Targets based on historical performance are an effective way to limit growth and hinder innovation.
History defines convention, convention defines the unexceptional, and without exception, new opportunity and improvement will be missed.
If a company’s revenue last financial year was $50M then a stretch target of $55M (+10%) may be selected for new year. It makes sense to aim higher to facilitate further positive movement at industry acceptable rates.
Conducting a mid-year review would then enable the company to determine if it is tracking above or below target rates, and thus whether the results are ‘good’ or ‘bad’.
But is that an accurate assessment?
What if last year’s result was impacted by external events that significantly impacted the company’s bottom line, such as an economic downturn, supply chain disruptions, public health emergencies, natural disasters, temporary industry disruptions, changes in government policy, or political instability?
Those factors may not be relevant in the current year and simply using historical results would mean that this year’s targets are well below capability, therefore reaching these targets would be fruitless.
Likewise, if the targets are unattainable but you are operating well, it may not be possible to ‘catch up’. Therefore, acting as an agent of demotivation and demoralisation.
There are so many factors that impact production, such as seasonal effects, technology changes, quality/availability of raw materials, production process efficiency, shifts in demand towards products of varying profitability, personnel availability/skills/productivity, and government regulations. Therefore, setting targets simply based on historical performance could limit growth potential, result in an inadequate response to changing market conditions, and breed overconfidence or discontent.
Achieving a target only adds value if it is attainable and aligned with the business’ capabilities and resources.
Do not use historical performance as the sole basis for future targets. It represents what has been possible in the past, and not necessarily what is possible in the future.
Influences on past performance must be understood, changes accounted for, and emerging opportunities anticipated and assessed.
