Perhaps some of you are reading this discussion out of frustration with your company’s strategic planning approach. I’ve had those feelings many times throughout my career. Often, 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 earnings. 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 share value 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 should strategy require more attention? 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 two thought patterns, or “executive tendencies” that create barriers to effective strategic planning. The 2 barriers are:
1. Overconfidence in abilities
2. Concerns about the complexity of the strategic decision facing the company
There are two types:
• 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.
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.
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. Environmental uncertainties can have a huge impact on strategic options.
Another reason that strategic issues are complex is because they impact the entire company, which means they affect numerous company departments. Since multiple business functions are involved, executives with very different attitudes, cognitive abilities and experience are needed to set the new strategy. While this divergence of thinking ultimately drives to a better decision, in the beginning these different perspectives can create dissension among team members. 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.
Yet, 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. They might limit the number of strategic solutions considered, which usually results in poor strategy. A second way executives simplify is by reducing the number of factors they use to evaluate the strategic solutions in order to make the strategic issue easier to understand. But when this approach occurs, the executive team must hope that they have identified the right factors and not left out any important ones. Finally, management simplifies 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 is the first step in helping your company grapple with them. Many companies have found that establishing a strategy formation process helps them overcome these barriers and make more effective strategy decisions.