Exploring behavioural science can be quite humbling. It shows us how easily and profoundly misled and distorted our thinking can be. Strategic decision makers, being people (generally), are also susceptible to cognitive biases. The McKinsey Quarterly sums it up with “Left unchecked, subconscious biases will undermine strategic decision making” [1].
As a psychologist, Gary Klein observed that much of what psychology was attempting to do was help people overcome their issues [2]. But, there was an important exception – Martin Seligman, considered to be the pioneer of positive psychology, was looking to add meaning and pleasure to people’s lives [2]. So, Klein, as a researcher of decision making, recognized that so it should be with decision making. Not only should we counteract the biases that distort our decision making, but for truly great decisions we needed great insights too. Klein summarised it neatly as “performance improvements = error reduction + insight generation” [2] (actually Klein used up arrows and down arrows, which I have interpreted as reduction and generation)
Now, as strategy consultants, my colleague [3] and I, were driven to the obligatory 2x2 to describe Klein’s equation. Imagine the vertical axis as error reduction and the horizontal axis as insight generation with both labelled from the origin as low to high.
This gives a top left quadrant (high error reduction, but low insight generation) of “missed opportunities” because error reduction is high, but insight generation is low, i.e. the decision makers are great at critical evaluation, but they are starved of great ideas and hence opportunities can be missed. Kodak, Blackberry, Yahoo! These were industry leaders that should have owned the future of their respective industries (photography, smartphones, search), but missed the opportunity. In other words, companies in this quadrant don’t do what they should have done.
The 2x2 gives a bottom right quadrant (low error reduction, high insight generation) of “reckless choices”, where there is no shortage of ideas, but there is inadequate robust critique of those ideas allowing companies to pursue strategic initiatives that are reckless. The M&A track record is testament to this. Approximately 50% of M&A deals result in “partial” or “substantial” value erosion [4]. There are headline examples like Quaker Oats’ acquisition of Snapple where 80% of the acquisition price was destroyed. It is not just M&A. Market entry, new product launches, large IT projects and capital projects share similar dismal results. In this quadrant, companies do what they should not have done … and could have avoided, had they applied good error reduction techniques.
The bottom left quadrant of (low error reduction, low insight generation) is hardly worth talking about. Here companies cannot come up with good ideas, nor critically assess which of their bad ideas to pursue. So, moving swiftly along.
The top right quadrant is the place to be. Good insight generation coupled with good error reduction. In today’s complex, uncertain and fast changing world, it has never been more important to be in this quadrant. Making reckless choices or missing opportunities as your industry context shifts dramatically, puts your organisation at elevated risk. In fact, from a recent HBR article, “public companies have a one in three chance of being delisted in the next five years” [5].
So, what does it take to be in the upper right quadrant? Readers of my weekly blog will already know part of the answer. A good strategic decision making process. But it’s also about the people. Good error reduction requires strong critical thinking capabilities. And good insight generation requires high levels of creativity. It is seldom that an individual will be a good critical thinker and a good creative thinker. So, it requires a team of people with complementary skills collaborating constructively.
References:
[1] “The Case for Behavioral Strategy”, McKinsey Quarterly
[2] “Seeing What Other’s Don’t: The Remarkable Ways We Gain Insights”, Gary Klein
[3] https://www.linkedin.com/in/sudeshan-govender-6432ba3
[4] “Seven catalysts for merger integration success”, Accenture, 2009
[5] “The Biology of Corporate Survival”, Martin Reeves, Simon Levin and Daniel Ueda.