this way, you can ensure that the goals of

 

all levels of management are consistent. If goals are

 

incompatible, you may find that employees feel like the middle

 

manager of a research and development company who exclaimed in a

 

seminar, How can I set my goals when I don't know where top

 

management wants to go?

 

 

 

Types of Goals

 

 

 

What areas of your managers' work are suitable for goal setting?

 

Ask managers to identify the most important aspects of their

 

work. In each area, they should set both short- and long-term

 

goals. Carefully developed goals, if attained, should give the

 

manager better control of the job. Each manager should define one

 

or two goals in each of the following categories:

 

 

 

   *  Regular work goals.

 

  

 

   *  Problem-solving goals.

 

 

 

   *  Innovative goals.

 

 

 

   *  Development goals.

 

 

 

By asking your managers to set at least one goal in each of

 

these four areas, you may open their eyes to new possibilities

 

they had not seen before. The goal-setting process can be a very

 

useful educational step.

 

 

 

Regular Work Goals

 

 

 

These include the major part of the manager's responsibilities.

 

For example, the head of production should focus on the quantity,

 

quality and efficiency of production and the head of marketing

 

should concentrate on developing and conducting the market

 

research and sales programs. In defining their regular work

 

goals, employees should include ways of

 

 

 

   *  Operating more efficiently.

 

 

 

   *  Improving the quality of the product or service.

 

 

 

   *  Expanding the total amount produced or marketed.

 

 

 

Problem-Solving Goals

 

 

 

These provide managers an opportunity to define their major

 

problems and to set a goal to solve each one. There is no danger

 

of ever running out of problems; new problems or new versions of

 

old problems are always present.

 

 

 

Innovative Goals

 

 

 

Because of the push for new products and new methods in today's

 

marketplace, innovation now gets much attention in seminars and

 

publications for top managers. Managers and workers should seek

 

new and better production methods, explore better ways to serve

 

customers and propose new products for the company. Managers will

 

need to use innovative approaches to make the company competitive

 

in a fast-changing national and international economic

 

environment.

 

 

 

Development Goals

 

 

 

In setting development goals, you and your managers recognize the

 

importance of acquiring new skills. Managers should plan for the

 

continued growth of each employee, both in technical areas and in

 

work relations with fellow employees.

 

 

 

Devising a Work Plan

 

 

 

You and your managers should use a miniature work plan to develop

 

goals that are complete and useful (see Exhibit 1). In developing

 

the plan, the following five areas should be addressed:

 

 

 

   *  Goal -- Be specific and concise.

 

 

 

   *  Measurement -- What benchmarks will you use to measure

 

      whether you have achieved your goals? These usually can be

 

      expressed in quantitative terms.

 

 

 

   *  Major problems anticipated.

 

 

 

   *  Work steps -- List three or four of the most essential

 

      steps. Give completion dates for each.

 

 

 

   *  Supervisor's goals -- Employees should identify which of

 

      their manager's goals relate to their own goals.

 

 

 

On the work plan, managers can show each of the major work steps

 

(subgoals) necessary to reach a goal. If the work steps are

 

completed by the indicated date, the goal is reached.

 

 

 

Use the form in Exhibit 1 to discuss goals with your managers. By

 

looking at the form, you can see not only the goal but also the

 

plan for reaching that goal. This will allow you to (1) ask

 

questions about the work steps and any potential problems;

 

(2) decide the best way to evaluate progress on the goals and

 

(3) help each of your managers understand how his or her goals

 

relate to those of the company.

 

 

 

All problems listed on the work plan should include a solution.

 

For example, suppose the head of a supply department sets a goal

 

to deliver all packages within one day after they are received.

 

Because employees may have difficulty meeting the new deadlines,

 

the work plan should include necessary steps to teach them the

 

new procedures before the program goes into effect.

 

     _______________________________________________________

 

 

 

             Exhibit 1  Plan to Achieve Objectives

 

 

 

     SUPERVISOR: ____________________________________

 

     

 

     OBJECTIVE #1: Increase gross sales margin of my area by 

 

                   12 percent by 9-1-92 and maintain at that

 

                   level for remainder of 1992.

 

     _______________________________________________________

 

 

 

             Major Action Steps   January -  December

 

                                     J F M A M J J A S O N D

 

    1. Decrease cost of serving                

 

       small accounts.                         X  

 

       a. Identify all customers not

 

          purchasing $5000 per month.X 

 

       b. Determine sales potential

 

          of each target customer.     X

 

       c. If potential is less than

 

          $5000,, transfer to jobber.    X

 

       d. Inform customer and 

 

          schedule jobber visit with

 

          customer.                      X

 

       e. If potential is $5000, 

 

          develop cooperative sales 

 

          promotion program.               X

 

       f. Implement program.                 X

 

       g. Evaluate & report results.           X

 

 

 

    2. Increase minimum calls per 

 

       salesperson to 10 per day.                X

 

       a. Analyze work methods of 

 

          high call salespersons.    X

 

       b. Identify salespersons with

 

          fewer than 10 calls placed.X 

 

       c. Analyze territory and 

 

          order of calls.              X

 

       d. Determine best routing of

 

          calls.                         X

 

       e. Determine most effective

 

          realigning of all 

 

          territories.                     X

 

       f. Implement plans.                 X

 

       g. Evaluate & report results.         X

 

     _______________________________________________________ 

 

 

 

Reporting Progress

 

 

 

An MBO program must include a provision for regular progress

 

reports. For this reason, the MBO concept is sometimes called

 

MBO/R, where the R refers to results. You and your managers will

 

only accomplish your goals or objectives if the MBO program calls

 

for a regular review of progress. For example, one large

 

organization issued nearly 100 pages of well-developed goals

 

prepared by many of its managers. The document was very

 

impressive, but it lacked a reporting system of any kind. You can

 

imagine the skeptical reaction of those who set goals for the

 

first year when they were asked the following year to draw up new

 

goals.

 

 

 

A monthly or quarterly review of progress toward goals will help

 

you determine where progress is below expectations. For example,

 

suppose that one of your goals is to reduce overtime work by

 

50 percent in one year, but you only reduce it by 15 percent in

 

the first quarter. Based on this information, you can exert a

 

special effort in the succeeding quarters to regain the lost

 

ground.

 

 

 

When progress is below expectations, you should identify the

 

problems holding back progress and assign someone to resolve

 

them. Failure to reach goals can result from

 

 

 

   *  The wrong objectives being established at the outset.

 

 

 

   *  Organizational restrictions being overlooked.

 

 

 

   *  Personal failure or a combination of factors.

 

 

 

In order to solve problems and meet a goal, managers may have to

 

adjust their time line or change the goal itself. All changes

 

should be written as new goals and included in the MBO files.

 

 

 

Evaluating Performance

 

 

 

In contrast to traditional methods, which evaluate performance

 

based on personal qualities such as leadership ability, the MBO

 

method evaluates performance based on objective results. Such

 

evaluation is a complex task that must be undertaken with care by

 

someone who fully understands MBO. (See Exhibit 2 for a

 

comparison of traditional and MBO evaluation methods.)

 

     _______________________________________________________

 

 

 

                            Exhibit 2

 

       Comparison of Traditional and MBO Evaluation Methods

 

                _____________________________________

 

 

 

     Characteristic   Traditional method      MBO method

 

     _______________________________________________________

 

 

 

     Frequency        Usually annually     Usually quarterly.

 

                      (if at all).

 

    

 

     Emphasis         Traits.              Results versus

 

                                           objectives.

 

   

 

     Subordinate's    Mental block.        Positive (feedback

 

     frame of mind    (doesn't know how    has told employee

 

                      traits will be       how well he or

 

                      evaluated).          she is doing).

 

    

 

     Suggestions for  Poor receptivity     Positive (much

 

     improvement      (much has been       has been based

 

                      based on employee's  on employee's job

 

                      traits).             performance).

 

    

 

     Tie in to        Rewards usually not  Rewards usually 

 

     rewards          directly tied in.    tied directly to 

 

                                           results.

 

    

 

     Summary          Little connection    Results oriented.

 

                      to results.  

 

     _______________________________________________________

 

 

 

Under the MBO program, you evaluate your managers' performance

 

based on whether they have achieved their five to eight goals.

 

You also must determine how well they have performed the

 

secondary duties that do not fall under goals. (See Exhibits 3

 

and 4 for examples of traditional and MBO performance evaluation

 

forms, respectively.)

 

     _______________________________________________________

 

 

 

                            Exhibit 3

 

       Example of Traditional Performance Evaluation Form

 

 

 

     Factor            Excellent Above   Average Below  Poor

 

                                 average         average

 

 

 

     Degree of cost-               

 

      consciousness                X

 

     Grasp of function      X

 

     Initiative                    X

 

     Decision-making 

 

      ability               X

 

     Application            X

 

     Judgment                      X 

 

     Health                 X

 

     Appearance             X 

 

     Loyalty                X

 

     Relationship with 

 

      people                       X

 

     Ability to develop

 

      subordinates                            X

 

     Work habits                   X

 

     Contribution to 

 

      company's progress    X

 

     Potential for 

 

      advancement                  X

 

                      ___________________________

 

 

 

     Employee:_________________ Rated by: __________________

 

 

 

     Date:_____________ Reviewed by: _______________________

 

                         _____________________   

 

     Acknowledgment: 

 

     I acknowledge this performance appraisal has been 

 

     discussed with me. This acknowledgment does not 

 

     constitute agreement with the findings.

 

 

 

               Signed:____________________  Date: __________

 

_________________________________________________________________

 

 

 

          Exhibit 4 -- Results-Oriented Evaluation Form

 

 

 

                                          Results achieved

 

                                      Quarters    Total year

 

     Objectives      Measure        1st 2nd 3rd  

 

 

 

     1. Improve by   1. At least     T   O   T   Achieved in 97 

 

      10% number of  three qualified             percent of

 

      qualified      candidates                  cases.

 

      applicants     referred for

 

      referred for   each job

 

      job openings.  opening.  

 

 

 

    2. Increase by   2. Number of    O   T   T   17 completed

 

     12% number of    persons com-               course.

 

     qualified        pleting basic

 

     welders during   welding course

 

     19xx.            #5. 

 

 

 

    Note: T = On target. No action necessary. O = Off target.

 

    Action necessary.

 

_________________________________________________________________

 

 

 

INSTALLING THE MBO PROGRAM

 

 

 

When installing an MBO program, start by asking your managers to

 

define their jobs, including their major responsibilities. Then,

 

for each responsibility, you and your managers must decide the

 

most effective way to measure performance in terms of results.

 

The outcome of this exercise may surprise you. You and your

 

managers may not agree on the major responsibilities of a certain

 

position. Also, you may find that no one is performing some

 

functions that you consider important. If the MBO system is to

 

succeed, you must show interest from the beginning and set the

 

example for your subordinate managers.

 

 

 

The education of your managers may be a formidable task. Until

 

this time, they have thought in terms of specific functions

 

managing a sales department, directing a credit office, etc.

 

rather than in terms of goals that contribute to the

 

organization.

 

 

 

One way to introduce the MBO system to your managers is in a

 

seminar conducted by you or a consultant. However, if you choose

 

a consultant, be sure that you are present for the entire

 

seminar. In this way, you will communicate to your managers that

 

the MBO system is a management priority.

 

 

 

During the seminar, ask each participant to prepare an actual

 

goal. Also, in small group sessions, have your managers review

 

each other's work plans and offer suggestions to improve them.

 

The experience of setting and reviewing goals makes MBO a

 

learning experience for all employees.

 

 

 

Encourage your managers to express their doubts, reservations or

 

opposition to MBO. They should get their feelings out in the open

 

as soon as possible. You, the consultant or other participants

 

can help to ease their concerns.

 

 

 

In the beginning of your MBO program, your managers will have to

 

learn to measure their own performance accurately, anticipate

 

real problems that will thwart their progress and take steps to

 

solve delays and other problems. During this learning period,

 

your managers should set fewer goals than would usually be

 

expected, perhaps three or four. After they develop and achieve

 

these goals, they can extend the number and area covered by each

 

goal.

 

 

 

MBO may look simple on the surface, but it requires experience

 

and skill to make it work effectively. If managers set annual

 

goals, it may take three to four years before good results from

 

this new system appear.

 

_________________________________________________________________

 

 

 

THREATS TO AN MBO PROGRAM

 

 

 

Not all MBO programs are successful. Some of the reasons why

 

programs fail to reach their potential are

 

 

 

   *  Top management does not become involved.

 

 

 

   *  Corporate objectives are inadequate.

 

 

 

   *  MBO is installed as a crash program.

 

 

 

   *  It is difficult to learn the system because the nature of

 

      MBO is not taught.

 

_________________________________________________________________

 

 

 

SUMMARY

 

 

 

It is hard to get people to think in terms of results rather than

 

the functions of their job; however, it can be done. The sequence

 

of steps you use may not work for someone else. It is often an

 

individual matter. No matter what steps you use, the final

 

results are what count.

 

 

 

If you feel that you are ready to introduce MBO to your company,

 

why not set it as a goal for yourself? Turn back and follow

 

through with the work plan. List your goals, method of

 

measurement, anticipated problems and the work steps necessary to

 

get your company managing by objectives.

 

_________________________________________________________________

 

 

 

APPENDIX: INFORMATION RESOURCES

 

 

 

U.S. Small Business Administration (SBA)

 

 

 

The SBA offers an extensive selection of information on most

 

business management topics, from how to start a business to

 

exporting your products.

 

 

 

SBA has offices throughout the country. Consult the U.S. 

 

Government section in your telephone directory for the office

 

nearest you. SBA offers a number of programs and services,

 

including training and educational programs, counseling services,

 

financial programs and contract assistance. Ask about

 

 

 

     *     SCORE: Counselors to America’s Small Business, a 

 

           national organization sponsored by SBA of over 11,000

 

           volunteer business executives who provide free

 

           counseling, workshops and seminars to prospective and

 

           existing small business people.  Free online counseling

 

           and training at www.score.org. 

 

 

 

     *     Small Business Development Centers (SBDCs), sponsored

 

           by the SBA in partnership with state governments, the

 

           educational community and the private sector. They

 

           provide assistance, counseling and training to 

 

           prospective and existing business people.

 

 

 

     *     Women’s Business Centers (WBCs), sponsored by the SBA  

 

           in partnership with local non-government organizations

 

           across the nation. Centers are geared specifically to 

 

           provide training for women in finance, management,

 

           marketing, procurement and the Internet.

 

 

 

For more information about SBA business development programs and

 

services call the SBA Small Business Answer Desk at 1-800-U-ASK-

 

SBA (827-5722) or visit our website, www.sba.gov. 

 

 

 

Other U.S. Government Resources

 

 

 

Many publications on business management and other related topics

 

are available from the Government Printing Office (GPO). GPO

 

bookstores are located in 24 major cities and are listed in the

 

Yellow Pages under the bookstore heading. Find a “Catalog of

 

Government Publications at http://catalog.gpo.gov/F 

 

 

 

Many federal agencies offer Websites and publications of interest 

 

to small businesses. There is a nominal fee for some, but most 

 

are free. Below is a selected list of government agencies that 

 

provide publications and other services targeted to small 

 

businesses. To get their publications, contact the regional 

 

offices listed in the telephone directory or write to the 

 

addresses below:

 

 

 

Federal Citizen Information Center (FCIC)

 

Http://www.pueblo.gsa.gov 

 

1-800-333-4636

 

The CIO offers a consumer information catalog of federal

 

publications.

 

 

 

Consumer Product Safety Commission (CPSC)

 

Publications Request

 

Washington, DC 20207

 

http://www.cpsc.gov/cpscpub/pubs/pub_idx.html 

 

The CPSC offers guidelines for product safety requirements.

 

 

 

U.S. Department of Agriculture (USDA)

 

12th Street and Independence Avenue, SW

 

Washington, DC 20250

 

http://www.usda.gov 

 

The USDA offers publications on selling to the USDA. Publications

 

and programs on entrepreneurship are also available through 

 

county extension offices nationwide.

 

 

 

U.S. Department of Commerce (DOC)

 

Office of Business Liaison

 

14th Street and Constitution Avenue, NW

 

Washington, DC 20230

 

http://www.osec.doc.gov/obl/ 

 

DOC's Business Liaison Center provides listings of business

 

opportunities available in the federal government. This service

 

also will refer businesses to different programs and services in

 

the DOC and other federal agencies.

 

 

 

U.S. Department of Health and Human Services (HHS)

 

Substance Abuse and Mental Health Services Administration

 

1 Choke Cherry Road

 

Rockville, MD 20857

 

http://www.workplace.samhsa.gov 

 

Helpline: 1-800-workplace. Provides information on Employee

 

Assistance Programs Drug, Alcohol and other Substance Abuse.

 

 

 

U.S. Department of Labor (DOL)

 

Employment Standards Administration

 

200 Constitution Avenue, NW

 

Washington, DC 20210

 

The DOL offers publications on compliance with labor laws.

 

 

 

U.S. Department of Treasury

 

Internal Revenue Service (IRS)

 

1500 Pennsylvania Avenue NW

 

Washington DC 20230

 

http://www.irs.gov/business/index.html 

 

The IRS offers information on tax requirements for small

 

businesses.

 

 

 

U.S. Environmental Protection Agency (EPA)

 

Small Business Ombudsman

 

1200 Pennsylvania Avenue NW

 

Washington, DC 20480

 

http://epa.gov/sbo

 

Hotline: 1-800-368-5888

 

The EPA offers more than 100 publications designed to help small

 

businesses understand how they can comply with EPA regulations.

 

 

 

U.S. Food and Drug Administration (FDA)

 

5600 Fishers Lane

 

Rockville MD 20857-0001

 

http://www.fda.gov

 

Hotline: 1-888-463-6332

 

The FDA offers information on packaging and labeling requirements

 

for food and food-related products.

 

 

 

For More Information

 

 

 

A librarian can help you locate the specific information you need

 

in reference books. Most libraries have a variety of directories,

 

indexes and encyclopedias that cover many business topics. They

 

also have other resources, such as

 

 

 

     *     Trade association information

 

           Ask the librarian to show you a directory of trade

 

           associations. Associations provide a valuable network

 

           of resources to their members through publications 

 

           and services such as newsletters, conferences and

 

           seminars.

 

 

 

     *     Books

 

           Many guidebooks, textbooks and manuals on small

 

           business are published annually. To find the names of

 

           books not in your local library check Books In Print,

 

           a directory of books currently available from

 

           publishers.

 

 

 

     *     Magazine and newspaper articles

 

           Business and professional magazines provide 

 

           information that is more current than that found in

 

           books and textbooks. There are a number of indexes to

 

           help you find specific articles in periodicals.

 

 

 

      *    Internet Search Engines

 

 

 

In addition to books and magazines, many libraries offer free

 

workshops, free access to computers and the Internet, lend 

 

skill-building tapes and have catalogues and brochures 

 

describing continuing education opportunities.

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