How many times have you run into the senior manager who has all the answers? Now, I’m not talking about the person who seems to come up with the right answers. I’m talking about the individual who is so confident in his/her abilities that they consistently make a “gut call,” regardless of the situation. If you are like many of the people I talk to, you’ve run into these people all the time. Here’s the dilemma; many of these managers are making bad decisions! In fact, a private consulting firm’s recent analysis of value degradation for US companies showed that 80% of shareholder value loss was the result of poor strategic decisions.
Executives often think the solution to a strategic issue is simple enough to base their decision on past experience, without performing a proper evaluation of the situation. The problem with this approach is obvious; none of us know enough to make snap judgements on complex issues. You’d think this would be obvious to all of us. But the fact remains in many organizations senior managers approach their strategic issues too simplistically. This phenomenon has disaster written all over it.
In my experience, poor decisions occur when executives ignore factors that could impact their strategic decision-making. Taking a simplistic approach to strategic decision-making opens the executive to the “blind-quadrant” conundrum. We don’t know what we don’t know. How can managers ensure that all factors critical for success are included unless they spend time to analyze the situation? It is just reckless to follow “tried and true” methods for decision-making without considering how the situation demands new data.
I recently heard of an example that demonstrates this point. A company decided to purchase a home infusion business. Based upon the financial evaluation, the business looked exciting. There was growing patient demand, and the profit margin was very high. Since government funding drove almost all of the revenue, the financial foundation seemed solid. After this assessment the company bought this business. But within a few months of the acquisition, the government significantly cut the reimbursement for home infusion, nearly eliminating the entire profit margin. The new corporate owner would lose money on every patient served.
What happened? Certainly the acquiring company executives did not take a stupid pill before making this acquisition decision. They examined the financials and the market; everything looked good. Well, at least everything they examined. Perhaps, confident in their standard “due diligence” checklist, they assumed the decision was simpler than it really was. Failing to examine their blind quadrant cost this acquiring company.
Because, not all factors important to this strategic decision were considered. If the acquiring company had investigated new factors that could impact their decision, they could have identified a new criterion; namely government reimbursement trends. The company would have learned that the government targets very high-profit medical services for cost savings. Once such an opportunity is identified, the government usually implements regulations either to control access to the service or reduce payments. In fact, if the acquiring company had performed this investigation, they would have learned that home infusion reimbursement rates had been very high a decade ago. Then rates were slashed. Only recently was the rate dramatically increased. With this knowledge, the company would have had a better sense of the profitability risk it was inheriting with the acquisition.
Why do strategic blunders occur so frequently in today’s corporations? Research shows that executives are overconfident in their decision-making competence. This belief fools them into thinking that identifying the best strategic option does not require great effort. So executives limit the number of disciplines involved in the decision, the data they collect or the amount of analysis they perform.
There are other factors that seduce us to consider complex issues too simplistically. Business executives tend to overestimate their analytical ability, their company’s competencies, and the firm’s strategic position. As a result, there is a bias to treat a decision simplistically because of the false confidence that as top-performing executives or companies they can easily overcome any unforeseen barrier.
But, let’s face it. Deciding that a strategic issue is simple enough to base the decision on intuition is not what really is going on. We executives are extremely busy. We have to make decisions and move forward. We don’t have time for complex analyses. And it is also true that humans have a limited capacity to deal with complexities. As a result, we managers tend to compress the issue into easily identifiable factors. Then we hope that we can resolve the strategic issue by gathering data on only these few factors.
So let’s not delude ourselves. It is an illusion to think today’s strategic decisions are simple. On the contrary, today’s strategic decisions are increasingly complex. They impact many more disciplines and departments than in the past. Scientific and technical issues abound. Regulatory changes impact the development process and product positioning. While focusing on existing competitors, offshore companies enter and change market dynamics. Today’s adjacent technology becomes tomorrow’s disruptive competition. Intellectual property awarded on one continent is ruled within the public domain in another. To make matters worse, all these issues intermingle, impacting our ability to make good decisions.
So what is the answer? If human nature biases us towards simplicity, how can we handle complex issues? By utilizing a system that breaks the complexities of the strategic issue into manageable pieces. These can be independently evaluated and combined for full analysis. More on this approach in future posts.
If you missed any of my previous posts, visit the website www.leansdm.com/blog.This site has a link that will let you email me with questions. You can also view other strategic decision posts on my LinkedIn profile page. Thanks for reading.