The Right Way to Set Goals
by Ram Charan

Posted on Wednesday, March 14, 2007, 12:00AM

If you're an aggressive, imaginative leader, you probably see countless opportunities to double, triple, or quadruple your business. But beware. Overambitious goals can be damaging to the business and your career, particularly if you pursue those goals without understanding their side effects.

You can't set goals on the basis of your ambition or imagination without considering the real-world constraints of the business. If you aim for double-digit revenue growth, how will you fund it? What will happen to debt and cash flow? And do you have people with the right skills to accomplish it?

This doesn't mean conservative goals are the way to go. A company that's pursuing 8 percent revenue growth in a market that's growing 15 percent is losing ground.

It's Tougher Than You Think

Goals are the destination your organization is moving toward. Linked to incentives and rewards, as they usually are, and combined with pep talks or intimidation, they have a powerful effect on people's actions and behavior.

Choosing the right set of goals of the right magnitude with the right time frame takes deep consideration and judgment. It's a distinct know-how. Yet many leaders think setting goals is a no-brainer.

It's a common mistake to take last year's goals and ratchet them up to show incremental improvement. If you set goals by looking in the rearview mirror, you could be missing big opportunities and allowing the organization to grow complacent.

Nor can you go by what's being projected for the industry or the economy overall. If your goal is simply to keep up with the competition, you'll never get ahead.

Some leaders set goals high, thinking they -- or, more likely, the people who work for them -- will somehow figure out a way to reach them. People might, by cutting corners or damaging the business.

In a consumer business, for instance, you can always improve earnings by slashing advertising dollars. But the short-term boost to earnings will take a toll on revenues down the line and can damage the brand. You have to be conscious of the trade-offs you're making.

The Know-How of Setting Goals

Even if your goals are handed to you, you can begin to develop this know-how by going through the mental exercise of thinking them through. You might also be able to influence the goals you're given if you're prepared to explain your thinking.

For example, when a middle manager was repeatedly given aggressive revenue and earnings goals that were impossible to achieve despite doing everything she could to streamline operations and build the business, she pushed back.

Her bosses were denying the fact that the entire industry was shrinking, and that the current strategy wasn't working. The manager's persistence forced the higher-ups to reckon with the real issue.

Goal-Setting Guidelines

Goals should always reflect the opportunities in the outside world, tempered by what's realistically doable. Here are some guidelines:

• Think about the "how."

Saying "We're going to grow revenues" is not enough. Saying "We'll grow revenues faster than our competitors" is better, but is still vague.

You need more specificity: "We'll grow twice as fast as the GDP over the next five years. One-third of that growth will be fueled by new products, which will be the result of a 25 percent increase in R and D money. We'll fund the R and D with money saved by cutting marginal product lines."

State your goals clearly, but also understand how they'll be accomplished. What actions will they trigger, and what are the implications for your business?

• Involve others.

You want the people who have to work toward the goals to have a chance to challenge them and the assumptions behind them. Then you'll know you haven't overlooked anything and you'll have a feel for whether the goals are realistic.

Some people resist goals because they don't like being held accountable, but others resist because they know that meeting them will do real harm to the business. Besides, people are more likely to buy into the goals if they have a chance to help shape them.

• Consider how goals interact.

A single goal -- whether it's profit or revenue growth, or market share, or even a hybrid like shareholder value -- distorts the business as people try to maximize that one measure. Instead, choose multiple goals, and as you do, consider how they interact with one another.

No company can maximize everything at the same time. Be sure the set of goals you choose can be accomplished simultaneously. Reducing working capital by 10 percent, for instance, might be impossible if another of your goals is to grow revenue 15 percent.

Several years ago, leaders of one of the world's largest automakers stated their intention to increase overall market share, but pursuing that goal proved to have a negative effect on earnings as the company struggled to support a very wide range of products.

• Consider the context.

Set your goals in light of the opportunities that exist internal and external to your business, unit, or department. Maybe there's an opportunity to redesign your supply chain and tap huge cost savings in the process, or a whole new customer segment that could cause a big jump in revenues.

Think broadly, and look forward, not backward. And be prepared to adjust the goals in light of what the rest of the business is doing -- for instance, in response to the CFO's need to increase cash in the coming year.

Things Change

A leader who changes goals because he's indecisive creates confusion and loses credibility. But that doesn't mean once you've established your goals that they're set in concrete and you never have to think about them again.

Goals that start out right can end up being wrong simply because the world changes. You need to be flexible, too, and change your goals as the situation warrants. Adjust the goals because something important has changed, not because your goal-setting was superficial in the first place.