In 1991, General Electric set itself two targets for the end of 1995. By the company’s later account, its highest operating margin in three decades had hovered around 10 percent, and its inventory turned over about five times a year. The new targets were a 15 percent margin and 10 turns.
GE had a word for targets like these: stretch.
In February 1995, with a year to go, Jack Welch and his vice chairman explained the idea in their letter to shareholders. Stretch, “in its simplest form, says, ‘Nothing is impossible,’” they wrote, and setting stretch targets “inspires people and captures their imaginations.” Business leaders set their own stretch goals at the start of each year, for things like income, cash flow and market share. But at the end of the year, a business was measured “not on whether it hit the stretch target, but on how well it did against the prior year, given the circumstances.”
The letter said what that rule spared people: “GE business leaders do not walk around all year regretting the albatross of an impossible number they hung around their own necks.” It also named what the arrangement rested on. The management team had been together a long time, and trust had grown, “and trust is an indispensable ingredient that allows a business to set big stretch targets.”
The same letter said 10 turns might be just beyond reach, but predicted GE would be “over nine” by the end of 1995. That, it said, would be no miss: it would be “a triumph to be celebrated.”
The next letter came in February 1996. GE had had a record year: revenues of $70 billion, up 17 percent, earnings of $6.6 billion, and a 45 percent total return for shareholders.
Then the letter turned to the targets. “1995 has come and gone, and despite a heroic effort by our 222,000 employees, we fell short on both measures, achieving a 14.4% operating margin and almost seven turns.”
The letter did not stop at the shortfall. “In stretching for these ‘impossible’ targets, we learned to do things faster than we would have going after ‘doable’ goals,” the letter went on, “and we have enough confidence now to set new stretch targets of at least 16% operating margin and more than 10 turns by 1998.”
GE’s 1998 annual report gave an operating margin of 16.7 percent, a record. Inventory turnover was 8.3.