There is no shortage of examples of failures of strategic decision making. These failures are of two types: 1. business leaders not doing what they should have (e.g. Yahoo! could have bought Facebook for $1b billion; it is now worth $300 billion), 2. and doing what they should not have (Quaker Oats destroying 80% of shareholder value in their purchase and handling of Snapple).
Today’s world is one of geopolitical instability (e.g. GFC, Brexit, Eurozone future, ISIS, Trump, …) and digital technologies creating or enabling an exponential growth in data, emergence of new business models and disruptive competitors, and changing / increasing customer expectations.
For publicly listed companies, it seems to be getting more difficult to make strategic decisions in today’s world. U.S. public companies now have a one in three chance of being delisted in the next five years, whether because of bankruptcy, liquidation, M&A, or other causes. That’s six times the delisting rate of companies 40 years ago. [1]
Strategic decisions typically have these characteristics: they are once-off or rare, require some prediction of the future, have at least one variable that is inherently uncertain, and are made by people.
There are many reasons for strategic decision failure. In this article, I highlight five myths that contribute to undermining the quality of strategic decision making. I call them myths because they are believed by many (perhaps most) people, but I assert that they are all untrue in the world of strategic business decision making.
Our intuition is mostly reliable
We/others make reliable predictions
Uncertainty can be ignored or assumed away
Cognitive biases are academically interesting, but not a real business issue
We should measure success by the outcome achieved, not the process followed
1. Our intuition is mostly reliable.
Myth! Our intuition is only reliable when three conditions are met. See Reliability of Intuition? and Instinct, Intuition and Insight.
2. We/others make reliable predictions.
Myth! Our prediction accuracy is awful, even for experts – see [An inability to Forecast]. Recent political events bear this out convincingly.
3. Uncertainty can be ignored or assumed away.
Myth! Uncertainty is unavoidable, yet modelling it well can give a competitive
edge.
Imagine that maximizing NPV is the key objective (as it so often is) and that there are two alternative strategies, one has an NPV of $100 million, the other of $80 million. Clearly the first strategic alternative should be selected, right? Not necessarily! If we embrace uncertainty and are thus able to describe an 80% confidence interval for what each strategy will deliver, then we might view things quite differently. Say the first strategy has [$50m, $100m, $110m] as its 10th, 50th and 90th percentiles and the second strategy has [$70m, $80m, $130m]. Now it is no longer obvious that the first alternative is better, in fact I would guess that with this probabilistic insight many executives would now select the second strategy.
4. Cognitive biases are academically interesting, but not a real business issue.
Myth! Biases are pervasive in the business world and can be big and bad. See [The Mother of all Biases] for brief coverage of confirmation bias. In future posts, I will cover other cognitive biases, like overconfidence bias, and show how they too can be value destructive.
5. We should measure success by the outcome achieved, not the process followed.
Myth! While 7 out of 10 companies rate the quality of strategic decisions on the business outcomes achieved [2], I argue in Reward good effort, not outcome that this is wrong. But, because this myth is so widely and deeply held, the process for making strategic decisions is not given the attention it warrants and hence few organisations invest in developing and following a good strategic decision making process. And neither do they seek to learn from what worked well and what didn’t in previous decisions so as to drive improvements in their strategic decision making capability.
Imperative:
1. Accept that these are myths
2. Use a good decision making process that addresses these five points
References:
[1] “The Biology of Corporate Survival”, (HBR, Jan-Feb 2016), Martin Reeves, Simon Levin, Daichi Ueda
[2] Accenture Research, December 2015