How many times have you run into the senior manager who has all the answers? I’m referring to the individual who is so confident in his/her abilities that they consistently make a “gut call,” regardless of the situation. I expect you’ve probably run into these people all the time. The problem is this approach generates poor decisions! As proof, I offer the findings of a large consulting firm’s recent analysis regarding US company value degradation showing that 80% of shareholder value loss was the result of poor strategy decisions.
Executives often think the solution to a strategic issue can be based on their past experience, without a detailed evaluation of the situation. The problem with this approach is obvious; none of us know enough to make snap judgments on complex strategy issues. Poor decisions occur when executives ignore factors that could impact their strategy. Taking this simplistic approach opens the executive to the “blind-quadrant” conundrum. Since we don’t know what we don’t know, we can’t anticipate and address the challenge to the business. This approach has disaster written all over it..
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. Market data showed 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. So, the company bought this business. But within a few months of the acquisition, the government significantly cut the reimbursement for home infusion, 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. Based upon their standard “due diligence” checklist; everything looked good. Well, at least everything they examined. Perhaps, they assumed the decision was simpler than it really was, so not all factors important to this strategic decision were considered.
If the acquiring company had expanded their due diligence checklist, they could have considered the business impact of government reimbursement trends. The company would have learned that the government targets high-expense 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 to service providers. 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 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. Failing to examine their blind quadrant cost this acquiring company.
Why do executives treat strategy so simplistically? Research shows that they are overconfident in their decision-making competence. Business executives also tend to overestimate their company’s capabilities and the firm’s strategic position. There is a bias to treat a decision simplistically because this superiority means any effort to improve the company position is bound to be successful.These beliefs fool executives into thinking that identifying the best strategic option does not require great effort. So they limit the number of disciplines involved in the decision, the data they collect or the amount of analysis they perform.
But 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 structures the identification of all important factors and presents them in an easy-to-understand format companies can form better strategies in less time. My strategy formation process, the Lean Strategic Decision Model does just this. If you are looking for a simple but robust process to improve you strategic planning capability, contact me for free digital copy of my international best-selling book that explains this process.