Strategic Planning Analogy #412: It’s Rational To Me

THE STORY
There’s an old story about a champion swimmer who lost one of his little pinky fingers in an accident. After the accident, the swimmer said that he was unable to swim anymore and refused to get back into the water.

His fans thought he was acting crazy. Okay, maybe his swimming might be a tiny bit slower without that finger. But to claim that he couldn’t swim any more at all? This didn’t make any sense to them.

Finally, one of the fans asked the swimmer why he couldn’t swim any more. The swimmer responded, “I use my pinky finger to get the pool water out of my ear after I swim. Without the pinky finger, I can’t get the water out, so I can’t swim anymore.”

THE ANALOGY
To an outsider, a lot of actions look irrational. The fans in the story thought that the swimmer was acting irrational. They didn’t understand how losing a finger prevented the act of swimming.

The problem was that the fans didn’t see the big picture. They were only looking at what happens in the pool. In the pool, the finger loss was not such a big deal.

The swimmer, however, saw the bigger picture. He knew that after he was out of the pool, that finger was essential to maintaining ear health. Without that finger, his ear would get infected and he would not be able to swim in the future.

So, even though the fans thought his refusal to swim was irrational (because they only looked in the pool), the swimmer felt he was being very rational, because he saw the larger implications.

It seems that a similar problem frequently occurs in business. Executives are constantly making decisions. Many times outsiders will look at these decisions and question the rationality of the decision. They will think the executive was crazy or misguided.

Literature in recent years has referred to this supposed irrationality as “decision bias.” The argument for decision bias goes something like this:

1) The decision maker has biases;
2) The biases in the mind of the decision maker triumph over logic;
3) Therefore, the decision maker makes an illogical decision.

However, I’m not so sure this is always the case. Executives don’t make it to the top because of a propensity for illogic. I think there is often something else going on. The ones claiming this so-called illogic are like the swimmer fans. Their view of the decision is too narrow (just looking in the pool). The executive may be looking at a larger scope (outside the pool) and see a reason why his decision is very logical (at least from their larger perspective). So before making a quick judgment about someone’s rationality (or supposed lack thereof), try to understand the perspective of the one making the decision.

THE PRINCIPLE
The principle here is that if you want someone to make the right strategic decision, then you have frame the decision within the context of the framework used by the decision maker. In other words, don’t blame bad decisions on irrational biases. Blame bad decisions on having created a system where the decision maker’s logic is contrary to the success of the strategy.

This is an important distinction. For if you believe the problem lies with illogical beings, you will try to fix the problem by trying to change the way people think. However, if you believe that the person is very rational, but has been put into a system where his/her personal logic is contrary to business goals, then you will try to change the system.

The Pool Example
Think of the business executives as being like that swimmer and the business environment as being like that swimming pool. As an investor in that business, you focus on what is happening in that pool and how well the swimmer is performing in that pool. You don’t care about what happens outside the pool.

The swimmer (the executive), however, has a life outside the work environment (the stuff outside the pool). In the story, this caused him/her to stop swimming.

The investor thinks this is illogical, since they see nothing in the pool to cause concerns. The investor sees the solution as trying to change the way the swimmer thinks about swimming (try to replace the so-called swimming illogic with logic). Since all the investor looks at is the pool, they try to find the solution within the pool (the way the person performs relative to the business). For example, they might focus on telling the swimmer that, logically, the hand stroke in the water still works with a missing finger (and to think otherwise is crazy).

However, had the investor assumed that the swimmer had a logical reason for his/her actions, the investor would have looked outside the pool at the swimmer’s concern for getting water out of the ear. They would have then come up with a replacement for the pinky to get the water out of the ear. With such a replacement, the swimmer would gladly get back into the pool and do what the investor wants. In other words, the best way to fix what was happening in the pool was to take care of a systemic issue outside of the pool. No amount of lecturing on the best way to swim would have fixed that issue.

The Real Example
I was reminded of this concept in a recent article from September 2011 in the McKinsey Quarterly. The article was entitled “A Bias Against Investment?”. The article was based on a recent survey of executives. According to the survey, executives claimed that their companies were not investing enough in their businesses. And the folks at McKinsey felt that underinvesting at this time was illogical.

McKinsey blamed the illogic on “well-known biases.” As “proof” of these biases, they pointed to some hypothetical questions in the survey. One hypothetical scenario was about a doing a deal with the potential of a small loss or huge reward. Many of the executives refused to do the deal. McKinsey claimed that this was mathematically illogical, in what they referred to as the “loss aversion bias”. McKinsey thought this illogical bias was even more tragic when applied to smaller investments (which were also looked at in the survey and had similar results). To quote the article, “Even if it made sense to be so loss averse for larger deals, it still wouldn’t make sense to be as averse to loss for smaller ones.”

But I think there may be a lot more going on here. There may be some sense here after all. I think those executives may be very logical. They are just using logic from outside the pool. These executives are not only worried about the health of the business, but the health of their career (like the swimmer who cared about the health of his ear).

The executive may have logical reasons to believe that being seen as responsible for losses, even small ones, could put their career at serious risk. They may get fired, not get a bonus, or never see a promotion because of that loss. However, if the upside occurs, the amount of the profits on a small deal may not be large enough to cause any personal benefits to the executive. They were already expected to do well, so doing well does not trigger extra bonuses or promotions.

Given that logic, the executive doesn’t just see what’s in the “pool”—big profit gains versus the risk of a small loss. Instead they see it as gaining nothing personally versus potentially losing their job. No wonder executives have a tendency to be averse to these types of options. From outside the pool, rejection of the deal looks very logical.

The Implications
Depending on which of us is correct (me or McKinsey) there is a major difference as to how to solve the problem. McKinsey’s approach would lead to the conclusion that companies should focus on getting people to change the way they think—to root out those nasty biases—or at least downplay them during decision making.

My approach would be to understand what is happening outside the decision at hand (outside the pool) which is causing a logical person to “rightly” (for them) make the “wrong” choice for the business (inside the pool). Once that is determined, then change the system so that the two are compatible. For example, in the scenario above, the company may need to change compensation and rewards/punishment policies which cause people to act contrary to what is in the best interests of the company. The companies need to get personal risks to be consistent with business risks.

Although luck may be a contributing factor, I believe most people make it to the top of a business because they logically made the right choices regarding what it takes to get to (and stay at) the top. The real problem is that the logical choice for getting to or staying at the top is not always consistent with the most logical choice for the business. If you want to fix some of the bad decisions, look at how to get the logic behind personal and business decisions to be more similar.

SUMMARY
Don’t automatically assume that bad decisions are caused by illogical executives. Instead, start by assuming that the executive is being perfectly logical from their perspective. Then try to figure out why the current system is causing personal logic to be out of sync with business logic and fix the system. Otherwise, your “logical” strategy may not get implemented, because it conflicts with the personal logic of the people implementing it.

FINAL THOUGHTS
A personal benefit from looking for a solution by changing the system is that it keeps you from having to go to senior executives and tell them to their face that they are illogical.

Analogy #195: This Logic Smarts!

THE STORY
When I was younger, I loved to listen to political and social debates. Over time, I noticed that many debaters used the tactic of “Knowledge” in their debate. The tactic goes something like this. “The reason someone disagrees with my position is because they have not yet become fully informed of all the facts. Once they hear all of the facts, they will see the obvious correctness of my position.”

At first, this sounded logical to me…the more knowledgeable a person, the better their decision. But then I thought, “Wait a minute!! This logic is horribly flawed!”

I soon realized that:

1) What the person was really saying was that anyone who disagreed with them was either stupid or ill informed. I knew this was a lie. There are almost always smart and stupid people on both sides of an issue. In addition, there are almost always well informed and ill informed people on both sides of an issue. If you don’t believe me, go to any political discussion site on the web. There’s plenty of craziness (and a rare bit of factual lucidity) on both sides. Rather than using facts to form an opinion, it seems that people first form opinions, and then selectively look for facts to support the opinion.

2) By claiming the “knowledge” tactic, one no longer had to logically prove one’s point. Rather than try to persuade you with logic, they would just say that you need to learn more. They would dismiss your points as coming from the ill-informed and expect you to believe them at face value because they were the so-called “expert.” This is not debate. This is slander.

The idea that, if we could just provide people with a little more knowledge, we could eliminate poverty, war, disease and any other political/social/economic ill no longer works on me.

If you still like the “knowledge” tactic, then I have a proposition for you. I think that everyone on the planet should send me $100. If you had all the facts on the issue, you would come to the conclusion that giving me $100 is the right thing to do. If you still do not agree with me, then you need to spend more time learning the true issues. Or better yet, just trust the people “in the know” (like me) and just hand over the money.

THE ANALOGY
Strategic debates in a business can often be similar to political debates. Just as there can be opposing points of view in politics, there can be opposing points of view in strategy. Different parts of your organization may have radically different visions of where the company should be heading (or how to get there).

How these debates are handled in your organization can have a large impact on the success of your strategic process (and ultimately the success of your business). The logic in political debates is often flawed. Don’t let those flaws creep into your strategic debates.

THE PRINCIPLE
The principle here is to not fall victim to sloppy reasoning. Sloppy reasoning can lead to half-baked or incorrect conclusions. Flawless execution of an incorrect strategy just means that you destroy your company in a faster, more efficient manner. Attention to the logic behind your conclusions, then, deserves at least as much attention as the rest of the strategic process.

Although there are many ways in which a company can fall victim to sloppy reasoning, we will focus on just one of them—the knowledge flaw. The knowledge flaw is similar to the knowledge tactic mentioned in the story. In strategic reasoning, the flow usually goes something like this.

1. Management believes that they have a great offering for the consumer.

2. Objective data, such as sales, market share and consumer research show that the consumer is not giving you the credit you think you deserve for your great offering.

3. Therefore, management concludes that the problem with the company is that the consumer just doesn’t understand how great the offering is. If we can just educate the consumer to how great we are, all our problems will be solved.

This logic can also be applied to the stock price. I’ve rarely ever met a CEO who thought their stock was overpriced. Invariably, CEOs truly believe that their company is superior in value to the price where the stock is trading. Therefore, they conclude that the problem is that stock traders and analysts are ignorant about how great the company truly is. If we can just educate them and give them our knowledge, the stock price would skyrocket.

In a few cases, it is indeed true that giving the customer or the stock analyst more information will be beneficial to you. My experience, however, is that this is rarely the bulk of the problem.

The flaws with this line of reasoning tend to be as follows:

1. Thinking too highly of your own offering.
We tend to have a natural bias towards our own brand. We take pride in our company and see it in its most favorable light, overlooking its flaws. After all, the company is a reflection of us, so if there is something wrong with the company, it can feel like there is something wrong with us. Hence, we tend to exaggerate how good our offering truly is.

Well guess what…the customer has none of that prideful bias towards us. They are a lot more skeptical. They will probably not see the offer as glowingly as you do.

2. Not thinking highly enough of the competitor’s offering
Just as we tend to see ourselves too favorably, we tend to see our competitors in an exaggerated negative light. To us, they are the enemy, and we tend to develop an emotional hatred towards our enemy (even if not rationally justified).

Well, to our customers, the competitor is not an enemy…it is just an alternative option. They will see the same thing we see in the competitor, but probably not classify it in such a negative light.

As a result of these first two points, we may see ourselves as far superior to competition, but our customers may see us as equals…or maybe as inferior. Giving them more knowledge probably won’t change their mind, because they are not seeing it in the biased manner as we see it. It will be just more of the same which formed their earlier opinion.

3. Mistaking greatness with superiority
Just because you have a great offering does not mean that others will flock to your door. In most mature industries, all of the competitors are very, very good and most are pretty great.

A great offer may only give you parity with others, not superiority. People rarely change their purchase patterns just to achieve parity with what they had before. If you want people to switch to you, you need a point of differentiation where you can claim superiority. Mere greatness is not good enough.

4. Ignoring the law of entrenchment
Even if you can achieve a small level of superiority, it may not be enough if you are the challenger to the leader. Entrenched leaders have a strong brand image. They also benefit from having habitual behavior patterns in their favor. Customers tend not to switch their comfortable and satisfied behavior away from the leader unless the superiority you offer is extremely compelling. It must be a large differential.

Think of the “King of the Hill” game. If you are on top of the hill, you can usually still defend your position against people who are slightly stronger than you because of the leverage advantage from being on top. That same advantage applies to market leaders. So even if you are a little better, it might not be enough.

5. Thinking too lowly of your customers
You may think you can trick customers into preferring you. You may be able to fool them once, but after that, look out. They will take revenge. Blogs and web pages will blast away against your trickery. You will end up worse than where you started.

6. Expecting too much from your customers
Customers lead busy lives. Their minds are focused on the all the little crises in their daily lives. You’re lucky if you can get them to think about you for a few nano-seconds each day. If it takes long, serious contemplation to ascertain why they should prefer you, then you have probably lost them. They will not take the time to find those little nuances that make you special.

They may be obvious to you, but you think about them for most of the day. Your superiority needs to be immediately apparent and quick to grasp. Why is the Prius the leading hybrid car? It is because its distinctive shape makes it easy to quickly determine that it is a different kind of car. Putting a hybrid engine in a regular-looking vehicle is too subtle…not enough bragging rights for the owner.

7. Ignoring the full realm influences on behavior
We may see ourselves favorably based only on rational attributes directly related to the offering at hand. Our customers evaluate us both rationally and emotionally, and use factors which transcend just the offer at hand. They may not like us because of our carbon footprint, the nation where we come from, a bad experience their uncle had 15 years ago, or whatever. Carrefour is having difficulties in China…not because of what they have done, but mainly because many Chinese are mad at the French and this is the one way they can get back at them.

SUMMARY
It is easy to think that everything is fine with your strategy, even if results are a little disappointing. You rationalize that the customer just doesn’t have all the facts yet. To fix the situation, all you think necessary is to help the customer learn why you are so wonderful. In reality, if you are having problems, it probably means that there are problems with your strategy. As we have seen, many things can blind you to your true position in the marketplace. Your strategy may not be as compelling as you think. Take off the rose-colored glasses and truly discern your strength as the customer sees it. Their opinion is more important than yours.

FINAL THOUGHTS
I’ve seen many leaders of companies blindly use only the products they produce. They stop buying competitor products out of principle, or a sense of loyalty, or to set an example. Unfortunately, they moment people do this, they cease to have any semblance of normalcy as a consumer. If you never experience the competition, then how do you know well you compare to them?