Behavioural Strategy in a Disruptive World

In recent months we've been working on the the structural changes that Enterprises have to make to deal with disruptive change - new technology driven change is the specific case of most interest. Recently I've started to look at the "null hypothesis" - ie what are the forces that resist change. This article by McKinsey on the problems with learning the Behavioural Psychology lessons in a company is thus very interesting:

Very few corporate strategists making important decisions consciously take into account the cognitive biases—systematic tendencies to deviate from rational calculations—revealed by behavioral economics. It’s easy to see why: unlike in fields such as finance and marketing, where executives can use psychology to make the most of the biases residing in others, in strategic decision making leaders need to recognize their own biases. So despite growing awareness of behavioral economics and numerous efforts by management writers, including ourselves, to make the case for its application, most executives have a justifiably difficult time knowing how to harness its power

In a recent McKinsey Quarterly survey of 2,207 executives, only 28 percent said that the quality of strategic decisions in their companies was generally good, 60 percent thought that bad decisions were about as frequent as good ones, and the remaining 12 percent thought good decisions were altogether infrequent. McKinsey research showed that the hypothetical solution - good analysis in the hands of managers who have good judgment - won’t naturally yield good decisions. The third ingredient - the process - is also crucial. So, what to do? As they note:

To use a judicial analogy, we cannot trust the judges or the jurors to be infallible; they are, after all, human. But as citizens, we can expect verdicts to be rendered by juries and trials to follow the rules of due process. It is through teamwork, and the process that organizes it, that we seek a high-quality outcome.

McKinsey identifies 5 broad groups of biases

Action-oriented biases - drive us to take action less thoughtfully than we should.
- Excessive Optimism
- Overconfidence
- Competitor Neglect

Interest biases - arise in the presence of conflicting incentives, including nonmonetary and even purely emotional ones.
- Misaligned personal incentives
- Inappropriate attachments
- Misaligned percepetion of corporate goals

Pattern-recognition biases - lead us to recognize patterns even where there are none.
- Confirmation bias.
- Management by example (remembering recent or dramatic examples).
- Storytelling bias (tendency to believe narrative more)
- False analogies
- Champion bias

Social biases - arise from the preference for harmony over conflict.
- Groupthink.
- Sunflower management (tendency to reflect the top management's views)

Stability biases = create a tendency toward inertia in the presence of uncertainty.
- Anchoring and insufficient adjustment. (Rooting oneself to an initial value)
- Loss aversion.
- Sunk-cost fallacy. (Paying attention to historical costs that are not recoverable)
- Status quo bias.

The solution, McKinsey believes, are processes which counter this:

Counter pattern-recognition biases by changing the angle of vision

Anyway, they use an interesting worked example of an emerging area we know well, ie WebTV (in general). Here they are looking at WebTV the company:

Sometimes, simply coaxing managers to articulate the experiences influencing them is valuable. According to Kleiner Perkins partner Randy Komisar, for example, a contentious discussion over manufacturing strategy at the start-up WebTV suddenly became much more manageable once it was clear that the preferences of executives about which strategy to pursue stemmed from their previous career experience. When that realization came, he told us, there was immediately a “sense of exhaling in the room.” Managers with software experience were frightened about building hardware; managers with hardware experience were afraid of ceding control to contract manufacturers.

Counter action-oriented biases by recognizing uncertainty

In most organizations, an executive who projects great confidence in a plan is more likely to get it approved than one who lays out all the risks and uncertainties surrounding it

Counter interest biases by making them explicit

Strong decision-making processes explicitly account for diverging interests. For example, if before the time of a decision, strategists formulate precisely the criteria that will and won’t be used to evaluate it, they make it more difficult for individual managers to change the terms of the debate to make their preferred actions seem more attractive. Similarly, populating meetings or teams with participants whose interests clash can reduce the likelihood that one set of interests will undermine thoughtful decision making.

Counter social biases by depersonalizing debate
Counter stability biases by shaking things up

They then look at four steps to adopting behavioural strategy in an organisation (I've edited it ruthlessly):

1. Decide which decisions warrant the effort (Materiality)

- Large, rare, one-of-a-kind strategic decisions eg M&A
- Repetitive but high-stakes decisions that shape a company’s strategy over time (eg R&D allocations in a pharmaceutical company etc)

2. Identify the biases most likely to affect critical decisions

Open discussion of the biases that may be undermining decision making is invaluable. It can be stimulated both by conducting postmortems of past decisions and by observing current decision processes.

3. Select practices and tools to counter the most relevant biases
For instance, one company fights pattern-recognition biases by asking managers who present a recommendation to share the raw data supporting it, so other executives in this analytically minded company can try to discern alternative patterns. (Climate Change data anyone )

4. Embed practices in formal processes
One reason it’s important to embed these practices in recurring procedures is that everything we know about the tendency toward overconfidence suggests that it is unwise to rely on one’s instincts to decide when to rely on one’s instincts!

Its interesting as quite a lot of these map closely to the "Anatomy of incompetence" I wrote about last weekend. There is clearly a general set of principles at work here.

The interesting things is to take these and throw them through a massively disruptive cycle, such as say the Old Media is experiencing right now, and see what examples one can find of these behaviours. But that, as they say, will be the subject of another post..........