Strategic discussions at the senior management level are often missing a clear set of guidelines and can be disjointed and incoherent. McKinsey conducted surveys with hundreds of senior executives and found that very few companies have a comprehensive, focused approach to strategy (see Have You Tested Your Strategy Lately). They developed a set of 10 basic tests and found that fewer than 35% of companies passed more than 3 of these tests. Here are those 10 tests:
- Will your strategy beat the market?
- Does your strategy tap a true source of advantage?
- Is your strategy granular about where to compete?
- Does your strategy put you ahead of trends?
- Does your strategy rest on privileged insights?
- Does your strategy embrace uncertainty?
- Does your strategy balance commitment and flexibility?
- Is your strategy contaminated by bias?
- Is there conviction to act on your strategy?
- Have you translated your strategy into an action plan?
The most useful aspect of these questions is their potential to create a focused discussion that can pinpoint where there may be critical misses in the strategic discussions.
BIAS CONTAMINATION
There are powerful biases (see test eight) that oft lead companies astray by creating critical errors in the strategic thinking process. Danny Kahneman won a Nobel Prize in Economics for identifying many of these psychological mechanisms (see Kahneman’s Nobel acceptance speech), which can seriously interfere with rational decision-making under conditions of uncertainty Of course, attempts to derive the right strategy always operate in conditions of uncertainty because one is trying to make best guesses about an uncertain future. Thus, strategic discussions are often particularly prone to the kinds of biases in thinking that Kahneman and others have demonstrated convincingly.
While there are hundreds of these biases (or, in Kahneman’s terms, ‘heuristics’) that have been experimentally confirmed, among the most dangerous to a rational strategic discussion are:
- Risk aversion: potential losses have a greater impact than potential gains
- Fundamental attribution error: assuming humans are the cause of an event, rather than circumstances
- Selective recall: remembering only those things that support our position
- Honoring sunk costs: pouring more money into failed or failing projects because of previous investment
- Framing biases: inducing overly positive estimates based on one particular framing of a concept
- Over-optimism: our tendency to hope for the best and believe too much in our own forecasts and abilities
- Anchoring: tying our valuation of something to an arbitrary reference point
- Loss aversion: putting too much emphasis on avoiding downsides and so eschewing risks worth taking
- Confirmation bias: over weighting information that validates our opinions
- Herding: taking comfort in following the crowd
There are, of course, many additional potential irrational processes that can enter into strategic discussions, not the least of which is the champion or leader bias, which means that ideas are given greater weight based on the person who is suggesting them (e.g., the CEO), when they may not be the ideas with the most merit.
To overcome such biases, it is extremely helpful to have a neutral third party involved who is aware of these irrational processes and can correct them. Wilson and Brekke (1994) (see Mental Contamination and Mental Correction, provide a detailed process map demonstrating how errors arise and can be corrected. To do so successfully, takes not only awareness of the biases but specific actions to overcome those biases and prevent the contamination.
One aspect of ROI Capital Consulting’s approach to strategic consulting is to identify such biases as they occur during the strategic discussions and prevent the strategy from becoming contaminated by these essentially irrational processes.