How to make sure your company’s next strategy succeeds

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This fabulous article by Charles Roxburgh is a must read for every decision maker responsible for deciding the fate of a proposed strategy. It explores in fascinating detail how the brain tricks leaders into making “rational” decisions that are nothing of the sort. In fact, it reveals that all of us work to a set of biases that we must consciously resist.

While my recent post on Prussian cast iron medals addressed how behavioural economics can work to actively lift value and change perceptions for buyers, Roxburgh’s work is a sobering reminder that rogue decision making is alive and well. Much of what he describes in terms of European financial services is equally applicable to what happens in many other fields. In this post, I highlight Roxburgh’s key observations, his recommendations on how to address them, and the steps I look to take as a strategist to ensure that what I’m doing gets the fairest hearing it can from the decision makers I’m working with.

Settle in please for a longer-than-usual riff on how decision makers can fight the forces of human nature and lift the chances of strategic success:

1. Read the forecasts for any strategy’s outcomes with care. The chances of failure are much higher than we like to give them credit for. Optimism is built into our DNA as human beings, which is vital for creativity, but unless carefully controlled it tends to see even the most careful strategist inserting unrealistic stretch into plans in the sincere belief that such extremes can be achieved.

Roxburgh suggests:

  • Avoid presuming certainty or success.
  • Stress-test strategies under a range of two or four scenarios.
  • Add 20 to 25 percent more downside to the most pessimistic scenario and see what floats.
  • Build flexibility and options into your strategy to enable responsiveness either up or down.

What I also try and do:

Quantify the problem honestly even before you look for answers. Not just how big is the problem, but what are the implications of the problem and have they been addressed. Regular readers will know that I’m a huge believer in the Stockdale Paradox. To that end, I look to maximise the extent and gravity of a problem whilst always believing that there is a viable and positive answer. Being brutally frank about what needs to be tackled can make for some tense conversations and the optimists in the room will quickly label you as a pain the butt, but it’s absolutely vital to avoid drinking in the fairy dust.

It also tells you something that so often gets lost: how big the answer really needs to be based on what’s being tackled, not how big it’s allowed to be based on the budget that’s been assigned.

2. Invest money where it counts, not where it feels good. Richard Thaler’s principle of ‘mental accounting’ is that decision makers subconciously assign various levels of sexiness to different budgets and Roxburgh gives some great example of this in the article.

Roxburgh suggests:

  • Judge every call for investment consistently.
  • Don’t allow money to be reclassified so that it is then acceptable to spend.
  • Remember every dollar is worth a dollar, no matter what it’s spent on.

What I also try and do:

Keep the resources and the problem in the same frame the whole time. Make sure money is spent on the actual problem, and that the problem doesn’t become a reason for money to be spent on something everyone would prefer to be involved with. The very real temptation here is to pin the strategy on the problem: to assign an answer that everyone would like to see happen (and its accompanying resources) to a problem no-one wants to tackle head-on, in the belief that doing so will fix the problem or at least make it more palatable to deal with.

3. Recognise that status quo bias means people would rather ignore what’s really going on. Roxburgh explains that people would rather leave things as they are, that they are more concerned about the risk of loss than they are excited by the prospect of gain and that they often exhibit a strong desire to hang on to what they own because the very fact of owning makes whatever it is more valuable to the owner.

The results of this bias, according to Roxburgh, are that decision makers are reluctant to make big calls. “The challenge for strategists,” he observes, “is to distinguish between a status quo option that is genuinely the right course and one that feels deceptively safe because of an innate bias.”

Roxburgh suggests:

  • Be prepared to shed. View divestment not as a failure but as a healthy renewal of the corporate portfolio.
  • Be as rigorous in your analysis of what stays as what you want to change.

What I also try and do:

Know what you’re keeping and what you’re changing – and why. For me there are four key things to identify in discussions with decision makers around any strategic change programme:

  • What must we keep?
  • What could we keep?
  • What could we change?
  • What must we change?

Start with what must stay. In my world, for example, you absolutely want to retain the intrinsic goodness of a brand at every level, from goodwill to heritage to culture, and that’s usually where I start – with what a brand must keep in order to retain competitive value. For me, this more conservative approach of moving from the known to the unknown does give people anchors. It allows decision makers to use status quo bias to their advantage because a clear rationale for why some things are staying leads onto the tougher questions of what must be left behind.

4. Know that there’s no such thing as the foreseeable future. Anyone whose read “Black Swan” will understand the dangers that past patterns present in terms of predicting the future. However anchoring is a powerful human trait. It causes us to look ahead based on what we’ve already seen. Companies do this all the time in their expectations around performance. “What you did last year – plus X percent.” So often those numbers are arrived at with little or no context in terms of market dynamics. As Roxburgh says, and as readers of Nicholas Taleb will know, “Repeated studies have failed to show any statistical correlation between good past performance and future performance.”

Roxburgh suggests:

  • Continually question every assumption about where a market is heading
  • Don’t allow yourself to be swayed by “industry consensus”
  • If you are going to look at patterns, take a long historical perspective. Put trends in the context of the past 20 or 30 years, not the past 2 or 3.

What I also try and do:

Pinpoint the assumptions. Sounds straight-forward. Isn’t. If it’s difficult to know what we don’t know, it’s equally challenging to establish what we don’t question. Sometimes conventions and assumptions are so ingrained in ways of working that people fail to recognise them as fallible or even negotiable.

Look long for patterns – but judge how long by the dynamics of the sector. Some sectors evolve faster than others, meaning some have longer turn times while others shift gear much more quickly. What feels like a responsible timeframe to analyse trends in the finance markets (Roxburgh’s reference point) could be ridiculous in a sector like technology (which isn’t even 30 years old yet as a consumer sector).

5. Know where the exit is, and know when to leave. The sunk-cost effect sees companies continuing to throw money at a problem, long after it has passed economic viability, in a bid to salvage their investment and miraculously turn things around. No-one likes to admit they got it wrong, but knowing when to do so, and doing so decisively, is critical not just to saving resources but having resources available to adequately fund what replaces it.

I watch in despair as companies make “strategic” decisions to continue investing in products that have no hope of recouping that investment, never mind making a profit, because no-one is prepared to pull the plug. When the idea does fail, the blame somehow falls on “market conditions” and everyone puts on their best game face.

According to Roxburgh, sunk cost effect can be explained by loss aversion (companies would rather spend more than write off everything to date) and on anchoring (once the brain has been anchored to a budget, the additional budget doesn’t seem unreasonable).

He suggests:

  • Kill what can’t work – and do so as early as is reasonable.
  • Pursue several strategic options – taking a portfolio approach to your strategy allows you to go with what works and ditch what doesn’t rather than relying on one master plan.
  • Gate fund as a stop-loss mechanism – release follow-on funding for a strategy only once agreed targets are met.

What I also try and do:

Have a strong, future-set brand story. Set a very clear vision for what a brand will feel like and be acting like when the strategy succeeds. I do that through the formation of a brand story that looks ahead to how the brand should be three years from now. I have found such a document keeps everyone very focused on the outcome and quickly shows when things are going off-track from a perceptive/receptive point of view.

Back up the story with clear numbers. At Audacity, we look to put a measurement framework in place that quantifies the story in terms of how things should track across a range of agreed metrics. Doing this enables decision makers to plot how a brand is progressing and to take corrective actions if things go off-kilter.

The story plots sentiment. The measurement framework plots numbers.

6. Resist the urge to herd. This idea is little short of comfort-food for marketing decision makers, so we won’t dwell on this one. But Roxburgh makes one point here that is well worth noting: “Some actions may be necessary to match the competition … But these are not unique sources of strategic advantage, and finding such sources is what strategy is all about.”

I think a worrying mistake that decision makers make is that they assume that once they have signed off the strategy, it will deliver advantage for the foreseeable future. Not true of course. As VJ Govindarajan has pointed out many times, a strategy’s effectiveness starts to fade the moment it is created. Why? Because once it is made public, and proven to be successful, the herd will inevitably adopt. The strategies of today are the hygiene factors of tomorrow – and the transition time from distinctive to indistinguishable continues to shorten.

What I also try and do:

Find ways to distinctualise your brand that then force others to play by your rules. The company that drives successful change in a market decides successful change in a market. In the strategy, look for ways to define the market atmosphere that work in your favour, and that actively work against a competitor trying to do the same thing. My friend Keith Rushbrook has a great question that he asks a strategy team to get them to that point, “What can we be or do that our competitors can’t be or do, and if they try, that’ll work to our advantage?”

Apple is a past master at entering a market after the initial forays, changing the rules, and then getting everyone else to play catch-up. As I’ve said elsewhere, “The most powerful brand you can own and manage is one where you know and write the code – not one that takes its cues from where others are, or where you perceive them to be.” Conversely, if you are the brand that everyone takes its cues from, you get to play to your strengths and your agenda, and your competitors can only follow.

7. Less will change than you expect. Humans misestimate future hedonic states. In other words, people are bad at estimating how much pleasure or pain they will feel if their circumstances change dramatically. Roxburgh says that people adjust surprisingly quickly even to major change, and that their level of pleasure (hedonic state) ends up, broadly, where it was before. Even acts that at the time seem revolutionary and highly disruptive emotionally will soon become the new normal.

Equally, within a culture, ideas that trigger predictions that they will generate huge difference to the company or to its culture seldom have as big an impact as predicted. Outrageous is often just a synonym for ‘too early’. If everything else is right, the concern that ‘our people will find it hard to adjust’ has been proven time and again to be incorrect. Yes, people will have misgivings – initially anyway – but they will soon adapt to what’s required.

Roxburgh suggests:

  • Keep things in perspective.
  • Navigate the inevitable swings in emotion and morale as people adjust to change.

8. Remember that the strategist’s role is to counter-balance the consensus bias. Let them do that. But then challenge them back. Roxburgh says people tend to overestimate the extent to which others share their views, beliefs, and experiences. He gives four examples of the false-consensus effect:

  • Confirmation bias – the tendency to seek out opinions and facts that support our own beliefs and hypotheses
  • Selective recall – remembering only facts and experiences that reinforce our assumptions
  • Biased evaluation – accepting evidence that supports personal hypotheses, while rejecting  contradictory evidence.
  • Groupthink – simply agreeing with those around us

By way of examples, he quotes classic lines one might hear from a CEO working from a false consensus basis:

  • “the executive team is 100 percent behind the new strategy” (groupthink)
  • “the chairman and the board are fully supportive and they all agree with our strategy” (false consensus)
  • “I’ve heard only good things from dealers and customers about our new product range” (selective recall)

False consensus is pernicious, says Roxburgh, because it can lead strategists to miss important threats and to persist with doomed strategies.

He suggests:

  • Put all ideas up for review. Create a culture of open challenge and constructive debate within management teams where reviews are welcomed as helpful, not hostile, acts.
  • Seek out and debate contrary views so that they have been considered. Even establish a “challenger team” to identify the flaws.

Final thoughts

I agree wholeheartedly. Whilst it may be hard for strategists to have the ideas they have worked on so hard picked apart by colleagues, it’s much more dangerous to leave ideas unlitigated. Debate is healthy providing it remains focused on the business outcomes and everyone is committed to finding real answers and not simply looking to issue ‘restraining orders’.

To close, a thought for strategists taking part in these processes. It’s never easy being the ideas person. It requires sustained energy and confidence, and you won’t get everything right all of the time, but then, as Roxburgh shows, neither will those around you.

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