Setting Objectives for Each Year of the Plan

Step 2 of the 3-Year Strategic Plan Exercise

As you know, the company’s board of directors has charged you and your co-managers with achieving
five performance objectives:
1. Grow earnings per share from $0.75 at the end of Year 5 to $1.25 in Year 6, $2.00 in Year
7, $3.00 in Year 8, $4.25 in Year 9, $5.50 in Year 10, $7.00 in Year 11, $8.50 in Year 12,
$10.50 in Year 13, $12.50 in Year 14, and $14.50 in Year 15.
2. Grow average return on equity investment (ROE) from 14.5% at the end of Year 5 to
17.5% in Year 6, 20% in Year 7, 25% in Year 8, 30% in Year 9, 35% in Year 10, 40% in
Year 11, and by an additional 2.5% annually in Years 12 through 15 (thus reaching 50% in
Year 15). Average ROE is defined as net income divided by the average of total
shareholder equity balance at the beginning of the year and the end of the year. Average
ROE for each company is reported on page 2 of the Camera & Drone Journal. Data for
calculating your company’s average ROE appears on page 4 of the Company Operating
Reports in the notes to the company’s Balance Sheet.
3. Achieve stock price gains from $12 at the end of Year 5 to $20 in Year 6, $35 in Year 7,
$60 in Year 8, $100 in Year 9, $150 in Year 10, $200 in Year 11, $250 in Year 12, $300 in
Year 13, $330 in Year 14, and $350 in Year 15. Board members believe these stock price
gains are within reach if the company meets or beats the annual EPS targets, achieves the
targeted rates of return on shareholders’ equity (ROE), rewards shareholders with growing
dividends, and from time to time prudently uses its financial capabilities to repurchase
shares of stock. The company’s stock price was $12 per share at the end of Year 5.
Note: Stock price is a function of revenue growth, earnings per share growth,
average ROE, credit rating, the rate of growth in the annual dividend paid to
shareholders, and management’s ability to consistently deliver good results (as
measured by the percentage of each year’s 5 performance targets that your
company achieves).
4. Maintain a healthy credit rating, defined as B+ or higher in Years 6 and 7, at least A- in
Year 8 through Year 10, and at least A in Year 11 through Year 15. The company’s credit
rating was B at the end of Year 5.
5. Maintain an image rating (brand reputation) of 70 or higher in Year 6, 72 in Years 7-8, and
75 in Years 9-10, 77 in Year 11-12, and 80 in Years 13-15. The image rating is a function of
(1) your company’s P/Q ratings for action cameras and UAV drones, (2) your company’s
global market shares for both action cameras and UAV drones (as determined by your
market shares in the four geographic regions), and (3) your company’s actions to display
corporate citizenship and conduct operations in a socially responsible manner over the past
4-5 years. Your company had an image rating of 70 at the end of Year 5.

As a rule, the targets established by the board should be the minimum performance levels that you
intend to achieve during each year of the plan period (the targeted values for EPS and stock price that
the Board and investors expect each year are shown on pages 2 and 3 of each year’s Camera & Drone
Journal).

The only time that it is “justifiable” to develop a 3-year plan where the objectives you set are below the
annual targets established by the Board and expected by investors is when your company is in dire
straits and you do not think it is reasonable or realistic to get things turned around such that the
expected performance levels can be achieved.

The Benefits of Setting and Achieving “Stretch” Objectives. Ideally, company co-managers should
set stretch objectives that are higher than the minimums expected by the board and by investors—
especially if achieving higher-than-expected performance levels will be necessary to keep the company
in the ranks of the industry leaders and in contention for industry leadership. A strategic planning effort
that is predicated on setting stretch objectives and then meeting or beating these objectives merits
greater applause from board members and investors than a 3-year plan that contains bare minimum
performance objectives which company managers are then able to easily meet or beat.

More importantly, though, setting and achieving stretch objectives will result in a higher
performance score on your 3-year strategic plan. The procedure for evaluating the caliber of your
company’s 3-year strategic plan is not based on just the words and financial projections in the plan but
on the level of performance that the plan delivers.

Your company’s “performance score” on the 3-year plan is based on the following point system
for setting objectives and then meeting or beating the targeted performance levels. Your
company’s management team will receive:
• 14 points for setting any one target below the investor expectation minimum and then meeting or
beating the target (= 70 points max. if applied to all 5 targets for each year of the plan). Thus,
setting and achieving sub-par objectives results in a maximum performance score of 70 or a C–.
However, under no circumstances will any points be awarded for setting and achieving a target
below a B credit rating and an image rating of 50.
• 16 points for setting EPS, ROE, Stock Price, and Image Rating targets equal to the Investor
Expectation Standard and setting the Credit Rating target to B+, and then meeting or beating the
target (= 80 points max. if applied to all five targets for each year of the plan). Thus, if all 5
performance targets are set at the normal or minimum level and if these targets are subsequently
achieved, then the performance score will come out to be an 80.
The actual values for the “normal” investor expectations performance targets for every year of the
simulation are shown on pages 2 and 3 of each year’s Camera & Drone Journal.
• 18 points for setting a stretch target on any one performance measure that is “one notch” above the
Investor Expectation and then meeting or beating the stretch target (90 points max. if applied to all
five performance measures).
➢ EPS—depending on if a company has already exceeded the Investor Expectation level in
the prior year, the “one notch” stretch targets are:
• 10% above the company’s actual EPS for EACH of the 3 upcoming years if the
company's EPS was above the Investor Expectation level for the prior-year.
• 10% above the investor expectation of EPS for EACH of the 3 upcoming years if the
company's EPS was below the Investor Expectation level for the prior-year.
➢ ROE—The “one notch” stretch targets are: 27.5% in Year 9 and Year 10, 33.0% in Year 11
through Year 13, and 38.5% for Year 14 and Year 15.
➢ Stock Price—depending on if a company has already exceeded the Investor Expectation
level in the prior year, the “one notch” stretch targets are:
• 10% above the company’s actual stock price for EACH of the 3 upcoming years if the
company's stock price was above the Investor Expectation level for the prior-year.
• 10% above the investor expectation of stock price for EACH of the 3 upcoming years if
the company's stock price was below the Investor Expectation level for the prior-year.
➢ Credit Rating of A–
➢ Image Rating—The “one notch” stretch target is 10% above the Investor Expectation for
EACH of the 3 upcoming years
• 19 points for setting a stretch target on any one performance measure that is “two notches” above
the Investor Expectation and then meeting or beating the stretch target (95 points max. per year if
done for all five performance measures). “Two notch” stretch targets are defined as:
 ➢ EPS—depending on if a company has already exceeded the Investor Expectation level in
the prior year, the “two notch” stretch targets are:
• 20% above the company’s actual EPS for EACH of the 3 upcoming years if the
company's EPS was above the Investor Expectation level for the prior-year.
• 20% above the investor expectation of EPS for EACH of the 3 upcoming years if the
company's EPS was below the Investor Expectation level for the prior-year.
➢ ROE— depending on whether or not a company has already exceeded the Investor
Expectation level for ROE, the “to notch” stretch targets are:
• 20% above the company’s prior-year ROE for EACH of the 3 upcoming years if the
company's ROE was above the Investor Expectation level for the prior-year.
• 20% above the Investor Expectation for EACH of the 3 upcoming years if the
company’s ROE was at or below the Investor Expectation level for the prior year.
➢ Stock Price—depending on if a company has already exceeded the Investor Expectation
level in the prior year, the “two notch” stretch targets are:
• 20% above the company’s actual stock price for EACH of the 3 upcoming years if the
company's stock price was above the Investor Expectation level for the prior-year.
• 20% above the investor-expected stock price for EACH of the 3 upcoming years if the
company's stock price was below the Investor Expectation level for the prior-year.
➢ Credit Rating of A
➢ Image Rating—20% above the Investor Expectation for EACH of the three upcoming years.
• 20 points for setting a stretch target on any one performance measure that is “three notches” above
the Investor Expectation and then meeting or beating the stretch target (100 points max. per year if
done for all five performance measures).
➢ EPS—depending on if a company has already exceeded the Investor Expectation level in
the prior year, the “three notch” stretch targets are:
• 30% above the company’s actual EPS for EACH of the 3 upcoming years if the
company's EPS was above the Investor Expectation level for the prior-year.
• 30% above the investor expectation of EPS for EACH of the 3 upcoming years if the
company's EPS was below the Investor Expectation level for the prior-year.
➢ ROE— depending on whether or not a company has already exceeded the Investor
Expectation level for ROE, then:
• 30% above the company’s prior-year ROE for EACH of the 3 upcoming years if the
company's ROE was above the Investor Expectation level for the prior-year.
• 30% above the Investor Expectation for EACH of the 3 upcoming years if the
company’s ROE was at or below the Investor Expectation level for the prior year.
➢ Stock Price—depending on if a company has already exceeded the Investor Expectation
level in the prior year, then:
• 30% above the company’s actual stock price for EACH of the 3 upcoming years if the
company's stock price was above the Investor Expectation level for the prior-year.
• 30% above the investor expectation of stock price for EACH of the 3 upcoming years if
the company's stock price was below the Investor Expectation level for the prior-year.
➢ Credit Rating of A+.
➢ Image Rating—30% above the Investor Expectation for Year 14 and Year 15 and an Image
Rating of 100 for Years 16-20.

Different degrees of stretch objectives (one-notch versus two-notch versus three-notch) can be
set for different performance measures. If company co-managers see fit, you can have an A+ credit
rating objective (a two- or three-notch stretch depending on the year), an image rating objective equal
to one-notch stretch, a ROE objective equal to a two-notch stretch, an EPS objective equal to the
normal expectation, and a stock price objective that is below the investor expectation level. Company
co-managers have nothing to gain from setting overly ambitious objectives and failing to meet them.

If a company meets or beats a performance target, then its performance score for that target
equals the corresponding number of points for that target.

However, underachievement of any target results in a point reduction proportional to the

underachievement, subject to a minimum “consolation prize” score of 10 points on the targets
set for EPS, ROE, and stock price. For instance, if you and your co-managers set a 30% stretch
target for EPS (which carries a score of 20 points if achieved) and actual EPS turns out to be just 60%
of the targeted level, then you will incur an 8-point scoring penalty and get only 12 points (60% of 20
points). If co-managers set a 10% stretch target for EPS (which carries a score of 20 points if
achieved) and actual EPS turns out to be just 20% of the targeted level, then you will incur an 10-point
penalty and earn the consolation prize score of 10 points. Again, note that you and your co-managers
have nothing to gain by setting overly ambitious objectives and failing to meet them.

To get a “good” (80 or better) performance score for any one year of the plan, the scoring approach
requires that a company achieve performance levels at least commensurate with investor expectations
that year (as shown on pages 2 and 3 of each year’s Camera & Drone Journal). To receive scores
above 80, a company must set “stretch objectives” that are higher than the investor minimum
performance targets and then meet or beat these stretch targets.

Clearly, the point system for judging the caliber of a company’s strategic plan (1) rewards co-managers
for setting stretch objectives and then succeeding in meeting or beating the stretch objectives and (2)
punishes the strategic plan scores of companies when the targeted levels of performance are not met.
The scoring is based on the principles that
• A company’s strategic plan is “good” if management met or beat the targeted levels of
performance and if these targets contained some “stretch.”
• A company’s 3-year strategic plan is “not so good” if it results in a performance far short
of what was promised—there can be no applause whatsoever for a strategic plan that over
promises and under delivers.
• There is no glory to be gained by “sandbagging” and setting easily achieved performance
targets—setting and achieving high stretch objectives earns a higher strategic plan score that
does a plan where company co-managers set lower target objectives and achieve them.

A company’s performance score for any one year of the plan is the sum of the points earned for
each of the five performance targets. A company’s overall performance score on the 3-year
plan is the average of the performance scores earned for each of the 3 years of the plan period.

The scores earned on the 3-year plan are reported on the 3-Year Strategic Plan link that appears
on the top of your Corporate Lobby screen—as the results for each year of the plan become
available, just click on the link and the scores will be shown at the top of the screen.

Clearly, this point system rewards setting stretch objectives and achieving them. But, as you will see
when you get deeper into the plan, it is quite unwise to develop a “pie-in-the-sky” type of strategic plan
with unrealistically high stretch objectives that entail “fairy-tale” prices, sales volumes, market shares,
costs and profit margins in order to achieve them. The pro forma income statement projections for
earnings per share and ROE that are an integral part of your strategic plan need to have close
connection to competitive and financial reality.