Businesspeople don't necessarily follow flawed strategies
because they're greedy, arrogant or careless. Our brains are
wired in ways that tend to prevent us from following tried-and-true
strategic principles.
That's the view of Charles Roxburgh, a London director of
consulting firm McKinsey & Co. who cites behavioral economics
studies that show decision-makers commit similar mistakes in ways
that suggest irrational behavior is innate. Below are the eight
hidden strategy flaws Roxburgh has identified and strategies to
help you overcome them.
1.
Overconfidence: We often exaggerate our own abilities,
Roxburgh says. Overconfidence and its sibling, overoptimism, lead
firms to tackle jobs they can't finish or count on overly rosy
forecasts. Temper overconfidence by adding 20 to 25 percent more
downside to pessimistic planning scenarios, he suggests, and be
wary of strategies based on certainty.
Content Continues Below
2. Mental
accounting: This describes the inclination to treat money
differently according to its source, allocation or use. It occurs
when companies slap cost controls on a vital core business while
spending freely on a risky new initiative. Overcome it by sticking
to the rule that a dollar is a dollar, no matter where it came from
or where it's going.
3. The status quo
bias: It's the tendency to leave things alone and may
keep you from dropping a product that once was profitable but now
loses money. Avoid it by viewing every business, product or market
as constantly in play and taking note of the risks of doing nothing
as well as making changes.
4. Anchoring:
This occurs when you hear a number such as the sale price for a
business you want to buy and unknowingly anchor your bid on that
figure. Overreliance on past performance data can also anchor you.
Avoid anchoring by looking at long-term trends and disregarding
others' attempts to anchor you.
5. The sunk-cost
effect: If you've ever thrown good money after bad,
you've experienced the sunk-cost effect. This is why businesses
keep investing in incomplete projects despite changed conditions
that make it unwise to pursue completion. Control sunk-cost effects
by evaluating incremental investments as if they were new projects,
and be ready to kill experiments quickly.
6. The herding
instinct: It's the urge to be like everyone else and
clearly offers no competitive advantage. Be different by breaking
away from the pack and cutting losses by quickly axing innovations
that fall short of expectations.
7. Misestimating
future hedonic states: This is Roxburgh's name for the
propensity to make bad forecasts of how much something will help or
hurt. For instance, founders may see selling the company as worse
than death when a sale may actually be the best move. Avoiding
overreaction, taking a long-term view, and keeping things in
perspective will help.
8. False
consensus: It happens when you overestimate how much others
share your views. We create this effect by seeking facts and
opinions that support our beliefs. Limit damage by encouraging open
debate and seeking contrary views.
You can use knowledge of common strategy flaws to predict
mistakes competitors are likely to make. "These flaws can be
insight into effective competitive strategy," says Roxburgh.
"For instance, you may see areas where your competitor will be
trapped by status quo bias into not reacting fast enough to a new
threat."
So far, no one has identified worrying too much about brain
limitations as a possible strategy flaw. But rather than aiming to
pinpoint all of them, you may be better off by simply realizing
that you have built-in strategic limitations. "Only the
paranoid survive," says Roxburgh, quoting longtime Intel
leader Andrew Grove. "In this phrase, Grove summed up a good
way to counter our natural tendency to be overconfident about the
future."
Mark Henricks writes on business and technology for leading
publications and is author of Not Just a Living.