If your business is already as large as you want it to be and you are stable and secure in your market, planning can be easy: more of the same. Few businesses fall into this category, and in most cases your business is growing or will be growing soon. How do you set metric targets when your metrics are changing so rapidly?
Consider the following metric chart we might use to set targets for Year 3 based on data from Year 1 and Year 2:
Target A is obviously not good, since it assumes the growth stops completely and we are in the same place next year as we are today. Target B is a better goal, extending the linear trendline into the future, but it assumes the growth rate stops and we have straight line growth until the end of the year. Target C makes more sense, following the historical growth trend but it might not be possible to keep increasing the rate of growth indefinitely.
A much better way to think about metric targets is in confidence intervals. Let’s revisit that planning metric, but instead of setting targets let us create a spectrum of potential targets:
Instead of specific targets, now we have ranges from which we can choose the targets that are right for the business. The red area are low targets, which should be easy to hit. The light green are stretch targets that might be hard to hit. The dark green are the most likely set of targets we might choose for Year 3.
As you can probably see, these ranges are related to the targets A, B and C we discussed before! That is because an easy way to get started setting your spectrum is to use those same three strategies (no growth, straight line growth, continued growth rate) as the start of your Low, Good and Stretch ranges. You can then modify them as appropriate to encompass your knowledge of your business and expected events over the course of the year.
Having such a spectrum in hand makes it easy to balance between being aggressive and realistic, since it is clear where your target falls. You can then choose your targets using whatever methods you prefer, and then reference check them against your spectrum to see where they fall.
Tomorrow we’ll cover some of those methods of setting targets when we talk about Planning for Efficiency.
Quote of the Day: “Everyone wants to live on top of the mountain, but all the happiness and growth occurs while you’re climbing it.” ― Andy Rooney