Stretch Goals, Factual/Counterfactual Reflection Strategies, and Firm Performance

Abstract Popular business press and academic publications have advocated for stretch goals, particularly to enhance firm performance. The general assumption is that stretch goals can create a more challenging task environment that upsets complacency, inspires motivation, encourages outside‐the‐box thinking, stimulates search and innovation, and guides efforts and persistence. Surprisingly few systematic empirical studies have been conducted to support stretch goal deployment, such as when and how to use them. This study introduces two reflection strategies – counterfactual reflection (managers confront performance feedback and create possible alternatives) and factual reflection (managers analyse their own decisions and explain performance feedback) – and uses two experimental laboratory studies to test how different reflection strategies contribute to the stretch goal‐performance relationship. The results indicated that using stretch goals does not affect firm performance, although theoretically, using stretch goals can create a more challenging task environment and enhance performance. Rather, it is the combination of the type of goal and reflection strategy that affects performance. I suspect that under stretch goals, managers may be unable to implement new ideas as expected, leading to growing performance gaps and perceived continuous failures over time. Consequently, their motivation to search for alternative solutions declines, and they may fall into a spiral of self‐constrained thinking. The results demonstrate that under stretch goals, managers use factual reflection strategies to deliberately reflect on performance feedback to achieve higher performance. In contrast, managers who are assigned moderate goals perform better if they use a counterfactual reflection strategy. I suggest that by using a different reflection strategy, managers can further improve performance by encouraging directed search behaviour and avoiding self‐constrained thinking spirals. My study provides a richer theoretical and empirical appreciation of the effect of reflection strategy depending on the task environment and goal‐setting.