Stretch goals and the pros and cons of risk-taking

Setting stretch goals that push the boundaries of your business’ capabilities can be an effective way of stimulating innovation. However, applying this approach may not always deliver the hoped-for outcomes.

Pushing yourself and your business to overachieve is a natural path to expansion, but where should you draw the limit?

In some cases, the best approach may be to reign in your ambitions rather than aiming sky high, according to recent research.

The research was conducted by associate professor and AGSM fellow at the University of New South Wales Business School, Shayne Gary, in collaboration with colleagues from Curtin and Deakin universities and the Sloan School of Management in the US. The results shed light on the effectiveness of stretch goals.

By conducting two experiments using a management simulation of a startup airline, the researchers considered methods of setting stretch goals, whether they are better employed in some situations than others, and how they can best be implemented.

To develop an understanding of how different goal levels affected performance, commitment and risk-appetite, goals were varied from ‘stretch’ to ‘moderate’. Participants were divided into teams in the first experiment and worked individually in the second.

Some teams and individuals responded well to working towards stretch goals. However, managers faced with goals they considered unattainable suffered from an erosion of confidence, with commitment diving and anxiety increasing.

No one rule for all organisations

“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,” Gary commented.

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

Grand ambitions can act as a significant motivator, however, it is certainly worthwhile considering the best path to achieving them.

However, Gary said the results did indicate which organisations may benefit from the stretch goal approach.

“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,” he stated.

“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.”

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