Most business executives implicitly believe these three pieces of conventional wisdom:
1. Find and secure your sustainable competitive advantage
2. Measure the quality of a strategic decision on the outcome delivered
3. Decide quickly and effectively by relying on intuition
But, when it comes to strategic decision making, they are all false beliefs. And they are dangerous. They undermine value creation and might even promote value destruction. Instead …
1. Frequently and fundamentally refresh your business model for competitive advantage
Driven in part by the emergence of more powerful technologies (e.g. artificial intelligence, robotics, internet of things, etc.) and new business models, the rate of industry change and the competitive pressures are likely to intensify.
Are large companies equipped to make the good strategic decisions that will enable them to flourish? Most senior executives believe so, but credible industry commentators believe otherwise.
74% of senior executives believe that: “Their organization currently has the right capabilities in place to inform strategic decisions and make strategic decisions as quickly as needed” [1].
“Public companies have a one in three chance of being delisted in the next five years. That’s six times the delisting rate of companies 40 years ago” [2]. One in two S&P 500 firms will be replaced in the next 10 years [3]; Two in three large firms will fail, be acquired or split up in the next 15 years [4].
This inability to sustain competitive advantage has led some prominent scholars to argue that we have seen “The End of Competitive Advantage” [5]. To remain relevant in a world of “transient advantage” requires making frequent strategic decisions.
The pursuit of a sustainable competitive advantage is a fool’s errand, instead frequently, and often fundamentally, refresh your business model for competitive advantage!
2. Decision quality should be assessed on the process followed
In Judge decision quality on process, not outcome, I wrote that the quality of a strategic decision should be judged on the process followed to arrive at that decision and not the resulting outcome.
In addition to execution, the outcome of a strategic decision is a function of the process followed to make the decision and luck (good or bad). Luck, by definition, is uncontrollable, while the process is controllable. So, the decision maker should take all reasonable measures to follow a process that produces a decision that maximises the expected value of the outcome that the decision maker seeks. The decision maker should also accept that the inherent uncertainties will, in some unlucky cases, deliver an undesired outcome.
For instance, if a particular business opportunity has an 80% chance of delivering $1 million profit and a 20% chance of delivering a $1m loss, then, assuming that the organisation has the risk appetite for a $1m loss, the rational choice would be to pursue that business opportunity – duh! But, what should be blindingly obvious, but so often isn’t, is that in one of five cases this opportunity will deliver a loss. Punishing the executive who pursues this opportunity and draws the short straw is encouraging conservatism that is ultimately value destructive, i.e. the executive who is afraid to take this bet will be leaving value on the table in four out of five cases. On the flip side, if the business opportunity had a 20% chance of winning $1m and an 80% chance of losing $1m, then the cowboy who takes this bet and wins should not be rewarded.
3. Rely on a proven data-driven process, not intuition, for strategic decision making
By now, it should be clear that we need to make strategic decisions more often and we need to invest in a good process for making those decisions. What does a good process look like? Why not be quick and effective by using intuition as Malcolm Gladwell made famous in “Blink” [7]? Well, intuition sure is quick – no argument there. My argument is regarding the effectiveness part. Is intuition an effective approach when making strategic decisions? Nope!
No, cognitive biases, social forces, and probability innumeracy will lead us astray. As noted in “Reliability of Intuition” [Reliability of Intuition], our intuition has been shown to be reliable only when three criteria are met. A stable, linear environment; numerous opportunities to make decisions of that nature, and swift feedback on how that decisions turned out. Typically, none of these criteria are met in the context of strategic decision making.
A few examples that will demonstrate the unreliability of our intuition and the distorting influence of social forces can be found in these articles: Probability innumeracy ([Trust your intuition: win a goat!], [Natural frequencies. No, it's not woo]); Cognitive biases ([The Mother of all Biases], [Don’t be so sure …], [When losses loom …]); Social forces ([Good people do bad things. Why?], [To be liked or to be right?]).
Employ a proven, data-driven process for reliably making high quality strategic decisions and ultimately creating more value.
If we accept that the conventional wisdom are false beliefs, we should infer that (a) we need to make strategic decisions more often, (b) we need to invest in a good process for making strategic decisions, and (c) that process should be data-driven.
So, what should we do about it? In "This time there is a "silver bullet"!" I wrote about what that process should look like. When effectively executed this process will counter the typical failure modes, drive decision quality and ultimately value creation. The four steps of the process are framing, alternatives, evaluation, and planning.
In Framing, we avoid solving the wrong problem. With this process we achieve clarity and focus on what we value, on the decisions we are making, and on the uncertainties we face.
In Alternatives, we risk missing opportunities through lack of imagination and settling for what easily comes to mind. Instead, with this process we generate a broad set of compelling, diverse and executable alternatives.
In Evaluation, our failure occurs when we inadequately deal with uncertainty and model what is easy, not what’s important. Rather, with this process we should identify and model the uncertainty variables that “move the needle” enabling us to select the strategic alternative that maximises our risk return prospects.
In Planning, we create plans that are inflexible and not achievable in budget, time or business case. With this process we create a plan that is realistic and has built-in agility.
Closing with the wise words of Bill Gates: “success today requires the agility and drive to constantly rethink, reinvigorate, react, and reinvent”.
References:
[1] Accenture Research, December 2015
[2] “The Biology of Corporate Survival”, Martin Reeves, Simon Levin and Daniel Ueda, Feb 2016
[3] “Corporate Longevity: Turbulence Ahead for Large Organizations”, Innosight, Spring 2016
[4] “Why Leaders Should Write Their Company’s Obituary”, Bain & Co., March 2017
[5] “The End of Competitive Advantage. How to keep your strategy moving as fast as your business.” McGrath, Rita Gunther (2013), Harvard Business Review Press.
[6] “Judge decision quality on process, not outcome”, Borchardt, July 2017 https://www.linkedin.com/pulse/judge-decision-quality-process-outcome-wayne-borchardt/
[7] “Blink : The Power of Thinking Without Thinking”, Malcolm Gladwell, 2005
[8] “Reliability of Intuition”, Borchardt, September 2016, https://www.linkedin.com/pulse/reliability-intuition-wayne-borchardt/
[9] “Trust your intuition: win a goat!”, Borchardt, January 2018, https://www.linkedin.com/pulse/trust-your-intuition-win-goat-wayne-borchardt/
[10] “Natural frequencies. No, it's not woo.”, Borchardt, January 2017, https://www.linkedin.com/pulse/natural-frequencies-its-woo-wayne-borchardt/
[11] “The Mother of all Biases”, Borchardt, November 2016, https://www.linkedin.com/pulse/mother-all-biases-wayne-borchardt-1/
[12] “Don’t be so sure …”, Borchardt, December 2016, https://www.linkedin.com/pulse/dont-so-sure-wayne-borchardt/
[13] “When losses loom …”, Borchardt, February 2017, https://www.linkedin.com/pulse/when-losses-loom-wayne-borchardt/
[14] “Good people do bad things. Why?”, Borchardt, January 2017, https://www.linkedin.com/pulse/good-people-do-bad-things-why-wayne-borchardt/
[15] “To be liked or to be right?”, Borchardt, June 2017, https://www.linkedin.com/pulse/liked-right-wayne-borchardt/
[16] “This time there is a "silver bullet"!”, Borchardt, December 2017, https://www.linkedin.com/pulse/time-silver-bullet-wayne-borchardt/