Goals are the foundation of strategy

10/10/2019 ☼ Strategy ☼ Design ☼ Goals

Goals defined; conventional understanding of business goals in strategy; practical reasons for the prevalence of this understanding; key concepts and assumptions underlying this understanding; problems with this understanding; hierarchy of goals and abstraction in goals; goals are inherently subjective; how design thinking treats goals; how design thinking can improve the way conventional strategy thinks about goals.

Main takeaways

Goals are the foundation of strategy. To be able to choose appropriate actions to achieve desired outcomes or levels of performance, you must first be able to define what the desired outcome is.
What is appropriate as an action depends entirely on what the desired outcome is. Another way to say this is: The definition of performance depends on the goal pursued.
Conventional strategic thinking treats “value” (usually conflated with profit) as the ultimate goal for organizations—this is problematic because of the many implicit assumptions this way of thinking has to make.
Design thinking emphasizes discovering, understanding, and defining problems before attempting to solve them—in other words, design thinking explores what goals are instead of taking them for granted.
Design thinking can potentially improve conventional strategic thinking by introducing an emphasis on understanding goals before developing strategic actions to achieve them.

Goals, purposes, values, problems, desired outcomes

Values are ways of understanding how important different things are. A goal is often equivalent to a desired outcome—both are held to be valuable. A purpose is the reason or motivation behind pursuing that goal. A problem’s definition reveals its underlying purpose and system of values. These are all different words that identify different aspects of what is essentially the same thing: What is important to the person or organization, and therefore worth spending effort to achieve.

Conventional strategy’s ideas about goals

The predominant approach in conventional strategy is to treat the goal of any business as achieving “value,” defined as the monetary worth of products, services, or assets. Often, profit is used as a more easily operationalized goal—this simplifies both management research and practice. The idea of monetary value as the overarching, overriding goal of the organization is usually encoded in its articles of incorporation.

Key concepts in the conventional understanding of goals

Value-added. In its simplest, most intuitive form, value added is the difference between the value of input and the value of output. Profit is directly related to the amount of value an organization can add through its activities.
Enterprise value. This represents, in a sense, how much the organization is “worth.” The goal for conventional strategy usually is to increase enterprise value. In order to do this, enterprise value must be quantifiable. There are many generally accepted (yet different) ways to calculate what an enterprise is “worth.” One way is to add the market value of an enterprise’s debt (how much that debt would be worth to someone else—which depends on how reliably the buyer thinks the enterprise will repay the debt, and the structure of the debt) and the market value of its equity (how much people would pay for all shares in the company). Another measure of enterprise value is to think about how much its future earnings are worth in the present, by calculating the net present value of its future cash flow. Applying different measures of enterprise value to the same business nearly always yield different numbers.
Businesses exist to benefit their owners, and the owner’s incentives are assumed to align with those of the business. Shareholders are those who own a part of the business (i.e., they own equity). The general assumption is that increasing shareholder value will also increase enterprise value.
Implicit and explicit costs. An explicit cost is a direct monetary payment the business makes (examples include wages, cost of materials, rent for a building). An implicit cost is the opportunity cost of using a resource it owns. For instance, a business which owns a building can either put its own offices there or rent it to other businesses—the amount it could have gotten in rent is the implicit (or opportunity) cost of using the building for its own offices.
Accounting profit vs economic profit. The idea of profit is based on the concept of adding value; the value a business adds is related to the profit it makes. The difference between revenue and costs (which is profit) is one estimate of value-added. Accounting profit considers revenue and explicit costs; economic profit considers revenue and both explicit and implicit costs (it is thus always lower than accounting profit). Economic profit more accurately reflects whether a business makes sense. Consider, for example, a business which has annual revenues of £200,000, wage cost of £50,000, and material cost of £45,000; it owns the building it works out of, and the market rent on that building is £500,000. Does this business make an economic profit? Would it make more sense for the business to become a landlord instead?

Why the pursuit of monetary value or profit?

The focus on profit as an organizational goal is based in the foundational assumptions of most business organizations, which are usually created and persist to benefit their founders/owners. Officers of an organization are bound to act in ways that benefit the owners of the organization. But there are also other reasons for this. In a competitive market, in theory, every business competes with other businesses for normal and supernormal profit. Those which fail to achieve even normal profit die and are replaced—this is how the long-run equilibrium emerges. Profit as a goal is thus also in pursuit of survival. Additionally, business owners can fire managers if they aren’t profitable—this means that managers are often also incentivized to pursue profit. Finally, there is a widespread assumption “profit is just what everybody wants.”

Strategy is built on understanding performance in relation to goals

Strategy is about taking action to improve relative performance. Conventional strategy assumes that profit is a goal, so a business that can increase its own profitability is improving its performance relative to competitors. Some performance questions conventional strategy asks in relation to goals are:

“Are we profitable enough?”: Evaluating performance in relation to the goal (profit).
“Which area are we more or less profitable in?”: Distinguishing between activities of comparatively better or worse performance at achieving the goal.
“What actions should we take to become more profitable?”: Choosing strategies to improve performance at achieving the goal (related to #2).
“How profitable should we be?”: Setting a target for performance in the first place.

Problems with the conventional concept of goals

Not all stakeholders are shareholders. Stakeholders are individuals or groups who have an interest in how the organization works and performs—examples of stakeholders include employees, teams within the organization, people living near the organization, customers of the organization, or even the environment (think about the example of an oil company which causes an environmental disaster due to a damaged oil well at sea). All shareholders who have an equity interest are stakeholders, but not all stakeholders are shareholders. If the organization’s goal is to increase shareholder value (see the assumption from above that increasing shareholder value will also increase enterprise value), its actions to do so may be at the expense of other stakeholders.
Private profit-seeking often works against the public interest. Facebook and election manipulation, Volkswagen and diesel engines, Samarco (Vale/BHP Billiton) and the Mariana Dam disaster, BP and Deepwater Horizon.
Many of the models for estimating the organizational metrics needed to diagnose or increase profitability are founded on unreasonable assumptions. For example, estimate enterprise value by modeling future cash flows requires strong assumptions about cash flows in the future (always uncertain) and discount rates in the future (also uncertain). Despite the uncertainty permeating this model, it nonetheless generates a very concrete, certain-seeming number for enterprise value. Making strategy based on models which have uncertain assumptions but certain-seeming outputs is very problematic.
The goal of strategy is often taken for granted as being value denominated in money, yet not all values are/can be denominated in money (nor should they be). Most strategy research and practice will treat profit, revenue, growth, sales, or innovation as goals—these relate to the underlying idea of monetary value as an overarching and overriding goal. However, other possible values include employee welfare, environmental sustainability, quality, and aesthetics.
Because all values are assumed to be commensurable (through money), conventional strategy often ignores multiplicity of goals.

Thinking more clearly about goals

It is possible for organizations to pursue goals other than profit

Any goal is possible to pursue, though not all goals are necessarily viable in all environments. Goals can also be counter-intuitive—these tend to enable highly innovative strategies. Some real-world examples:

Non-profit and not-for-profit organizations (including governments) often pursue social welfare and other non-profit goals. Examples: The National Health Service, The Salvation Army.
B-corporations and multiple bottom-line businesses explicitly pursue a balance between profit and other priorities. Examples: Patagonia, Warby Parker, Method Home Products.

Goals define how performance is measured

An organization that does not have profit as its goal should not measure its performance by how profitable it is. Before performance measures can be defined, goals must first be clearly understood.

Goals are nested and hierarchical

Goals are almost always nested within each other, so goals can be super-ordinate or sub-ordinate. A super-ordinate goal “contains” many sub-ordinate goals, and is higher up in the “hierarchy” of goals. For instance, the super-ordinate goal of [getting into a graduate program in mathematical finance] may involve many sub-ordinate goals such as [take more advanced mathematics courses], [be a research assistant for a professor in mathematical finance], and [do well in GREs]—each of those sub-ordinate goals is likely to have its own sub-ordinate goals nested within it. “Super-ordinate” and “sub-ordinate” are relative terms when used to describe goals

Goals can be abstract or concrete

The more super-ordinate a goal is, the more abstract it is likely to be (“Be more profitable” or “Live somewhere sunny and warm”). Conversely, the more sub-ordinate a goal is, the more concrete it is likely to be (“Increase profit margin on widgets by 15% by the end of 2019” or “Move to Honolulu in Q4”). All else equal, the more abstract a goal is, the greater the variety of concrete goals that can potentially contribute to achieving that goal—and vice versa. Another way to say this is: all else equal, the more abstract the goal, the more freedom you’re likely to have in finding ways to achieve it.

There is no such thing as an objectively correct goal, purpose, or value.

Goals, purposes, and values are inherently subjective. What appears to be an objectively correct goal (for instance, profit in conventional strategic thinking) may simply be commonly assumed to be correct—without actually being correct at all. Even the argument that all organizations seek survival (continued existence)—i.e., that survival is an “objective” goal that all can agree on—holds little water. For instance, the Gates Foundation aims to wind up operations and spend all its funds within 50 years of its founders’ deaths.

Design thinking helps fix conventional strategic thinking

Design thinking emphasizes the importance of beginning with understanding the nature of (and thus the value system underlying) the problem situation, then defining the problem to be solved—this is another way of saying design, if applied to strategy, would begin by interrogating what the goals of the organization are (or should be).

This is an extremely simplified overview, written for undergraduates, that integrates 1) conventional strategy’s approach to goals, 2) alternative goals, and 3) design approaches to problems. The undergraduate course uses Robert Grant’s Contemporary Strategy Analysis as a basic reading (it is one of many possible sources for similar ideas). For more on the design thinking ideas alluded to above, see Herbert Simon’s Sciences of the Artificial; and on alternative goals, see E. F. Schumacher’s Small is Beautiful and Yvon Chouinard’s Let My People Go Surfing. A full reading list (for my PhD seminar in strategy and design) is available here.