Have your companies had difficulties developing 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” in 1985. Why did the company embark on such a colossal misstep? Certainly Coca Cola was attempting to improve its financial performance and they viewed Pepsi followers as primary cola-inclined prospects. But how could tampering with a successful formula and risking alienation of a loyal customer base be a sound strategic move? Do you think the company thoroughly examined this strategy before implementation? Probably not, since Coca Cola reintroduced its original formula three months after the New Coke launch.
So, how is it that even the best can make strategic mistakes? Are there common factors that place companies at risk of poor strategy. I discussed two barriers to effective strategic decision-making in my previous post. In this article I’d like to discuss two others:
3. Tendency towards accepting a satisficing strategy
4. Believing effort to drive strategy is wasteful
Satisficing behavior. The third barrier to effective strategy formation is the tendency to satisfice. This refers to an executive team settling for an acceptable strategy rather than driving towards a strategy that could maximize business outcomes. Even though it is logical to assume that business executives would want to collect sufficient facts and analyze the situation rigorously enough to maximize their company’s business strategy, executives rarely devote exhaustive effort to address their strategic issues. Quite frankly this should not be surprising. How often have you had enough time to perform all the analysis you’d like before the decision due date arrived? Have you had all the resources you wanted to drive important projects? Usually time pressures and cost constraints prevent executives from the rigorous examination required.
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.
So, when satisficing is allowed to occur, not all the important factors for making the decision are uncovered, nor important facts for guiding the decision collected. As a result, satisficing jeopardizes the decision outcome because the executive has no idea whether uncollected facts could have identified a different strategy.
Wasted effort. The final executive tendency is the belief that strategy requires too much effort, or the required effort will have little impact on the company’s performance. When this perception persists, most often executives feel their time is better spent tackling those operational tasks that will drive financial performance.
First, let’s recognize the obvious. Strategy formation is a complex task and usually requires a lot of resources. Current strategy formation techniques are onerous, requiring significant effort from the company’s most expensive employees. And if a company chooses an ad hoc approach to setting strategy, it is likely the executive team ventures off-track, performs redundant activity, and probably never reaches a satisfactory conclusion. No wonder many executives feel their time is better spent handling operational problems that can drive short-term financial performance.
Overcoming these strategy barriers. Creating awareness of the barriers that can hinder your company’s strategy creation is the first step toward preventing them from negatively impacting you.
I also believe that implementing an efficient strategic decision process is necessary. Executives need an approach that leverages our human nature to satisfice and avoid wasted effort. The key is to simplify the strategy formation process by providing a list, like the one shown here, that helps executives identify all the important factors, called decision criteria, necessary to address their strategic challenge.
So how do decision criteria overcome sasticing behavior and a tendency to view strategy as wasted effort? Breaking a strategy problem into separate criteria makes analysis more manageable; smaller pieces permits better focus, data collection of only relevant information and easier analysis. 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. The executive repeats these steps until all the important factors have been analyzed. After a conclusions is made for each criterion, the results for all are compiled into a simple table that is easy to analyze. This approach makes overwhelmingly complex issues become more manageable and less time-consuming.
Another way to mitigate the impact of these barriers 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 strategy under consideration to the criterion ranking scale, which allows us to select the best option.
(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 the above 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 would not be considered a viable opportunity. At the opposite end of the scale, a strategic alternative that generates $5B or more is a very good investment, because it generates a revenue stream that meets the company’s revenue target.
Conclusion. We all know that setting a solid business strategy can lead to long-term success. By utilizing newly created simple techniques to form company strategy, executives can avoid those tendencies that prevent them from tackling this important activity.