In Strategy We Trust

In Strategy We Trust: Barbara Brooks Kimmel of Trust Across America interviews ACS’ Mark Chussil

This interview comes from the Trust Across America blog, where Barbara Brooks Kimmel writes on building great business through trustworthy behavior. Ms. Kimmel is a Founder of Trust Across America. I had appeared on Trust Across America’s radio show on September 29, 2010, and Ms. Kimmel and I continued our discussion after the show.

Barbara: Mark, tell us a little about your background.

Mark: I am the Founder and CEO of Advanced Competitive Strategies, and author of Marvelous Techniques: Essays on Going Beyond Strategy as We’ve Known It (available direct from ACS) and Nice Start: Questions Only You Can Answer to Create the Life Only You Can Live (Inkwater Press). I lecture and consult globally about strategic thinking, business war games, and strategy simulation. My work has appeared in Fast Company, The Wall Street Journal, and elsewhere. And finally, I earned an MBA at Harvard and a BA at Yale.

Barbara: Why do companies engage in untrustworthy behavior?

Mark: No one gets up in the morning saying “My job today is to screw up the world. If I make people miserable, if I hurt the general well-being, if I damage our civilization in even the slightest way, then I can go to sleep with the satisfaction in a job well done.” Most people want to do good things, but when we work for a company, we are bound, in a keep-my-job way, to “do good” according to the company’s definition of “doing good.” We do what we’re paid to do.

Barbara: On your blog you have an essay called “What You Pay For.” Is that what you mean?

Mark: Yes. The customer gets what he or she pays for, and companies are our customers when it comes to employment. If the customer, the company, pays you for sales growth, it will get sales growth from you. It may also get profits or innovation or social responsibility, and it may also get shortcuts or bribery or non-compliance with safety regulations, but those are side effects.

Barbara: Presumably a trustworthy company cares about more than just sales growth.

Mark: Yes, a trustworthy company will care about other metrics too, such as impact on the environment, fair treatment of employees, customers, and suppliers, and living up to its word. The point is that compensation programs — what companies pay for — are tremendously important. Perhaps one way to identify trustworthy companies is to find out what they pay for.

Barbara: What else can we look at besides compensation programs?

Mark: Look also at how they work. Kaiser Permanente, the big HMO, is proactively using data on medical tests. Over the last 15 years they identified 450 patients with new or recurring cancers or abnormal biopsies who would not otherwise have been found. I’m one of their customers, and that proaction is one reason why. See “What the Doctor Missed” in The Wall Street Journal.

Barbara: The Wall Street Journal had an article on automobile safety (“What’s Safer, a Chevy or Mercedes?”). I think you blogged about it, in “Who Doesn’t Like Airbags?”. The auto industry has often resisted mandatory safety improvements, even going back to seat belts, as well as fuel-economy standards. Now they compete on safety features and fuel economy. What happened?

Mark: Regulations forced some good behavior, such as publicizing crash-test results so customers would have the information they need to compare car models. Plus, Lee Iacocca, who used to run Chrysler, decided to stop resisting safety improvements and, instead, make safety a selling point. The resulting competition directly benefits customers.

Barbara: Why did Mr. Iacocca do that?

Mark: I don’t know. Did he change his mind because he saw there was money to be made or because he wanted to save people’s lives? Do we care about the answer?

Barbara: Are you saying that it doesn’t matter why a company does good things? What, then, does it mean to be “trustworthy?”

Mark: At one level I don’t care why a company does good things. I want Delta to fly me safely from one place to another. I don’t care if they do it because they’re afraid of punishment if they fail, they don’t want to lose customers (perhaps literally), or they think it’s honorable to keep their customers safe. Does it matter if I give to a charity because I like the charity or because I think the donation will get me into heaven? [See Update at the end of this interview for more on this subject.]

Barbara: But the threat of punishment seems to happen when a company has proven itself untrustworthy.

Mark: I agree. We expect “trustworthy” to have some connection to good motives and intentions, not merely following the rules. A company that demonstrates good intentions makes us trust that it will not deceive us or put us at risk. We’re all sadly familiar with the opposite kind of company.

Barbara: So let’s talk about a company’s motives and intentions. Is it reasonable to expect a company to behave well?

Mark: Professors Jay Lorsch and Rakesh Khurana of the Harvard Business School wrote an article called “The Pay Problem.” They say corporations have shifted their focus from “stakeholders” to “shareholders.” Stakeholders can include customers, employees, and society in general; shareholders means just the people who own shares in the company. When we evaluate decisions in terms of effects on stakeholders, we look more broadly than when we think only of shareholders.

Barbara: What difference does that shift make?

Mark: I believe it means we have more need of government regulation, and I think that recent events ranging from the financial crisis to the BP oil spill show why. We need rules to ensure that the shareholders-perspective does not go too far. That’s why we have anti-trust laws, the FAA, FDA, and FTC, minimum fuel economy rules, and so on. Those solutions might have been controversial when they were first put in place, but just try to take them away now.

Barbara: You mentioned regulations, which are enforced with fines and other actions. An article in Newsweek, “Do Fines Ever Make Corporations Change” (September 13, 2010), suggested that fines won’t make corporations change because they are tiny relative to the size of the companies. Do we get untrustworthy behavior because fines are too low?

Mark: Perhaps fines are too low, and perhaps inspections are too infrequent or lax. An option might be for fines to go up as a company accumulates offenses, just as insurance companies raise our rates if we get into too many accidents or we face more years in prison for repeated offenses. But those are punishments. We really want to prevent bad behavior, and there are reasons why companies may think it’s profitable to risk take chances.

Barbara: Why?

Mark: One reason is that companies generally don’t quantify the value of their reputations, so they don’t know until it’s too late (and maybe not even then) how much it hurts to have their name dragged through the mud. A second is that human beings underestimate the odds of a bad event; “it won’t happen to us.” A third is that there’s little incentive to be the first one to play fair. Managers can clearly see, or think they see, the costs of playing fair, and it’s harder for them to see the benefits.

Barbara: It’s important to level the playing field or to have vigorous competition.

Mark: I agree. Regulations level the playing field so no one has extra costs. I’ve worked with executives who want stronger regulations so that they can do what they know is right without making themselves uncompetitive. And Lee Iacocca’s move, being the first to embrace safety features, was important because he changed the calculus for the other automakers. They could see the costs of falling behind.

Barbara: So what are you saying about companies? Why don’t they see the benefits as well as the costs of trustworthy behavior?

Mark: Some management experts say if you don’t measure it you won’t manage it. Problem is, financial statements don’t have lines for reputation, customer loyalty, product quality, and so on, and they don’t show how a loss of reputation trickles down to a lousy bottom line. And management culture is dominated by financial statements.

Barbara: In your writing you often talk about the quality of decision-making. What do you mean by that?

Mark: Imagine you have a persistent cough. You would not expect your doctor simply to say “in my experience, people with persistent coughs usually have bacterial pneumonia, so take these antibiotics and you’ll be fine.” Well, you won’t be fine if your persistent cough comes from asthma, emphysema, or lung cancer. A doctor who just gives antibiotics to every coughing patient who comes in without asking questions and running tests… that sounds to me like it’d be malpractice. But an executive following that approach might have a fine career in the business world. See my essays “It’s Working!” and “Gross Galactic Product.”

Barbara: In other words, part of trustworthiness is good decision-making.

Mark: Yes, even for shareholders. I think everyone would agree that the quality of decisions affects the probability of good outcomes. The better the decisions, the better the outcomes. It’s not a guarantee, but it raises the odds. Good outcomes mean jobs for employees, healthy communities, happy customers, and fair returns for shareholders. Bad decisions and bad outcomes help no one.

Barbara: Okay, so how do we get good-quality decisions? Isn’t that why companies try to hire the best managers, with experience and education?

Mark: Yes, but if that’s all it took we wouldn’t have companies going under. GM didn’t go under after a slow decline of 40 years because it hired bad managers; on the contrary, it went under in spite of hiring good managers. See my essay “Suffering Was Optional.”

Barbara: If having good managers isn’t enough, what else do we need?

Mark: Just as there are modern tools of medicine that help your doctor make good decisions about your persistent cough, there are modern tools of management that help managers make good decisions about their businesses. But in management we still have a culture of experience, even “instinct,” instead of rigorous, critical thinking. One of the themes in my book Marvelous Techniques is that we have biased humans using flawed tools, and that leads to bad decisions.

Barbara: What do you mean by “biased humans” and “flawed tools”?

Mark: I don’t mean that humans are biased in the sense of prejudice, and I don’t mean tools are flawed in the sense that they make mistakes in arithmetic. I mean that all managers are humans, and humans have a variety of unconscious biases that interfere with our ability to make good decisions. I mean that tools are flawed if they are the wrong tool for the problem, such as using an accounting-based spreadsheet to answer a strategy question.

Barbara: Give me examples of biased humans.

Mark: Russo and Shoemaker, in Decision Traps, talk about overconfidence and group biases that led, among other things, to the Challenger disaster. Tavris and Aronson, in Mistakes Were Made (but not by me), talk about cognitive dissonance, which makes people cling to past beliefs, such as the guilt of a person held in prison for many years, even after there’s conclusive evidence to the contrary. Dörner, in The Logic of Failure, describes the disaster at Chernobyl, when people overrode safety systems because they believed they were experts and knew what they were doing.

Barbara: How does that apply to business?

Mark: Perhaps the most obvious example is price wars. Price wars can be devastating to companies; look at the airlines. You’d think that smart, experienced managers wouldn’t start price wars. Yet they do, and getting out of them can take a long, unprofitable time. Price wars are a more complicated subject than they might appear, but the key thing is that no one expects to suffer a price war. They expect to enjoy a price advantage.

Barbara: What’s another mistake due to bias?

Mark: Managers often think they can forecast the results of a strategy in their heads; that’s what they’re doing when they say “if I do this, then I’ll get that result.” Business, though, is immensely complicated. Just to give you an idea of that: I conducted a recent program for a Fortune 500 company in which we determined that there were over 39 million possible outcomes from the options they faced. No human being can even list them, let alone pick which are the most probable or most profitable. See my essay “The How-Likely Case.”

Barbara: How about flawed tools?

Mark: We talked earlier about financial statements that don’t take into account reputation, customer loyalty, product quality, and similar factors. Those spreadsheets also don’t take competitors’ reactions into account. As a result, many analyses based on financial spreadsheets leave companies vulnerable to surprises. Generally unpleasant surprises, because spreadsheet analysis implicitly assumes that a strategy will work.

Barbara: How, then, can companies avoid falling into those traps?

Mark: The best techniques I’ve seen involve business war games and strategy simulations, which are ways to stress-test business strategies. They’re able to get past the limitations of spreadsheets and trend lines, and they’re able to handle the arithmetic. By the way, business war games aren’t about war or conquest. See my essay “The War (Game) Metaphor.”

Barbara: Should we not trust companies unless they use business war games or strategy simulations?

Mark: My point is not about business war games or strategy simulations, although they do work. The point is that companies need conscious, deliberate processes that ask tough questions, such as what could make our strategy fail. The USA and the EU took a step in that direction when we started to stress-test banks after the financial crisis. Without that question we get wishful thinking, results that disappoint, careers that flame out, people losing their jobs, and contributions to economic problems instead of to economic recovery.

Barbara: Why look at what could make a strategy fail?

Mark: Because that’s how we know how risky it is and what we have to do to strengthen it. Imagine how much better off we’d all be if we’d run those stress-tests before the financial crisis instead of after.

Barbara: Have any stories about that?

Mark: Sure, see my essay “When I Was Wrong.” I put together a pricing simulation that, so far, about 300 strategists have tried. I put in my own strategies, and they didn’t do very well. After I got over my private humiliation, I realized it was a good thing. Before the simulation, you’d have every reason to trust my advice: I’m an expert in my field, and you could expect me to know what I’m talking about. After the simulation — that is, after I learned from the simulation — you’d get much better advice from me. The trick is to make mistakes where it’s fast, cheap, and educational, not when real jobs, real careers, and real money depend on it.

Barbara: Mark, thank you for sharing your thoughts with me.

Mark: You’re welcome. Thanks for having me on the show, and congratulations on the work you’re doing at Trust Across America.

If you have a comment or question about the interview, Trust Across America invites you to share it in their comments box.

Update, October 7, 2010. In Brazil Engineers a Critic-Proof Dam, The Wall Street Journal says Brazil decided it made business sense to build environmentally conscious dams on the Amazon. “The dam’s greener hue isn’t because of any special environmental ardor on the part of the builders. It reflects a calculation about the unpredictable extra costs that environmental suits, [Amazonian] Indian protests and political backlashes can cause. ‘In the end, this is business,’ said Gabriel Azevedo, a former World Bank and World Wildlife Fund executive who serves as sustainability director at the energy division of the dam’s lead construction company, Odebrecht SA.”

Update, January 7, 2011. Trust Across America named Mark Chussil “one of 2010’s Top 100 Thought Leaders in Trustworthy Business Behavior.”

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