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 overestimate their personal capabilities, in particular, their analytical ability. As a result, executives are prone to skimp on analysis, in response to time pressures to accomplish operational activities. 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 likely to do this especially after achieving huge market success. Overconfidence breeds complacency and complacency is a springboard to business failure. Perhaps the biggest challenge facing an overconfident leadership team is overcoming the inertia of success because it can hinder rationale assessment of the company’s changing business environment and prevent the firm from modifying its business strategy to successfully address the change.

Let’s examine a business case that demonstrates this point.

The case

For decades, Schwinn was the dominant bicycle manufacturer. As success followed success, company management became confident in their ability to predict market needs and fulfill them.

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 ride through nature preserves and over mountains. This cyclist felt most bikers would love these opportunities.

Schwinn’s reply? “We know bikes. You are an amateur. We know this market better than anybody.” The cyclist’s idea was completely dismissed.

Over the next few years, while Schwinn was busy adding incremental features that provided limited customer value, this amateur established the mountain bike market. Schwinn management missed the biggest market trend in decades because their overconfidence created a myopic view of the market.

Bill Gates reinforces the idea that company success can lead to failure, saying, “Companies fail when they become complacent and imagine that they will always be successful.” Complacency tempts the executive team into applying less rigor in the identification and evaluation of a strategic challenge. This leads to poor strategy.

Schwinn was a very successful company; the management team was a good one. However, even great teams can make mistakes. In the absence of a process that could guide them through an analysis of their existing strategy, Schwinn could not successfully examine the bicycle market shift that was about to occur.

Strategy formation problems like this are more common than one would think. Without a formal process, leadership teams can delude themselves into thinking they are performing a rigorous analysis, when in reality they are not. Perhaps the team convinces itself that only a few factors need to be considered. Maybe the team limits data collection because it is pressed for time. Possibly some important members fail to fully engage because they are focused on operational issues. Or maybe the team opts for a “tried and true” approach because it is easier than designing a new, innovative strategy.

By using a defined process for setting strategy, a process like the Lean Strategic Decision Model®, failure like Schwinn’s can be avoided. A defined process prevents the detrimental activities, mentioned above, from hampering a company’s strategic evaluation. It 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. It does not get satisfied early or allow premature decisions. As a result, teams work until the best business outcome is identified. A strategic decision process would have ensured that the Schwinn decision team investigated the cycle enthusiast claim before dismissing it.

Don’t fall into the overconfidence trap. Make sure you give strategic issues the respect they deserve and examine them rigorously.