Have the companies you’ve worked for experienced difficulties formulating a winning strategy? Some companies have this problem all the time. But even the best companies make mistakes.
As evidence, consider Coca Cola’s introduction of new Coke. Why did this company embark on such a colossal misstep? Certainly the company was attempting to improve its financial performance and they viewed Pepsi followers as a cola-inclined customer group. But how could tampering with a successful formula and risking alienation of a loyal customer base be a sound strategic move? Is it reasonable to think that the company examined all the important factors to this strategy when they made this decision? Probably not, considering how quickly the company overturned its decision after the negative customer reaction.
It is possible that executive bias played a role in this strategic blunder. In my previous article, I indicated that there were 5 executive biases that form barriers to effective strategic decision-making. I identified the five barriers as:
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. Tendency towards satisficing behaviors (settling for suboptimal outcomes and not maximizing decisions)
5. Believing effort to drive strategy is wasteful
In Part 1 I examined the first three tendencies. Here, I am going to examine tendencies 4 & 5.
The fourth barrier to effective strategic decision-making is the tendency to satisfice. First, understand that maximizing behavior is the optimal approach to strategic decision-making. The more you examine the issue, the more data you collect and the greater the analysis, the better your decision outcome will be.
But executives rarely perform exhaustive searches when confronting their strategic issues. As a result, not all the important factors for making the decision are uncovered, nor important facts for guiding the decision collected. By relying on what is easy, executives fail to maximize their decision. This approach is “satisficing.” From the executive’s perspective, even a satisficing decision can advance the company’s position. But, a haphazard approach to resolving the strategic issue, like that mentioned above, creates a situation where alternatives and facts to make the decision are suboptimally derived. This leaves the decision outcome to chance. The executive has no idea whether another alternative could have maximized company performance.
Why do executives fall into this trap? Usually time pressures and cost constraints are the primary culprits. And really, in your business career, how often have your felt you had enough time to perform all the analysis you’d like to before the due date arrived? Have you had all the resources you wanted to drive important projects?
Satisficing behavior is related to a concept termed “bounded rationality.” This concept recognizes that we executives try to make rational decisions; we’re not illogical people. We’re not trying to gamble our careers away. But we are only logical in areas and to the extent that we collect enough facts to apply our logic. Satisficing behavior limits our understanding of the problem, hence limiting the extent to which we can be logical. Our logic is constrained or bounded by what we don’t know.
There is a way to overcome these complexity (mentioned in the previous article) and satisficing tendencies. Using a strategic decision approach that leverages our human nature to evade complexity. Simplification occurs through a process where strategic issues are analyzed in smaller pieces, called criteria, that are easier to tackle.
So how does this approach overcome executive tendencies? Instead of trying to resolve the overwhelming task of picking the best solution through one huge analysis, the executive can focus on one criterion at a time: analyze it, draw a conclusion and then move on to the next. Then the executive repeats the process until all the important factors have been analyzed. These independent conclusions are compiled into a simple but comprehensive analysis that guides the final decision. This approach makes overwhelmingly complex issues become more manageable and less time-consuming. Breaking the issue into smaller pieces permits better focus, data collection of only relevant information, easier analysis and more efficient solution selection.
The final executive tendency is the belief that it takes too much effort to resolve a strategic issue. This isn’t meant to imply that executives want to kick back their feet and relax. Most often executives feel their time is better spent tackling those operational tasks that will drive financial performance. First of all let’s state the obvious. Complex issues like strategy will require resources. And in many instances they may require a lot of resources. Current approaches for making strategic decisions require the executive to collect too much information. In the absence of an efficient process the executive can go off track and focus on subject matter that is not important for the decision. These are just two reason why most organizations use more resources for strategic decision-making than they need to; their strategic decision process is inefficient.
A better strategic decision process provides a framework for efficient decision-making. First, a defined process avoids the delays teams encounter in deciding upon the next steps. A defined process can actually save time by eliminating redundant effort and preventing collection of too much or incorrect data.
One way to streamline analysis and improve efficiency in strategic decision-making is through a process called criteria ranking. This involves setting up a broad classification scale for each criterion used in the analysis. We compare the data for each alternative to the criterion ranking scale, which allows us to rate each potential strategic solution, and ultimately select the best option. Here’s an example. Note there are five separate categories, from worst to best as you move down the table.
(in $B / year)
|Very poor potential||<$.8|
|Poor potential||$.8 – $2.3|
|Neutral||$2.4 – $3.6|
|Good potential||$3.7 – $5.0|
|Very good potential||>$5.0|
In this example we have established a criteria ranking scale for revenue potential. A strategic alternative that generates revenue of $.8B or less is a very poor investment for the company; it is not considered a viable opportunity for the company because it does not meet the revenue requirement established in this analysis. At the opposite end of the spectrum, a strategic alternative that generates $5B or more is a very good investment, because it generates a high revenue stream that meets the company’s revenue target. This chart also indicates that with a revenue potential of $2.4B – $3.6B, we are indifferent to the strategic alternative.
I have elaborated on the barriers presented to strategic decision-making by executive biases. Recognize I’m not inferring that these biases are executive flaws. Rather, they are business approaches that have allowed us to be successful in managing our day to day activities that are being misapplied when we are facing strategic decisions.
There are other barriers hampering strategic decision-making. After all, if there weren’t a lot of barriers, this strategy formation task wouldn’t be so hard. Most strategic decisions are made in a team environment. And team dynamics can prevent effective strategic decision-making. We will cover these kinds of strategic decision barriers in a future article.