10-21-2014, 10:45 PM
The art of setting healthy targets in business
Kodak went from market leader to bankruptcy, choosing to ignore a new up-and-coming technology.
As an F&B outlet, Starbucks needed its customers to feel special. Instead, it opened too many outlets and created a proliferation of products it could not handle.
BY
JOHN BITTLESTON
PUBLISHED: 4:03 AM, OCTOBER 21, 2014
Whenever we buy something — a cup of coffee, a house or a business — we do so to make our lives more fulfilled or at least seem to be more fulfilled. We want to make our lives richer and this is not just about money. It is about the dreams we all have and the expectations that come with our dreams. Good business people recognise this and sell dreams.
Yet, many business owners fail to recognise this. Instead, their focus is on maximising the return on investment in the shortest possible time, taking what they can and moving on.
There are plenty of examples of well-known brands that have what I call “unhealthy targets”.
Instead of helping a company grow and connect with its customers, these short-term targets have led to the closing of outlets, an exodus of staff and, in the worst case, the death of the company. Fortunately, there are ways to set healthier targets.
First, what are unhealthy targets? Thrashing a donkey to pull a cart faster invariably ends in the death of the donkey. So it is with businesses.
Mad dashes for profit may look good, but the most highly valued businesses show consistent, steady and sustainable growth with few hiccups along the way.
Short-sighted bosses set targets in a totally arbitrary way. Some, desperate to achieve revenue, lower prices. This creates price wars that benefit no one — not the company, its competitors nor even the customer in the long run. Others cut costs ruthlessly, leaving no scope for future development. But without new products or services, a company cannot survive.
Kodak went from market leader to bankruptcy, choosing to ignore a new up-and-coming technology. It feared that digital photography would cannibalise its film business. So, despite inventing the first digital camera in 1975, Kodak focused on improving the quality of film, in an attempt to increase sales of its film business. Today, we all own a digital camera; film photography has become a niche interest for enthusiasts.
Starbucks also focused on the wrong target. As an F&B outlet, it needed its customers to feel special. Instead, it opened too many outlets and created a proliferation of products it could not handle. It forgot to provide that unique customer experience. Customers who built Starbucks stopped patronising it. Starbucks later closed some 600 stores.
Unhealthy targets breed unhealthy workplaces. Zynga, the popular mobile games company, instilled a culture of ruthless competition between its development teams.
However, the employees did not like it. So when the stock was floated, they cashed in their chips and quit the company, leaving investors with heavy losses on their shares.
SETTING TARGETS WITH STINGS IN THE TAIL
Management normally involves using a combination of stick and carrot. Soft management fails as certainly as brutal management. What works is balanced management — and that produces balanced targets.
I built international food company Cerebos Pacific with unusual target-setting. I asked those reporting to me to set their own targets, which I accepted. There was a two-pronged sting in the tail, however.
The achievement of their own target entitled them, and their direct reports, to a great bonus, based on a percentage of their target.
The higher the target, the higher the bonus — provided they achieved the target. If they did not, they got lunch with me and free tissues for their tears, but no bonus.
This applied even if failure to reach the target was genuinely not their fault or due to circumstances beyond their control.
What if they achieved higher results than the target they had set? They got the bonus percentage of the target they had set — not of what they had achieved. Why should I pay for people to make bad forecasts?
Consider the pressures on my managers. Significant rewards were achievable with the highest possible forecast, provided that they achieved it. It produced a mental tug of war — with the business as the winner.
The targets told me what my cash flow would be for the year, with little but insignificant variation. I could now devote the year to mentoring my managers so that the next target they set — for the year beyond the current one — would optimise their performance and thus, their bonus.
This approach to setting targets did more than pressurise managers. It integrated them with their reports into the target-setting process so that they all felt responsible for the targets and thus for the business.
Out of all my management systems, this was the most successful. It put the ownership of the business into the hands of the people running it.
Targets have to be reasonable, while stretching employees. Targets must relate to the market, the competitive situation, the prevailing margins and the potential for development.
And when targets are set by people who are going to achieve them and reap good bonus payments, the value of the company increases. This is what we call a win-win situation.
ABOUT THE AUTHOR:
John Bittleston is executive chairman of Terrific Mentors International. He incorporated international food and Chinese remedies company Cerebos Pacific in 1981, before listing it on the Singapore Exchange in 1983. He later sold the company to Suntory Holdings of Japan.
Kodak went from market leader to bankruptcy, choosing to ignore a new up-and-coming technology.
As an F&B outlet, Starbucks needed its customers to feel special. Instead, it opened too many outlets and created a proliferation of products it could not handle.
BY
JOHN BITTLESTON
PUBLISHED: 4:03 AM, OCTOBER 21, 2014
Whenever we buy something — a cup of coffee, a house or a business — we do so to make our lives more fulfilled or at least seem to be more fulfilled. We want to make our lives richer and this is not just about money. It is about the dreams we all have and the expectations that come with our dreams. Good business people recognise this and sell dreams.
Yet, many business owners fail to recognise this. Instead, their focus is on maximising the return on investment in the shortest possible time, taking what they can and moving on.
There are plenty of examples of well-known brands that have what I call “unhealthy targets”.
Instead of helping a company grow and connect with its customers, these short-term targets have led to the closing of outlets, an exodus of staff and, in the worst case, the death of the company. Fortunately, there are ways to set healthier targets.
First, what are unhealthy targets? Thrashing a donkey to pull a cart faster invariably ends in the death of the donkey. So it is with businesses.
Mad dashes for profit may look good, but the most highly valued businesses show consistent, steady and sustainable growth with few hiccups along the way.
Short-sighted bosses set targets in a totally arbitrary way. Some, desperate to achieve revenue, lower prices. This creates price wars that benefit no one — not the company, its competitors nor even the customer in the long run. Others cut costs ruthlessly, leaving no scope for future development. But without new products or services, a company cannot survive.
Kodak went from market leader to bankruptcy, choosing to ignore a new up-and-coming technology. It feared that digital photography would cannibalise its film business. So, despite inventing the first digital camera in 1975, Kodak focused on improving the quality of film, in an attempt to increase sales of its film business. Today, we all own a digital camera; film photography has become a niche interest for enthusiasts.
Starbucks also focused on the wrong target. As an F&B outlet, it needed its customers to feel special. Instead, it opened too many outlets and created a proliferation of products it could not handle. It forgot to provide that unique customer experience. Customers who built Starbucks stopped patronising it. Starbucks later closed some 600 stores.
Unhealthy targets breed unhealthy workplaces. Zynga, the popular mobile games company, instilled a culture of ruthless competition between its development teams.
However, the employees did not like it. So when the stock was floated, they cashed in their chips and quit the company, leaving investors with heavy losses on their shares.
SETTING TARGETS WITH STINGS IN THE TAIL
Management normally involves using a combination of stick and carrot. Soft management fails as certainly as brutal management. What works is balanced management — and that produces balanced targets.
I built international food company Cerebos Pacific with unusual target-setting. I asked those reporting to me to set their own targets, which I accepted. There was a two-pronged sting in the tail, however.
The achievement of their own target entitled them, and their direct reports, to a great bonus, based on a percentage of their target.
The higher the target, the higher the bonus — provided they achieved the target. If they did not, they got lunch with me and free tissues for their tears, but no bonus.
This applied even if failure to reach the target was genuinely not their fault or due to circumstances beyond their control.
What if they achieved higher results than the target they had set? They got the bonus percentage of the target they had set — not of what they had achieved. Why should I pay for people to make bad forecasts?
Consider the pressures on my managers. Significant rewards were achievable with the highest possible forecast, provided that they achieved it. It produced a mental tug of war — with the business as the winner.
The targets told me what my cash flow would be for the year, with little but insignificant variation. I could now devote the year to mentoring my managers so that the next target they set — for the year beyond the current one — would optimise their performance and thus, their bonus.
This approach to setting targets did more than pressurise managers. It integrated them with their reports into the target-setting process so that they all felt responsible for the targets and thus for the business.
Out of all my management systems, this was the most successful. It put the ownership of the business into the hands of the people running it.
Targets have to be reasonable, while stretching employees. Targets must relate to the market, the competitive situation, the prevailing margins and the potential for development.
And when targets are set by people who are going to achieve them and reap good bonus payments, the value of the company increases. This is what we call a win-win situation.
ABOUT THE AUTHOR:
John Bittleston is executive chairman of Terrific Mentors International. He incorporated international food and Chinese remedies company Cerebos Pacific in 1981, before listing it on the Singapore Exchange in 1983. He later sold the company to Suntory Holdings of Japan.