The Hidden Flaws of Corporate Strategy

McKinsey Quarterly has an interesting article on the hidden flaws of corporate strategy. Here are the best reasons I have seen for why good executives support bad strategies. There are seven basic reasons. The authors relate these to a function of how our brains are wired. To read the complete article you can find it at the link below.

Flaw #1: Overconfidence. In our abilities; in our ability to make accurate estimates and other areas. To counter this overconfidence, test strategies under wider range of scenarios; add 20 – 25% to the most pessimistic scenario; and build more flexibility and options in to the corporate strategy.

Flaw #2: Mental Accounting. This is the tendency to treat money differently depending on where it comes from, where it is kept and how it is spent. An example might be setting cost caps on core business while spending freely on startups.

Flaw #3: The Status Quo Bias: Leaving things as they are. The perception is it reduces risk. Many people are risk averse. This makes it difficult to sell assets or shift resources. This can be averted by adopting a radical view of all portfolio decisions and subject all status quo options to a radical risk analysis.

Flaw #4: Anchoring: When an executive is presented with one number, then asked to make an estimate of something unrelated, he/she will almost always come up with a number close to the first one. This is dangerous when the anchoring is in the past. To combat anchoring, look at all trends over 30 – 40 years, not just a few. Resist all tendencies of those around to anchor.

Flaw #5: The Sunk Cost Effect:  Also known as throwing good money after bad. Examples are when huge projects have cost overruns and show no chance of making up the deficit. We should be willing to kill strategic projects early and to apply rigorous analysis to incremental investments.

Flaw #6: The Herding Instinct: This is the tendency to conform to the opinion and behaviors of those around us. Pressure to follow the herd can be irresistible. Me- too strategies can prove to be bad ones. Make sure you kill a failing strategy early.

Flaw #7: Misestimating Future Hedonic States: People don’t know how to estimate how badly or good they will feel if their situation changes. Business takeovers are a good example. Sometimes people will feel the takeover will be terrible, when in fact it turns out to be the right move. So, keep things in perspective and take a dispassionate unemotional view.

Flaw #8: False Consensus: In this flaw, people overestimate the level at which people share their views, beliefs and experiences. Group think and selective recall are just two thought processes that contribute to this false consensus. So, keep a culture of balance, have a strong checks and balances and don’t “lead the witness”.

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To read the entire article go to:

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Posted by Dr. Sarah Layton in Organizational Strategy, Strategic Planning on August 8, 2012.

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