If some of you are reading this discussion out of frustration with your company’s strategic decision approach, I know just how you feel. I’ve wondered about this many times throughout my career. But while carrying out my responsibilities designing and implementing sales and marketing programs, I noticed that many of the strategic questions I asked were never evaluated. And in my estimation, failing to address these questions damaged my companies’ ability to maximize their opportunities.
Eventually, I reached the conclusion that many companies excel at operational activity but fail at strategy formation. After considering the situation for a time, the reason became apparent. Senior executives are judged on quarterly results. Period. As a result, they spend practically all their time on activities that drive the short-term financials. CEOs will tell you that the quickest route to failure is to consistently miss quarterly financial expectations because today’s investors demand short-term revenue and profit progress. So it should come as no surprise that issues impacting long-term financial results can escape the attention of corporate leaders. The fallout from today’s short-term focus is that strategic decision-making is the poor stepchild in business circles today.
Why is strategy important? Think about strategic decisions as a corporate sextant. A sextant is the tool used by sailors to track the movement of the stars as a guide for plotting a ship’s course. At points throughout a corporation’s journey, the firm will face junctures where it must modify its course, just like a ship, in order to reach port. These junctures are the points where strategic decision-making occurs. Choose poorly and the company strays off course, perhaps so severely that the cargo spoils.
I’ve identified five thought patterns, or “executive tendencies” that create barriers to effective strategic decision-making. The 5 barriers are:
1. Finding the time to make strategic decisions
2. Overconfidence in abilities
3. Concerns about the complexity of the strategic decision facing the company
4. Satisficing not maximizing behaviors
5. Believing effort to drive strategy is wasteful
The first barrier was discussed in a prior blog, so I won’t deal with it here. If you missed it, you can find it here: http://leansdm.com/strategic-decision-myth-1-i-dont-have-time/
The second barrier is overconfidence. There are two types to discuss:
• Research shows that executives tend to overestimate their analytical ability. They think the solution to a strategic issue is simple enough to base their decision mainly on past experience, without performing a proper evaluation of the situation.
• Executives also tend to overestimate their company’s capabilities or market position. Management may think competition is weak, whether because of resource limitations or an inability to execute. As a result, management’s plan of action is certain to work. And if the executives miscalculated, the plan would need only a minor adjustment to be successful. Or, perhaps management believes the company is the market trend leader, capable of driving trends for the company’s benefit. Confidence in your capabilities is essential; arrogance about them is damaging.
So, how does overconfidence affect strategic decision-making? Overestimating either personal or company capabilities can tempt the executive into performing a less rigorous evaluation of strategic issues. And as a result, poor strategic decisions occur.
A third executive tendency affecting strategic decision-making is concern about the complexity of a strategic issue. Let’s face it, there is an element of truth here; strategic issues are complex.
This is due to a few things. Strategic issues are complex because of the uncertain environment companies face. There is uncertainty about customer needs, ability to pay, and changing demographics. Uncertainty from the competition: their new products, strategies, or tactics. Uncertainty from changing regulations or societal values. While operational tasks can be affected, environmental uncertainties affect strategic activity the most.
Another reason for increased complexity is that strategic decisions have an impact on the entire company so they affect numerous company departments. Since multiple business functions are involved executives with very different attitudes, cognitive abilities and experience have input into a strategic decision. While this divergence of thinking ultimately drives to a better decision, in the beginning these different perspectives require time for bridging before alignment of ideas can occur. In addition, the disparity of expertise between the functions may make it difficult for one discipline to understand the detailed explanations of the other. Congruence can take time.
So how does complexity impact strategy? We humans have a limited capacity to deal with complexity. So, executives may view complex problems as overwhelming. When this happens, action could be delayed or even avoided.
Even if the momentum to resolve the strategic issue builds up enough to start a strategic evaluation, complexity drives business people to respond suboptimally. Often executives respond by oversimplifying. First, by limiting the number of strategic solutions considered. Limiting solutions usually results in poor decisions. A second way executives simplify is by reducing the number of factors they will use to evaluate the strategic solutions. Executives understand that a reduction in the number of criteria limits the amount of facts to collect, hence reducing complexity. But as a result, the executive must hope that he or she has identified the right factors and not left out any important ones. Another way management simplifies is by reducing analysis. Perhaps they won’t collect all the data. Or they may not perform the right analysis. All of these approaches lead to suboptimal strategic decision-making.
Some of these barriers to strategic decision-making may exist in your own organization. Creating awareness of these strategy-limiting behaviors should help your company grapple with them.
The next discussion will address the other two executive tendencies that serve as barriers to strategic decision-making.