The use of stretch goals is critical to building an innovative culture and driving breakthrough performance year after year. Why? You can’t drive a business breakthrough with incremental progress and modest aspirations. A sky-high goal is needed that will require an organization to invent a new solution. Even when the stretch goals are not achieved, the organization will have been stretched so that it can’t return to its earlier form.
“By reaching for what appears to be the impossible, we often actually do the impossible. And even when we do not quite make it, we inevitably wind up doing much better than we would have done.” Jack Welch
Think Big: The X-Games
If you watch the X Games on T.V., you’ll see people perform stunts that seem impossible. They do double back-flips on motorcycles. They drive snowmobiles off ramps and perform aerial acrobatics. And the tricks keep getting bigger and crazier, year after year.
Elite free climbers are in the same category. They scramble up sheer cliffs with only a bag of chalk at their side. No pitons. No ropes. No net. From a layman’s perspective, these daredevils seem like they have completely lost their minds. But there’s another way to look at it.
These ingenious athletes set their sights on a goal that seems unattainable to the rest of us. Then they develop innovative tools, equipment and training techniques to bring it within reach.
That’s the way it works with innovation engineering, too.
The first step is to set a daring goal. Then you engineer a way to get there—closing the gap, step by step.
Definition of a Stretch Goal
The classic definition of a stretch goal is one that cannot be achieved with what is known today, i.e aim for something that is impossible today. While reaching for the impossible can be inspiring, this definition can lead to some inconsistent application, which can ultimately burn out an organization.
To build a perpetual innovation machine, we need to apply stretch goals toward improving performance for a company’s key constituents; Customer, Employee, Shareholder, and Community. For each of these constituents, the stretch goal should be based on closing the gap to a world class benchmark in a 3-5 year timeframe. The purpose is twofold:
1) While it may seem impossible within your industry, someone, somewhere has already achieved what you are after. A look through history shows that many innovations have been discovered this way.
2) Closing the gap in 3-5 years guarantees that you will have to look beyond continuous improvement and challenge the status quo.
Setting a Stretch Goal: A Customer Focused Example
While working for a major financial institution, we set an aspirational goal to become the world’s most admired company. From our customer’s perspective, this meant that we had to service them at levels never seen before in banking. After all, many people thought (and still think today) that the idea of delighted bank customers was an oxymoron.
The next step was to establish a stretch goal. The documented world class benchmark for “Customer Delight” was the Ritz Carlton. An unbelievable 92% of customers were delighted with the overall experience they received at the Ritz while the Bank’s scores were stuck in the upper 30’s. Our scores were so low that even the IRS had better scores than us!
Lofty goal. Check. Impossible today. Check.
But the story doesn’t end there. We needed to start breaking down the goal to close the gap, step by step. Given the huge size of the gap (92% vs. 38%, i.e. 54 points), getting to world class benchmark in five years would clearly require a different mindset within the organization. This would require a 10 point improvement each year versus the historical annual goal of 1.5 points – which barely kept pace with the industry.
So how did it all turn out? [see The Bank Case Study] Just like Jack Welch’s quote, even though we didn’t achieve the stretch goal, we did achieve breakthrough performance. The company went from “worst to first” in the financial services industry, improving 14 points in 3 years. To put the improvement in perspective, the efforts resulted in an additional 3.9 million delighted customers and 4 million net new accounts. Quite a turnaround!
Where do Companies Go Wrong
In the past few months, the usefulness of stretch goals has been a hot topic with articles lobbying both for and against. The stated problems with stretch goals include that they can be terribly demotivating, pursuit of them leads to a dangerous tendency to foster unethical behavior, and they can lead to excessive risk taking.
- Stretch goals and the incentive system have to be aligned. They require three levels of incentives based on the level of stretch. I have used this incentive system in many organizations and believe me – motivation was never an issue.
- Threshold: Success starts when you hit your normal improvement rate and incentive payments should start.
- Target: The planned incentive level should be a significant improvement to the run rate and is dependent on the aggressiveness of the goal.
- Stretch: The incentive system really starts to ramp up in payouts when performance moves beyond the target level.
- What many companies eventually figure out, is that the best way to achieve financial success is through their customers and their employees. When stretch goals are focused on these two constituents, the chance for unethical behavior is reduced dramatically.
- Achieving breakthrough performance is inherently risky. Engineers always look to minimize risk in a cost effective manner. From my last post, building an innovative culture based on 8 key components helps to create a system that delivers results while minimizing risks.
- Lastly, stretch goals are not for every organization, but then again, neither is achieving greatness.
Business transformation is essential for success and survival and it all starts with a daring goal. When used correctly, stretch goals are an essential component of any innovative culture. Then it takes some solid engineering principles to find a way to get there.