The New Rules of strategy – part 4

Diagnose organizational susceptibility to bias…

Every organization has its own culture, drug whether designedly so or not. Like the personality of an individual, culture is multi-layered. At the centre are fundamental drivers of behaviour – motivations and values. These shape the surrounding layers which encompass attitudes, beliefs, expectations and assumptions. All this is manifested in the outer layer of behaviour – decisions, communications, actions and language – and celebrated in the organizational artefacts on display for all to see, staff rituals and routines, the often told myths and legends about great deeds, and the symbols of respect accorded to those with seniority and responsibility.

A strong culture creates the alignment necessary for effective execution. But a failing company may also have a strong culture – just one that is taking the organization the wrong way. Whether a strong culture is a help or hindrance depends on how useful it is to overcoming the challenges the business faces. These challenges evolve over time and problems arise when corporate behaviours fail to adapt in parallel.

Senior management teams also have their own sub-cultures. There is a tendency (due to in-group bias) for like to promote like – or like-minded at least. A common mind-set generates efficient working practices but not effective ones if poor decisions arise from a common set of blinkers. These blind spots stem from the unspoken assumptions about the organization – what it does, why that is important, where it competes, how it succeeds, etc. – all of which can introduce framing bias.

Framing biases are also introduced by the frameworks used. Generating alternative ways of looking at strategic challenges opens up discussion. Even if the prevailing beliefs and assumptions are deemed to be fine, at least the blindness to risks inherent in the current

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approach is reduced.

The best way to counteract the biases from assumptions hidden in organizational cultures is to identify and then challenge them. Reviewing high level objectives and the key performance indicators that are tracked identifies priorities and the implicit assumptions (notably about cause and effect) that such prioritization contains. Assessment of strategy development processes and the documents that result will also highlight which factors or challenges are seen as most important.

The process of challenge may not change the common assumptions that bind the organization together nor lead to the culture being questioned. However the chances of dangerous blind spots becoming apparent are much improved.

…Also encourage contrarian instincts…

One common blind spot is the tendency of companies in a particular industry to behave like a herd and all do the same thing at the same time. Herding leads to imitation and convergence, resulting in commoditization and a downward spiral in profitability as there is no differentiation other than price.

As everyone is after the same capabilities and assets, another consequence is paying over the odds for those that appear to be in short supply. This is most expensively manifested in overpaying for acquisitions when a fashionable sector or business model allows potential targets to command far higher prices than the discounted value of the future cash flows they will generate.

Avoiding the commoditization trap requires contrarian instincts – first thinking about doing the opposite to what everyone else is doing. Differentiation requires being different, and the more marked the differences, the more sustained the competitive advantage it delivers will be.

Being a contrarian may not come naturally to strategists as the graduating classes of leading business schools, a common seeding ground for strategy roles, have frequently been cited as good contrary indicators. When newly minted MBAs are drawn in exceptional numbers into one particular sector, it is because only at its cyclical peak can the component companies offer the salaries necessary to attract talented but heavily indebted business school graduates. But studying the history of booms and busts from tulip mania in the 17th Century to the recent sub-prime disaster can help. Recognizing the seeds of such booms and understanding the costs borne by those caught up in the busts provides fertile ground for contrarian instincts to flourish.

…And imbue strategy development with checks and balances

Contrarian instincts also help to mitigate the chances of groupthink – when like-minded executives mutually reinforce their shared views to the detriment of serious consideration of alternatives. This typically results in confirmation bias – just considering supportive evidence – and overconfident over-optimism about the likely success of the favoured course of action.

Contrarianism can be organizationally embodied by establishing the role of Devil’s Advocate so that important decisions are fully challenged and discussed. But other techniques can also be instituted (all of which are expanded on in more detail in the sections on Prediction Prejudices and Evaluation Errors).

The risk of overconfidence compounding over-optimism can also be mitigated by undertaking Pre-Mortems – assuming failure one year on from the launch of an initiative and seeking to divine the reasons for that failure. Also by asking people to provide twelve reasons for proceeding – the cognitive strain involved in generating that many ensuring that confidence is not excessive. And if these reasons and the resulting views on whether to proceed or not must be submitted in advance of any discussion, again the risk of groupthink is reduced.

Cognitive strain increases the likelihood of challenge by engaging critical faculties. And it can also be introduced by ensuring that strategic decisions are based on written documents rather than abbreviated slide presentations with flashy diagrams and quasi-hypnotic charts. Ideally these documents would contain a barely legible font and colour combination to ensure close and irritated scrutiny – grumpiness also increasing the chances of sceptical (rather than compliant) review.

What all the above do is insert discomfort into the decision-making process. One of the biggest implications of behavioural economics for strategy development is that a comfortably made decision is likely to be less effective than one that seems difficult to make. If a decision seems easy, the chance that some of the negatives have been ignored – for reasons of innate prejudice, introduced biases or cognitive distortions – is high. In mitigating these effects, a little discomfort goes a long way with the likelihood that better strategies will result.

* * *

This is the final post in this particular series on what we believe should be the New Rules of strategy development. While imperfect, as all approaches are, we believe they create an approach

to strategy development that makes it is harder for bias to flourish giving the strategies created more chance to generate the intended results.

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