BizAims

The objectives and goals of the SBU may be stated in terms of activities (manufacturing a specific product, selling in a particular market); financial indicators ; desired positions ; and combinations of these factors. Generally, an SBU has a series of objectives to cater to the interests of different stakeholders. One way of organizing objectives is to split them into the following classes: measurement objectives, growth/survival objectives, and constraint objectives. It must be emphasized that objectives and goals should not be based just on facts but on values and feelings as well. It is in seeking answers to such questions that value judgments become crucial. The perspectives of an SBU determine how far an objective can be broken down into minute details. If the objective applies to a number of products, only broad statements of objectives that specify the role of each product/market from the vantage point of the SBU are feasible. On the other hand, when an SBU is created around one or two products, objectives may be stated in detail. Measurement objectives and goals define an SBU’s aims from the point of view of the stockholders. The word profit has been traditionally used instead of measurement. But, as is widely recognized today, a corporation has several corporate publics besides stockholders; therefore, it is erroneous to use the word profit. 

On the other hand, the company’s very existence and its ability to serve different stakeholders depend on financial viability. Thus, profit constitutes an important measurement objective. To emphasize the real significance of profit, it is more appropriate to label it as a measurement tool. It will be useful here to draw a distinction between corporate objectives and measurement objectives and goals at the level of an SBU. Corporate objectives define the company’s outlook for various stakeholders as a general concept, but the SBU’s objectives and goals are specific statements. For example, keeping the environment clean may be a corporate objective. Using this corporate objective as a basis, in a particular time frame an SBU may define prevention of water pollution as one of its objectives. In other words, it is not necessary to repeat the company’s obligation to various stakeholders in defining an SBU’s objectives as this is already covered in the corporate objectives. Objectives and goals should underline the areas that need to be covered during the time horizon of planning.Profitability Profits in one form or another constitute a desirable goal for a product/market venture. As objectives, they may be expressed either in absolute monetary terms or as a percentage of capital employed or of total assets. At the corporate level, emphasis on profit in a statement of objectives is sometimes avoided because it seems to convey a limited perspective of the corporate purpose. But at the product/market level, an objective stated in terms of profitability provides a measurable criterion with which management can evaluate performance. Because product/market objectives are an internal matter, the corporation is not constrained by any ethical questions in its emphasis on profits. 

Market Share In many industries, the cigarette industry, for example, gaining a few percentage points in market share has a positive effect on profits. Thus, market share has traditionally been considered a desirable goal to pursue. In recent years, extensive research on the subject has uncovered new evidence on the positive impact of market share on profitability. The importance of market share is explainable by the fact that it is related to cost. Cost is a function of scale or experience. Thus, the market leader may have a lower cost than other competitors because superior market share permits the accumulation of more experience. Prices, however, are determined by the cost structure of the least effective competitor.

The high-cost competitor must generate enough cash to hold market share and meet expenses. If this is not accomplished, the high-cost competitor drops out and is replaced by a more effective, lower-cost competitor. The profitability of the market leader is ascertained by the same price level that determines the profit of even the least effective competitor. While market share is a viable goal, tremendous foresight and effort are needed to achieve and maintain market share positions. A company aspiring toward a large share of the market should carefully consider two aspects: (1) its ability to finance the market share and (2) its ability to effectively defend itself against antitrust action that may be instigated by large increases in market share. For example, when General Electric considered entering the computer business, it found that to meet its corporate profitability objective it had to achieve a specific market share position. To realize its targeted market share position required huge investment. The question, then, was whether General Electric should gamble in an industry dominated by one large competitor (IBM) or invest its monies in fields where there was the probability of earning a return equal to or higher than returns in the computer field. General Electric decided to get out of the computer field. Fear of antitrust suits also prohibits the seeking of higher market shares. A number of corporations Kodak, Gillette, Xerox, and IBM, for example have been the target of such action. These reasons suggest that, although market share should be pursued as a desirable goal, companies should opt not for share maximization but for an optimal market share. Optimal market share can be determined in the following manner:

1. Estimate the relationship between market share and profitability.

2. Estimate the amount of risk associated with each share level.

3. Determine the point at which an increase in market share can no longer be expected to earn enough profit to compensate the company for the added risks to which it would expose itself.

The advantages of higher market share do not mean that a company with a lower share may not have a chance in the industry. There are companies that earn a respectable return on equity despite low market shares. Examples of such corporations are Crown Cork and Seal, Union Camp, and Inland Steel. The following characteristics explain the success of low-share companies: (a) they compete only in those market segments where their strengths have the greatest impact, (b) they make efficient use of their modest research and development budgets, (c) they shun growth for growth’s sake, and (d) they have innovative leaders. Briefly, market share goals should not be taken lightly. Rather, a firm should aim at a market share after careful examination. The following example illustrates the importance of market share. With an initially high share of a growing and competitive market, management shifted its emphasis from market share to high earnings. A manager with proven skills was put in charge of the business.

Earnings increased for six years at the expense of some slow erosion in market share. In the seventh year, however, market share fell so rapidly that, though efforts to hold profits were redoubled, they dropped sharply. Share was never regained. The manager had been highly praised and richly rewarded for his profit results up to 1990. These results, however, were achieved in exchange for a certain unreported damage to the firm’s long-term competitiveness. Only by knowing both and by weighing the gain in current income against the degree of market share liquidation that entailed could the true value of performance be judged. In other words, reported earnings do not tell the true story unless market share is constant. Loss of market share is liquidation of an unbooked asset upon which the value of all other assets depends. Gain in market share is like an addition to cost potential, just as real an asset as credit rating, brand image, organization resources, or technology. In brief, market share guarantees the long-term survival of the business. Liquidation of market share to realize short-term earnings should be avoided. High earnings make sense only when market share is stable.

For most managers today, growth is the Holy Grail. When charting strategy, they focus on ways to expand revenues, believing that higher sales will bring higher profits. The assumption is that a company able to capture a large proportion of revenues in an industry a large market share will reap scale efficiencies, brand awareness, or other advantages that will translate directly into greater profits. If you can grow faster than your competitors, the thinking goes, profits will surely follow. Unfortunately, profits do not necessarily follow revenues. Consider the recent experience of Gucci, one of the world’s top names in luxury leather goods. In the 1980s, Gucci sought to capitalize on its prestigious brand by launching an aggressive strategy of revenue growth. It added a set of lower-priced canvas goods to its product line. It pushed its goods heavily into department stores and duty-free channels. In addition, it allowed its name to appear on a host of licensed items such as watches, eyeglasses, and perfumes. The strategy worked sales soared but it carried a high price: Gucci’s indiscriminate approach to expanding its products and channels tarnished its sterling brand. Sales of its high-end goods fell, leading to erosion of profitability.

Although the company was eventually able to retrench and recover, it lost a whole generation of image-conscious shoppers in some countries. Gucci’s misstep highlights the problem with growth: the strategies businesses use to expand their top line often have the unintended consequence of eroding their bottom line. Gucci attempted to extend its brand to gain sales a common growth strategy but ended up alienating its most profitable customer segments and attracting new segments that were less profitable. It was left with a larger set of customers but a much less attractive customer mix.

Other Objectives In addition to the commonly held objectives of profitability, market share, and growth (discussed above), a company may sometimes pursue a unique objective. Such an objective might be technological leadership, social contribution, the strengthening of national security, or international economic development.

Technological Leadership. A company may consider technological leadership a worthwhile goal. In order to accomplish this, it may develop new products or processes or adopt innovations ahead of the competition, even when economics may not justify doing so. The underlying purpose in seeking this objective is to keep the name of the company in the forefront as a technological leader among security analysts, customers, distributors, and other stakeholders. To continue to be in the forefront of computer technology, in 1987 IBM entered the field of supercomputers, an area that it had previously shunned because the market was limited.

Social Contribution. A company may pursue as an objective something that will make a social contribution. Ultimately, that something may lead to higher profitability, but initially it is intended to provide a solution to a social problem. A beverage company, for example, may attack the problem of litter by not offering its product in throwaway bottles. As another example, a pharmaceutical company may set its objective to develop and market an AIDS-preventive medicine.

Strengthening of National Security. In the interest of strengthening national defense, a company may undertake activities not otherwise justifiable. For example, concern for national security may lead a company to deploy resources to develop a new fighter plane. The company may do so despite little encouragement from the air force, if only because the company sincerely feels that the country will need the plane in the coming years.

International Economic Development. Improvement in human welfare, the economic progress of less-developed countries, or the promotion of a worldwide free enterprise system may also serve as objectives. For example, a company may undertake the development of a foolproof method of birth control that can be easily afforded and conveniently used.