The good, the bad and the ugly

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.

70% of your strategies fail

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:

  1. 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.
  2. 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.
  3. 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 .
  4. 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.
  5. 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…

You are not nearly as rational as you like to think

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?

Take your own medicine!

Growth strategy in consumer products

Nobody told us that – but maybe they should have…

I have worked on commercial, operational, financial and organizational strategies in retail, logistics, aviation, pharma, energy and consumer products for almost 25 years – so forgive me for having trouble limiting myself, when we founded Behavioural Strategy Group:)

Our focus back then was purely on combining what seemed like a bloody obvious idea – why don’t we use decision science on decisions? Crazy right? Or in other words why not apply the field of behavioural economics to the most important decision arena in the world – strategy. Great idea – easy win.

The idea is still great, but I like to think that I am now wiser, more mature – after all, that idea is just shy of its 5th birthday and after many fun strategy projects, where we have repeatedly stressed that strategy is firstly about deselecting options (it even says so on Behavioural Strategy Groups website, so it must be true), it is time to take that awful medicine.

Except, this medicine will be awesome, because the focus will be purely on the exciting area of growth strategy for consumer products, where Behavioural Strategy Group really have an edge – a tried and true way to generate deep insights and make solid strategy decisions, that I am proud to say has resulted in the most powerful strategy processes, I have seen. Hands down.

Now my network in consumer products and retail is not bad – in fact I am working on a growth strategy for a retailer right now – but I would love your help to put out the word to senior commercial managers in midsized consumer products and retail companies in Denmark, that the new kid on the block is now all grown up.

Thanks in advance friends! 
Brian

Cofounder of Behavioural Strategy Group

Innovative project approach recognized

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Behavioural Strategy Group was just featured in the Comatch newsletter to more than 1,000 strategically minded businesses with an article on our next practice strategy as an innovative project approach!

Of course you should not be cheated of the article so here is the link – enjoy reading:

Next practice strategy

If you want to learn more, then contact us here or read more on strategy and change at Behavioural Strategy Group.

Going once, twice, sold… out!

beslutningsstrategy

… is our book, Beslutningsstrategi, in the original version, that was awarded 5th place among global management books of 2016!

Readers also loved it as this quote from Jakob Wedel, a partner at Monitor Deloitte illustrates: “I have read many management books. But this one surprises. Beslutningsstrategi puts behavioural economics at the center of strategic decision processes. Brilliantly written – should find it’s way to board and management rooms fast”

The book is the first time ever, that anyone has structured our more than 200 biases into a coherent whole and treated each bias type with the relevant current strategic management tools such as “Playing To Win”, “Scenario Planning” and many more.

Sometime this spring the book is expected to sell out, but you can still buy the original version from our publisher here, if you are quick: https://www.djoef-forlag.dk/da/boeger/b/beslutningsstrategi#

If you are interested in hearing more or want to have an inspiration session for your management team, then contact us here or read some of the other articles on strategy and change at http://www.behaviouralstrategygroup.com.

Stratecution nugget: incentives work…

money.jpg

… but not in the way that you expect!

Firstly, as Daniel Kahneman points out in his landmark book, Thinking Fast & Slow, quoted above, money drives individualism over team work.

Secondly, as Dan Ariely, another key behavioural economics player, has described again and again, money tends to take us away from focusing on the overall purpose of an organization and towards maximizing our own benefits – and they do not always align.

Thirdly, as shown by Daniel Pink, money as an incentive even in basic jobs tend to reduce performance.

So incentives work, but probably not in the way that you want – instead think of rewarding on a team level with a more profit sharing approach.

Did you like this blog article? Then contact us here, follow us or read some of the other articles on strategy and change at http://www.behaviouralstrategygroup.com.

 

Stratecution Nugget: A single tactic increases success rate 300%

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Did you you know that in the vast arsenal of Behavioural Economics tactics to deal with our +200 biases, one of them alone can increase your chance of success in execution by 300% or a factor 4?

We are talking about small commitments as opposed to big bang implementation. We all have a tendency once the whole strategy has been thought through, decided upon and written up in beautiful slides to spring the whole thing on our organization.

And why should we not? After all they deserve to know. We also need to get going. Plus how can they can they execute correctly, if they do not understand the full picture? All valid reasons. But if you want to succeed, research says it is not the way to go.

There are several pieces of research, but our favorite one is this one from London, where families on two adjacent streets were asked to put up a big ugly sign in their front yard like “Drive Slow. Kids Playing”. On one street 20% of the houses put one up, but on the other street 80% agreed to do it. 20% vs 80%!

Now the streets were adjacent, there was no timing or demographic differences. It was the little differences. On the street with 80% the families had been asked a week in advance to put up a small postcard with the same worlds in their window – who can say no to that? Well, once you have made even a small commitment, it is very difficult to for humans to back down, when a week later they were asked to put up the bigger sign…

Did you like this blog article? Then contact us here, follow us or read some of the other articles on strategy and change at http://www.behaviouralstrategygroup.com.

 

Stratecution NEXT: Decision Strategy (5)

overconfidence

Before the holidays we started introducing core concepts from our book, Decision Strategy, that was awarded the 5th best management book globally of the year. This is part 5, so if you have missed the earlier parts, click the links below:

Part 5: If confidence is good, then overconfidence must be…

”All you need in life is ignorance and confidence, then success is sure”

Mark Twain

“The game is over”, said Mohammed al Douri, Iraq’s ambassador to the UN in April 2003. After only three weeks of fighting US forces occupied Baghdad, while Saddam Hussein was caught in a cellar on the outskirts of Tikrit later in the year. But while the invasion turned out to be a great success, the Iraqi liberation war was anything but. In Washington Saddam’s dictatorial regime was expected to crumble as soon as America set foot in the country, but Shiites did not rise, the Sunnis fought fiercely, the Iraqi guerrilla war surprised the unprepared forces and there were no weapons of mass destruction. How could the US be so wrong in a time when the intelligence community was better equipped than ever?

It all started with a few neoconservatives – among which the most prominent was Defense Secretary Paul Wolfowitz – who had long been convinced that expelling Saddam Hussein would pave the way for a grand reorganization of the Middle East that would move it away from tyranny and anti-Americanism and toward modernity and democracy. But maybe the most prevalent reason to attack Iraq was, that it would be a courageous use of American power, which mixed raw strength with idealism after the 1990s years of retreat and the terrorist attack on September 11. A combination of ambiguous intelligence and a strong belief that one could easily ‘smoke the bad guys out’, underpinned rosy scenarios, and poor planning – for example the original game plan called for 500,000 soldiers but was cut down to 160,000 for 3 months in the final approach – and only 8 years later the last soldiers were extracted.

The reason we often enter hopeless wars lie in our tendency of overconfidence. Although a more realistic assessment of the situation and the alternatives could lead to more peaceful solutions, our view is obscured by positive illusions, wishful thinking and overconfidence. Historical data show that each side before the start of the war, are convinced that they have more than 50 percent chance of winning!

Our tendency to overestimate our skills, the accuracy of our decisions or the value of our ideas is not limited to war. It is human and found across time, cultures and circumstances. Even the best laid business plans are often ruined by the annoying interference by reality. There is an abundance of examples of overconfidence in professional contexts such as stock market bubbles, the number of new entrepreneurs setting up shop despite 90% default rates and the many high profile acquisitions despite high risk of failure.

But could overconfidence not be a good thing? Is it not our self-conceit that makes us rise to the challenge and pushes us to perform better than our perceived limits? The short answer is no. With the exception of some limited benefits in innovation processes, overconfidence is one of the biggest obstacles to good decision making.

Although self-conceit can be fatal to decision-making processes, it is almost ironic how easy it is to correct. Churchill once said that it is important to remember that no matter how certain you feel about victory, there would be no war if the other person did not also think he had a good chance. If only the Americans had remembered to ask themselves a few perspective changing “what-if” questions, they could have avoided some of the biggest challenges. For example, why did Saddam Hussein dare risk a war? With the loss of the Gulf War in 1991 and a widening gap between Iraq and US forces, the outcome was given for the invasion – but the war was not.

When discussing overconfidence there are three different scenarios:(1) overestimation of our actual performance, (2) overplacement of our performance against others and (3) overprecision, that is exaggerated confidence in the accuracy of our beliefs:

Overestimation – the reason for project being late and over budget

You are preparing slides for a last minute presentation. It is the night before, but you do not worry much, because you are an experienced speaker. Although it is a new topic, you got slides from the former lecturer and you usually get good feedback. When you take the stage, you realize that your lecture is completely off target. You were not prepared for the participants’ prior knowledge of the subject, you have not quite understood all the points in the slides that you got and 45 agonizing minutes seem like a lifetime.

We tend to believe that we are better across a wide range of domains than we actually are, that we have more control over situations than we actually have and that we can plan out things quite detailed. This planning fallacy is reason for projects coming in late and over budget.

This is also yet another reason that bonuses can be difficult to use as a motivator. You may receive a bonus of USD 10,000, but you have expected 5,000 or 15,000. The easiest way to exceed our expectations is to reduce them and we have therefore developed defensive pessimism: While we will start out optimistic in a year or a project, we shield ourselves from any disappointment towards the end of the year or project through pessimistic assessments about ourselves and our possibilities, because it feels extra hard when our inflated belief meets reality.

Overplacement – the reason we enter hopeless projects

93% of motorists believe that they are better than average and 25% of students consider themselves in top 1%. Besides making performance appraisals difficult to agree on between managers and employees, it means that entrepreneurs will go into markets where their objective possibilities for success are limited or we will continue a hopeless lawsuit at high costs.

Interestingly, recent research also provides for our tendency to believe that we are performing worse than others when it comes to very difficult tasks. Both extremes are problematic. While overplacement may lead us to throw money at bad projects, then underplacement may prevent us from pursuing great projects – whether in business or in life.

Overplacement can create some nasty surprises, when we suddenly face reality. For example highly intelligent people joining ivy league schools often drop out, when they finally meet real competition. We simply tend to focus on ourselves instead of comparing ourselves with the particular group we belong – or we think of our own team as more competent than average. That would be okay except the other talented teams may impact on our own teams opportunities. In the business world this leads to lack of understanding of the market and competitors.

Overprecision – never ask experts to predict the future

Throughout history experts’ overly precise estimates have proven to be wrong again and again. For example, the neoclassical economist, Irving Fisher, who became famous for shortly before the Wall Street crash in 1929 saying that stock prices seemed to to have reached a permanently high level. Or Harry Morris Warner, one of the founders of Warner Bros, who in 1927 rhetorically asked who on earth wanted to hear actors talk? Or Thomas Watson, founder of IBM, who in 1943 predicted that there might be a world market for five computers.

Of course everyone can make mistakes in areas where they have limited knowledge, but the question is whether expertise buys us more precision? Studies show that we in areas with prior knowledge or expertise closer to the correct answer. The problem is that we as experts are becoming more cocksure about our ability to predict the future and therefore defines narrow confidence intervals (i.e. how sure we are of our estimate), so we still miss the target. The problem is that our one lone estimate has a tendency to make mistakes.

The problem is further cemented by human interaction patterns. For example few voters will choose a politician with the slogan: “I think it’s way, but I’m not sure.” We feel that confident people are more persuasive, competent and we reward them with influential positions. When the confidence and capability is positively correlated, it makes sense. But people quickly learn that to succeed, they must adopt a ‘fake it till you make it’ approach.

6S Model – bring in the devils advocate

Overconfidence is not the hardest bias to work with. Often we just need to consider consider worst-case scenarios, adverse information or adjust our project estimates with standard percentage to minimize the effect. Here are a few examples from the 6S parameters of Strategy, Structure, Steps, Systems, Skills and Style:

In Strategy you might towards the end of the process deploy Gary Klein’s “premortem” technique, where you imagine that the project has failed and you are analyzing the reasons behind. It is a clever way to invite in the devils advocate without strong opposition and is great at uncovering the biases and challenges that may threaten your strategy or project.

In Systems overoptimistic organizations often overestimate their abilities and underestimate how long something takes. Although you should always start with detailed plans to increase realism, then make sure to build in flexibility around those very precise estimates and consider whether the decisions in the system should be “opt in”, where you must actively choose a direction rather than an “opt out”, where you can just let system 1 press the accept button without reflecting on the consequences

This was part 5 of our book, Decision Strategy. Next week we will look at the power of loss aversion and the crazy lengths we will go to avoid it – stay tuned!.

Did you like this blog article? Then contact us here, follow us or read some of the other articles on strategy and change at http://www.behaviouralstrategygroup.com.