All companies seek to establish a commanding position in their marketplace. But how many know that dramatic success can lead to dismal failure, if a firm is not careful?
Here’s a little background. Research shows that executives tend to be overconfident in their capabilities. They believe that their analytical ability is greater than it really is. As a result, they may not think through situations as well as they should. After all, if an executive has great analytical skills, in all likelihood, the first concepts that come to mind are probably the most important anyway.
Executives also tend to overestimate their company’s capabilities. Firms are prone to do this especially after achieving huge market success. This causes them to underestimate their competition or worse, think they have control of the customer.
So how does this fit into my opening statement? Perhaps the biggest challenge facing an overconfident leadership team is overcoming the inertia of success. Now this statement may seem a bit odd to you. But here’s the logic. You know it’s important to celebrate success. Promoting success can generate belief in the company and a positive attitude. This impacts employee attitudes which can translate into employee retention and improved work ethic. This is all good for the company. However, there is a fine line between promoting success and reveling in it. Going too far can result icomplacency, which if it causes the firm to take a laissez faire approach to business strategy is extremely risky, as demonstrated by Schwinn’s strategic mistake.
For decades, Schwinn bicycle company was the dominant manufacturer. As success followed success, company management started to believe its own press clippings. Managers and employees gloried in the company’s ability to predict market needs and fulfill them. But it turns out they were not thinking broadly enough.
One day, an avid cyclist approached Schwinn about a new kind of bike; one that would withstand the rigors of biking on gravel and dirt paths. Cycling would no longer be limited to city streets. Cyclists could bike in nature preserves and over mountains. This cyclist felt most bikers would love the opportunity to bike through natural scenes such as this.
Schwinn’s reply? “We know bikes. You are an amateur. We know this market better than anybody.”
As a reader of the Schwinn case our own hubris may cause some of us to dismiss it; we ignore the lessons the past could teach us. In hindsight, we see the irrational decisions made by executives and mock them for their stupidity. We develop a rationale that explains why we would never make such a huge mistake. But Schwinn’s business failure was not caused by stupid people or poorly run companies. We all need to understand that this could happen to us, today.
This case is intended to teach us that overconfidence opens a company to complacency and thereby tempts the executive team into applying less rigor in the identification and evaluation of a strategic issue. This leads to poor strategic decisions. Bill Gates acknowledged this by saying, “Companies fail when they become complacent and imagine that they will always be successful.”
So how can a failure like this be avoided in your firm? By using a defined process for making the strategic decision like the Lean Strategic Decision Model®. A strategic decision process demands that companies implement a rigorous approach to the business strategy challenge, regardless of the circumstances. A process doesn’t get cocky. It doesn’t allow executives to slack off. And your strategy teammates make sure that everyone is putting in the work to arrive at the best business outcome.
A strategic decision process would have ensured that the Schwinn decision team at least investigated the claims of the cycle enthusiast. Don’t fall into the overconfidence trap. Make sure you give strategic issues the respect they deserve and examine them rigorously.