Once upon a time the bad strategy was born. Something had gone wrong and the old family mansion was falling apart. The head of family decided to ask her closest companions to help her build a new and greater one. They jumped at the task and picked up whatever materials were lying around. Without a particular idea of what they were looking for, they tried to create some patterns. Eventually – having identified many interesting patterns – they created a master plan including all the different patterns, so nobody felt left out. Finally, they convinced the head of family to force the plan onto everyone. This is the bad strategy – and the typical approach in most companies. It will be fun and time-consuming, but do not expect a solid strategy.
The ugly strategy was born sometime in the mid 1900s. The head of family had learned from the first experience and hired a team specialized in architectural wonders. They had great mansion cases, broad competencies and perfect pedigrees. This could not go wrong. The team clarified all the problems of the head of family. They broke down the problems into different categories and prioritized based on all their experience and information. They analyzed and synthesized the knowledge into a brand new architectural wonder – a new and greater mansion. They combined the different documents into a crisp recommendation and handed it over to the head of family, who was excited beyond belief – until she realized that all that money had only bought her a piece of paper. She still needed to hire scores of specialists to translate the paper into plans and the plans into a real mansion. This is the ugly strategy – and the scientifically correct approach, deployed by top tier consultancies. CEO desk drawers are full of such strategies, that were never implemented.
The good strategy was born in 21st century behavioural economy. The head of family had no more room in her desk for paper plans and sought out a new method – the behavioural approach. She was surprised to learn that process was six times more important than analysis and so the mansion would be co-created in four steps with her family. The first step involved broadening the perspective of everyone in the family on what a modern mansion could be and look like. The second step helped the family make the final decision on what kind of mansion would be the right one given the expected development of the surroundings. The third step recognized that such a process could unravel new questions to be deep dived into – but at least they did not have to go through ALL the data used in the bad and the ugly strategies. Finally, the fourth step recognized that the world changes and there is great uncertainty, so the mansion had to be built with some flexibility – a way to future proof the building. This is the behavioural approach – minimizing classic strategy pitfalls of opportunity misinterpretation, poor design, competency misalignment, lack of follow through and disregarding external change.
This is the new way of doing strategy. Come join us.
We previously talked about how our 35,000 daily decisions are all at least semi automated and this automation is the culprit behind the well known 70% failure rate in strategic initiatives.
This failure rate has spurred a debate about whether you prefer good strategy or good execution. Obviously the answer is both and the research does show that the underlying reasons behind failure comes from both camps. But what is striking is how everyday those reasons are – from misinterpreting the opportunity over not aligning competencies to forgetting to allow for external change. Not really rocket science is it?
Imagine strategists explaining to the board some years later: “yeah, execution was awesome, but we did not really understand what we were working on” or “everything was going great, until the market dared respond!”. But is it fair to tease strategists like that? Or is something else going on? Lets examine each of the five reasons identified by McKinsey:
Opportunity misinterpretation. So you failed to fully comprehend the environment and strategic positions five years into the future. Well that is the job right? Maybe, but we are all – regardless of intellect, personality and background – subject to availability bias, where we focus on our existing information aka WYSIATI – What You See, Is All There Is. For example Blockbuster completely misunderstood, where the market was heading and kept investing in their brick & mortar network.
Poor design. So you understood the opportunity, but failed to design a fitting strategy. One of the most devastating biases in decision making is confirmation bias, where we look for information to confirm our hypotheses. For example Blackberry had the same information as everyone else, but focused on keyboard phones for B2B communication, when market went to touchscreen B2C entertainment.
Competency misalignment. So you understood the opportunity and designed a fitting strategy only to forget to align organizational structure, processes and skills. No biggie – boards habitually add substantially different work to existing organizations, as most people are prone to overconfidence bias, where we believe we do not need much preparation or resources to complete a task. For example Sony never lost faith in their proprietary Betamax technology, even as the open VHS standard was quickly outpacing them .
Lack of follow through. So you understood, designed and prepared for the opportunity, but the organization never got it done. Well, we have a preference for status quo – an emotional bias. It might seem lazy, but imagine this “hypothetical” situation: You worked as a top performing manager for 10 years and seen many strategies with limited impact. Suddenly the board sends you a new approach after a strategy retreat. Do you a) try to implement the high level thoughts in the slide deck or do you b) continue to do what has made you successful for 10 years? This also happens at company level. For example Newscorp kept investing in MySpace despite major market share losses to Facebook and they eventually got USD 34m for at USD 580m investment.
External change. You are in the clear – you got the strategy and execution right – but the world changed. When we commit publicly to a course of action, it is extremely difficult to change and we prefer to avoid any risk of losses. Thus it can take long – sometimes devastatingly long – for a company to change strategy. For example think of how long it has taken for traditional car makers to embrace electric vehicles.
So maybe it was not fair to tease the strategists. There are powerful biases created millions of years ago to ensure our survival that now prevent even the smartest of people from rational decisions – let alone the complexity of strategy. We need a new way of doing strategy…
We make 35,000 decisions every day. If you stop to count your decisions in a day, then you will probably be hard pressed to come up with more than a few, where you actually thought them through. So where does the rest go?
Well, the marvel of our brain developed millions of years ago to ensure our survival, is that we have an ever vigilant automatic system 1 based on our human instincts around what is safe, interesting, valuable – and what is not. This system will make +95% of your decisions in a day – and that is great for fast decision making.
What is not so great, is when this system 1 proposes decisions to it’s more thoughtful brother, system 2, in a way that sounds great, feels great and makes it easy for system 2 to endorse, but really makes very little rational sense, if you actually stop to think about it. This is the reason that we are rarely stupefied – we almost always have an intuitive answer, that we can relatively quickly rationalize afterwards.
Now many decisions are not that difficult – and many are not that critical. But sometimes you make strategic decisions that make or break a career, a company or even a country. Even if you decide you want to think that one through, you will constantly be bombarded with your system 1 suggestions – and most of the time you will take them, because they certainly sound rational. This is why 70% of all strategic initiatives fail.
Nothing is more powerful than an idea whose time has come – Maybe it is time for a new way of doing strategy?