When Firms Should Stretch for Goals

February 23, 2017

 

Aim high, they say. Shoot for the moon. Companies are enticed by stories of firms who risked it all and won big. But a professor at Duke University's Fuqua School of Businessfound the firms most likely to take on a stretch goal are the least equipped to succeed, while the best-placed companies tend to sit on the sidelines.

"If you have recent success and adequate resources, that's the time you should try for these really radical innovations," Professor Sim Sitkin said. "If you're coming off a recent failure and you're choosing to go for broke because, well, why not, that's exactly the time you should not go for stretch goals."

Stretch goals are defined as seemingly impossible targets, given an organization's current capability.

"Does your organization have the skill, the experience, the resources to achieve a particular goal, or do you actually have absolutely no idea whether it's possible to achieve it?" Sitkin said. "If you have no idea whether it's possible, that's a stretch goal."

These goals have two aspects: They're extremely difficult, and novel.

"The idea here is that if you're pursuing a stretch goal, then it seems impossible, there's no known path to achieving it and you are in a situation where you don't necessarily have the resources needed to achieve it," Sitkin said.

In 2011, health care firm DaVita created a team tasked with saving at least $60 million in four years, while also improving patient outcomes and employee satisfaction.

"They did it," Sitkin said, "even though they had no idea if was possible."

Organizations often fail to realize when to reach for the stars and when to hold off.

Stretch goals are popular because they are seen as leading to big success. But most fail. Sitkin said they have value, but that organizations often fail to realize when to reach for the stars and when to hold off.

Sitkin found the best time for firms to pursue a stretch goal is when they are flush with resources and fresh from a recent success. But those firms, he said, rarely tend to do so.

"They sit back, they become risk averse, and they become very conservative," he said.

Instead, the most likely firms to pursue stretch goals are those with limited resources who are stinging from a recent defeat.

"Because they've experienced recent failure, they're going to go for broke," Sitkin said. "But if your resources are constrained, stretch goals probably aren't going to work so well for you."

Not that Sitkin said struggling companies shouldn't set lofty goals. He suggested pursuing small wins, to build resources and confidence, and undertaking experiments that can result in small losses.

"They may be a little risky, you know that nine out of 10 of them may not succeed, but because they're small, it's not a big risk. It's not a big problem if they don't work out well, and in fact you can learn a lot," he said. "The key here is if you do a proper analysis and really understand your situation, you can pursue stretch goals in a smart way."

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