Our book, Decision Strategy, received 5 stars as the 5th best management book globally of the year in the most prestigious business paper, Børsen. This is part 1 of a small series, where we introduce core concepts from the book. Later parts can be viewed here:
Part 1: Why do we need Behavioural Strategy?
”Take a simple idea, then take it seriously”
The last 50 years we have witnessed a revolution in strategic thinking. Ground-breaking work of great thinkers like Michael Porter and Henry Mintzberg has paved the way for a solid management tradition. Today, most senior managers are trained in strategic management, and large companies often have their own strategy teams.
Yet business is filled with examples of bad strategy and strategy execution with disastrous consequences. 70% of all strategic initiatives fail according McKinsey, and what is worse, many companies will look at one moment to a promising future and the next find themselves brought to their knees. Almost half of the 25 companies that originally went through Tom Peters and Robert Waterman In Search of Excellence needle’s eye, either no longer exist, are bankrupt or are faring poorly.
We all know the countless examples of poor strategic decisions; Kodak, who missed opportunities in digital photography, a technology they had invented; the Swiss national airline, Swissair, which was so financially stable that it was known as “the flying bank”, but as a result of a failed M & A strategy succumbed to debt, or Nokia that chose market retention over innovation and dropped out of competition with the words: “we did not do anything wrong, and yet we lost.”
The question is why talented executives are backing flawed strategies in a time when we have access to so much information? Misinterpreting opportunities, poor strategy design and lack of follow through are some of the key reasons according McKinsey research. But they are all fairly everyday reasons that should not get in the way of a solid strategy right?
Wrong. We are simply not as rational as we like to think. 95% of our decisions are taken on pure intuition based on a brain developed thousands of years ago and by no means equipped to handle the speed, pressure and diversity of decisions of today. It has developed shortcuts and simplifications that may have helped early humans to survive on the savannas of Africa like “if it looks like a deer, and everyone else chases it, it must be lunch.”
The strength of behavioral economics is that it brings the real world into the strategy process and thus all strategists should take an interest in behavioral economics. It is not about the next fad or adding a new organizational unit. As in the Buffet quote at the top, it is all about taking a simple idea – that we are systematically irrational – very seriously to build systems and organizations that will be flexible and robust enough to handle human excesses – and it is this agility and robustness that will separate your organization from the competition.
The idea is simple yet not easy. A few first mover investment funds have incorporated behavioral economics to counteract systematic biases, but strategy has not yet been penetrated. And it is not hard to guess why: unlike marketing, where the biases and irrational behaviour of others are used routinely to increase sales, strategy requires us to recognize our own biases.
This was part 1 on our book, Decision Strategy. Next week we will look into how our brain works, how that can wreak havoc on strategy and what to do about it – stay tuned!
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