How to Set Business Goals
Many organizations set goals and fail to reach them. Others achieve some of their goals by accident. There are some leaders that question whether setting goals is a valuable exercise at all. You can even find much written on why goal-setting is a farce. Adam Galinsky, a professor at Northwestern University’s Kellogg School of Management and one of the authors of a Harvard Business School report called “Goals Gone Wild,” argues that “goal-setting has been treated like an over-the-counter medication when it should really be treated with more care, as a prescription-strength medication.” His position is that goal-setting can focus attention too much on the wrong things and can lead people to participate in extreme behaviors to achieve their goals.
I am of the position that goal-setting serves a critical purpose in helping to provide direction, clarify priorities, cause important discussions, influence positive behavior change, and stimulate focus. Goals are an essential part of the time strategies equation. Like anything else in life, when developed in an unsound way, misdirected, overemphasized, and not used in context they will not serve their purposes and can cause more harm than good.
Often I find people do not put enough thought into their goals and thus have an incomplete set of goals. I have one client that was so focused on achieving a sales goal every year that they neglected every other priority. They never came close to reaching their target. It was not until we had a complete set of goals that they ever achieved real sales progress. When focused correctly, goals take into account customers, employees, shareholders, vendors, operations, sales, profit, and record keeping.
I have seen goals rally an organization to reach extraordinary results. A great example is a company that I have worked with for a number of years. This highly successful organization needed to refocus their organization around their core customer. After growing their business for years they realized that 75% of the accounts they serviced did not represent their core customer. They had built a business model that was better suited for the other 25% of their customer base. The smaller base of customers actually represented 60% of revenue and 80% of their profit. The owner refocused the organization to double the number of core customers. They want to achieve in 5 years what previously required 25 years to accomplish. This focus changed the course of the company. Without divulging their strategy, which is unfolding, this singular focus on core customer changed the leadership structure, sales organization, marketing, product and service focus, and operations of the company. Last year was so successful that the company far exceeded any 2 years combined in terms of adding number of core customers. This year my client is on track to double last year and should meet their five-year goal. If their projections are correct they will more than double company revenue. More importantly, profit and firm value will triple or quadruple.
I have also seen the opposite occur when an organization focused too much on the wrong goal. Usually that wrong goal is sales growth. The thought process behind this choice is that sales solves all problems. The problem with this line of thinking is that not all sales are equal. Goals can lead to extreme behaviors and if misdirected can be destructive. In many cases transactions and customers can be unprofitable. People who try to make it up on volume and do not focus on profit typically lose. One common mistake in staying focused on sales growth and combining that with nearsightedness is discounting products and services to close deals at the end of a quarter to earn bonuses. Putting this into context, you pay someone extra to earn you less money! Ironically, if you are the owner you have cost yourself in four ways:
- You made less profit in the long-term. You probably could have closed the same transaction for more by waiting. The time value of money is in your favor, even if you use that money to pay debt. Say you have a 10% loan. You probably save only 1% or 2% on the money by paying earlier. I bet the your discount offer is much greater.
- You are teaching your customers that your pricing is not firm. If they wait until quarter-end they can squeeze lower pricing out of your sales people. Worse, they have learned that you are always negotiable.
- You are not training your sales people to maximize margin at every turn. So in the end you will sell more but make less.
- You paid commission and bonus on a lesser deal.
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