How biases, politics and egos trump good strategy
When creating a strategy for
your organization there are many obstacles. It's important to know what they
are and how to get around them.
Peter Drucker famously
said that “culture eats strategy for breakfast.” Nowhere is that more evident
than in meetings to decide corporate strategies. In those rooms, egos and
competing agendas, biases and social games reign. That’s because strategy isn’t
the only thing at stake. Jobs - even careers - are on the line.
The budget process
intrudes, too. You may be discussing a five-year strategy, but everyone knows
that what really matters is getting a “yes” to the first-year budget. The
outcome of all these dynamics is the Hockey stick projection, confidently showing future
success after a dip to account for first-year spending—a bold forecast that,
more often than not, fails to materialize.
A few years back, the
former CEO of a major Las Vegas casino operator told my colleagues and me that
he wished just once an executive would say to him, “Man, things are not well
down here, and, to tell you the truth, I can’t tell which way is up. I really
have no idea why things are heading south - but we are on it, rolling up our
sleeves to turn this sucker around.”
Why is this social side
of strategy so pervasive? Because strategy development poses exactly the kind
of problems for which the human brain is least adapted. People are prone to
many well-documented unconscious cognitive biases that exist to help us filter
information in day-to-day decision-making. But these unintentional mental
shortcuts can distort the outcomes when we are forced to make big,
consequential decisions, infrequently, and under high uncertainty - precisely
the type that we confront in the strategy room. Even the most seasoned executives
have only limited experience and pattern recognition in these situations.
Trying to improve your strategic decisions is like working on your golf game by
practicing blindfolded, and not finding out if your ball went into the hole for
three years.
Before you can tackle
the social side of strategy, you need to know what to look for.
START WITH THE COGNITIVE BIASES…
There are many
well-documented biases, but these are among the most dangerous in the strategy
room.
Overconfidence:
Experts become more confident
as they gather more data—even though the additional data might not make their
projections any more accurate. Overconfidence is self-reinforcing, too. It
leads people to ignore contradictory information, which makes them more
confident, which makes them more likely to ignore contradictory information. We
convince ourselves that we have a winning strategy this year even though we
continue doing pretty much what we’ve always done.
Confirmation bias:
When you bring together
a bunch of people with shared experiences and goals, they typically wind up
telling themselves stories, generally favorable ones. One study found, for
instance, that 80% of executives believe that their product stands out against
the competition—but only 8% of customers agree.
Survival bias:
This is one to which
the strategy processes is particularly prone, because we only see what
happened, not what didn’t happen. We can precisely measure the behavior of the
customers we have, but what about the silent voices of the customers we don’t
have?
Attribution bias:
This one often kicks in
when a target is missed, with blame piled on the most convenient cause
available, usually some one-off event—unseasonable weather, an IT outage,
etc.—even though such one-off occurrences seem to happen every year. With
failure dismissed as an externality, the management team closes ranks and
decides to double down and re-establish the goal. “We lost a year, but we’re
going to get back on track.”
…THEN ADD THE SOCIAL DYNAMICS
As hard as it might be
to overcome those individual biases, agency problems are the real torpedoes to
strategies. They’re fueled by the reality that managers act in their own
interest, not purely in that of the enterprise. Do these sound familiar?
Sandbagging:
“I’m only going to
agree to a plan that I know for sure I can deliver. My reputation is on the
line, and I can’t risk being the one division that misses budget.” Individuals
will often have a different attitude to risk than their overall enterprise
does.
The short game:
“Someone else will be
running this division in three years, anyway. I just need to milk performance
for the next couple of years, get a good bonus and the next promotion—or maybe
get poached by our competitor.” The motivations of the executive are not
automatically aligned with those of the owners.
My way or your problem:
“I know this business
and industry better than the CEO and better than the board. They’ll just have
to believe what I tell them. If I don’t get the resources I ask for, then
there’s my excuse for not delivering.” The line executive has inside knowledge,
and often the CEO and board have little choice but to accept their version of
the truth. Market share can be defined favorably by excluding geographies or
segments where the presenter’s business unit is weak.
I am my numbers:
“I get judged by my
numbers, not by how I spend my time. I’m just going to work hard enough to hit
my targets, but not a lot more.” One’s supervisor can’t directly observe the
quality of effort, and results can be noisy signals. Were those poor results a
noble failure? Were those great results dumb luck?
No matter the precise
motivation, executives will use every bit of social power to improve the
chances of their business succeeding. So how do you overcome these strategy
room dynamics? You need an objective benchmark against which to measure a
proposed strategy’s chances of success.
https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-strategy-and-corporate-finance-blog/how-biases-politics-and-egos-derail-business-decisions?cid=strategybook-eml-alt-mip-mck-oth-1801&hlkid=59fea3a8985e41ae8db66931db8f90ec&hctky=1627601&hdpid=912b58a3-f6ce-49ab-9cb5-69a2dc040c8d
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