The Hierarchy of Objectives

by Charles H. Granger

  • Why is a conceptual framework of objectives important in decision making?
  • What are the most important characteristics of good objectives?
  • How should objectives be chosen and established?
  • How can objectives be used profitably by management?

We are all faintly amused by the aptness of the old quotation, “Having lost sight of our objective, we redoubled our efforts.” Everyone admits to having been caught in this situation atone time or another. But is it possible that most large organizations are in this predicament a good part of the time?

Evidence indicates that this may indeed be true. The main trouble seems to be a lack of clear understanding of questions such as the above. In discussing these questions I shall use the term objective in the relatively broad, nonspecific sense which it commonly has in everyday business language. In this sense an objective is “an aim or end of action”; it is also used as an aim or guide to intermediate decisions and actions. For example, a sales manager might say, “Our objective is to have our salespeople make as many calls possible”—but he or she might be very conscious of the fact that a more fundamental objective is to develop high sales volume.

Role & Importance

Everyone will admit that objectives are important. But is it really necessary to analyze them? Can they be taken for granted? On a larger scale we have evidence like this:

  • In a $50-billion-a-year organization, Secretary Robert S. McNamara and professional military people are in serious dispute because of a new way of looking at objectives.
  • The Roman Catholic Church has called some 2,500 of its highest officials from their pressing daily business to help rethink that organization’s objectives.
  • The American Telephone and Telegraph Company was perhaps saved from government ownership in the 1930’s by having thought out its objectives.
  • Sears, Roebuck and Co. has expanded from being a catalog merchant into a fabulous range of services as a result of a continuing redefinition of its objectives.
  • Theodore Levitt proposes that some leading industries may be in danger of going the way of the railroads because of inappropriate objectives.1

Less dramatic examples, because they are so much more numerous, probably have even greater importance. Think of the waste from the countless decisions made every day which could have been made better if the desired objectives had been more apparent to the decision-maker. In many organizations, if you ask a number of managers to write down their principal objectives, you may get strongly conflicting answers. The results? Research and development money is sometimes spent on projects which are later abandoned because they are inconsistent with broader corporate objectives. Committees spend countless hours thrashing over problems unrelated to the over-all purposes of their organizations. Vacillation on acquisition policies is often attributable to inadequately defined objectives. And so on.

Organization planning, marketing planning, R & D planning, financial planning, to say nothing of total corporate planning, properly begin with the question, “What are our over-all objectives?” Moreover, proponents of Douglas McGregor’s “Theory Y” stress the importance of integrating the objectives of the individual with the objectives of the organization. But how can this be done if the organization’s objectives are not really known? It seems that there is a major opportunity for increased effectiveness if our objectives can be made clearer by even a small amount.

Subtle Conflicts

Clarity is not the only question. Balance is important, too. Thus:

  • Many a company is in trouble because customer-service objectives are not properly related to profit objectives.
  • One utility will tell you (privately) that it ran into a serious earnings problem because its managers overstressed customer-service objectives to the slighting of profit objectives, a condition that took some years to correct.
  • Some companies recruit too many top-rate college graduates to be consistent with the rather modest objectives of the over-all organization. When after a few years it becomes apparent to these high-potential individuals that the organization does not really intend to pursue very challenging objectives, the result is wasteful high turnover.

Lyndall F. Urwick sums up such problem sin a refreshing and often-overlooked way:

“Unless we have a purpose there is no reason why individuals should try to cooperate together at all or why anyone should try to organize them. This, however, is very easily forgotten. Once an organization is set up, a human group is in being, all the individual and personal motives which have induced persons to join the group, which keep them in the game and playing the game, assume great importance in their minds. Most of us suspect that the main purpose of the undertaking which employs us is to provide us personally with a job… People derive social satisfactions from working together. And they build up, often unconsciously, very elaborate codes of behavior, and loyalties, and affections and antipathies, which may have little or nothing to do with the formal organization of the undertaking, the official relationships which their superiors recognize… Every organization and every part of every organization must be an expression of the purpose of the undertaking concerned or it is meaningless and therefore redundant.”2

Is a Theory Necessary?

Management literature is teeming with titles such as “How to Set Objectives,” “How We Set Our Objectives,” and even with articles on the appropriateness of one objective as opposed to another—profits versus survival, volume versus customer-service, and the like. Less attention has been given to the structure of objectives, pseudo-objectives, and constraints. Some sort of conceptual framework embracing the whole range of objectives seems necessary if we are ultimately going to use objectives more effectively. In some orderly way we must relate the “grand design” type of objective with the much more limited objectives lower down in the organization. And we have to examine how one type of objective can be derived from another. Again quoting Urwick:

“We cannot do without theory. It will always defeat practice in the end for a quite simple reason. Practice is static. It does and does well what it knows. It has, however, no principle for dealing with what it doesn’t know… Practice is not well adapted for rapid adjustment to a changing environment. Theory is light-footed. It can adapt itself to changed circumstances, think out fresh combinations and possibilities, peer into the future.”3

Tests of Validity

How can the validity of an objective be tested? What should an objective accomplish? Here are some important criteria to be applied to an objective:

1. Is it, generally speaking, a guide to action? Does it facilitate decision making by helping management select the most desirable alternative courses of action?

2. Is it explicit enough to suggest certain types of action? In this sense, “to make profits” does not represent a particularly meaningful guide to action, but “to carry on a profitable business in electrical goods” does.

3. Is it suggestive of tools to measure and control effectiveness? “To be a leader in the insurance business” and “to be an innovator in child-care services” are suggestive of measuring tools in a helpful way; but statements of desires merely to participate in the insurance field or child-care field are not.

4. Is it ambitious enough to be challenging? The action called for should in most cases be something in addition to resting on one’s oars. Unless the enterprise sets objectives which involve reaching, there is a hint that the end of the road may be at hand. It might be perfectly appropriate for some enterprises which have accomplished their objectives to quietly disband. However, for an undertaking to have continuity, it needs the vitality of challenging objectives.

5. Does it suggest cognizance of external and internal constraints? Most enterprises operate within a framework of external constraints (e.g., legal and competitive restrictions) and internal constraints (e.g., limitations in financial resources). For instance, if objectives are to be a guide to action, it appears that American Motors, because of its particular set of constraints, should have somewhat different objectives than General Motors.

6. Can it be related to both the broader and the more specific objectives at higher and lower levels in the organization? For example, are the division’s objectives relatable to the corporate objectives, and in turn do they also relate to the objectives of the research department in that division?

If such tests as these are valid indications of the meaningfulness of objectives, then several further propositions become apparent. First, objectives, as aims or ends of action, are intimately involved in a complex of other important considerations or guides to action, such as definitions of the business, internal and external constraints, measurements of success, budgets, and long-range plans. Secondly, there is a ranking or hierarchy of objectives, proceeding in concept from the very broad to the specific. Logically, the specific or more limited objectives should not be in conflict with the broad objectives. The second proposition in particular deserves further consideration.

Complete Framework

Much of the confusion which apparently exists about objectives can be alleviated by viewing objectives as a whole framework or complex of “aims or ends of action” and other guiding considerations. In this framework it is not helpful to think there is one overriding consideration, such as “profit,” since we must also concede in the next breath that another objective is to “stay within the law.” Profit may indeed be the factor to be maximized in a particular case, but it cannot be viewed as the sole objective. The concept of a hierarchy is illustrated in Exhibit I.

Exhibit I. Hierarchy of objectives in terms of level of need or activity

Leading Characteristics

Granted the existence of this hierarchy, what is significant about it? What are its important characteristics and implications?

1. The full range of objectives and guiding considerations is distressingly broad. No one individual in a large organization could consciously make each decision in light of the total framework of objectives and guiding considerations. Hence, in practice many managers are guided in their decision making by what they themselves view as their own key objectives. This creates quite a problem. Recognition that there is such a problem does not mean that we should shrug our shoulders and ignore the whole subject. It suggests the need for a greater effort to organize and compartmentalize objectives into classes that are useful for each decision-maker in the organization.

2. The rate of change with time decreases as we go up the scale. Short-term programs and budgetary objectives may change in less than a year. But long-range plans may exist for several years without major revision, and the “grand design” of an enterprise may last throughout the leadership tenure of its chief executive.

3. For most enterprises even the broad objectives are subject to change in 20 years. The argument is sometimes advanced that the very broad objectives of an enterprise are tied in with human values which are essentially immutable or subject to change only in terms of millennia. A good case could be made for this in terms of some organizations such as the Church. In other fields, however, the “grand design” even of many large organizations has changed within a leadership generation. The airframe industry, Sears, Roebuck and Co., the Tuberculosis Association, and the U.S. Air Force are examples. In smaller organizations it is not unusual to see the needs and values of the leader change—for instance, from financial security to esteem or creative contribution to society—with a discernible change in objectives of the organization. Management consulting firms are keenly aware of the fact that, when a new chief executive comes into power, there is considerable potential for consulting services in helping the organization to rethink and redetail its objectives in line with the new values, creeds, and grand design of the incoming chief executive.

4. Debates on how specific an objective should be are not especially helpful. One sometimes encounters the argument that an objective “to earn a fair return for the stockholder” is a pious but meaningless mouthing; 20% pre-tax return on invested capital (or some such specific target) is advanced as a more appropriate alternative. The scale of objectives in Exhibit I suggests that both of these are necessary (along with others). On the one hand, if we intend to use objectives as a tool for measuring progress, we are certainly much better able to do so if we have a certain percentage figure like 20% appropriate to the year. On the other hand, 20% (or any other fixed per cent) may be ridiculous for a recession year when nobody in the industry can even approach the figure; it then becomes meaningless. Thus, to derive a valid measurement we must fall back on our broader objective of fair return to the stockholders.

5. Debates on the merit of one type of objective as opposed to another are only meaningful in light of the particular circumstances. For example:

One frequently hears arguments as to whether profitability, public service, or perhaps customer-service or survival of the enterprise should be the ascendant objective. Arguments of this kind can quickly degenerate into a chicken-or-egg type of controversy.

Exhibit I suggests that the relative merit of a particular type of objective can only be evaluated in light of the particular circumstances being faced—the internal and external constraints, the values of the individuals who control the destiny of the enterprise, and so on. It might be entirely appropriate for a large undertaking, threatened with nationalization or government-directed splitting up which it deems against its best interests, to emphasize public service objectives more than profit objectives. H. Igor Ansoff points out that the near-term profits of many rather large firms are relatively secure anyway.4

6. The obviousness of the need for stated objectives appears to decrease as we approach the upper end of the hierarchy. Consider the experience of the Defense Department:

Until the McNamara era, much Congressional debate centered around budgetary allocations in the traditional service categories (Army, Navy, Air Force, and so on), each broken down by personnel, operation and maintenance, procurement, R & D, and military construction. These traditional budget categories represent objectives of a sort and are still being used. But Secretary McNamara and his colleagues revolutionized the concept of objectives in government by taking this line of reasoning: It is not a fundamental objective simply to have so many men in the Marine Corps or to build such and such an Army base. The real objective is maximum national security. Within what might be called a grand design of national security, a number of “missions” were established, including strategic retaliation, continental air and missile defense, and general-purpose warfare capability. Now, for example, the Fleet Ballistic Missile System can be evaluated in terms of its contribution and cost/effectiveness relationships to the mission of the strategic retaliatory forces.

Although the advantages of evaluating the Defense Department program in light of its objectives seem obvious after the fact, and although such a system was long advocated by the Hoover Commission and other bodies, the Defense Department is the only major government department to have done this on a large scale.

This apparent casual approach to objectives is not a phenomenon of government organizations. How many talented leaders from business and other endeavors sit on boards of various churches, educational institutions, charities and the like, struggling with budgets in cases where the less obvious but more fundamental objectives have not been thought out? It is not an easy job. For example, one large church organization, after much preparatory staff work, required six early-morning-to-late-evening sessions of two days each (including the time of a large group of nationally prominent individuals) to redefine its objectives (the equivalent of grand design, missions, and charters in Exhibit I) and related matters.

While formalized statements of grand design and missions apparently exist only in a small percentage of business organizations, formalized charters and policy statements are relatively common; long-range plans are becoming much more so, and almost every business has a budget.

7. The need for broad objectives of the grand design and mission type is not restricted to the very large company. For example:

One moderate-size New England company is founded on a variety of specialized technologies in mechanical sealing devices. The head of this company views its grand design as “stopping the leaks around the world.” Bizarre as this first sounds, it is a perfectly workable concept for a grand design for a highly successful undertaking—which it already is on a moderate scale. From it are spawned missions relating to certain markets and applications. There is a network of charters relating to various operating divisions both in this country and abroad. This organization seems to have a unified sense of purpose and destiny which it would otherwise lack. The whole management team seems to know where it is going, and the individual managers are excited and enthusiastic about their common purpose.

The unfortunate cases are the organizations which lack such an over-all sense of purpose and are not doing anything to correct it; or perhaps their grand design is substantially accomplished or no longer appropriate to the current environment. These are the business enterprises in declining or static industries, the philanthropies for which the needs are now only marginal, and so on. The objectives of these organizations seem to be “to keep on doing what we have been doing,” but the people in them are troubled and perplexed because they see that their results are not particularly satisfactory by a number of standards. A business enterprise in this situation may view its over-all objective as “10% net profit on stockholder investment”—but it does not have a ghost of a chance of achieving it on a consistent basis. People in the organization become engrossed in their personal objectives of holding onto their jobs. If only the board of directors in such cases would insist on having a written statement of the grand design!

8. Objectives should not only guide action but also stimulate it. Frederick R. Kappel, chairman of the board at AT&T, observes:

“Unless the business sets demanding and exciting goals, it runs a heavy risk of losing vitality. This is an area where people in top management positions have heavy responsibilities… If these goals fail to stimulate, there is something missing at the top… In the sense that I am using the word, a goal is something presently out of reach; it is something to strive for, to move toward, or to become. It is an aim or purpose so stated that it excites the imagination and gives people something they want to work for, something they don’t yet know how to do, something they can be proud of when they achieve it.”5

Steps in Derivation

When we choose and establish directives, we cannot logically proceed in one step from a grand design to a budget, although companies undoubtedly often attempt this. We are in effect confronted with a situation of goals within goals within goals.

We must start with the given statement of the broader objective (see Exhibit II). Next comes the process of setting up yardsticks, criteria, “key result areas,” or some other form to measure the success of the stated objective. Obviously the more tangible such yardsticks are, the more usable they will be. But if they are going to be specific and realistic (for example, so many dollars in world trade), then it is necessary to consider both the internal resources of the enterprise (“How much physically can we export?”) and the environmental conditions (“What share of which world markets can we obtain?”). Hence both an analysis of internal resources and an environmental analysis are called for in setting up realistic and adequately challenging criteria.

Exhibit II. Process of deriving specific objectives from broader objectives

The next step requires that management define the range of possible activities which it might use to accomplish the larger objective. For example, the question for a furniture company might be: What balance of emphasis is best between office and home furnishings? The alternatives must be weighed in terms of their effectiveness in accomplishing the objective, on the one hand, and of the consumption of available resources, on the other hand.

As the preferred new subobjectives and subprograms begin to emerge, one can expect numerous conflicts and inconsistencies. In the case of the exporter, for example, protection of domestic sales may not always be consistent with expansion of foreign trade. Hence some sort of reiteration or recycling is called for to minimize the inconsistencies before the final subobjectives can be decided on.

So much for the general process. What are the problems of making it work? What requirements must be observed?

Role of Creativity

Establishing even a subobjective within the framework of a broader objective is a creative act. It involves the conceptual creation of a number of possible subobjectives, testing them against the realities of (1) consistency with internal resources, (2) consistency with environmental conditions, and (3) effectiveness/cost relationships in accomplishing the broader objective. Here we see the familiar concepts of creativity: exposure (to the broader objectives, internal and environmental constraints, and challenges), gestation, idea emergence, testing against reality, recycling.

Borrowing from the studies of creativity, we can see that individuals who are creative on the practical level, provided they have had appropriate exposure to the company situation, can be very helpful in establishing objectives. On the other hand, we have to beware of situations in which objectives are set without adequate exposure to environmental conditions (not all would-be staff planners are conscious of this); likewise we must beware of situations where objectives are set without adequate analysis of both internal and environmental conditions (not all line managers are conscious of this).

The creation of a workable grand-design type of objective thus emerges as an especially creative act. There are no broader objectives to be guided by. Creators of grand designs have as tools only their needs, values, and drives, and the company’s environmental and internal constraints and challenges.

Motives & Appeals

In setting meaningful objectives, much help can come from creative people—those with high idea-emergence, good at censoring their own ideas against reality, persistent at recycling their ideas for improvement, having adequate exposure to internal and external factors, and possessing adequate drives. Moreover, Douglas McGregor’s “Theory Y” approach to management suggests that the higher-order personal drives (such as those based on ego needs and self-fulfillment needs) of these people should be coupled with the objectives of the undertaking for the most effective accomplishment of the mission. This may be especially true in the higher echelons of a large organization. To oversimplify the thought, pay raises and threats of discharge may work with blue-collar workers, but the higher motives may be more effective with the financially more secure managers.

Frederick R. Kappel cites the visionary goal of AT&T—“the big dream stated without equivocation, the dream of good, cheap, fast, worldwide telephone service for everyone.” He observes that such a goal is “not a wishful fancy. It is not a speculation. It is a perfectly clear statement that you are going to do something.” He then points out three conditions which in his opinion favor setting the right goal at the right time:

1. An instinctive feeling for quality throughout the organization.

2. Freedom to make some mistakes.

3. A recognition of the pressure of external factors.

He further points out that “part of the talent or genius of the goal-setter is the ability to distinguish between the possible and the impossible—but to be willing to get very close to the latter.”6

Eric Hoffer takes a stronger view, at least in regard to the goals of large undertakings or “mass movements.” He suggests that the goals for a vital undertaking should be impossible of achievement (for example, achieving God’s Kingdom on earth), and points out that the best climate for setting these visionary goals is among the groups who are down but not quite out.7 For example, the Black Muslim movement apparently cannot reach the most abject Negroes, who seem to have little interest in anything beyond a day-to-day existence, nor does it apparently appeal much to Negroes who are currently “successful” in American society.

Does this apply to companies in the business world? Are there any indications that the downtrodden business organization, like pre-Hitler Germany, is most susceptible to a brilliant renaissance, and all that it lacks is a deliverer, a leader who electrifies its members with visionary goals? One could say that George Romney did something of this sort with American Motors. But such examples seem rare. Why aren’t there more of them? There is certainly no lack of prospective candidates! Perhaps there is a lack of George Romneys, or perhaps they find themselves called into other fields. But any organization, in however severe straits, can probably boast a few young hotbloods who can establish visionary objectives, but who lack the other qualities of drive and leadership to carry them out.

Need for Renewal

There is probably merit in reestablishing objectives every so often just for the sake of reestablishing them. One might think that if objectives were once set, and if internal and external conditions did not change too much, the objectives would be valid for a good long time. But the same old objectives repeated over and over produce no impact, no challenge.

Perhaps this is a failing of many religious organizations. Canonical types of objectives, produced many years ago by undoubtedly brilliant churchmen, simply do not inspire the organization members of today unless they themselves have gone through the process of thinking out the objectives and reached similar conclusions.

Some “Theory Y” practitioners have gone to an extreme; they favor changing the objectives at a given level and position every time a new individual comes into the job. In other words, the new appointee, along with his own superior and others with the need to know, sits down and writes a new job description including new objectives for the work. “Theory Y” practitioners claim to have encouraging results with this approach.

Locating Responsibility

Should the superior set the objectives for individual subordinate groups? It is apparent that she must at least approve them in order to discharge her own duties. Beyond this, she probably has broader exposure to internal and environmental conditions than subordinates. But she may or may not be the creative type who can visualize a whole range of subobjectives, one for each of the various groups, the best of which are chosen after analyzing effectiveness and costs. Some subordinates may be better at this creation of alternatives than the superior is. Certainly they should have had greater exposure in depth (if not in breadth) to internal and environmental constraints, challenges, and opportunities. Accordingly, it would seem that to combine the best of these talents, the objectives for the subgroups should be worked out jointly by the leader of the subgroup and the superior.

How much help can staff give the line in this process? Certainly staff can conduct the internal analyses of resources and the environmental analyses of external conditions, always using the line for appropriate inputs in these analyses. Most line managers are accustomed to using their staffs in a similiar capacity. Staff people can also propose and analyze a number of alternative subobjectives, and can sometimes make particularly brilliant contributions in proposing possible alternatives which might otherwise have been overlooked. This can be a major contribution of creative staff workers. Consultants, who are a form of temporary staff, do this frequently.

But the old principle holds true: the people with the ultimate responsibility have to make the ultimate decisions. Furthermore, they have to be brought into the decision-making process at sufficiently fundamental levels so they can have a full understanding of the context in which the final decision choices are being made. No responsible line people could be expected to accept ready-made objectives proposed by a staff person or researcher unless they had personally weighed and debated the relation to internal and external conditions and the range of possible alternatives.

Working-Upwards Approach

Now suppose, as is often the case, that a company has not in recent years formally developed a written statement of objectives, and that (as should more often be the case) a member of the board of directors convinces fellow members that they should have a written statement of objectives. Where should the job begin?

One might reason that logic calls for starting at the top of the hierarchy displayed in Exhibit I, starting with needs, values, and drives of the key individuals, and proceeding on down to creeds, grand designs, missions, and the like. For instance, Secretary McNamara and his associates, in the recent installation of program budgeting in the Defense Department, appear to have gone from a grand design to missions, to program elements (analogous to charters).

However, in our consulting practice with both business and nonbusiness enterprises, my associates and I have found that as a practical measure the top of the scale is not the best place to start. We have found that profit objectives in terms of growth in earnings per common share are typically the most readily graspable starting point in business. They lead very understandably to environmental analysis (first in terms of profit results of comparable companies in industry, then to analysis of market requirements, technical trends, and competitive trends in the business environment) and analysis of internal resources.

People seem to have little difficulty in understanding the need and value of analyzing profit goals. Once this understanding has been obtained, it is not too painful to work up and down the hierarchy to fill it out; going up to other key result areas, charters, policies, missions, and even grand designs, and down to long-range plans, strategic programs, budgets, and short-term programs. Suddenly there is a new clarity to the growth directions for the enterprise, the type of management development needed, and the like.

As already indicated, there is a continual process of reiteration. In this reiteration one objective is adjusted in light of another, and in light of new developments in resources and in environmental conditions. Hence it does not really matter that some managers do not readily see the need for defining the higher-level objectives, and that attempts to attack the broader questions of creeds and grand designs make them squirm. When they start with some very tangible aspect such as profits, then work into the other types of objectives as the need to do so becomes demonstrated, they can achieve as good an understanding as anyone can.

Practical Uses

What are the practical uses of objectives? What tangible results come from giving thought and time to the clarification of objectives? An analysis was recently made by the American Management Association of companies that had developed formal company creeds.8 In all too many cases this analysis indicated that the benefits were along the lines of “having opened up our thinking” or “a beneficial exercise for those who took part,” but the practical results were rather hard to measure. This is unfortunate, for there are practical benefits indeed to be obtained.

Better Planning

Probably the most significant use of objectives is in planning. Not many organizations can conscientiously answer the question, “What should we be doing, and how much?” But carefully worked out objectives can narrow the target area, if not altogether pinpoint it. For example:

  • The new programing system in the Department of Defense is based on the nine types of missions or broad objectives of that organization (e.g., strategic retaliation). For the first time on an over-all, formalized basis, the cost of each Defense Department activity has been related to its effectiveness in fulfilling these missions. Alternate systems are presented for top-level consideration in terms of cost and effectiveness analyses. The practical results include “thumbs down” for the RS-70, the Skybolt missile, and the Nike-Zeus antimissile system.
  • A major charity had been moving along on its natural momentum, doing an effective job in many ways, but not quite sure of just how large it should grow in the future, what new programs it should be undertaking, and what financial and other plans it should be making to ensure its future effectiveness. It has now developed a number of specific subobjectives in light of a definition of its broader objectives. Practical results are taking place in the way of organizational changes, staff recruitment and development, long-range financing plans, and development of new service programs—all based on a general agreement at the policy-making level of what the organization should look like in 1973.
  • The management of Sears, Roebuck, in speaking of its objectives, says: “The Company sees itself not so much as a catalog merchant or retailer, but as an organized system for efficient and economical distribution, dedicated to serving the public with a broad range of goods and services [italics added], and to meeting any change in demand.” Probably 90 out of 100 large organizations have some stated objectives of this general type. But the difference is that Sears not only states its objectives; it lives by them. In the last ten years the number of mail-order plants has remained steady at 11, and the number of retail stores has increased slightly from 694 to 748 (although many have been modernized and expanded). But the company is now upgrading itself into a style house, as its recent advertising demonstrates. Here are examples of the variety of Sears, Roebuck activities—

– It runs a fleet of 5,000 service and installation trucks.

– Through Allstate it is the largest stock company insurer of automobiles in the country, and fourth largest in the fire and casualty field.

– It is in the life insurance business.

– The Allstate Motor Club and Allstate Tours operate in the travel field.

– It has entered the savings and loan business.

– Homart Development Company recently opened its first shopping center, with a half-dozen others in various stages of planning.

– Sears, Roebuck Acceptance Corp. has about $500 million of installment contracts.

In short, Sears, Roebuck has not occupied itself with perpetuating its existing form. It has arrived at broad objectives and derived a wide and changing range of supporting missions, or subobjectives. All this has led to handsome results, with earnings per share increasing in eight out of the last ten years.

  • A major drug company has staked out a grand design in the field of human health and well-being. In accordance with this broad objective, the research group has identified some 40 potential and actual program areas—e.g., cardiovascular ailments, fertility control, and cancer. In annual program planning reviews within the research group, scientists and managers go through a series of steps for deriving specific program objectives. They have environmental analysis material on hand—for instance, “If we develop a tranquilizer with such and such characteristics, it will capture X per cent of the market.” They also have organized information inputs on the long-range needs in the health field (e.g., dermatology). At the same time they have conducted resources analyses so they know their abilities in certain specialized lines of research.

Choice of Alternatives

The hierarchy of objectives is also valuable in analyzing and choosing alternative courses of action. (This benefit is obviously related to the planning values just discussed, but it deserves separate emphasis.) To use the experience of the drug company again:

To stimulate thinking about alternative courses of action, management encourages scientists to attend association meetings; invites a considerable number of outside technical consultants—usually university people—to meet with executives; and stresses the study of data from marketing research and the detail sales force.

Three important questions stand out in the criteria for screening the wide range of alternate subprograms—

1. How important is the proposed program? Importance is usually measured in terms of profit potential.

2. Can we do it? This question is usually related to the availability of skills and knowledge to overcome the technical problems involved.

3. What will it cost? Here the company has what amounts to a cost/effectiveness analysis of alternative programs, much along the lines described earlier in the case of the Department of Defense.

Of course, the process of exploring alternatives ends with a good deal of reiteration or recycling to cut out nonessentials here, fill out a program there, and to make the total research effort consistent with a practical budget. In practice, as might be expected, the general program areas do not change radically from year to year. Once a specialized staff and momentum are built up in a given area, a program may last for some time, uncovering new opportunities as time goes along. However, specific detailed projects are changed, and the over-all emphasis in the program also changes as a result of management’s approach.

Management Development

One of the most interesting uses of a framework of objectives is in management development. Most executives are keenly aware that the difference between their organization and other organizations in its field is its personnel. They recognize that development of its own people is a key issue in the health and success of any enterprise.

Recent theory as well as actual practice in management development has stressed the concept of identifying the objectives of the individual with the objectives of the enterprise. It also stresses making these objectives as specific as possible, and measuring their exact success in meeting them. For example, contrast the effectiveness you might expect in an organization where a supervisor says, “I’m responsible for quality—whatever that means,” with effectiveness in an organization where he or she says:

“I’m responsible for rejects which come off the rotary machines and I’ve agreed on the standard with the Chief Inspector. Each day I get an analysis of rejects so I can put things right. At present the General Manager and I agree on 2.7 per cent rejects as acceptable, but we have a plan to get this down to 2.2 per cent by next November.”9

There is ample evidence that this concept of management by objectives and by specific results actually works, and works well. However, the question not always thoroughly explored is, “Are we doing the right thing to begin with?” Possibly the quality control supervisor in the foregoing example is inspecting beautiful products for which there is little demand, for a market where quality is not a key result area, in a situation where the products could better be purchased from the outside, or where the entire company would be better off merged into a larger organization.

If a framework of objectives has been worked out for the whole organization, there is not so much danger of misdirected effort. Top management can be assured that all employees are working toward common purposes which are mutually consistent, appropriately challenging, and realistic in light of both internal and external opportunities and threats. It can be assured that people’s potentials are being developed along lines which will increase the effectiveness of the company.

Organizational Efficiency

It should not be inferred from the foregoing discussion that the formal organization structure should be rearranged to conform closely with objectives in various parts of the company. Rearrangement may or may not be appropriate, depending on the circumstances. For example:

  • In the Department of Defense we find that both the B-52 and the Polaris submarines are program elements in the Strategic Retaliatory Forces. Nevertheless, organizationally they fit into conventional Air Force and Navy formats. Support elements of an organization (for instance, the payroll department) are frequently organized separately as one distinct entity supporting a number of departments or divisions which may have widely differing objectives. This is done for the sake of efficiency.
  • Non-Linear Systems, Inc., a specialized California instruments manufacturer with 350 employees, has developed a curious form of organization which ties in closely with the theory of objectives.10 The company has a president and seven vice presidents, each responsible for an area such as innovation, market standing, profitability, or productivity. It shows evidence of having excellent results with this system.

However, we must not forget that in business true efficiency—unlike the dictionary definition—is not merely producing a certain result at the lowest cost; worthwhile efficiency is producing a desired result at the lowest cost. It is a ratio in which cost is the denominator, and the degree of effectiveness in producing some desired result is the numerator. Thus we can hardly consider efficiency without considering a range of objectives. The cost/effectiveness studies in the Department of Defense and “value analysis” studies at General Electric11 illustrate the application of such thinking to logical cost reduction and efficiency improvement.


It is curious that so many discussions of management begin with exhortations to clarify objectives, and then, as if the nature of objectives were well known, proceed to explore some other aspect of the matter at hand. In reality we know very little about the nature of objectives. And it is abundantly clear that we cannot quickly set up some objectives for an enterprise and then proceed on the assumption that they will be meaningful guides to action.

Taking stock of the little knowledge we do possess, we find that we know a few bare essentials. For instance, there are certain minimum tests which an objective, or a set of objectives, should pass. Thus, objectives—

…need not begin with the broad grand design of the enterprise, but all objectives in the hierarchy should be consistent with it;

…should make the people in the enterprise reach a bit;

…should be realistic in terms of (a) the internal resources of the enterprise, and (b) the external opportunities, threats, and constraints;

…should take into account the creative conception of a range of alternatives and the relative effectiveness and cost of each;

…should be known to each person so that he or she understands the work goals and how they relate to the broader objectives of the total enterprise;

…should be periodically reconsidered and redefined, not only to take account of changing conditions, but for the salutary effect of rethinking the aims of organizational activities.

Objectives, properly developed and applied, can tell us in what paths, new and old, our total undertakings should be moving. They can guide both the day-to-day activities and the personal development of individuals in an organization. If we in management can clarify the objectives of our undertakings by even a small amount, we can greatly increase the effectiveness and efficiency of our businesses.

1. “Marketing Myopia,” HBR July–August 1960, P.45.

2. Notes on the Theory of Organization (New York, American Management Association, 1952), pp. 18–19.

3. Ibid., p. 10.

4. Business Objectives (Pittsburgh, Carnegie Institute of Technology, unpublished paper, 1962).

5. Vitality in a Business Enterprise (New York, McGraw-Hill Book Company, Inc., 1960), pp. 37–38.

6. Vitality in a Business Enterprise (New York, McGraw-Hill Book Company, Inc., 1960), pp. 40, 56–58.

7. The True Believer (New York, Harper & Brothers, 1951).

8. Stewart Thompson, Management Creeds and Philosophies, Research Study No. 32 (New York, 1958).

9. John W. Humble, “Programmitis and Crown Princes,” The Manager, December 1963, p. 47.

10. See, for example, Arthur H. Kuriloff, “An Experiment in Management, Putting Theory Y to the Test,” Personnel, November–December 1963, p. 12.

11. See, for example, Hugh McCullough, “New Concepts in Defense Planning, Programming and Budgeting,” The Federal Accountant, September 1962, p. 70; also, L. D. Miles, “Purchasing Must Analyze Values,” Purchasing, January 4, 1960, p. 65.

A version of this article appeared in the May 1964 issue of Harvard Business Review.