How to set targets to drive business performance

A leader's guide to target setting

Targets are essential for driving better business results. Locke’s goal-setting theory shows that people perform better when they have something to work towards¹. But the wrong approach to target-setting can have the opposite effect, damaging business performance and staff morale. Let’s discuss what companies should – and shouldn’t – be doing.

What’s going wrong?

Right now, many organisations aren’t using targets effectively to drive performance improvements. Broadly speaking, they fall into two camps:

The complacent. Some companies set weak targets that are met year after year. These organisations might think they’re standing still – but they’re actually falling behind their competitors and their industries, which are moving forward all the time. By not improving, they’re inflicting damage on their businesses, employees and customers. Over time, this performance decay can create a serious competitive disadvantage.
The aggressive. Other organisations use increasing targets like a whip, constantly asking their people to push harder and harder like a jockey on a horse.

These current approaches to target-setting aren’t working. Instead, companies should adopt an alternative approach to setting goals, using both technical analysis and a different management style.

The technical side of target-setting

There’s often a temptation to set a target 2% above current levels. That’s actually counterproductive, because teams are likely to work 2% harder to meet the goal. They might work overtime, take shorter lunch breaks, or use shortcuts. The additional pressure increases the risk of burnout.

That’s a serious concern. If people feel chronically overloaded, they don’t have enough time for rest and recovery, let alone innovation and professional development². Some researchers have found that up to 85% of staff in financial services have been seriously impacted by burnout³. The risk is particularly high if organisations incorrectly implement Lean management principles. Research has found that when Lean is introduced without continuous improvement, people experience higher levels of stress.⁴

It sounds counterintuitive, but organisations actually achieve better results by setting stretch goals linked to the company’s strategic objectives. These might mean performance 15%, 20% or even 40% above current levels, depending on the business context. When people see those kinds of targets, they don’t try to work harder – they look for ways to enact fundamental change. That doesn’t have to mean expensive investments in new technology. It could be reprioritising work and stopping activities that are less important (we encourage executives to adopt the mantra: ‘start less, finish more’). This gives people more time to focus on work that does drive business performance. In an ideal scenario, a target of 10+% performance increase can result in 10% less effort if the team truly transforms its ways of working.

Google is an advocate of stretch goals. Its philosophy says:

We set ourselves goals that we know we can’t reach yet, because we know that by stretching to meet them, we can get further than we expected⁵.

Stretch goals are similar to moonshots, which are often discussed in Agile methodology. Moonshots are difficult goals that have significant outcomes (the term was first used to describe landing a man on the Moon and returning him safely to Earth)⁶. They encourage companies to envisage their desired future state and work back from there, rather than look for ways to improve the status quo.

The right management style and culture

Stretch goals must be accompanied by a shift in management style and corporate culture. If executives set aggressive targets, then punish people for not hitting them, staff burn out and the company culture turns toxic.

Instead, organisations should use stretch goals to create healthy, open discussions on how to improve. Agile practices like retrospectives (where teams reflect on past experiences to drive future improvements) can be a great forum to discuss the change needed to reach more ambitious targets.

Leadership teams must also create ‘psychologically safe’ environments, where employees know that progress towards goals will be celebrated, but they won’t be reprimanded if targets are missed. This is really important, because it’s unlikely that stretch goals will be achieved in the short term. On a similar note, stretch goals shouldn’t be tied to employee remuneration, otherwise people are punished for missing them. As Locke points out: “if goals are used with a threat of negative consequences, stress and anxiety can be increased”⁷.

Managers should become ‘servant leaders’, who focus on empowering their teams to work autonomously. For instance, managers can help individuals, teams or functions identify obstacles that are preventing performance improvements, then dismantle them. Managers should offer extra support to teams trying to reach particularly challenging targets.

As part of becoming servant leaders, managers should coach their teams on how to tackle problems independently using a range of tools – including some Agile practices. For instance:

‘waste walks’, where team members work together to identify wasteful practices taking place within a business process
‘observations’ (watching an employee or customer activity take place)
‘A3 templates’, which are a structured approach to problem-solving and continuous improvement from Toyota’s playbook. Teams study the current situation/problem, perform root-cause analysis, set a new goal, then take corrective action to reach it
process visualisation – whether through “old-school” process mapping techniques or process mining tools like Celonis or Disco.

Critically, managers should remind their teams of the Agile principle: ‘simplicity is the art of maximising the work not done’. That’s something we should always bear in mind.

What does this look like in practice?

Let’s take a look at a couple of real-life examples where target-setting has significantly impacted business performance.

First, some positive examples. In the early 1970s, Southwest Airlines was forced to sell off a portion of its fleet. By achieving its stretch goal of 10-minute turnaround times at the gate, it managed to maintain its existing flight schedule using a reduced number of planes. Its success came from employing practices used by race-car pit crews⁸.

Toyota is another great example. It hit its target of doubling fuel efficiency, by enabling the Prius development team to rapidly run experiments using slack resources.

The story of Yahoo shows what happens when stretch goals are implemented incorrectly. The company set ambitious targets linked to staff remuneration. In parallel, it introduced a bell model that ranked employees’ performance against their peers, driving competition among team members. These two measures combined encourage people to find any means possible to hit targets – regardless of any damage to customers, the brand, or their colleagues. This poor management style was a key reason for Yahoo making a loss of $4.4 billion in 2015.

Key takeaways

We’ve come up with some recommendations to help organisations looking to improve their approach to target-setting.

Select the right metrics. Before you adjust your targets, make sure you’re measuring the right things. After all, ‘what gets measured gets managed’. You want targets that track quality and operational efficiency – and, of course, are aligned with the organisation’s strategic objectives.
Don’t set too many targets. We recommend that organisations focus on a ‘critical few’ objectives and key results (OKRs). Three to five targets for each person, team or function is ideal.
Set your targets at the right level. Pick a target that sparks discussion around “what needs to be true for us to get there?”. This is a great way to identify the changes needed to achieve exceptional results over time.
Give teams tools, structure and support. These could be retrospectives, waste walks, 1:1 coaching, delegated decision-making, A3 templates for problem-solving, or something else. The aim is to equip people to generate ideas, solve problems and drive performance – while ensuring they feel psychologically safe so they’re not afraid of failure and experimentation.
Reassess your targets regularly. Use flexible planning horizons and regularly discuss what should be done differently. Don’t feel obliged to use annual plans or year-on-year comparisons if a different planning horizon makes more sense for your business.

These recommendations serve as useful guidelines, but there’s no one-size-fits-all solution. Setting the right targets is an art and a science. The right approach will be different for each organisation, each team and each individual. The key is finding the right level of target that drives superior performance, without risking complacency or burnout.