Why setting stretch goals is a double-edged sword

Aspirational targets can be effective, but there is a downside

The success of US conglomerate GE in the 1990s is often attributed to the leadership of chief executive Jack Welch and his implementation of “stretch goals”.

The idea was that goals around metrics such as profit, market share and the share price would be set so high that achieving – and even attempting – them would inspire unprecedented innovation which would not only boost short-term performance, but transform the company.

In describing stretch goals to his executives, Welch’s favourite example was reportedly Japan’s high-speed shinkansen (bullet train). The goals for the bullet train project required the development of completely new technologies that would never have been attempted if the stretch goals had not been in place.

Despite their success at GE, and at many other organisations, stretch goals have remained controversial. In some cases, they have created both success and failure.

Toyota, for example, gave its engineers a year to create a vehicle that increased fuel efficiency by 100%. The team tried out 80 hybrid technologies before narrowing the list down and creating the highly successful Prius hybrid.

But at the same time, stretch targets around market share – introduced with the aim of overtaking GM as the world’s number one car maker – led to corner cutting and shoddy production at Toyota which saw thousands of cars recalled.

So, are there right and wrong ways to set stretch goals? Are they better in some situations than in others and how best can they be implemented?

These were questions Shayne Gary, an associate professor and AGSM fellow at UNSW Business School, considered in a collaborative research project with colleagues from Curtin and Deakin universities in Australia, and from the Sloan School of Management at MIT in the US.

In two experiments using a management simulation of a start-up airline, Gary and his colleagues sought to understand how stretch goals impact on risk-taking, motivation and ultimately influence performance.

‘While they might work for some organisations, they don’t work for all and are by no means a magic silver bullet’

SHAYNE GARY

Not a ‘rule for riches’

“There has been a lot of work in the area of organisational psychology around challenging goals, and this has been used to underpin the call to adopt stretch goals,” says Gary.

“Goals clearly provide focus and motivation for individuals and teams to put in the amount of effort they need to do well.

“The trouble is that when you scale this up to the organisation level there hasn’t really been much research on what the effects are – either positive or negative – of setting stretch goals.”

Field experiments with organisations willing to systematically vary performance goals would be a great approach to studying this issue, but most organisations are not eager to set – and stick with – different goal levels across similar business units.

Case studies of organisational goal setting are useful but also have important limitations, says Gary, because they can’t give a picture of what would have happened if the organisation had not implemented stretch goals.

The alternative is a laboratory experiment, which is the course Gary and his colleagues chose.

Goals were varied from stretch to moderate in order to understand how different goal levels impacted on performance, and also on commitment and risk appetite. In the first experiment, participants were divided into teams, and in the second they worked individually.

“The key insight is that stretch goals do benefit a small fraction of the organisations which adopt them, but they are certainly not a ‘rule for riches’ for every organisation,” says Gary.

“While they might work for some organisations, they don’t work for all and are by no means a magic silver bullet.”

Multiple balls in the air

“Our results do give us some indication about situations where stretch goals might be more likely to succeed,” says Gary. “[And] are also suggestive about the different types of organisations that will gravitate to stretch goals and see positive results.

“For example, if you are a venture capital or private equity firm and have a portfolio of investment companies, and need for only one in 10 to pay off, then in that case it pays to set aggressive targets.

“But if you are a medium-sized family business and the majority of the family wealth is tied up in the business, then you probably don’t want to adopt stretch goals for performance because the risk is greater.”

The study, says Gary, suggested that stretch goals are more appropriate when the projects are part of a portfolio.

“You have to have multiple balls in the air and if one of them works, then the benefits can be massive,” says Gary.

“The accepted view is that one out of every seven start-up ventures is successful, but when you begin you don’t know which one that will be, so you have to be resilient to the possibility of failure.

“And while failing six times and succeeding the seventh can be a good result for some organisations, for others this would be a disaster.”

While some teams and individuals responded well to the stretch goals, the research project also highlighted the potential negative impacts.

“We could absolutely see a vicious negative spiral with some of the managers,” says Gary.

“If they started to believe that the goals were simply unattainable, then their confidence would erode, their commitment would plummet and their anxiety levels would increase up to the point that they decided to let go.

“In some cases, goals were self-set at lower levels when participants realised they could not hope to achieve targets.”

This contrasted with experiment participants who had been assigned moderate goals, and whose commitment to the assigned goals remained high.

‘Certainly, they can be effective when setting objectives in areas where you want to drive innovation and change’

JOHN MEACOCK

Potentially dysfunctional

There is also an ethical dimension. Managers under extreme pressure to achieve unrealistic goals can sometimes make unethical decisions.

The fake bank account scandal at Wells Fargo Bank in 2016, for example, has been attributed to the potentially dysfunctional effects of stretch goals.

Managers were incentivised with aggressive performance targets, and to reach them they opened multiple accounts for customers, many of whom had no idea the other accounts in their name even existed.

John Meacock, chief strategy officer for Deloitte in Australia and the Asia Pacific, has seen stretch goals work in some situations and fail in others.

“Certainly, they can be effective when setting objectives in areas where you want to drive innovation and change,” he says.

“In those situations, people can only deliver if they change the business model and take a different approach.”

In the “normal” course of business, however, Meacock believes stretch goals have “as much downside as upside”.

“Where I have seen it not work is where people create very unrealistic goals, and people lose confidence and almost say, ‘why bother’,” he says.

“So it’s a balance of trying to make the stretch something that is doable and achievable, because once people get behind, it can be very disheartening, and most people get confidence from being in front.”