Strategy Planning Analogy #558: Counting People

TWO STORIES

1. High School Survey

The US government used to do an annual survey of high school students. The objective of the survey was to track things like the levels of drug use and sexual activity in that age group. Because the writers of the survey were afraid that high school students would lie about their own personal activities, the government asked the students to estimate what percentage of students in their high school they felt were doing each of these types of things.

At first, the government would average all of the responses for each question to get an estimate of how prevalent various activities were. But then, someone dug deeper into the results. What they found was that although the average percentage number was somewhere in the middle, very few of the individual students ever answered with a number in the middle. Instead, there were two clusters of answers on each question—one cluster of students which gave a very high percentage answer and one cluster of students which gave a very low percentage answer. This caused the government to take a second look at the results.

As it turns out, the researchers found out that most students do not hang out with a large percentage of their fellow students. As a result, the students had no idea of the drug and sexual activity of the greater student body. Instead, they only had the reference point of their small band of close friends. 

And these close bands of friends tended to behave similarly to the others in the same band. So, if a student participated in these activities, most of their friends did also, so they concluded that most of the people in the school must also do these things. Similarly, if a student did not participate in these activities, most of their friends also did not, so the student would assume that most of the students in the entire school also did not.

Based on these insights, the government shifted its emphasis from tracking the change in the averages from year to year to tracking the relative sizes of the high and low clusters from year to year.

2. Amazon Music Reviews
Before buying music, I like to read the reviews in Amazon. Over time, I realized that the vast majority of all the music on Amazon has an average ranking of 4.5 out of 5. With nearly everything rated equally, it became impossible to use these average ratings to decide which music to purchase.

But then, I started thinking. The problem with Amazon music ratings is that they are voluntary. This is not a random sampling. People only turn in a rating when the mood hits them. And typically, the mood only hits them if something they hear is especially good or especially bad. And it in the vast majority of cases, the review came from people who thought the music was especially good.

Once I figured that out, I stopped looking at the average rankings of the review and instead started looking at the number of reviews in total for a particular piece of music. My logic was that if only the ones who loved the music send in a review, then the more reviews sent in, the more people loved that music.

This has turned out to be a far more effective way to use the Amazon review process.

THE ANALOGY
Companies like to base their strategies on facts. Sometimes, they try to get their facts directly from the consumer. This tends to happen most often at three phases of strategic planning:

1.     At the beginning, when trying to understand the market place.

2.     In the middle, when testing concepts

3.     At the end, when assessing whether the strategy is working.

The good news is that in today’s interconnected world, there are lots of ways to get consumer input.

The problem is that these sources can often have flaws like the ones mentioned in the stories. Complainers and the people who rate companies online are not a random sample. They are biased towards people who like to rate or towards people with extreme views (like the Amazon music ratings). If you just look at the average ratings and comments, you will most likely come to the wrong conclusion. It may be better to count the reviews, rather than average them.

And even well designed surveys can with random sampling can have flaws. After spending decades in consumer research, I discovered that people will try to honestly answer all of your questions well, but they often just don’t know the answer, so they guess—and often very wrongly (like the high school survey). I have found this to be particularly true when asking people to predict their future behavior in areas where they have little experience (like how they would react to a new strategic scenario).

Therefore, we need to be careful in how we interpret this data.

THE PRINCIPLE
The principle here is that one cannot run a strategic planning process based solely on research, especially if you only look at averages. Part of this is due to some of the research flaws mentioned earlier. Another part is due to the nature of strategic planning itself.

Strategic planning is looking for ways to build a new and better future. It can be about finding new white spaces which have never been exploited. It can be about inventing solutions which never before existed. It can be about building business models that break all the old rules. It can be about finding uncharted “Blue Oceans” of opportunity. In other words, strategy is a lot about trying to get ahead of the curve and be an early adopter of the next big thing.

Of course, if you are trying to lead the way into the future, you may be several steps ahead of the general population. Questioning the general population may not be very useful at such an early stage. 

However, if you wait to move until the consumers can speak as experts, it is too late to be at the front end of the strategic revolution. That’s one reason why Steve Jobs didn’t believe in consumer research. He knew that consumers can’t speak meaningfully about a future not yet envisioned.

But that doesn’t mean that research is useless. As seen in the stories above, there are creative ways to look at data to get insights. But may mean you cannot take the initial results at face value. For example, we saw that instead of averaging out what people say, it may be better to just count how many say something. Therefore, be careful when looking at your results. Don’t necessarily take it at face value. Search deeper for the true implications—especially as the questioning looks into the future or is not randomly sampled.

Other things to keep in mind:

1. Although consumers may be unable to articulate how they will act in an inexperienced future, they can articulate what irritates them in the current state. Knowing the irritations of today can help you when designing the newer future.
2. Some people may be living closer to the leading edge than others. Focusing research on leading edge people may give better results.
3. Even though solutions my change over time, attitudes/concerns/desires regarding the problem may be more stable. If you focus on researching the more stable problem issues, it may give insights into how to develop better, innovative, new solutions.

But probably the most important thing to understand is that strategy is not pure math or pure science. It also has an element of artistic creativity. Creating the future is, by definition, creative. Eliminate the creative and you will never find what you are looking for.

SUMMARY
Although we may want a data-based approach to strategy, relying only on data—or taking the data at face value—will probably lead you in the wrong direction. The future is not precise, so you cannot take just a precise approach to get there. The consumer is not always very helpful or knowledgeable in looking beyond incremental change. Therefore, one will need to also rely on artistic creativity to get to the future. In fact, the creative part is likely be more important than the scientific part.

FINAL THOUGHTS
You cannot find the future if you are only looking backwards. And looking backwards is where the consumers are. Sometimes you have to look forward, to the places where the customers have not yet arrived. Creative insight, rather than research, may be more useful.

Strategic Planning Analogy #523: Why Let Facts Get in the Way?

THE STORY
A retailer once asked me to look at the data to see how much sales increased after his stores were remodeled. After examining the data, I concluded that for most of the remodeled stores, sales did not change at all as a result of the remodel.

The response by the CEO of the retailer? “I don’t believe the data.” He went on to spend a bunch of money on further remodels.

Another retailer asked me to study their idea to add a new product category to their stores. I wrote a memo—with lots of facts and numbers—showing that adding this product line would be an incredibly stupid idea.

The response of the retailer. “We had no intention of ever not adding this category. We already signed the deal and are going to do it anyway. We just wanted some paperwork in the files to help justify the deal we already intended to do. If your paperwork won’t support the project, then we’ll just do it without support documents on file.”

I’m reminded of the Mark Twain quote, “Never let facts get in the way of a good story.” Or in this case, it should read “Never let facts get in the way of a pre-conceived notion.”

THE ANALOGY
Business leaders have to make a lot of decisions. Most claim they want their decisions to be based on facts. The problem occurs when those “facts” contradict the pre-conceived notions of the business leader.

Do you ignore the facts and go with your gut (as they did in my stories)? Or do you ignore your gut and go with the facts?

As we will see in this blog, there is no automatic answer that works in all cases, but there is a process to figure out what to do in every case.

THE PRINCIPLE
The principle here is that there is a difference between facts and insight. A fact is an isolated nugget of truth. Insight is having sufficient understanding of the situation in order to make the proper decision.

Not all facts lead to insight. For example, I might have a fact that my grass is tall. From that fact, I might conclude that it is time to cut the grass. But true insight would have also known that at that very moment my grass was wet, the ground was soft & mushy, and that it was a pitch-black night outside. Under those conditions, it was not a good time to cut the grass.

Was my fact on grass length incorrect? No, but that fact did not give enough insight to make the right decision.

My gut intuition can also be insufficient for insight, particularly if my experience is not very relevant for the current decision.

So how do I gain insight when facts and intuition disagree? Here are three suggestions.

1) Question the Fact-Giver

There’s a Samuel Butler quote which says “Figures never lie, but liars often figure.” In other words, a person with a personal agenda can selectively use facts to promote their agenda rather than true insight. They present a false insight, distorted by what they choose to disclose and what they choose not to disclose.

It has been said that you can prove just about anything with the Bible if you are willing to take the words out of context. And that’s what these “liars” (people with an agenda) do. They start with their preconceived agenda and let that bias dictate how they present the facts. Their goal is to sell their position rather than provide true insight into what is going on.

You see this all the time in politics, where each extreme position uses facts to “prove” their agenda is true. How can the use of so-called “true facts” come to such different conclusions? It’s all in the packaging.

Several decades ago, U.S. News and World Report Magazine looked at some of the political hot-buttons of that time, like abortion and gun control. They showed that, depending upon how a survey question is worded, you can get a majority of the people to agree with either extreme.

Therefore, when the facts contradict your gut, one can start by questioning the motives of the one presenting the facts. Do they have a hidden agenda? Is their objective unbiased insight or something else?

Ask yourself these questions:

1. Are ALL the facts clearly moving in only one direction? (Rarely is the world that neat and tidy—there are probably relevant facts not being shown)
2. What does this individual gain or lose personally depending on how the decision goes?

Actions you can take:

1. Ask for all the data collected (not just what is in the Powerpoint deck).
2. Have an independent third party (with no agenda) look at the data.
3. Spend less time discussing the conclusions in the deck and more time discussing the assumptions behind those conclusions.

2. Question the Fact Receiver

The feelings of your gut are based on a lifetime of experience. This experience has exposed you to a lot more facts than just what is in front of you with today’s Powerpoint deck. This experience can help expand your insight and provide a better context for making decisions than just dealing with facts presented at the moment. The gut may indeed be more insightful than the facts.

But, then again, your gut may be way off base. You may have your own hidden biases, which impact your gut (even if you are not aware of them). Perhaps your experiences are irrelevant to the question at hand. Perhaps you’ve spent so much time living detached from the real world and surrounded by “yes-men” that you are out-of-touch with how your customer really lives (I spoke more about that here).

Often times, situations when facts and intuition are add odds with each other occur when a company is going through a crisis. Things are going badly. The old approaches aren’t working any more. Is this really a good time to rely on past-based intuition when the successes and tricks of the past don’t appear to be working?

Therefore, before going with your gut, ask yourself these questions?

1. Is my past experience really relevant for today’s decision?
2. Have things changed enough that the rules of the past no longer apply?
3. Do I have a hidden bias? Does my personal situation change depending upon how I decide?
4. Is my gut based on true insight or desperation and panic?

Actions you can take:

1. Have some confidants outside the industry that you can bounce ideas off of.
2. Spend more time out in the field talking to customers and seeing how the world works out on the front lines where your business interacts with the marketplace.

3. Look for the Story Behind the Facts

An individual fact is like an individual word. It can only tell you so much by itself. However, if you can string a bunch of words together into a story, then you really have something—insight.

All of that intuition you have has been strung together into a wondrous story of how the world works. The problem occurs when the new facts don’t fit into your story of how things work.

The problem may be that the facts have been distorted (as mentioned earlier). In that case, it may make sense to stick with the story in your gut.

However, times may have changed and your story may no longer fit how the world of today (or tomorrow) works. It may be time for a new story of how the world works.

So, when looking at facts which don’t conform with your story, ask yourself these questions:

1. Is there sufficient proof that times have changed enough to make old assumptions irrelevant?
2. Do the new facts string together to make a coherent and believable alternate story more in tune with the times? (or is there no story found within the facts).

Actions you can take:

1. Try to build an alternative story that holds the new facts together and compare that story to your old story.
2. Spend more time discussing what has changed in the environment and WHY.

I knew a company who held a story that the disgruntled customers who complain a lot are at high risk to leave because they are the ones most frustrated. They ran their business based on that story. However, facts showed that it was more often the quiet customers who left. This puzzled them until further analysis came up with a new story. They discovered that the noisy customers really wanted the relationship to work and were actively making noise in order to make the relationship better. The quiet ones had given up on the company and were ready to move on to the competition. Since the new story better fit the facts, they adopted the new story and ran their business accordingly.

SUMMARY
Many times, decision makers are faced with facts that disagree with their gut. Rather than always going with the gut or always going with the facts, do some further investigation. Check to see if the fact-presenter has a biased agenda. Check to see if your intuition is relevant to the situation at hand. Check to see if the facts tell a better story than the story you already cling to. Based on this further analysis you can determine when to go with the guts and when to go with the facts.

FINAL THOUGHTS
In the case of the store remodel research mentioned earlier, the CEO had a story in his head that if you make a store better, customers will like you more and reward you with more sales. In most cases this is true. And that is why he stuck with his gut and ignored the facts. But times had changed and this store concept was becoming irrelevant. This created the need for a new story: When you make an irrelevant store nicer, you don’t make it relevant. You just have a prettier irrelevant store. This new story fit the facts. Today, this retailer no longer exists because of its irrelevance.

Strategic Planning Analogy #506: Perspective

THE STORY

Let’s assume that a government transportation committee examined whether to add more lanes to an urban highway. 

The conclusion of their study went something like this:

Yes, we concede that during a brief period of the day (rush hour), the highway becomes highly congested and traffic stops moving. However, outside of rush hour, the highway is operating well below capacity and flows very smoothly. Since the highway is well below capacity for approximately 85% of the day, we see no reason to add any lanes. After all, 85% efficiency for a highway is quite acceptable.

The response from a consumer group advocating extra lanes went something like this:

The reason why the highway flows well outside of rush hour is because that is not the time when the highway is most used and most needed. According to our research, 85% of the cars using the highway use it during the congested rush hour period when cars greatly outnumber the current highway capacity. Since the highway is well above capacity when 85% of the drivers are on it, we see a clear justification for adding more lanes to the highway. After all, 85% inefficiency for a highway is quite unacceptable.

So is the current highway 85% efficient or 85% inefficient?

THE ANALOGY

Strategy creation involves making decisions. Facts are a key input for making those decisions. In fact, I had a boss once who on a daily basis would say that he would not make any decisions unless they were “fact-based.”

But how reliable is the “fact-based” approach? In the story above, two groups used facts to reach a conclusion. The transportation committee used facts to “prove” that the highway was 85% efficient. The consumer group used facts to “prove” that the highway was 85% inefficient. These facts lead each group to come to a different conclusion about adding lanes to the highway.

Was one group’s facts right and the other group’s wrong?  No, both groups had equally true facts:

a)     85% of the TIME OF DAY the highway had excess capacity.

b)     85% of the TIME OF DRIVERS using the highway was during times of inadequate capacity.

So what is the right “fact-based” decision? Obviously, we need more than just these facts to reach an acceptable decision. And when it comes to strategy we need more than just facts as well.

THE PRINCIPLE

The principle here has to do with perspective. Facts alone do not automatically lead to the proper conclusion. It is only when we place those facts within the context of the proper perspective that we see what is the right thing to do. Therefore as much care and effort should be given to developing the proper perspective as is given to acquiring the right facts.

Perspective depends on two items: Where one is looking from and what one is looking at. In strategic analysis there are usually multiple places to look from and multiple items to look at. If you miss out on examining some of these options, you may come to the wrong conclusion.

Perspective #1: Where One Is Looking From

From the eyes of the transportation officials looking at the highway from afar, what they saw was smooth operations nearly all day long. From the eyes of the drivers on the highway, nearly all of them saw congestion nearly every moment they were on the highway. Their different perspectives cause them to see the situation very differently.

A similar situation can occur in developing your strategy. From the eyes of the executives inside your organization, you may see a particular strategic option as ideal for your bottom line. But how does that option look from the perspective of other eyes?

Perhaps your decision places added burdens on your suppliers, causing them to no longer want to supply you or only supply you if they get added compensation for those added burdens. That added compensation might wipe out a lot of the original advantages you saw from the internal executive eyes. A similar situation could also occur with your distributors.

Or perhaps your decision triggers an adverse reaction from your customers when they see it. This problem could not be seen with the internal executive eyes, but was quickly apparent to the customers’ eyes.  The unperceived adverse consumer reaction could make that original strategic option no longer as viable as first seen.

Or perhaps when your competition sees the strategy, they perceive it as a bigger threat than you thought and they react far more aggressively than anticipated. This aggressive reaction wipes out your perceived benefit.

Or maybe when those ideas from headquarters get down to the factory floor, they cannot be operationalized as smoothly as one thought. Something gets lost in the implementation on the factory floor which hurts the strategy’s effectiveness.

Therefore, before making a decision, step away from the pile of facts and look at the situation through other sets of eyes. How will the decision be seen by all the other relevant parties (suppliers, distributors, customers, competition, front line employees, the government, etc.)? How will their perspective affect their behavior, and how will that behavior impact your strategy?

You may find a need to modify your strategy in order to get all of the players see the situation in a manner which moves them all in a favorable direction for your business.

In addition, consider how you communicate your decisions, so that you can help influence how others see it. How the decision is communicatted may be just as important as the decision itself when it comes to implementation.

Perspective #2: What One Is Looking At

In the story, everyone was looking at the same issue: what is the proper number of lanes to have on the highway.  It assumes that the only way to address congestion is by looking at lane-count for the highway. Is this a fair assumption?

Perhaps there are other solutions one could look at, like:

a)     Increasing use of public transportation;

b)     Convincing more people to use alternate routes;

c)     Getting businesses to stagger the hours employees work;

d)     Reallocation of traffic direction for the current lanes depending upon time of day (e.g., more inbound lanes in the morning and more outbound lanes in the evening).

e)     Financial incentives for carpooling.

f)      Building a separate road nearby.

How do you know you are making the right decision if you have not fully explored all potential options? All those facts you’ve gathered may only be applicable to examining one particular option. If you look at the problem in a different way, you may find that you need a different set of facts altogether.

Remember, business success usually depends on offering a superior solution to your customers’ problems. There may be many distinctively different ways to solve that problem. Unless you examine many alternatives, you may not offer the right solution.

Perfecting the obsolete is not a path to success. After all, even a mediocre smart phone is far superior to the best Morse code telegraph solution, no matter how much time you spend trying to perfect it.

So don’t frame your strategic discussion too narrowly. Before deciding on the best way to do something, first make sure it is something worth doing. First frame the discussion around finding the best solution rather than just finding ways to improve the status quo.

SUMMARY

Facts are useful, but facts alone are incomplete. Facts are only useful if seen from the proper perspectives. Therefore, before deciding a course of action, improve your perspective by:

a)     Looking at the problem through all the eyes of the various people who have an influence on the successfulness of the strategy (suppliers, distributors, customers, competition, front line employees, the government, etc.).

b)     Looking at multiple ways to solve the problem. Creative, superior solutions may look nothing like the status quo.

FINAL THOUGHTS

Great strategic solutions may take you into uncharted territory—doing things in a way they have never been done before. There won’t be a big pile of facts to help you in uncharted territory. And if you wait to act until you can get a big pile of facts, someone else will have already captured that strategic space. Perspective helps fill in the holes when facts are hard to come by.

Strategic Planning Analogy #319: Take the “F” Out

THE STORY
At the exercise club where I work out, there are a series of TV monitors by the equipment, so that you can watch TV while exercising. Each monitor is set to a different channel. Some of the channels include a few of those political news cable channels.

It is interesting watching simultaneously how the different political cable channels report on the same news items. One would think they must be reporting from different planets, because their conclusions have absolutely nothing in common. Often, even their so-called “facts” of the situation have almost nothing in common. The “liberal” channels and the “conservative” channels each seem to live in their own little world.

I guess I shouldn’t be surprised. Emory University in Atlanta released the results of a political study back in January of 2006. Test subjects were given statements by a prominent conservative politician (a Republican) and a prominent liberal politician (a Democrat). The statements contradicted each other.

When shown these statements, both Democrat and Republican test subjects ignored the contradictions for their own party but saw the contradictions made by the other side. Worse yet, while going through the test, the test subjects did not show any increased activation of the parts of the brain normally engaged during reasoning. In other words, political opinions and mental reasoning appear to have nothing in common.

That explains a lot.

THE ANALOGY
One part of the strategic planning process is fact-gathering. Different people place different levels of importance on the fact-gathering phase. As we talked about in an earlier blog, some people become obsessed with “fact-based decision-making” as being a top priority.

However, as we saw in the story, one person’s facts may be another person’s fiction. And even if we could agree on the facts, the story shows that mental reasoning regarding those facts may not occur. As a result, opinions and behaviors may have very little to do with the facts.

Therefore, when you are trying to develop a strategy to get consumers to behave in a particular manner (to your benefit), facts may be irrelevant. It may be more important to align yourself with a particular opinion segment (something like a political party) than to align yourself with the facts.

THE PRINCIPLE
The principle here is that actions are more important than facts. Profit occurs when the right actions occur. Since actions are not necessarily determined by facts, then facts should not necessarily be the focal point of your strategy.

We need to get the “F” out. In other words, instead of focusing on “facts,” we should be focusing on “acts” (facts without the F).

This is not to imply that we should lie to our customers or intentionally deceive them. Not only is this wrong behavior, it is ultimately stupid behavior over the long haul. The global banking industry is feeling a lot of negative pressure and new restrictive regulations because of the perception that they deceived the public.

Losing the trust of your customer base can be a death sentence. And in today’s internet-connected, socially-conscious climate, bad corporate deeds always seem to find a way out into the public eye to your detriment. (Even if the facts aren’t 100% accurate, the damage is done).

Therefore, the idea is not to throw away the facts (and deceive), but rather to give higher preference to the mindsets in particular activity groups.

For example, let’s assume you want to sell lawn care products/services. You could dig up all the facts around the most productive way to care for a lawn, but this may not result in the ideal lawn care strategy. When you look at actions, what you will probably find is that there are two distinct types of actions regarding lawn care. One group hates lawn care—sees it as a burdensome chore—and wants as little activity as possible. Another group sees lawn care as a passion—like a pleasurable hobby—and enjoys their time in the activity.

The first group wants to do less than what the facts would say are ideally productive. The second group wants to do more than what is necessary. Neither is looking for the factually most efficient. Instead, a good strategy would be to pick a segment (no matter how “irrational” their actions seem) and appeal to the way they want to act. Either position your strategy as “the brand that minimizes the chore” or “the brand that enhances the satisfaction of the hobby.”

Another example could be cat food. If one were to look at the facts, one might come to the conclusion that the most appropriate food for a cat would be one that is high in meat, fat and bone meal. However, many of the people who put a high priority on their pets (and are willing to pay a premium to feed them) behave as if their cats were miniature people. They want them to eat what they believe is a good people diet, full of lean protein, grains and vegetables.

If you want these folks to act in a way that gets them to purchase your brand of premium cat food, you probably need to cave in to some of these pre-conceived notions and behaviors and put in some vegetables. This is like the political candidate who can only get elected by his party if he agrees to some of the party’s long-held notions.

So how can we apply this to the fact-gathering stage of strategic planning?

1) Put more emphasis on what people do than on what people say.
One of my favorite cartoons has someone going door-to-door taking a survey about what people are watching. One man goes to his door and tells the survey-taker that he only watches educational documentaries. In the background, you can see a TV set showing a low-brow comedy program. The moral of the story: Don’t believe what people say, but what people do.

This is why a behavior-based system to determine what people watch, like Nielsen (who has a box connected to your TV set) will get a more accurate reading than asking people what they watch (like in the cartoon).

The old joke used to be that nobody knew who Playboy was selling all those magazines to, since nobody claimed to be buying them. And if you did find someone who admitted to buying the magazine, they would claim they bought it for the articles, not the photos. If that were the case, why does Playboy bother to put photos in the magazine? Don’t trust the “facts” of what people say; trust the facts of what they do.

Rather than getting bogged down in endless pre-product scenario testing with consumers, get a prototype out there in the real world to test. One of the beauties of the digital age is that it is so easy to get a beta test out into the field. This allows you to get feedback based on actual activity.

If you want to develop a product to help people in doing their work, watch how they work at their place of work. If you want to improve the meal-making process in the kitchen, watch how people act in the kitchen.

2) Understand that different segments operate under a different set of “facts”—Pick One
Just as Democrats and Republicans seem to operate under a different set of facts, so do other segments. We saw this also in the lawn hobbyists versus the lawn-work haters. These segments have a different way of looking at the world.

It is nearly impossible to build a political position that would be equally loved by both Democrats and Republicans. They love totally different things. Similarly, it is nearly impossible to win by trying to pick a business strategy which tries to make everyone in the market happy. Broad middle-of-the-road strategies are rarely as successful as those which target specific segments or niches.

If you target a like-minded, similar-behaving segment, you can focus on specializing in exactly what they are looking for. You can appeal to their set of “facts.” You can speak their language. You can be a clear “winner” in the eyes of that segment. By contrast, if you try to appeal to conflicting points of view, you end up being the best option for nobody. So pick a segment for your strategy.

3) Interpret facts via a chosen filter
Once you choose a segment, try to see the world through their eyes. Filter the facts through the same filter they use. Don’t try to force them into buying what you think they should want. Give them what would make the most sense within their view of the world. Even something as simple as different views on lawn care can create heated battles among neighbors—as heated as political discussions. So don’t assume your business is too mundane to be beyond having different filters. Take heed or they may rebel against you.

SUMMARY
The world is not a homogeneous mass of people sharing a similar point of view. Not only do we have different opinions, we often cannot even agree on the facts. Instead of being homogeneous, the world tends to cluster into a number of segments based on how one acts. Therefore, when designing a strategy, pay more attention to how people act than fretting over the precision of various facts.

FINAL THOUGHTS
Even if your targeted segment seems irrational, it only appears irrational because you are looking at the behavior through the wrong lens. Through their lens, it seems perfectly logical. Find the lens that helps you see the “logic” that they see.

Strategic Planning Analogy #316: Use Your Gut

THE STORY
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.

THE ANALOGY
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.

THE PRINCIPLE
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.

SUMMARY
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.

FINAL THOUGHTS
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.

Bad Decisions

Introduction
Recent articles from the McKinsey Quarterly have been looking at poor strategic decision-making. They are articles worth reading. Some of the articles look at how our biases can distort our thinking process. Others look at the problems which occur when we rely on our intuition rather than facts when making decisions. They claim these two issues can keep us from making the right strategic decisions.

After reading the articles, I thought I’d make my own comments on the subject.

WHY DO WE MAKE SO MANY BAD STRATEGIC DECISIONS?
The key question here is “Why do so many companies make so many poor strategic decisions?” We’ve all seen lots of poor decisions in the business world. To simplify the discussion, I’ve boiled poor strategic decision-making down to three causes:

1) The Main Goal Has Not Been To Make Good Strategic Decisions
If you want good strategic decisions, it helps to have good strategic decision-making as your primary goal. That may sound obvious, but unfortunately, many of the decision-makers on strategic issues do not have “making a good corporate strategic decision” as their main goal.

Instead, many of the leaders have different primary objectives. They tend to fall into the following two categories:

A. Avoiding Pain- Pain of Going Through Change
- Pain of Arguments/Discord in the Organization
- Pain of Taking a Risk
- Pain of Admitting Failure/Mistake
- Pain of Drawing Negative Attention to One’s Self as a Naysayer (hammers hit the nail that is sticking up)
- Pain of Going Against Wishes of Powerful Stakeholders (Shareholders, Key Customers, Bosses, etc.)

B. Increasing Personal Gain
- Career Advancement
- Benefits to One’s Silo in the Business
- Maximizing Bonus/Rewards

Often times, the right strategic decision involves pain and/or reductions in personal gain. If people are more concerned about pain and personal gain then they are about making the right decision, then they will, by nature, make the wrong strategic decision. Don’t assume that people automatically give good strategic decisions a priority when making a choice.

2) Wrong Amount of Facts
Facts provide the information which leads to knowledge. This knowledge helps us make better strategic decisions. If you eliminate fact gathering and analysis from your decision-making process, you increase the risk of making a wrong decision.

Relying just on experience and personal intuition can be dangerous. Your “golden gut” may not be as golden as you think. It needs to be tempered with facts. Therefore, too little attention to facts can cause poor decisions.

At the same time, too much attention to facts can also lead to poor decisions. When blazing new strategic trails, there may not be many facts at all to gather. If you wait until all the facts are in, it can be too late to act. First-mover advantage is over and the game is already won by someone else. Trying to gather consumer insights in an area where consumers have no prior experience can lead to bad and misleading data—sure the customers will tell you something, but it will usually be wrong, since they do not know how they will react under unknown circumstances.

Paralysis of Analysis (from too much data) is just as damaging as only relying on your golden gut (no data). A balance is needed.

3) Wrong Interpretation of the Facts
Just because you have the facts does not mean that you will interpret them properly. Three factors tend to cause improper interpretation:

A. Backward Lens
We often interpret facts based upon our knowledge and experience in the past. However, times can change. The “truths” of the past may no longer apply. Our worldview may no longer be in sync with the new truths of today. Sometimes we need to update our rules-of-thumb or risk having an obsolete point of view.

B. Preference Lens
Sometimes we see the world through the lens of our own personal desires and feelings. Our personal desires and feelings may be quite a bit different from those of our customers. Often times, our customers can be less knowledgeable and less wealthy than us. Their hopes and fears may be quite different from our own due to these differences.

C. Static Isolationism
The world is ever-changing, ever moving. Wayne Gretzky credits his hockey success to skating to where the puck will be rather than to where it has been. Similarly, if we only focus on interpreting facts as to what they say about “now,” we will never catch up to them. By the time we get to where that factual puck was, the puck will be somewhere else. Static analysis (assuming the facts we gather are not moving) will always put us in the wrong strategic place.

Not only are things moving, but their movement is altered based upon how others act. If I plan to take market share away from someone, I should expect them to retaliate. If I am a retailer, my success may have more to do with the decisions made by Wal-Mart in that category than my own decisions (because they are so powerful). Just because I choose not to cannibalize my business does not mean that others won’t choose to cannibalize my business. As a result, we cannot think in isolation (as if we are the only players in the game). We must consider the moves of others and how that will change the nature of our “facts.”

HOW DO WE MINIMIZE THESE THREATS TO GOOD DECISIONS?
1) Get Decision-Makers to Have a Goal of Making Good Decisions
If “Avoiding Pain” and “Increasing Personal Gain” are contrary to good strategic decisions, then we have to fix this. Take away some of the pain in making right decisions by fostering a culture where risk-taking, dissention, and failure are acceptable—even praiseworthy. Use tools to make differences of opinion constructive rather than destructive.

Create a reward system where people are penalized for being too selfish. Bonuses should have a corporate component, so that you maximize your selfish financial interests only by looking out for the long-term good of the entire corporation

2) If People Cannot Decide In the Strategic Interests of the Corporation, Don’t Let them Make Strategic Decisions.
It is often important to get input from across the organization. Hearing diverse opinions from all the key sectors is good. But that doesn’t mean that all the contributors of information should get a final vote in the decision. If the people are too biased or cannot see the big picture, then thank them for their input and make the decision without their vote.

3) Get the Right Amount of Facts
As we saw earlier, too much or too little data can cause problems. One of the questions I ask myself is this: What is the likelihood that additional data would cause me to come to a different conclusion? If the likelihood is high, get more data. If the likelihood is low, stop gathering data.

4) Get Biases Out in the Open
You cannot deal with biases unless they are out in the open. When someone states an opinion, keep asking them why they hold that opinion until you get to the root of the issue.

5) Think Dynamically
Assume that the world is dynamic and that your actions (and the actions of others) will change the way the world evolves. Look at various scenarios. Anticipate responses rather than reacting to them. Do role playing, where you have people take on the role of your competition—to see how they will react.

SUMMARY
Bad strategic decisions come from wrong goals, wrong amounts of data, and wrong interpretation of data. Unless we fix these issues, we will be prone to making bad decisions.

FINAL THOUGHTS
Strategic decision-making is not a “once, forever” proposition. If the passage of time lets you see that a prior decision was a mistake (or that a prior correct decision is no longer relevant), it is okay to change your mind. Changing your mind shows that you are strong, not weak. Not that you should change your strategy every week (or even every year). But never changing is a path to disaster, since a changing world will eventually make all strategic decisions obsolete.

Analogy #206: The Magic Tool

THE STORY
When I moved from Minnesota to Ohio, I seemed to have lost my toolbox and tools. Apparently, my old tools got all intermingled with my son’s tools in Minnesota and now I don’t have them any more. So I went to Sears and got a cool new toolbox (“softsided”) and have been slowly filling it up with tools as I buy them when needed.

This got me thinking…how valuable are tools when they are located five states away from where you live? Can a tool be of much use when the human element is so distant? Wouldn’t it be great if we had “magic tools” that could do all of the work by themselves without a need for a human? Then I could stay at home and just send my toolbox to get the work done.

Let’s say I needed to build a house in Florida. If I had magic tools, I could just send the toolbox to Florida. The tools would jump out of the toolbox and do all the work. The saw would cut the boards all by itself (no humans involved). The hammer would hammer nails without the need for a human to hold it. When they were all done, the tools would jump back into the toolbox and be sent back to me here in Ohio, where I spent the whole time reading a book on house architecture.

That would be great! Sign me up for some of those magic tools.

THE ANALOGY
House builders are not the only ones who would like magic tools. Business leaders also seem to be always looking for “magic tools”—tools to help make running a business easier and/or more profitable. Every year, bookstores are filled with books describing the hot new business tool. These books sell very well.

All that money being spent on finding the latest magic business tool creates quite a feeding frenzy. Software developers also claim to have the latest magic tool for business. Just plug their new software into your IT system and your problems are solved! Management consultants never seem to be at a loss for having new magic tools, either. Just call them up. I’m sure that they would love to sell you the tool (at an outrageous price).

It all looks so tempting. Let the magic tools do their thing, while management just sits back and counts all the extra money they are making.

Unfortunately, a tool is just a tool. My hammer cannot hammer without me. I am the one doing the hammering—the hammer is just I tool I use in the process. Put an axe in the hands of a lumberjack and you will get a pile of firewood. Put an axe in the hands of an axe murderer and you will have gruesome deaths. Don’t blame the axe. It is just a tool.

The same axe can produce either firewood or death. The outcome depends on the one using the tool.

The same is true of business tools. Their effectiveness depends upon the one using it. If you expect the magic tool to do all the work on its own, don’t be surprised if the outcome is a disappointment.

THE PRINCIPLE
Most of the modern business tools today rely heavily on fact-gathering. If you can just gather enough of the right kinds of facts, the “tool” will produce “metrics” that can be displayed on “scorecards” or “dashboards” to tell you exactly what to do. Taken to an extreme, you get someone like a boss I used to have. He claimed that everything he did was “fact-based” and he would not act until all the facts were in and they had been run through one of these fancy tools.

Unfortunately, the principle of this blog is that “fact-based management” is not really management at all. Facts are like tools. If all you do is let “facts” dictate your actions, then you are acting as if the tool is doing all the work by itself. There is virtually no human element involved—just do what the facts say.

Just as a hammer works best when in the hands of a skilled craftsman, facts are most useful when interpreted by a skilled strategist/businessperson. They need to be actively managed as part of a larger strategic effort.

Average tools in the hands of a skilled craftsman will create better houses than top-of-the-line tools in the hands of an idiot, because the quality of the craftsman is more important than the quality of the tool. Similarly, the quality of the human business leader is more important than the quality of the latest magic tool for business.

I was reminded of this principle when reading today’s Wall Street Journal (September 10, 2008). There were two seemingly unrelated articles in this issue that caught my eye.

The first article praised a new magic business tool being used by retailers. The tool collects data on the productivity of store salespeople. Then it uses that data to schedule the employees. The most productive employees get scheduled the most hours and the busiest hours. The less productive employees get fewer hours and hours when the store is less busy. In the example in the story, the tool discovered that the optimum level of time it should take a salesperson at the store to make a sale was 5 minutes. Therefore, when scheduling employees, the computer staffed the hours on the sales floor based on exactly 5 minutes per sale, with estimated sales broken down into 15 minute intervals.

At first, this sounds great. It should optimize productivity by having only enough people to serve the demand (no excess payroll), and by getting a higher percentage of the time on the floor be with your most productive sales people. Human error was taken out of the system because the computer did all the work.

What was the actual result? Well, due to the nature of the program, weaker employees were given weaker time slots. This made it even harder for them to hit the quotas, so they got even weaker scores (no fault of their own).

Second, if an employee had something else going on in their life which required some flexibility in scheduling, it was ignored, because there was no human element to work out a schedule with. This created ill will. In addition, when you schedule people in 15 minute increments, you create unrealistic schedules for people to live lives around, further demoralizing the employees.

From a customer’s point of view, this productivity measuring caused employees to fight over customers in order to get credit for the sale. In addition, the old strategy of spending time with customers to build up a strong rapport for long-term lifetime sales had to be discarded to try to make a sale right now in just five minutes. So now the customer experience was diminished.

The result? Terrible morale for the employees and a less satisfactory experience for the customer.

Does this mean the tool was bad? No. It just needed to have the human touch applied in order to use the tool more wisely. Rather than abdicating management solely to the computer, it needed to be seen as a helpful aid in the hands of a human manager.

The second article in the paper talked about how UAL got punished in the stock market because of a computer error. Apparently, an old 2002 article about UAL’s old bankruptcy court filing appeared in Google as a new news item. Computers which blindly scan for new news articles picked it up and gave the UAL bankruptcy prominence. Suddenly, everyone was selling off UAL stock thinking there was a new bankruptcy there. The lack of any human intervention here caused a real mess for UAL.

Put these two articles together and you can start to see the problems of relying solely on fact-based management. Namely:

1) Not all facts are really as factual as you think. Flaws get into the system…false stories about UAL…false readings on employee productivity due to how busy the store is when they are scheduled.

2) If you accept facts blindly without question, you will end up making bad decisions…like selling off the wrong stock or ruining the relationships with both your employees and your customers.

3) Near-term “facts” may cause decisions which create long-term disasters, because the long-term impacts are not yet at a point where your tool can manage them. For example, that store tool cannot measure lost productivity long term when you destroy morale, or lost future sales because customers are no longer being wooed for lifetime sales.

4) Truly monumental improvements to strategy (as well as true innovation) cannot be found in historical “facts.” Great leaps of innovation have to look well beyond a historical reservoir of data. Creativity has to look at future possibilities, not measured history.

5) By the time all the facts are in, the game is usually over. The innovators who invented the new opportunities have already grabbed the business. Business implies taking risks—acting before all the facts are in. By the time all the data is in to eliminate the risk, the rewards for taking the risk are gone.

6) By the way, given the dynamics of the marketplace, all the facts are never in. By the time you think you have all the facts, the market will have moved a bit, making them less relevant. If you wait for all the facts before acting, you will wait forever.

SUMMARY
Management tools are nothing more than tools. The real value is in the quality of the person using the tool. Blindly following fact-based tools without human intervention is a dangerous path to take. “Facts” are not the end-all and be-all of management. They are just one element which needs to be synthesized with human intuition, compassion and insight. Let’s put the management back into fact-based management.

FINAL THOUGHTS
In the Disney movie Fantasia, Mickey Mouse had a magical wand which allowed him to get tools—like brooms—to do the work without the need for humans. At first, everything looked great, but in the long run, Mickey ended up with a disaster on his hands, because when brooms work without human intervention they create a real mess. Don’t fall into Mickey’s trap. Put direct human management into the mix.