Why is it important to set both strategic and financial goals? Please justify your answer
Strategic goals provide a sense of direction, a vision. It outlines the goals that the organization would like to achieve (McCann III, Leon-Guerrero & Haley, 2001). As Yogi Berra told, "If you don’t know where you are going, you are certain to end up somewhere else.” A company thus without strategic goals would be without a target and thus have a higher chance to deviate from its motto and fail to deliver on user promises. In addition, financial goals are equally important for a business. As the name suggests, it revolves around money or finances. A business needs to manage their finances to ensure sustainable growth (Ulrich & Lake, 1991). Financial goals help in creating a balanced plan to determine and achieve a company’s short, medium and/or long-term objectives.
Strategic and financial goals are both equally important for an organization to have. Missing out on either one of those wouldn’t simply complete the equation. Strategic goals show a vision of where the company would like to be after ‘x’ number of years. Relating this with an example, Khalti starting to use Kiosk to allow users added method to use their application is a strategy. Let’s consider that the motive of the company here is to increase the transaction using this method. Financial goals help set the finances they would like to add from that method if any. Relating to the same example, Khalti setting a target to increase the total transaction by 40% originating from Kiosk while this medium increasing the overall revenue of the company by 25% by 2020 would be a financial objective. As in the example, each of those goals completes each other. The financial objective also made it possible to gauge the achievement of the goal.
Considering another example where a company wants to move to a new location. For this, the company would need a million dollars. It’s a strategic goal to move to a new location as that provides a better opportunity for the company and it’s a financial goal to dictate how the funds can be generated to ensure the goal is fulfilled. It also ensures that the company is focused on a goal and doesn’t deviate away from it.
Comparing strategic and financial goals, it’s clear that the financial goals are more measurable. The performance can be analyzed, progress looked into and change strategy if need be if the goal is lagging behind. Whereas strategic goals are more focused on the performance and the end result that the company wants to achieve. Strategic goals unlike in financial goals progress can’t be easily trackable and thus financial goals are the one which becomes the focus in most of the board meetings causing heated debates (Khan, 2012). Financial goals even though is the one which is visible in the front, it’s also strategic goals which provides a sense of direction while increasing operational excellence. Thus, both strategic and financial goals are of importance to the organization of any size.
Khan, I. (2012). The Balanced Scorecard: Strategic Planning and Management. Prabandhan: Indian Journal Of Management , 5 (5), 47.
McCann III, J., Leon-Guerrero, A., & Haley, J. (2001). Strategic Goals and Practices of Innovative Family Businesses. Journal Of Small Business Management , 39 (1), 50-59.
Ulrich, D., & Lake, D. (1991). Organizational capability: creating competitive advantage. Academy Of Management Perspectives , 5 (1), 77-92.
Strategic goals are more concerned with the internal and external aspect of how the business is to be run. It deals with operations, mid-level management and higher level decision making aspect. This may be clear as to what to achieve and how to achieve it but it will be incomplete without understanding and setting goals for financial aspect such as capital budgeting, asset management, cash flow etc.
Depending upon the past financial statement of a company alone, to set financial objective may not be without error as well. Future is unknown and a poor performer may be able to bring huge positive changes while good performers can falter into difficulties. Therefore future financial performance depend on good strategic objectives and are two sides of the same coin. (Gamble, Peteraf, & Thompson Jr, 2015)
It can be said that strategic and financial goals will not be complete without each other as strategic goals are made to increase shareholders wealth. Strategic performance measurement system (SPMS) is being used more and more these days to evaluate the performance or return on investment. Managers should target achieving financial and strategic goals if they are to envision improvements in financial performance. (Webb, 2001)
Let us take an example of a restaurant. If the owner wants to improve cash inflow, it is not in the financial statements of the past years that will help and guide them out. The sales record, preferred dish, cost of production etc. will not matter as much as what the customer thinks of the food in the restaurant or the ambience. Satisfied customer are loyal customers that bring cash inflow. Therefore cost reduction and pricing may be a financial goal but strategic goal will be to understand customer perception and satisfying them. Both are important for the success of the restaurant.
Gamble, J. E., Peteraf, M. A., & Thompson Jr, A. A. (2015). Essentials of Strategic Management The quest for competitive management. NewYork: McGraw-Hill Education.
Webb, A. R. (2001). Managerial goal commitment in a strategic performance measurement system: The effects of causal-linkages and non-financial goal achievability. Ann Arbor: ProQuest Dissertations Publishing. Retrieved from https://proxy.lirn.net/MuseProxyID=mp03/MuseSessionID=co10e33dz/MuseProtocol=https/MuseHost=search.proquest.com/MusePath/central/docview/304738304/abstract/CE27D489EF334CACPQ/1?accountid=158986
In the current business world, the technological advancement and globalization are accelerating the global transformation of the competitive environment. In such a situation, for a firm to survive and grow, it must have strategic orientation. The term strategy has evolved from military science/ world with industrialization and globalization it got popularity in the business world as well [David, 2011]. The present state of strategic management is result of a series of advancement in the past.
Strategic management involves formulations, implementation, and control of strategies for a sustainable competitive advantage. Some of the major points to highlight the important of strategic management are discussed below:
- Builds Synergy
- Deliver value to customer
- Exploits core competencies
- Deals with opportunity and threats
- Strategic Fit
- Competitive Capability
- Organization Unity
- Recourse Management
- Organizational Effectiveness
- Manages Change.
If I am a manager for ABC Company and setting strategic goals helps me to get long - terms vision and objective. If I have clear strategic plan then I can easily visualize the final picture of my work and I easily execute these works. These long terms objective are clearly defined a general time framework and plan for a company’s long term goal.
If we have clear strategic goal an organization may attain an advantage with respect to cost market power, technology, or management skill. Similarly,
- Strategic management always focused on competitive advantage through a Strategic Management efforts are always directed towards building core competencies.
- It creates a more proactive management approach by founding on future opportunity.
The financial goal setting is an integrated set of action taken to produce goods or service with features that are acceptable to customer at lower cost, relative to that of competitors [Rao, 2016]. Under this attempts are made to offer standardize products to the customers at price lower than competitors. Its main aim is to reduce cost and increase the market share by providing acceptable product. The overall profit increases due to higher sales irrespective of the lower price. The Importance of setting financial goals are:
- Economies of Sales: Per Unit cost of product decrease if the production is carried out in large quantity.
- Capacity Utilization: If a business operates in full or maximum capacity per unit cost of production goes down.
- Low Cost Materials: If a production is carried out with low cost materials the cost per unit of production can be removed. The price sensitive customers prefers the products with low cost.
- Increase in Market Share: The financial strategy may attract more customer by offering products to low price which results in increase market share.
The main aim of setting financial goal in business is to grow revenue of business, decrease the cost, Improve margin and Make profit to shareholders.
David, F. (2011). Strategic Management: Concept and Cases. New Dheli: Pearson Education .
Rao, P. (2016). Business Policy and Strategic Management . Mumbai: Himalya Publising House .
Goals serve as the aim of one’s actions and motivate people towards attainment of a desired results. Goals and motivation are inter wined as it has been observed that people are motivated to work when they are given a certain goal to achieve rather than dictating them and constantly telling them to give their best. In case of an organization, it is important to set goals to guide the organizational activities and make sure that all the efforts are concentrated towards same direction (Turkay, 2014).
Strategic goals are related with overall business operations. They provide direction and vision towards which the company should move to get the desired results that may be increased profitability, reduced cost, increased market share or increased customer base. They provide answer to why the company is existing and operating. The strategic goals cannot be set on the basis of particular department or unit. They are based on the overall organizational scenario and are prepared for comparatively longer time period. The strategic goals may address the issue of market standing, innovation, human resources, financial resources, physical resources, productivity, responsibility of profit requirement (Essays, 2015).
Unlike strategic goals, financial goals address only the financial goals. They are mainly related with increasing profit and decreasing costs. Financial goals are more concrete, specific and measurable than strategic goals. Because of the quantifiable, visibility and tangibility, the financial goals often become the focal point for dispute and tension at higher levels of organization (Donalson, 1985). Cash flow, credit worthiness, growth on earning, return on investment, dividend growth etc. are the areas covered by financial goals.
For example: The strategic goal of an organization is diversifying the revenue stream. The financial goal to support this strategic goal is to increase the revenue by 20% by introducing new products targeted to a newly identified market segment. From this example, we can see that the strategic goals and financial goals are related with each other. The financial goals help in the attainment of strategic goals. Strategic goals set what the company ultimately wants to achieve and financial goals set the short and long-term financial targets the company needs to meet in order to attain the strategic goals. Strategic goals provide vision and financial goals provide a mechanism to check whether the efforts are moving towards the right direction or not and take corrective measures in case of deviation. Thus it is important to set both strategic and financial goals.
Donalson, G. (1985). Financial Goals and Strategic Consequences. Harvard Business Review . Retrieved from https://hbr.org/1985/05/financial-goals-and-strategic-consequences
Essays. (2015, November 27). The Difference Between Financial Objectives and Strategic Objectives. Retrieved from https://essays.pw/essay/the-difference-between-financial-objectives-and-strategic-objectives-essay-158055
Turkay, S. (2014). Setting Goals: Who, Why, How? Retrieved from Harvard University: https://vpal.harvard.edu/publications/setting-goals-who-why-how