Term Paper (Group 4)

8/3/2019 Term Paper (Group 4)

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Term paperGroup 4

Guidelines for setting targets.

How should we determine the target levels?

Cataldi Matteo

Hoof Robert

Lisechko Yulia

Munoz Martin Marina

Sekereov Zuzana


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TABLE OF CONTENTS

1 INTRODUCTION 31.1 Practical importance of this topic 31.2 Goal of the paper 31.3 Structure of the paper 42 TARGETS IN GENERAL 42.1 Goals vs. Targets 52.2 Why to set targets 52.3 Target Levels 62.4 Where are the targets applied 63 CLASSIFICATION 63.1 Measures 73.2 Target 74 GUIDELINES 94.1 Guidelines for different types of target setting 104.2 Stages of setting targets process 115 PRACTICAL IMPLICATIONS /EXAMPLES 126 PROBLEMS 146.1 Criticism of target setting 157 CONCLUSION 15REFERENCES 17


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1 INTRODUCTIONDuring the last years, setting targets has been one of the main topics in the academic

literature, especially in managerial studies. People need a measure to be achieved, and

the company needs to give a general direction through the creation of targets (as goals to

achieve).

1.1 Practical importance of this topicThe relevance and the importance of that topic, especially in the managerial and the

accounting field, has been highlighted by several authors, both about a general view on

the targets (e.g. Knapp and Catriona, 2010) and about more specific applications of

targets to peculiar industries or sectors (e.g. Ielpo et al., 2009, in FED regulation, or

Costello and Brian, 2009, in a plans sponsor investment). Furthermore, analyzing the

practical environment (i.e. market environment) in the last years we can notice several

instances of firms that failed in their business, or reported large losses, due to target

setting issues (Langford-Wood and Salter, 1998). Other examples, can be related with

the wrong development of a target measure (i.e. the target measure is not aligned with

the SMART model): academic studies are plenty of business cases that are reporting

that kind of issues (Payne, 2007)

Finally, especially in the psychological field, several empirical analyses have shown

how setting targets properly on people or teams can lead to improvements in the whole

business chain and to commitment by the employees (Yukl et al.,1999).

Given these reasons, we strongly believe that target setting, if well implemented, can

produce positive effects within the company and, in addition, both with the stakeholders

and the customers: however, one of the aim of this paper is to prove this statement.

1.2 Goal of the paperThe investigation done in the academic literature has as an aim to give a more

comprehensive picture of the importance of targets. Starting with the definition of

targets and differences to goals we would like to give a classification of the target levels,

as provided by the literature: several categorizations have been proposed, and we seek to

describe the most important ones.

Moreover, we would like to review guidelines given in the previous studies, to achieve

the goal of setting targets. We know that the suggestions can vary among different ages


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of studies or among different geographical areas, but we would like to assemble, as we

did in the categorization of targets, the main studies conducted to give to our readers a

general frame on the concern.

Finally, we conclude our paper giving practical implications, and seeking to list some

topics where little research has been conducted.

1.3 Structure of the paperIn section 1 we provided an introduction to our paper, drawing how the current studies

are structured. Furthermore, we listed the main purposes of this paper. In section 2 we

provide the general picture of targets: we start from the issues emerging from the

sources in which the authors seek to define targets and demonstrate differences between

goals and targets. We then move on where targets are applied and the main reasons of

why to set targets. Some guidelines for setting targets, as the number or the levels, are

provided in this section. Section 3 examines the several classifications of targets in

literature. In section 4 we continue the topic by naming guidelines for setting targets.

Section 5 explores practical implications of setting targets and examples in different

contests, such as hospitals or banks. In section 6 we seek to define, based on our

sources, which are the main problems concerning target setting (different schools of

thought) and mention contradictory views of advocates and critics of setting targets.Session 7 concludes with the points inferred from our analysis.

2 TARGETS IN GENERALMost of companies doing some business have to deal with target-setting and

performance measurement. The concept of targets and related measurement system is

widely used. Before talking about how and why they might be used, it is important to

understand what targets are. The word target can be explained in several ways. Targetis a commitment we made to achieve a specific level of service. It might be something

that we strive for but may never achieve (for example; zero defects). It can be expressed

as a level that represents our minimum performance below which we should never fall.

There are a number of other definitions for targets.

Definitions of a target:

Targets specify time bound desired levels of improvement.


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Audit Commission, Targets in the Public Sector, September 2003

Targets: usually desired or promised levels of performance based on performance indicators.

They may specify a minimum level of performance, or define aspirations for improvement.

House of Commons Public Administration Select Committee, On Target? Government

by Measurement, 2003

A performance target represents the level of performance that the organisation aims to achieve

rom a particular activity. Such targets should be consistent with the SMART criteria

Source: Choosing the Right Fabric (Government and Audit Commission), March 2001

There are a lot of common characteristics. Targets are timely, relevant and well-defined.

They are frequently used in order to improve performance and as motivationaltechniques. They define desired or aspirational level of services. In general, it is agreed

that targets should be SMART; i.e. Specific, Measurable, Achievable, Relevant and

Time bound.

While discussing targets, we could come across other expressions which are

significantly similar. There is confusion about different types of targets and related

terms such as goals and objectives.

2.1 Goals vs. TargetsGoals or objectives are far-reaching and comprehensive aims to be achieved by the

organization. They are generally at broader level than targets and probably less specific.

These terms are often used interchangeably, though sometimes one (such as goal) is

taken to be at a broader level of generality (PMMI Project, 2005). On the contrary,

targets are focused and specific. They refer to physical achievements in the

organization's business. They help employees to make day to day decisions.

Management expects targets to be met in order for goals to be achieved. The goals,

objectives and targets are set in such a way that they are consistent with each other and

help to achieve each other.

2.2 Why to set targetsTarget setting is a key management process which should be undertaken by everyone

responsible for delivering service improvements. Targets are significant. They help to

clearly focus on what is important. They also:

define the entire purpose of your business;


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focus attention on the kind of service that is needed; help front line managers focus effort and resources on priorities; help organisations to develop a culture of continuous improvement; help determine the quality of the strategy or tactics that you will adopt; help local authorities to know when and how to adjust services and

resources according to policy priorities.

2.3 Target LevelsAfter having decided which aspects of performance to target, it is necessary to set the

level of required performance. Target levels should comprise an element of stretch and

ambition. However, they must also be attainable. When setting the level for a target, we

should consider using tools such as benchmarking against similar organisations, in

addition to using historical performance (HM Treasury, 2003). Past performance might

be a good starting point and will often be appropriate indicator. Then, it is also

necessary to take into account the capacity of the organisation, the amount of resources

available and other matters which can ensure improvements, such as technical changes,

changes in regulatory framework or those relating to improving business processes. As

mentioned above, targets for performance measures can be set by using benchmarking.

Benchmarking involves comparison of performance, practice and processes with otherorganisations operating in the same or similar field (Wealleans, 2001).

2.4 Where are the targets appliedTarget setting as an activity is common within organisations and used for a variety of

purposes. Setting performance targets can help to deliver the strategic changes that

many growing businesses need to make. Targets play a key role in improvement of

operation processes They are helpful to increase efficiency and effectiveness. In order to

assess the success of business, setting of targets is commonly established. Targetsassociated with reward system are implemented to encourage involvement of

employees. All in all, it is apparent that targets are set within most area and industries to

achieve long-term goals. (Johnston,2011)

3 CLASSIFICATIONTargets, as a combination of the corresponding measures and their levels can be

classified according to different systems.


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3.1 MeasuresA commonly used classification for measures of targets is the differentiation in financial

and non-financial targets. (Banker et al., 1998, p.67) While financial targets are well

researched for a longer time, non-financial targets are still a field for current research

(Hansen, 2009). An advantage of financial targets is that they are very easy to use. The

data is most likely already present in the company and setting the target is just a matter

of numbers. However, a link to the strategy may not be easily established. Non-financial

targets are often easier to link to the strategy, however data acquisition may be a hurdle

here. One example is customer satisfaction, which might not be measured otherwise. A

further advantage of non-financial targets is the fact that non-financial measures might

be leading to financial measures later. (Banker et al., 1998, p.67)

3.2 TargetThe probably most common classification is according to the source in internal and

external benchmarks. It has been discussed already in the 1970s as projection of past

trends for internal benchmarks and international comparisons for external

benchmarks (Gostowski, 1970, p.10). However, it is still used in a very recent article

concerning target-setting guidelines (Johnston, 2001, p.1400). For internal benchmarks,

historic statistical data is necessary, whereas for external benchmarks, a set of peers has

to be found. This differentiation can have significant effects related to the company

strategy (Johnston, 2001).

However, there is another definition for an internal/external classification (Walleans,

2001). In the external case, we set targets in accordance with customer expectations.

This process might be simple as we need just to translate customer expectations into

target and set the limit. The target may be set for us: specification limits for products contract delivery times and other measured conditions customer charters estimated price or budgetary quotation.

There are many cases when there is no external customer specifying his requirements,

so we have to set our own targets against a customer expectation. There might be a

temptation to set it at a level that we can comfortably meet, but if we ask others for their


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input (i.e. the marketing or sales departments) they may suggest an unattainable value.

There are a lot of ways in which we can determine target level:

use current expectation that the organisation already has; there often existssomething to define what is expected;

ask customers for their opinions. This could be done as a part of the generalinvestigation of customer desires;

find out what competitors are doing. Through market research or benchmarkingwe may be able to find out what levels of performance our competitor can and

do achieve;

look at our previous performance levels. Even though we have not formallymeasured our processes in the past, we should be able, via study and records, todetermine what the results would have been if we had been monitoring them

regularly. (Welleans, 2001)

Further, a given objective target level for a manager may multiply to more than one

subjectivetarget level, for example a performance level and a survival level (March

1987, p.1412), creating three possible states with different behaviours.

A further distinction can be made into absolute and relative levels (compare

benchmark targets above), where relative levels, for example, are a comparison to

peers within the company.

Finally, a very recent classification of target types is given by Meekings, Briault and

Neely (Meekings, Briault and Neely 2011). They classify the following four target

types: close-as-you-can targets, far-as-you-can targets, benchmark targets and

yes/no targets. Close-as-you-can targets are based on a figure, which usually cannot

be ultimately reached, but the target is reaching it, for example zero defects. Further,

far-as-you-can targets typically do not have a certain figure to be reached or even a

limit. As for example in most financial figures, more is better. Benchmark targets

are always related to peers, for example market share, which is a relative measure.

Finally, yes/no targets are of a binary type and occur mostly, when there are exact

financial targets set (e.g. reaching a minimum ROI of 10%). Succeeding as well as

failing is possible, but nothing in between. (Meekings et al., 2011).

The Balanced Scorecard, as proposed by Kaplan and Norton (Kaplan, Norton, 1996),

names four target perspectives: Financial, which is the shareholder perspective;

Customer, representing the strategy from the customers point of view; Internal


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business processes, which focuses on processes in order to satisfy customers and

shareholders; and finally, Learning and growth, aiming on a base that enables

change, innovation and growth.

Further frameworks like the performance prism (Neely, Adams and Crowe, 1997)

keep the processes and learning and growth classification, but add further attention

to strategy and stakeholders.

4 GUIDELINESIt is apparent for everyone in business today that the goals must be specific, measurable,

realistic, and have a completion time. Consequently, it is a task of top management to

set precise targets for the company as a whole, as well as for each unit and employee.As Carl Hughes put it, the starting point for the goal setting process is the corporate

vision. A good practice is to choose a few goals which you can achieve in the nearest

time (one of them should be financial) and work on them while moving progressively

towards the new ones (Hughes, 2003). The crucial point here is to provide an open

discussion on targets, resources, and competitive advantage among managers and

subordinates. In general, for setting a target, its purpose must be known and its outcome

be defined (PMMI Project, 2005). Targets are frequently used for motivation purposes,

but it causes problems such as incomparable dissatisfaction of employees when they

cannot meet the target. The business practice show that the use of value drivers as the

base for counting bonuses can work well, while there is no direct improvement in

organizational performance in case of using as one of bases for bonuses such a financial

measure as EVA (Malmi, Ikheimo,2003). Also, dysfunctional behavior can occur, e.g.

neglect non-target areas and increase financial and operational risks. It is important to

remember about creativity of people concerning the cutting corners when pursuing

targets set by management.

Everyone from upper levels of management to lower levels of sales must understand

and memorize the targets of the company. That is why a good target-setting system

should have finite number of targets in key areas which will drive up the performance of

the whole company.

It is crucial to assign responsibility for achieving the targets to the concrete unit or

individual. Moreover, the responsibility should be held only for those targets which can


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be directly influenced by this organizational unit or employee. These should also be

involved in setting the target (PMMI Project, 2005).

When targets are delegated to the responsible ones, the resources should be available for

them as well. Therefore, the suitable change in span of control and accountability should

be considered. The span of control enables the unit/individual to get resources, decision

rights, and responsibility for use of it. The span of accountability gives the employees

understanding of how their results will be evaluated, and is connected to the

measurability principle of setting targets. (Simons, 2005, p. 24)

In addition to setting targets, operational targets should be set in order to lead the way in

daily activities (PMMI Project, 2005). Moreover, if the difficulties in achieving targets

are experienced during a long period, it would be beneficial to improve the skills andknowledge of employees responsible through the suitable training.

4.1 Guidelines for different types of target settingFurther practical advices for targets to set are structured according to the given

classifications. Internal sources for target levels should be used, when evolutionary

process change is intended. They will lead to little change in the process and modest

improvement, but the benefits are long-term and driven by the employees. Risk, capital

and time consumption are minimal. However, when revolutionary process change isintended, external sources should be used. Revolutionary process change is

characterized by a redesign of the existing process with substantial improvements,

however short-term benefits and the necessity to have the top management involved.

Also, risk is high, as well as capital and time consumption. (Johnston, 2001, p.1389)

Setting nonfinancial targets needs additional considerations. They suffer from longer

lead times and can even lead to a worse performance in some financial measures. This

must be taken into account when setting both targets, for example by lowering the

financial target for the time-period until increased performance due to the nonfinancial

target pays off (Ittner and Larcker, 2003).

Regarding the recent classification by, close-as-you-can targets can be used to direct

attention. Although the target level can be chosen freely, it should be a number that

represent perfection. For as-far-as-you-can targets, the target level is an assumption

derived from multiple factors and should only be seen as a further step. For

benchmark targets holds the same as for close-as-you-can targets, the only

difference is that the best benchmark instead of perfection determines the target level.


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Finally, a yes/no target should not be set for itself, but as a mean to reach other

targets. (Meekings, Briault and Neely, 2011)

For all targets, behavioral reactions may occur. A connection between the prospect

theory (Kahnemann and Tversky, 1979) and managerial targets has been established,

stating that risk-taking preferences are changing depending on the current performance

related to a target. When reaching the performance level does not seem to be realistic,

managers tend to show more risky behaviour, then when performance level is

achievable. The opposite holds for the survival level - when only slightly above survival

level, managers tend to be more risk-averse than when they are in the middle between

survival and performance level. (March, 1987) This knowledge can be used to influence

risk attitudes to the level desired by the company by setting target levels.There are still companies which do not set goals but practise the problem-solving

attitude.

Most of the techniques of goal setting advise to set realistic, achievable goals. We would

like to disagree with this statement because if we are expecting the extraordinary results,

the goals should be very challenging, making people jump over their heads.

In order to establish stretch targets, the company should establish measurable target

responsive to team members efforts, structure the team in terms of autonomy and

empowerment, modify working environment, and build the culture of continuous

support and encouragement. Stretch targets are the objectives that force organizations to

significantly alter their processes in a way that involves the whole new paradigm of

business operations. In fact, stretch targets are those that are considered virtually

unattainable. (Thompson, Hochwarter and Mathys, 1997) Without target values the

utility of a performance management system is massively reduced. (2GC Ltd., 2003)

4.2 Stages of setting targets processIf the key areas that drive business performance have been already identified and a wayof measuring them has been found, then a next step is to start setting targets to give

everyone a clear picture of what they should be aiming for. Target setting might sound

easily but it is difficult to do it in practice. Targets should provide a structure to assess

the performance of our business. Some are used to promote accountability, others help

manage a service and some are set for self-improvement.

When we want to set a target, it is desirable to go through several stages to set

challenging but realistic target (PMMI Project, 2005):


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1. Know what outcome you are trying to achieve

2. Clearly define where you are now and where you want to get to

3. Identify measures

4. Set targets in consultation with staff, Members and citizens

5. Action plan to achieve the target.

6. Final checks

The number of targets set is equally important. We should achieve a balance in terms of

the number of targets we set. There is no definitive number but setting too many targets

can be counter productive, can lead to target fatigue and be an end in itself. Setting toofew targets may mean that attention is focused on the targeted areas at the expense of

the untargeted areas. The balance needs to be managed very carefully, so that the right

number of targets is set and the range of targets reflects the breadth of services involved.

5 PRACTICAL IMPLICATIONS /EXAMPLESReviewing the academic literature about the topic, we discovered that most studies

about a practical use of setting targets where based in the Spanish area.

An instance can be provided by (Prior and Surroca, 2010), in their study about how to

set targets in public hospitals: comparing the productive frontiers of several Spanish

hospitals and taking measures from that benchmark they were able to provide guidelines

on the concern. Their empirical-based article was using a statistical model, where

outliers or influential records were eliminated.

The former example can be related to the external benchmark (Gostowski, 1970)

depicted in the classification section.

The second instance that provides important insights on the topic is a study by Lovell

and Pastor (Lovell and Pastor, 1997). Although the study was conducted more than 10

years ago, it can give us interesting starting points to reflect on. The authors examine the

performance of target setting procedure employed by a large financial institution in

Spain to evaluate the operating performance of its branch offices: they evaluate the

ability of the branch offices to meet the targets established by bank management, the

targets themselves and then find that the list of targets can be reduced without

significant loss or distortion of information to bank management.


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The text itself can provide us with a large number of understandings about the

phenomenon of target setting

Firstly, branch offices typically succeed in meeting or surpassing some targets, while

failing to meet others: using the Data Envelopment Analysis linear programming

technique developed by Charnes and others (Charnes et al., 1978), their idea of the

study is to aggregate performance indicators across all targets into a single performance

indicator. Even if the technique was implemented for application in public sector and

not-for-profit settings, where prices are distorted or nonexistent, the use of the former

helped by the absence of prices in the targets set by the bank for its branch offices: with

this instrument they were able to aggregate multiple performance indicators into a

comprehensive scalar valued performance indicator for each branch office.Several other studies have used DEA to evaluate the performance of bank branch

networks, but Lovell and Pastor were the first scientists in doing that in a target setting

environment. Moreover, they are aware that setting several targets consumes more

resources, in the form of monitoring costs at the bank and compliance costs at the

branch offices, than setting fewer resources does: their intent is to reduce the number of

them, with some minimally acceptable loss or distortion of information content (they

decreased the number of relevant indicators from 17 to 7, without significant losses of

information). Their ability resides in their continous analyses in which they are testing

the change of the DEA index if a variable is removed.

The variable deletion technique is based on a "comparison" of the efficiency scores of the complete radial

DEA model, which includes all the variables, and of the reduced model, which is obtained by deleting cer-

tain variables from the complete model. Of course at least one input and one output of the complete model

must also belong to the reduced model..(They) were able to delete 10 targets because they provided no

independent branch office performance evaluation information of their own. This finding offers a way

for bank management to reduce the monitoring and compliance costs of operating its target setting

procedure. (Lovell and Pastor, 1997)

This second instance can be linked to the theme of the number and the nature of the

targets to be set, providing us with an insight that several measures can be useless and,

indeed, deleted (i.e. not implemented) because of their positive correlation with other

variables: furthermore, it suggests us to conduct analysis to prove the quality and the

average achievement of the targets already set, to transform them into helpful tools.


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6 PROBLEMSTargets are often used as a tool for improving performance. The most important fact that

we could bear in our mind while setting targets is achievability. Targets have to be

perceived as achievable by individuals who are in charge of making them happen.

However, in several cases targets are not set well and do not lead to expected

improvement. Amongst the reviewed literature, the most common causes are:

Lack of ownership of targets. Each target should have a named officer against it who is

accountable for performance. Also, those involved in delivering the service have an

opportunity to input to the discussion in setting the targets.

Unreliable data. Revisit the definition of the performance indicator and ensure that it is

robust i.e. that there is no room for different interpretations and that it is clear where theinformation is coming from.

Ambiguous indicator. Sometimes an indicator can be interpreted in different ways.

Such a performance indicator cannot be used as an absolute indicator of performance,

only a starting point with further investigation needed. It will therefore be inappropriate

to set a target against such an indicator.

Confusion over terms. Be clear whether you are using target to mean an aspiration,

something which is stretching but achievable, a plan of intended direction without

consequences whether it is reached or not, or a standard whose achievement is expected.

Too high or too low. Sometimes those without market knowledge set stretch targets

that are unrealistic. When targets are set too high, employees may become discouraged

or engage in dysfunctional behavior to distort or misrepresent outcomes. Conversely,

when targets are set too low, the maximum potential of salespeople is not being realized,

and additional bonuses are being paid out without any real boost in performance.

Generally, a performance measuring system, which is perceived as well-designed,

increases motivation, performance and job satisfaction (van Herpen, van Praag and

Cools, 2005).

Hitting the target, missing the point. Some performance measures, though no longer

linked to the current business strategy, continue to be used anyway. If performance

measures are not reviewed regularly, there is a strong chance that some targets persist

even though they are well past their sell-by date.


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Reality check. Related to the previous point, we found that most organizations did not

review their targets, once set, until the end of the defined period. (Franco-Santos, 2010,

PMMI Project, 2005)

6.1 Criticism of target settingAlthough setting targets is common in most organisations, there are a lot of people who

find it damaging and criticise this process. As there is an obvious contradiction between

arguments of advocates of target setting and their critics, they do not seem to be able to

find a common ground. Lets consider critics, who point out that target setting can be

linked with problems, such as if targets are set too high, they can cause stress and

demotivation, yet if set too low, they may encourage complacency. If targets are

imposed, they are unlikely to be owned by those who have to deliver them. Targets

cannot be established appropriately without knowing current and future process

capability. They do not explain how to improve performance. Moreover, they provoke

cheating including either distortion of the data or distortion of the process. There are

also view that targets are likely to cover only aspects of performance that are simple to

measure, rather than a systemic perspective. Critics claim that the overall process of

targets is negativedestroying trust and personal responsibility within relationship. On

the other hand, the advocates of target setting state various benefits, claiming thatchallenging goals lead to far better performance than easy and vague goals. They also

argue that the theory behind target setting is well researched, valid and considerably

useful. There is some evidence that target setting can make people happier. (Meekings,

2010)

7 CONCLUSIONWe have given an overview on target setting, starting from the foundations of what is atarget over classification, guidelines, and finally ending with common problems and

examples. We provided the framework analysis of target-setting process which exists

nowadays. The objective of this term paper was to develop guidelines for target-setting

which would result in improvement of business performance. We illustrated the usage

of our guidelines by studying the real business cases.

In many cases, behavior of individuals is an important factor, which is influenced by

targets and should be kept in mind. For example, there are influences on risk-taking,

motivation, happiness. Further there are behaviors like cutting corners or even


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destructive behavior in order to reach short-term goals. Only few cases consider these

factors when targets are set, but many experience them afterwards.

In order to determine target levels we provided the overview of different classifications

of targets such as financial and non-financial, internal and external classes. When

concentrating on the target levels, we should take into account an element of stretch and

ambition. While setting the target levels, we should consider using tools such as

benchmarking against similar organisations, in addition to using historical performance.

We also discussed the most frequent problems which arise during implementation of

targets in practice.


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