A marathon, not a sprint.

A marathon, not a sprint.

The world changed for all of us in the first quarter of this year. All of the plans we had in place for 2020 were disrupted as the coronavirus spread around the world. Our well-thought-out goals to grow and develop were quickly set aside as we switched gears to simply get through the day. We all became agile, adaptive, and reactive, changing strategies as the situation demanded.

“Now that we have a better sense of what we are up against, that this will be a marathon and not a sprint, we need to take a look at where we stand. What are our goals for moving forward into the next 18 months?”

When setting goals, Blanchard suggests a three-step formula:

  1. Assess your current situation.
  2. Decide where you want to be, keeping in mind your new reality.
  3. Outline a clear first step that’s achievable.

Assessing your current situation

“COVID has put a lot of pressure on us. And when pressure is applied, cracks form along fault lines. It’s likely that frailties you may have had before this have flared up. Many of us are familiar with the typical coping strategies of overeating, overdrinking, or binge-watching TV shows. But other, more subtle tendencies, especially those connected to core personal needs—such as the need to control or the need to judge—can rear their heads when life is disrupted. It is really important to pay attention to these tendencies so that they don’t inadvertently run the show.  

“Do you know where your fault lines are? Have you noticed your frailties? Addressing them starts with naming them and claiming them. Bring your limiting coping mechanisms under control and shore up those frailties. If a coping strategy is getting the best of you, get some support from a friend, a significant other, or your manager. Find small ways to get your needs met that don’t cause you to alienate others.”

Decide where you want to be

Next, get back to your original vision of who you wanted to be, says Blanchard.

“We can’t do everything at the same time, so it is important to use your values—what you say is important to you—to decide which part of your vision is most significant right now. If you have never done purpose work (often referred to by Simon Sinek as finding your “WHY”), now is the perfect time to give it some thought.

“When creating a vision for your team, or possibly reclaiming it after being knocked off course, you might think about asking team members: What is our purpose? What have we lost in the last few months that we should try to get back? What have we never had that, if we had it, would make us stronger and more likely to achieve our purpose? 

“Asking questions like these will do two things: (1) generate feedback you may need to hear; and (2) help your team members to reconnect with the powerful basics that will drive the changes needed to get moving in the right direction.”

Outline a clear first step

This is where you turn the vision into action, says Blanchard.

“Think: What is the first thing I can do that is a manageable task and has a beginning, middle, and end? An example might be to complete a ten-minute workout on a free workout app between ending your workday and getting dinner started. Your first task should be small and completely doable.

“The best way to ensure that you will actually take your first step is to find a buddy who will also do it, or who will do something else they commit to during that same ten-minute period. You can easily sabotage yourself by making the task too big or too involved. The key is to choose something you can succeed at right away—because there is nothing quite so compelling as success.”

Take action now

In any case, it’s getting started that counts says Blanchard.

“It has been a challenging year—but perhaps the time has come to commit to our own growth and development.”

That’s great advice. Abraham Maslow famously said, “You will either step forward into growth or you will step back into safety.” To the degree that each of us can see the road before us, let’s take that step forward by rediscovering our purpose, taking a realistic view of our current situation, and committing to action!

By David Witt, based on the work of Ken and Madelaine Blanchard.

Pruning Projects Proactively

Pruning Projects Proactively

The dilemma

You’ve seen it too many times: your company has a number of projects that are underperforming or business units that just won’t die. Much of the time, they linger because of emotional or legacy attachments that executives have toward specific projects or parts of the business. Rather than pull back when there are signs of significant financial or operational weakness, individuals and teams are inclined to escalate their commitment to losing courses of action. For these executives, hope springs eternal.

The research

The tendency to hang on too long is a common phenomenon. A range of studies reveal that senior executives are more willing to invest in divisions they previously led than in emerging opportunities; and both individuals and teams tend to overinvest in the founding business within a multibusiness company.

Additionally, a close examination of asset distribution and performance in both cash-needy and self-sufficient multibusiness and stand-alone US companies is illustrative: a significant percentage of assets in both types of companies are underperforming.

Profitable assets have returns greater than the cost of capital. Self-sufficient businesses have returns that exceed the growth rate, thus they can fund themselves.

The remedies

There are two effective techniques for understanding when to hold on to an asset and when to let it go.

Change the burden of proof.

One energy company counterbalanced executives’ natural desire to hang on to underperforming assets with a systematic process for continually upgrading the company’s portfolio. Every year, the CEO asked the company’s corporate-planning team to identify between 3 percent and 5 percent of the company’s assets that could be divested. The divisions could retain any assets placed in this group, but only if they could demonstrate a compelling turnaround program for them. The burden of proof was on the business units to prove that an asset should be retained rather than just assume that it should.

Categorize business investments.

Some companies have taken a ranking approach: they assign existing businesses to one of three groups—grow, maintain, or dispose—and follow clearly differentiated investment rules for each group.

Depending on the company and industry, the rules might involve thresholds for growth or profitability or a reexamination of the businesses’ competitive position.

The rules should come from the corporate center, and they should be transparent to all in the organization, so that resource-allocation decisions are based on business realities rather than corporate politics. Even in this scenario, executives need to explain why existing businesses should be grown or maintained rather than disposed of.

By deploying both techniques, companies can more easily—and more objectively—cut underperforming assets and business units from their portfolios.

About the author(s)

Tim Koller is a partner in McKinsey’s New York office, where Zane Williams is a senior expert. Dan Lovallo, an alumnus of the San Francisco office, is a professor of business strategy at the University of Sydney.

Five Sustainable Success Levers

Five Sustainable Success Levers

Nov 20, 2017: Weekly Curated Thought-Sharing on Digital Disruption, Applied Neuroscience and Other Interesting Related Matters.

By Kevin Cashman

Curated by Helena M. Herrero Lamuedra

Every leader faces a daunting aspiration: Generate success now and then continuously accelerate itIt is hard enough to be successful and even more challenging to keep it going in today’s dynamic, change-rich world. As tough as our mandate is, I would suggest a sustainable simple success formula: purpose generates success, performance sustains it and ethics insures the first two endure.

Purpose is the creative force that elevates leaders and teams to move from short-term success to long-term significance. It engages and energizes workforces, customers, vendors, distributors, communities and stakeholders around a common mission, something bigger than products and larger than profit. It is the foundational meaning that unleashes latent energy and motivation as it generates enduring value. Purpose answers the essential question: Why is it so important that we exist? Ethics answers the enduring question: How are we in continuous service to our constituencies?    

As leaders, we have a responsibility to address this significant question,Why is it so important that we exist?” With this question, we courageously face who we are and how we are in the world. As we reflect on it and the battle that rages for the soul of capitalism, we also may want to consider: How do we view capitalism and the role of business? Will we define business solely in terms of transactional financial levers, designed to accumulate capital, or will we apply our vision to shape business as a more universal lever that serves a higher, more sustainable purpose? Will the top 2% serve the 98%, or will the top 2% dominate, control and be served by the 98%?

Unilever takes the universal levers of purpose and ethics and tries to serve the 100%. Their core values are much more than aspirational concepts. Their purpose statement is more than a slogan. Yes, they struggle to live it at times, but the constant struggle to serve is a worthy value-creating goal. As purpose-driven leaders remind themselves over and over again: purpose and ethics are not perfection, but the pursuit of service-fueled value.

Dedicating themselves to the core values of “integrity, responsibility, respect and pioneering,” Unilever’s core purpose keeps them focused on succeeding “with the highest standards of corporate behavior towards everyone we work with, the communities we touch, and the environment on which we have an impact.” There is no company-centric charge to be “#1 based on financial metrics” or “winning is all that matters” in their purpose statement. Their considerable success is driven by an ethical conviction to serve.

Paul Polman, CEO of Unilever, expressed his genuine belief and conviction in purpose-driven leadership and the power of service a Huffington Post article, “Doing Well by Doing Good”: “The power of purpose, passion, and positive attitude drive great long-term business results. Above all, the moment you realize that it’s not about yourself but about working for the common good, or helping others, that’s when you unlock the true leader in yourself.” When purpose becomes personal, it becomes real, powerful and ethical.

Recently, Unilever recruited Marijn Dekkers, another purpose-driven leader, to be Chairman of its board. Like Polman has done through his leadership, Marijn created significant enduring value during his tenure as CEO of Bayer. His leadership brought vitality and relevance to Bayer’s purpose; to their culture, their leadership growth, and to their market value. Commenting on this purpose-driven value creation, Marijn shared with me recently, “It is relatively easy to pull financial levers to generate short-term profit. Many people can do that. What is challenging, and the real skill of leadership, is to inspire sustainable growth by relentlessly serving employees, customers, vendors, communities, and the planet. When purpose becomes the generator of profit, then long-term success, service and sustainability have a chance to be realized.”

Expanding on the value-generating power of ethics and purpose, Marijn shared five levers for sustainable leadership success:

• EBITDA Never Inspires: “After a few years, no one remembers the number, but everyone remembers the contributions the products and services have made to the lives of people. Spreadsheets rarely inspire; stories of service move us in a memorable manner.”

• Take the Extra Steps: “Do the right thing before you are forced to do so. Purpose is real, and ethics is operating, when companies go beyond what they need to do for employees, vendors, customers and communities. Even 2% more effort on purpose creates multiple returns for everyone involved. It takes so little but returns so much. Being a good citizen on the things we do not make money on, can actually create more lasting value in the long run.”

• Build Authentic Reputation: “Reputations are not merely a public relations exercise. Reputations are built through ensuring that we are customer and enterprise-serving and not self-serving. Corporations are too often seen as self-serving, so attending to real-service is the counter-balance to negative reputations. The equity of our brand is built through living our purpose in very tangible ways.”

• Do the Right Thing When No One is Looking: Marijn shared a recent story of cycling along a river and wanting to dispose of his stale chewing gum. He realized that there were at least three options: 1) Throw it on the grass and mindlessly riding on; 2) Wait for a trash bin to come along and throw it at the bin but very likely someone would need to clean up the mess later;  3) Stop to find a leaf, roll up the gum in the leaf and dispose of the gum properly. “It took a small sacrifice to find the leaf and carefully dispose of it. But it was clearly the right thing to do.” Real ethics show up in both small and big acts of service.

• Remember Others: “Ethics is remembering others. Lack of ethics and purpose is placing self over service. As a CEO this is tough, since there are so many “others” to consider. But making the attempt to serve as many “others” as possible is the ethically fueled purpose of leadership.”

Purposeful, ethical leadership is a conscious act of self-examination to insure that our behaviors are really serving people – especially when no one is watching.

What steps can you take today to inspire purpose and remember ethics?

Digital Transformation: Strategy Push or Technology Pull?

Digital Transformation: Strategy Push or Technology Pull?

Aug 24, 2017: Weekly Curated Thought-Sharing on Digital Disruption, Applied Neuroscience and Other Interesting Related Matters.

By Niall McKeown

Curated by Helena M. Herrero Lamuedra

“If we understand what the technology is capable of, we will be in a better place to tell you how our organisation can leverage it” – says one business leader.

“This is what we want the business to achieve and how we’re going to get there.  Go find technology that helps make this happen” – says another.

So which comes first? Do we start with understanding what technology is capable of and devising a strategy to leverage it? Or do we define our strategy and then use technology to deliver it? Should leadership strategy push the business or should the rapid adoption of new technologies pull the business? Perhaps it’s a hybrid of strategy push and technology pull?

CIO.co.uk (an online magazine for Chief Innovation Officers) suggests that IT supports the business strategy. They argue that organisations should have an agile IT function capable of exploiting new technologies that facilitate delivery of the organisation’s strategic vision.

Harvard Business Review, as far back as 1980 have been suggesting that strategy pushes the business and technology is required as a support function.  MIT Sloan doesn’t sit on the fence either.  They suggest that Strategy – not Technology Drives Digital Transformation.

Times, however, are changing.  Most of these thought leadership articles were written pre-artificial Intelligence.  The explosion of new technologies and its rapid adoption by industry and consumers is creating massive opportunities for businesses that are technically informed, agile, opportunistic and innovative. Few modern businesses can claim to be all four unless their leadership has at least studied formal frameworks for digital transformation and upgraded their leadership thinking in new data driven decision making strategy planning and leadership techniques.

My own experience would suggest that the most advantaged leaders create strategy influenced by what is possible. They leverage new technologies as well as the assets that have always delivered competitive advantage to their business. They don’t abandon what makes them great, they augment it, enhance it, upgrade it. Transformation, however, is where they aim for step change not marginal gain. If I were to put a number on it, the most successfully transformed businesses are 80% strategy-pushed and 20% opportunistically technology-pulled.

Turning the linear circular: the future of the global economy, leveraging Internet of Things

Turning the linear circular: the future of the global economy, leveraging Internet of Things

CE

Jun 5, 2017: Weekly Curated Thought-Sharing on Digital Disruption, Applied Neuroscience and Other Interesting Related Matters.

By Mark Esposito

Curated by Helena M. Herrero Lamuedra

Institutions, both in the private and public sector, can always reap the public relations benefits of doing good, even while still accomplishing their goals. As resources become scarcer, a major way to enhance social performance is through resource conservation, which is being underutilized.

Although the traditional model of the linear economy has worked forever, and will never be fully replaced, it is essentially wasteful. The circular economy, in comparison, which involves resources and capital goods reentering the system for reuse instead of being discarded, saves on production costs, promotes recycling, decreases waste, and enhances social performance. When CE models are combined with IoT, internet connected devices that gather and relay data to central computers, efficiency skyrockets. As a result of finite resource depletion, the future economy is destined to become more circular. The economic shift toward CE will undoubtedly be hastened by the already ubiquitous presence of IoT, its profitability, and the positive public response it yields.

Unlike the linear economy which is a “take, make, dispose” model, the circular economy is an industrial economy that increases resource productivity with the intention of reducing waste and pollution. The main value drivers of CE are (1) extending use cycles lengths of an asset (2) increasing utilization of an asset (3) looping/cascading assets through additional use cycles (4) regeneration of nutrients to the biosphere.

The Internet of Things is the inter-networking of physical devices through electronics and sensors which are used to collect and exchange data. The main value drivers of IoT are the ability to define (1) location (2) condition (3) availability of the assets they monitor. By 2020 there are expected to be at least 20 million IoT connected devices worldwide.

The nexus between CEs and IoTs values drivers greatly enhances CE. If an institutions goals are profitability and conservation, IoT enables those goals with big data and analysis. By automatically and remotely monitoring the efficiency of a resource during harvesting, production, and at the end of its use cycle; all parts of the value chain can become more efficient.

When examining the value chain as a whole, the greatest uses for IoT is at its end. One way in which this is accomplished is through reverse logistics. Once the time comes for a user to discard their asset, IoT can aid in the retrieval of the asset so that it can be recycled into its components. With efficient reverse logistics, goods gain second life, less biological nutrients are extracted from the environment, and the looping/cascading of assets is enabled.

One way to change traditional value chain is the IoT enabled leasing model. Instead of selling an expensive appliance or a vehicle, manufacturers can willingly produce them with the intention of leasing to their customers. By imbedding these assets with IoT manufacturers can monitor the asset’s condition; thereby dynamically repairing the assets at precise times. In theory the quality of the asset will improve, since its in the producers best interest to make it durable rather than disposable and replaceable.

Even today, many sectors are already benefiting from IoT in resource conservation. In the energy sector, Barcelona has reduced its power grid energy consumption by 33%, while GE has begun using “smart” power meters that reduce customers power bills 10–20%. GE has also automated their wind turbines and solar panels; thereby automatically adjusting to the wind and angle of the sun.

In the built environment, cities like Hong Kong have implemented IoT monitoring for preventative maintenance of transportation infrastructure, while Rio de Janeiro monitors traffic patterns and crime at their central operations center. Mexico city has installed fans in their buildings which suck up local smog. In the waste management sector, San Francisco and London have installed solar-powered automated waste bins, that alert local authorities to when they are full; creating ideal routes for trash collection and reducing operational costs by 70%.

Despite the many advantages to this innovation, there are numerous current limitations. Due to difficulty in legislating for new technologies, Governmental regulation lags behind innovation. For example, because Brazil, China, and Russia do not have legal standards to distinguish re-manufactured products from used ones, cross-border reverse supply-chains are blocked. Reverse supply chains are also hurt by current lack of consumer demand , which is caused by low residual value of returned products. IoT technology itself, which collects so much data people’s private lives, generates major privacy concerns.

Questions arise like: who owns this data collected? How reliable are IoT dependent systems? How vulnerable to hackers are these assets? Despite the prevalence of IoT today, with 73% of companies invest in big data analytics, most of that data is merely used to detect and control anomalies and IoT remains vastly underutilized. Take an oil rig for example, it may have 30,000 sensors, but only 1% of them are examined. Underutilization of IoT in 2013 cost businesses an estimated 544 billion alone.

Even with these current barriers, because of the potential profits and increased social performance, the future implementation of an IoT enhanced CE is bright.

Estimates are that the potential profits from institutions adopting CE models could decrease costs by 20%, along with waste. The increase in efficiency combined with the goodwill generated by conservation is a win-win proposition for innovation, even with costs implementation, future monetary profitability will make it a no-brainer.

Keeping Up With New Work Culture

Keeping Up With New Work Culture

May 15, 2017: Weekly Curated Thought-Sharing on Digital Disruption, Applied Neuroscience and Other Interesting Related Matters.

By Scott Scalon, Hunt Scalon Media

Curated by Helena M. Herrero Lamuedra

Companies are facing a radically shifting context for the workforce, the workplace, and the world of work, and these shifts have already changed the rules for nearly every organizational people practice, from learning and management to executive recruiting and the definition of work itself. Every business leader, no matter their function or industry, has experienced some form of radical work transformation, whether it be digitally in the form of social media, for example, demographically, or in countless other ways. Old paradigms are out, new ways of thinking are in — and talent, that one ‘commodity’ we’re all after is caught up in the middle of it all.

Almost 90 percent of HR and business leaders rate building the organization of the future as their highest priority, according to Deloitte’s latest Global Human Capital Trends report, “Rewriting the Rules for the Digital Age.” In the report, Deloitte issues a call-to-action for companies to completely reconsider their organizational structure, talent and HR strategies to keep pace with the disruption.

A Networked World of Work

“Technology is advancing at an unprecedented rate and these innovations have completely transformed the way we live, work and communicate,” said Josh Bersin, principal and founder, Bersin by Deloitte, Deloitte Consulting. “Ultimately, the digital world of work has changed the rules of business. Organizations should shift their entire mind-set and behaviors to ensure they can lead, organize, motivate, manage and engage the 21st century workforce, or risk being left behind.”

With more than 10,000 HR and business leaders in 140 countries weighing in, this massive study reveals that business leaders are turning to new organization models, which highlight the networked nature of today’s world of work. However, as business productivity often fails to keep pace with tecnological progress, Deloitte finds that HR leaders are struggling to keep up, with only 35 percent of them rating their capabilities as ‘good’ or ‘excellent.’

“As technology, artificial intelligence, and robotics transform business models and work, companies should start to rethink their management practices and organizational models,” said Brett Walsh, global human capital leader for Deloitte Global. “The future of work is driving the development of a set of ‘new rules’ that organizations should follow if they want to remain competitive.”

Talent Acquisition: Biggest Issue Facing Companies

As the workforce evolves, organizations are focusing on networks of teams, and recruiting and developing the right people is more consequential than ever. However, while Deloitte finds that cognitive technologies have helped leaders bring talent acquisition into the digital world, only 22 percent of survey respondents describe their companies as ‘excellent’ at building a differentiated employee experience once talent is acquired. In fact, the gap between talent acquisition’s importance and the ability to meet the need increased over last year‘s survey.


How Else the World of Work Is Changing

It is, indeed, a landscape of shifting priorities, and nowhere are we seeing this unfold more than among the group that matters most: job candidates. Five years ago, benefits topped their list of preferences. Today it’s culture and flexibility. Organizations need talented employees to drive strategy and achieve goals, but finding, recruiting and retaining people is becoming more difficult. While the severity of the issue varies among organizations, industries and geographies, it’s clear that this new landscape has created new demands. And organizations are scrambling.

It is critical, according to the report, to take an integrated approach to building the employee experience, with a large part of it centering on ‘careers and learning,’ which rose to second place on HRs’ and business leaders’ priority lists, with 83 percent of those surveyed ranking it as ‘important’ or ‘very important.’ Deloitte finds that as organizations shed legacy systems and dismantle yesterday’s hierarchies, it’s important to place a higher premium on implementing immersive learning experiences to develop leaders who can thrive in today’s digital world and appeal to diverse workforce needs.

The importance of leadership as a driver of the employee experience remains strong, as the percentage of companies with experiential programs for leaders rose nearly 20 percentage points from 47 percent in 2015 to 64 percent this year. Deloitte believes there is still a crucial need, however, for stronger and different types of leaders, particularly as today’s business world demands those who demonstrate more agile and digital capabilities.

Time to Rewrite the Rules

As organizations become more digital, leaders should consider disruptive technologies for every aspect of their human capital needs. Deloitte finds that 56 percent of companies are redesigning their HR programs to leverage digital and mobile tools, and 33 percent are already using some form of artificial intelligence (AI) applications to deliver HR solutions.

“HR and other business leaders tell us that they are being asked to create a digital workplace in order to become an ‘organization of the future,’” said Erica Volini, a principal with Deloitte Consulting LLP, and national managing director of the firm’s U.S. human capital practice. “To rewrite the rules on a broad scale, HR should play a leading role in helping the company redesign the organization by bringing digital technologies to both the workforce and to the HR organization itself.”

Deloitte found that the HR function is in the middle of a wide-ranging identity shift. To position themselves effectively as a key business advisor to the organization, it is important for HR to focus on service delivery efficiency and excellence in talent programs, as well as the entire design of work using a digital lens.

How Jobs Are Being Reinvented

While many jobs are being reinvented through technology and some tasks are being automated, Deloitte’s research shows that the essentially human aspects of work – such as empathy, communication, and problem solving – are becoming more important than ever.

This shift is not only driving an increased focus on reskilling, but also on the importance of people analytics to help organizations gain even greater insights into the capabilities of their workforce on a global scale. However, organizations continue to fall short in this area, with only eight percent reporting they have usable data, and only nine percent believing they have a good understanding of the talent factors that drive performance in this new world of work.

One of the new rules for the digital age is to expand our vision of the workforce; think about jobs in the context of tasks that can be automated (or outsourced) and the new role of human skills; and focus even more heavily on the customer experience, employee experience, and employment value proposition for people.

This challenge requires major cross-functional attention, effort, and collaboration. It also represents one of the biggest opportunities for the HR organization. To be able to rewrite the rules, HR needs to prove it has the insights and capabilities to successfully play outside the lines.

Design Culture with the Brain in Mind

Design Culture with the Brain in Mind

May 1, 2017: Weekly Curated Thought-Sharing on Digital Disruption, Applied Neuroscience and Other Interesting Related Matters.

By Charles Roxburgh, McKinsey

Curated by Helena M. Herrero Lamuedra

After nearly 40 years, the theory of business strategy is well developed and widely disseminated. Pioneering work by academics such as Michael E. Porter and Henry Mintzberg has established a rich literature on good strategy. Most senior executives have been trained in its principles, and large corporations have their own skilled strategy departments.

Yet the business world remains littered with examples of bad strategies. Why? What makes chief executives back them when so much know-how is available? Flawed analysis, excessive ambition, greed, and other corporate vices are possible causes, but this article doesn’t attempt to explore all of them. Rather, it looks at one contributing factor that affects every strategist: the human brain.

The brain is a wondrous organ. As scientists uncover more of its inner workings through brain-mapping techniques. But the brain isn’t the rational calculating machine we sometimes imagine. Over the millennia of its evolution, it has developed shortcuts, simplifications, biases, and basic bad habits. Some of them may have helped early humans survive on the savannas of Africa (“if it looks like a wildebeest and everyone else is chasing it, it must be lunch”), but they create problems for us today. Equally, some of the brain’s flaws may result from education and socialization rather than nature. But whatever the root cause, the brain can be a deceptive guide for rational decision making.

These implications of the brain’s inadequacies have been rigorously studied by social scientists and particularly by behavioral economists, who have found that the underlying assumption behind modern economics—human beings as purely rational economic decision makers—doesn’t stack up against the evidence. As most of the theory underpinning business strategy is derived from the rational world of microeconomics, all strategists should be interested in behavioral economics.

Insights from behavioral economics have been used to explain bad decision making in the business world, and bad investment decision making in particular. Some private equity firms have successfully remodeled their investment processes to counteract the biases predicted by behavioral economics. Likewise, behavioral economics has been applied to personal finance, thereby providing an easier route to making money than any hot stock tip. However, the field hasn’t permeated the day-to-day world of strategy formulation.

This article aims to help rectify that omission by highlighting eight.This is far from a complete list of all the flaws in the way we make decisions.

Several examples come from the dot-com era, a particularly rich period for students of bad strategy. But don’t make the mistake of thinking that this was an era of unrepeatable strategic madness. Behavioral economics tells us that the mistakes made in the late 1990s were exactly the sorts of errors our brains are programmed to make—and will probably make again.

Flaw 1: Overconfidence

Our brains are programmed to make us feel overconfident. This can be a good thing; for instance, it requires great confidence to launch a new business. Only a few start-ups will become highly successful. The world would be duller and poorer if our brains didn’t inspire great confidence in our own abilities. But there is a downside when it comes to formulating and judging strategy.

The brain is particularly overconfident of its ability to make accurate estimates. Behavioral economists often illustrate this point with simple quizzes: guess the weight of a fully laden jumbo jet or the length of the River Nile, say. Participants are asked to offer not a precise figure but rather a range in which they feel 90 percent confidence—for example, the Nile is between 2,000 and 10,000 miles long. Time and again, participants walk into the same trap: rather than playing safe with a wide range, they give a narrow one and miss the right answer. Most of us are unwilling and, in fact, unable to reveal our ignorance by specifying a very wide range. Unlike John Maynard Keynes, most of us prefer being precisely wrong rather than vaguely right.

We also tend to be overconfident of our own abilities. In a 1981 survey, for example, 90 percent of Swedes described themselves as above-average drivers. This is a particular problem for strategies based on assessments of core capabilities. Almost all financial institutions, for instance, believe their brands to be of “above-average” value.

Related to overconfidence is the problem of over-optimism. Other than professional pessimists such as financial regulators, we all tend to be optimistic, and our forecasts tend toward the rosier end of the spectrum. The twin problems of overconfidence and overoptimism can have dangerous consequences when it comes to developing strategies, as most of them are based on estimates of what may happen—too often on unrealistically precise and overoptimistic estimates of uncertainties.

One leading investment bank sensibly tested its strategy against a pessimistic scenario—the market conditions of 1994, when a downturn lasted about nine months—and built in some extra downturn. But this wasn’t enough. The 1994 scenario looks rosy compared with current conditions, and the bank, along with its peers, is struggling to make dramatic cuts to its cost base. Other sectors, such as banking services for the affluent and on-line brokerages, are grappling with the same problem.

There are ways to counter the brain’s overconfidence:

  1. Test strategies under a much wider range of scenarios. But don’t give managers a choice of three, as they are likely to play safe and pick the central one. For this reason, the pioneers of scenario planning at Royal Dutch/Shell always insisted on a final choice of two or four options.
  2. Add 20 to 25 percent more downside to the most pessimistic scenario. Given our optimism, the risk of getting pessimistic scenarios wrong is greater than that of getting the upside wrong. The Lloyd’s of London insurance market—which has learned these lessons the hard, expensive way—makes a point of testing the market’s solvency under a series of extreme disasters, such as two 747 aircraft colliding over central London. Testing the resilience of Lloyd’s to these conditions helped it build its reserves and reinsurance to cope with the September 11 disaster.
  3. Build more flexibility and options into your strategy to allow the company to scale up or retrench as uncertainties are resolved. Be skeptical of strategies premised on certainty.

Flaw 2: Mental accounting

Richard Thaler, a pioneer of behavioral economics, coined the term “mental accounting,” defined as “the inclination to categorize and treat money differently depending on where it comes from, where it is kept, and how it is spent.” Gamblers who lose their winnings, for example, typically feel that they haven’t really lost anything, though they would have been richer had they stopped while they were ahead.

Mental accounting pervades the boardrooms of even the most conservative and otherwise rational corporations. Some examples of this flaw include the following:

  • being less concerned with value for money on expenses booked against a restructuring charge than on those taken through the P&L
  • imposing cost caps on a core business while spending freely on a start-up
  • creating new categories of spending, such as “revenue-investment spend” or “strategic investment”

All are examples of spending that tends to be less scrutinized because of the way it is categorized, but all represent real costs.

These delusions can have serious strategic implications. Take cost caps. In some UK financial institutions during the dot-com era, core retail businesses faced stringent constraints on their ability to invest, however sound the proposal, while start-up Internet businesses spent with abandon. These banks have now written off much of their loss from dot-com investment and must reverse their underinvestment in core businesses.

Avoiding mental accounting traps should be easier if you adhere to a basic rule: that every pound (or dollar or euro) is worth exactly that, whatever the category. In this way, you will make sure that all investments are judged on consistent criteria and be wary of spending that has been reclassified. Be particularly skeptical of any investment labeled “strategic.”

Flaw 3: The status quo bias

In one classic experiment, students were asked how they would invest a hypothetical inheritance. Some received several million dollars in low-risk, low-return bonds and typically chose to leave most of the money alone. The rest received higher-risk securities—and also left most of the money alone. What determined the students’ allocation in this experiment was the initial allocation, not their risk preference. People would rather leave things as they are. One explanation for the status quo bias is aversion to loss—people are more concerned about the risk of loss than they are excited by the prospect of gain. The students’ fear of switching into securities that might end up losing value prevented them from making the rational choice: rebalancing their portfolios.

A similar bias, the endowment effect, gives people a strong desire to hang on to what they own; the very fact of owning something makes it more valuable to the owner. Richard Thaler tested this effect with coffee mugs imprinted with the Cornell University logo. Students given one of them wouldn’t part with it for less than $5.25, on average, but students without a mug wouldn’t pay more than $2.75 to acquire it. The gap implies an incremental value of $2.50 from owning the mug.

The status quo bias, the aversion to loss, and the endowment effect contribute to poor strategy decisions in several ways. First, they make CEOs reluctant to sell businesses. McKinsey research shows that divestments are a major potential source of value creation but a largely neglected one. CEOs are prone to ask, “What if we sell for too little—how stupid will we look when this turns out to be a great buy for the acquirer?”

These phenomena also make it hard for companies to shift their asset allocations. Before the recent market downturn, the UK insurer Prudential decided that equities were overvalued and made the bold decision to rebalance its fund toward bonds. Many other UK life insurers, unwilling to break with the status quo, stuck with their high equity weightings and have suffered more severe reductions in their solvency ratios.

This isn’t to say that the status quo is always wrong. Many investment advisers would argue that the best long-term strategy is to buy and hold equities (and, behavioral economists would add, not to check their value for many years, to avoid feeling bad when prices fall). In financial services, too, caution and conservatism can be strategic assets. The challenge for strategists is to distinguish between a status quo option that is genuinely the right course and one that feels deceptively safe because of an innate bias.

To make this distinction, strategists should take two approaches:

  1. Adopt a radical view of all portfolio decisions. View all businesses as “up for sale.” Is the company the natural parent, capable of extracting the most value from a subsidiary? View divestment not as a failure but as a healthy renewal of the corporate portfolio.
  2. Subject status quo options to a risk analysis as rigorous as change options receive. Most strategists are good at identifying the risks of new strategies but less good at seeing the risks of failing to change.

Flaw 4: Anchoring

One of the more peculiar wiring flaws in the brain is called anchoring. Present the brain with a number and then ask it to make an estimate of something completely unrelated, and it will anchor its estimate on that first number. The classic illustration is the Genghis Khan date test. Ask a group of people to write down the last three digits of their phone numbers, and then ask them to estimate the date of Genghis Khan’s death. Time and again, the results show a correlation between the two numbers; people assume that he lived in the first millennium, when in fact he lived from 1162 to 1227.

Anchoring can be a powerful tool for strategists. In negotiations, naming a high sale price for a business can help secure an attractive outcome for the seller, as the buyer’s offer will be anchored around that figure. Anchoring works well in advertising too. Most retail-fund managers advertise their funds on the basis of past performance. Repeated studies have failed to show any statistical correlation between good past performance and future performance. By citing the past-performance record, though, the manager anchors the notion of future top-quartile performance to it in the consumer’s mind.

However, anchoring—particularly becoming anchored to the past—can be dangerous. Most of us have long believed that equities offer high real returns over the long term, an idea anchored in the experience of the past two decades. But in the 1960s and 1970s, UK equities achieved real annual returns of only 3.3 and 0.4 percent, respectively. Indeed, they achieved double-digit real annual returns during only 4 of the past 13 decades. Our expectations about equity returns have been seriously distorted by recent experience.

Besides remaining unswayed by the anchoring tactics of others, strategists should take a long historical perspective. Put trends in the context of the past 20 or 30 years, not the past 2 or 3; for certain economic indicators, such as equity returns or interest rates, use a very long time series of 50 or 75 years. Some commentators who spotted the dot-com bubble early did so by drawing comparisons with previous technology bubbles—for example, the uncannily close parallels between radio stocks in the 1920s and Internet stocks in the 1990s.

Flaw 5: The sunk-cost effect

A familiar problem with investments is called the sunk-cost effect, otherwise known as “throwing good money after bad.” When large projects overrun their schedules and budgets, the original economic case no longer holds, but companies still keep investing to complete them.

Financial institutions often face this dilemma over large-scale IT projects. There are numerous examples, most of which remain private. One of the more public cases was the London Stock Exchange’s automated-settlement system, Taurus. It took the intervention of the Bank of England to force a cancellation, write off the expenses, and take control of building a replacement.

Executives making strategic-investment decisions can also fall into the sunk-cost trap. Certain European banks spent fortunes building up large equities businesses to compete with the global investment-banking firms. It then proved extraordinarily hard for some of these banks to face up to the strategic reality that they had no prospect of ever competing successfully against the likes of Goldman Sachs, Merrill Lynch, and Morgan Stanley in the equities business. Some banks in the United Kingdom took the agonizing decision to write off their investments; other European institutions are still caught in the trap.

Why is it so hard to avoid? One explanation is based on loss aversion: we would rather spend an additional $10 million completing an uneconomic $110 million project than write off $100 million. Another explanation relies on anchoring: once the brain has been anchored at $100 million, an additional $10 million doesn’t seem so bad.

What should strategists do to avoid the trap?

  1. Apply the full rigor of investment analysis to incremental investments, looking only at incremental prospective costs and revenues. This is the textbook response to the sunk-cost fallacy, and it is right.
  2. Be prepared to kill strategic experiments early. In an increasingly uncertain world, companies will often pursue several strategic options. Successfully managing a portfolio of them entails jettisoning the losers. The more quickly you get out, the lower the sunk costs and the easier the exit.
  3. Use “gated funding” for strategic investments, much as pharmaceutical companies do for drug development: release follow-on funding only once strategic experiments have met previously agreed targets.

Flaw 6: The herding instinct

The banking industry, like many others, shows a strong herding instinct. It tends to lend too much money to the same kinds of borrowers at the same time—to UK property developers in the 1970s, less-developed countries in the 1980s, and technology, media, and telecommunications companies more recently. And banks tend to pursue the same strategies, be it creating Internet banks with strange-sounding names during the dot-com boom or building integrated investment banks at the time of the “big bang,” when the London stock market was liberalized.

This desire to conform to the behavior and opinions of others is a fundamental human trait and an accepted principle of psychology. Warren Buffett put his finger on this flaw when he wrote, “Failing conventionally is the route to go; as a group, lemmings may have a rotten image, but no individual lemming has ever received bad press.” For most CEOs, only one thing is worse than making a huge strategic mistake: being the only person in the industry to make it.

We all felt the tug of the herd during the dot-com era. It was lonely being a Luddite, arguing the case against setting up a stand-alone Internet bank or an on-line brokerage. At times of mass enthusiasm for a strategic trend, pressure to follow the herd rather than rely on one’s own information and analysis is almost irresistible. Yet the best strategies break away from the trend. Some actions may be necessary to match the competition—imagine a bank without ATMs or a good on-line banking offer. But these are not unique sources of strategic advantage, and finding such sources is what strategy is all about. “Me-too” strategies are often simply bad ones. Seeking out the new and the unusual should therefore be the strategist’s aim. Rather than copying what your most established competitors are doing, look to the periphery for innovative ideas, and look outside your own industry.

Initially, an innovative strategy might draw skepticism from industry experts. They may be right, but as long as you kill a failing strategy early, your losses will be limited, and when they are wrong, the rewards will be great.

Flaw 7: Misestimating future hedonic states

What does it mean, in plain English, to misestimate future hedonic states? Simply that people are bad at estimating how much pleasure or pain they will feel if their circumstances change dramatically. Social scientists have shown that when people undergo major changes in circumstances, their lives typically are neither as bad nor as good as they had expected—another case of how bad we are at estimating. People adjust surprisingly quickly, and their level of pleasure (hedonic state) ends up, broadly, where it was before.

This research strikes a chord with anyone who has studied compensation trends in the investment-banking industry. Ever-higher compensation during the 1990s led only to ever-higher expectations—not to a marked change in the general level of happiness on the Street. According to Tom Wolfe’s Sherman McCoy, in Bonfire of the Vanities, it was hard to make ends meet in New York on $1 million a year in 1987. Back then, that was shocking hubris from a (fictional) top bond salesman. By 2000, even adjusted for inflation, it would have seemed a perfectly reasonable lament from a relatively junior managing director.

Another illustration of our poor ability to judge future hedonic states in the business world is the way we deal with a loss of independence. More often than not, takeovers are seen as the corporate equivalent of death, to be avoided at all costs. Yet sometimes they are the right move.

Often, top management is blamed for resisting any loss of independence. Certainly part of the problem is the desire of managements and boards to hang on to the status quo. That said, frontline staff members often resist a takeover or merger however much they are frustrated with the existing top management. Some deeper psychological factor appears to be at work. We do seem very bad at estimating how we would feel if our circumstances changed dramatically—changes in corporate control, like changes in our personal health or wealth.

How can the strategist avoid this pitfall?

  1. In takeovers, adopt a dispassionate and unemotional view. Easier said than done—especially for a management team with years of committed service to an institution and a personal stake in the status quo. Nonexecutives, however, should find it easier to maintain a detached view.
  2. Keep things in perspective. Don’t overreact to apparently deadly strategic threats or get too excited by good news. During the high and low points of the crisis at Lloyd’s of London in the mid-1990s, the chairman used to quote Field Marshall Slim—”In battle nothing is ever as good or as bad as the first reports of excited men would have it.” This is a good guide for every strategist trying to navigate a crisis, with the inevitable swings in emotion and morale.

Flaw 8: False consensus

  • People tend to overestimate the extent to which others share their views, beliefs, and experiences—the false-consensus effect. Research shows many causes, including these:
  • confirmation bias, the tendency to seek out opinions and facts that support our own beliefs and hypotheses
  • selective recall, the habit of remembering only facts and experiences that reinforce our assumptions
  • biased evaluation, the quick acceptance of evidence that supports our hypotheses, while contradictory evidence is subjected to rigorous evaluation and almost certain rejection; we often, for example, impute hostile motives to critics or question their competence
  • groupthink, the pressure to agree with others in team-based cultures

Consider how many times you may have heard a CEO say something like, “the executive team is 100 percent behind the new strategy” (groupthink); “the chairman and the board are fully supportive and they all agree with our strategy” (false consensus); “I’ve heard only good things from dealers and customers about our new product range” (selective recall); “OK, so some analysts are still negative, but those ’teenage scribblers’ don’t understand our business—their latest reports were superficial and full of errors” (biased evaluation). This hypothetical CEO might be right but more likely is heading for trouble. The role of any strategic adviser should be to provide a counterbalance to this tendency toward false consensus. CEOs should welcome the challenge.

False consensus, which ranks among the brain’s most pernicious flaws, can lead strategists to miss important threats to their companies and to persist with doomed strategies. But it can be extremely difficult to uncover—especially if those proposing a strategy are strong role models. We are easily influenced by dominant individuals and seek to emulate them. This can be a force for good if the role models are positive. But negative ones can prove an irresistible source of strategic error.

Many of the worst financial-services strategies can be attributed to over-dominant individuals. Their behavior set the tone and created a culture of noncompliance.

The dangers of false consensus can be minimized in several ways:

  1. Create a culture of challenge. As part of the strategic debate, management teams should value open and constructive criticism. Criticizing a fellow director’s strategy should be seen as a helpful, not a hostile, act. CEOs and strategic advisers should understand criticisms of their strategies, seek contrary views on industry trends, and, if in doubt, take steps to assure themselves that opposing views have been well researched. They shouldn’t automatically ascribe to critics bad intentions or a lack of understanding.
  2. Ensure that strong checks and balances control the dominant role models. A CEO should be particularly wary of dominant individuals who dismiss challenges to their own strategic proposals; the CEO should insist that these proposals undergo an independent review by respected experts. The board should be equally wary of a domineering CEO.
  3. Don’t “lead the witness.” Instead of asking for a validation of your strategy, ask for a detailed refutation. When setting up hypotheses at the start of a strategic analysis, impose contrarian hypotheses or require the team to set up equal and opposite hypotheses for each key analysis. Establish a “challenger team” to identify the flaws in the strategy being proposed by the strategy team.

An awareness of the brain’s “flaws” can help strategists and culture designers steer around them. All strategists should understand the insights of behavioral economics just as much as they understand those of other fields of the “dismal science.” Such an understanding won’t put an end to bad strategy; greed, arrogance, and sloppy analysis will continue to provide plenty of textbook cases of it. Understanding some of the flaws built into our thinking processes, however, may help reduce the chances of good executives backing bad strategies.

About the author(s)

Charles Roxburgh is a director in McKinsey’s London office