Thursday, April 1, 2010

Strategic Planning Analogy #316: Use Your Gut

Back in 1983, Howard Schultz traveled to Italy. While there, he took part in the local culture of the Italian coffee bar. While spending time just sitting at the coffee bars and soaking up the cultural experience, Howard had an inspiration. Howard believed that Americans would become just as captivated with this Italian coffee experience as he was.

The idea was to design a “third place” for Americans, somewhere between home and work. It would be a place for conversation and a sense of community. And, yes, a place to buy quality coffee at premium prices.

When Howard got back to the US, he started a coffeehouse, called Il Giornale. In 1987, he purchased Starbucks to further his vision.

Apparently, Howard’s gut instinct was pretty good. There are now more than 15,000 Starbucks in 50 countries. Annual sales are in the $10 billion range. That’s a lot of coffee.

If Howard Schultz had done a lot of research into coffee facts back in the early 1980s, I don’t think he would have gotten much support for his vision. Price was one of the main drivers of coffee purchases, with a constant price war going on in the supermarkets between the top brands. Premium-priced quality coffees in the US hardly existed, and there was not a strong clamoring for it, either.

Nobody was really clamoring for a “third space,” either. Convenience was the driving force, as people were looking for ways to do things faster and easier. The idea of going out of your way to get a slow coffee experience would have sounded insane to most people at the time.

Seeking community? The 1980s were a key time of people moving out into the suburbs to escape interaction and hide in the comfort of their suburban home.

Young adults, a key Starbucks segment, at that time were into drinking colas, not coffee. Coffee was seen as that boring drink that old people consumed. And the last thing the youth wanted was to behave like old people.

If you were to have added up all the facts, the Starbucks vision would have looked like a real loser. Yet it was just the opposite.

Howard Schultz’s intuition, however, could envision something beyond the facts. This intuition was more valuable than the facts.

In the business world, strategic decisions are being made all the time. Usually, these decisions are made based on a blend of facts and intuition. Most of the current business literature praises fact-based decision-making and downplays the role of intuition. However, as we can see in this story, transformational strategic decisions like Starbucks often need to rely more on intuition, because the facts of the day are all pre-transformation.

It is like trying to measure the wingspan of a butterfly while it is still a caterpillar. The caterpillar has a wingspan of 0, because it is still in the pre-transformation stage. The wings do not come until after the metamorphosis—when the caterpillar turns into a butterfly. Rejecting a caterpillar’s eventual flying ability based on pre-transformation factual measurements will lead to the wrong conclusion—that this animal will never fly.

Intuition is needed in the pre-transformation stage, in order to envision a post-transformational world (because you won’t see it in the pre-transformation facts). Like the pre-transformation caterpillar, “facts” would have lead people to believe that Starbucks wouldn’t fly, either. And they would have been wrong.

A recent article in the McKinsey Quarterly was titled “Strategic decisions: When can you trust your gut?” The article was in interview with Nobel laureate Daniel Kahneman and psychologist Gary Klein.

This article tended to downplay the importance of gut intuition. It was considered to be a tool fraught with many perils—one to be used very minimally, because it was not very reliable. In fact, it was downplayed so much that the interviewer had to ask if there were ever situations when intuition could be trusted in the business world.

Gary Klein responded that intuition is best suited for situations with high predictability. He continued to say that in very turbulent situations there is no basis for intuition.

At first, this sounded very logical to me. But then I started thinking about examples like Starbucks. Eventually, I came to the conclusion that often the principle should be the exact opposite of what Gary Klein said, especially when it comes to major strategic decisions.

During times of high stability and high predictability, facts are probably at their highest level of relevance. You know exactly how to interpret the facts, because the future environment is virtually identical to the environment in which the facts are collected. You can trust the “facts” of customer behavior and customer research more than at any other time, because behavior is relatively stable and there is no turbulence to befuddle the consumer opinions. And because the management has already successfully acted in this environment, they will know exactly what the facts imply for their business. Therefore, stability is the best time to rely on the facts.

It is during times of turbulence when facts are the least reliable. Conflicting reports may be coming in. The “facts” may predate the latest turbulence and be obsolete or irrelevant. Customer opinions may be worthless because they applied to an older context. Customers may have no idea how the turbulence will affect their long-term future behavior, so they cannot give you accurate insight. Today’s “facts” cannot tell you where the environment will end up when the turbulence finally reaches a new level of stability (like trying to measure butterfly wings on a caterpillar). Therefore, since facts are at their lowest level of reliability during turbulence, one needs to rely even more on intuition in order to make sense about what is going on.

This is especially true when you are trying to create a transformational strategy, like Starbucks. In essence, transformation strategies are trying to take a stable environment and intentionally inject turbulence into it. The idea is to intentionally upset the status quo in order to create a new environment more favorable to your company.

Great strategic moves often try to re-write the rules of the game. Starbucks re-wrote the rules of how we view the role of coffee in our life. Apple re-wrote the rules on how we interact with people, information and entertainment. Linked-in has re-written the rules of how people find jobs. Social networking sites have changed the rules on how people think about their privacy.

I enjoy watching old movies made before the digital revolution. It is funny to see people driving around town looking for a pay phone, because cell phones weren’t invented. Housewives slave for hours to make dinner, because there are no microwaves or fast food restaurants. People have to wait until they get tomorrow’s newspaper in order to know what is going on in the world. It is difficult today to even imagine living like that anymore. Similarly, it would be difficult for people of that time to imagine the lifestyles we have today. Mere facts are not very useful in transformational situations like this. Instead, you need the intuition of visionaries—people like Howard Schultz.

Peter Drucker used to say that the best way to predict the future is to create the future. In other words, the more you take control of your destiny and proactively work to write the rules of the future, the more likely you will know what the future will be. Howard Schultz did not wait for the coffee revolution to occur before jumping in. Instead, he proactively created the coffee revolution. He created demand that did not before exist through his strategic actions. He made the old facts obsolete by creating a new world.

Similarly Steve Jobs did not wait for the digital music revolution to reach stability before jumping in. Through the iPod and iTunes, he invented the new reality that people flocked to. Through intuition, he envisioned a future and made it happen. Steve Jobs didn’t look at the facts to see what the future was evolving into. Instead, he envisioned a better world and made it happen, regardless of the facts.

Contrary to popular opinion, turbulent times may be the best time to ignore the facts and rely on creative intuition. This is even more true when you are intentionally trying to upset the status quo and proactively re-write the rules of the future in your favor.

Here’s the real shocker. If it weren’t for intuitive visionaries like Schultz and Jobs, the world would have evolved differently. There might not have ever been a coffee revolution or an app store for smart phones without them. The facts at the time would have been identical. Yet the outcomes would have been different. The intuition of visionaries had more to do with how these markets developed than the facts of the moment. Think about that next time people are telling you to reject intuition and stick to fact-based decision-making.

1 comment:

  1. Gerald,
    You mention "The Third Place" and "The Third Space". I like the two terms. They remind me of what Pleudmann said," There is no real direct bonding between two parties; it is always stronger through a third party". I have used this to make one of my most important publications. A wife and husband may have a direct bond, but it becomes stronger if a kid (the third party) bridges this relation.
    So, Gerald, your analysis makes genuine sense. Your addition of the bridging third space is a real food for thought.