It’s Working!

It’s Working! How evidence proves all’s well before a fall, by Mark Chussil

What does your strategy-development process have in common with the financial crisis gripping us all?

That depends on how you think about what’s working and what isn’t.

Much has been said and written about what’s gone wrong with the economy: indecipherable financial instruments, assumptions that home prices would continue to rise, lack of regulation, and on and on. But those aren’t just causes; they’re effects, too. Complex securities, bad assumptions, and deregulation didn’t materialize out of nowhere, they’re the effects of decisions people made. So why did smart, self-interested, experienced people decide to buy and sell such complicated instruments, risk so much on such unsupportable assumptions, and let the inmates run the asylum?

It’s tempting to say that they’re greedy, short-sighted, narrow-minded, and selfish. Thinking that makes it easy to blame them, to emphasize how different they are from us, and to justify why we should punish them.

Well, maybe they are greedy, short-sighted, narrow-minded, and selfish. Some of them, anyway. But it’s hard to believe that all of them are. It’s even harder to believe that greed, short-sightedness, narrow-mindedness, and selfishness alone could cause the problems we’re experiencing.

We could blame denial and wishful thinking (theirs, of course). But that too isn’t particularly satisfying: it merely labels the problem, it doesn’t explain or solve the problem. After all, no one gets up in the morning and decides to make multi-billion-dollar decisions on the basis of denial, so advising “don’t go into denial” is about as helpful as “have a nice day.”

Let’s rephrase our question. What would lead so many smart, self-interested, experienced people to go down the same path? Greedy denial doesn’t make people behave the same way. What makes people behave the same way is shared beliefs.

In the case of the financial crisis (and perhaps your company’s strategy-development process; we haven’t forgotten that part), the shared belief was that the party wasn’t over. When you believe the party is over, you go home; the people who stay are those who think there’s still fun to be had.

Why did they think there was still fun to be had? After all, smart, self-interested, experienced people, whether or not they’re greedy deniers, know that house prices won’t rise ad infinitum, especially knowing that the engine of that growth is people who buy more house(s) than they can afford. However, they could easily fall into the keep-partying trap for a simple reason: the “evidence” showed that their strategies were working. For years their numbers got better and better. Success! And their intelligence, cleverness, and resourcefulness (plus an “insane drive” for ever-better results) kept the party going. Continued success! You can say that it’s a lousy strategy, party-pooper, but look at my numbers. It’s rational to keep going. It’s working!

And that’s where we can see the parallel with strategy development. We judge the success of a strategy by its outcomes — it’s working! — and we decide to stay at the party because the party has been pretty good to us so far. We extrapolate the past into the future, and we don’t see where our own efforts may be prolonging the buzz.

Consider Blockbuster. It grew rapidly: its first store opened in 1985, and it was sold to Viacom in 1994 for $8.4 billion ($11.6 billion in 2007 dollars). It was “split off” in 2004 after multi-billion-dollar losses, when it had a market value of $2.7 billion ($3.0 billion in 2007 dollars). Its current market value is slightly over $300 million. [Update, September 26, 2010: Blockbuster to Remake Itself Under Creditors, says the Wall Street Journal. Blockbuster filed for bankruptcy on September 23.] We note with respect that Blockbuster’s owners, Wayne Huizenga and John Melk, left the party when all was still merry.

(Tangent: Business schools teach that you should sell something when you cannot make it more valuable than it currently is and when it’s worth at least that much to someone else. Often, though, we fall into various emotional and analytical traps, such as “it’s working!,” and finally sell at fire-sale prices at the sorry end of the party. Sound sadly familiar?)

Of course a misguided “it’s working!” isn’t the only cause of bad strategies or the financial crisis. What’s especially interesting about it, though, is that it is closer to the root of the problem than singling out the individuals who fall for its seductive lure. What’s interesting too is that we can do something about it.

My colleagues and I have learned over many years that strategists make better decisions when they look as assiduously for reasons why a strategy isn’t going to work as they look for reasons why it will. I find that business war games are tremendously effective at that process (as I describe in “Learning Faster Than the Competition“), but they’re not the only way. Whether you use business war games or something else, the trick is to stress-test your strategy options, especially because so many conventional tools and discussions focus on why your strategy is going to succeed. For instance, spreadsheets of your business’ future rarely take into account the moves your competitors are about to make.

Who is more likely to fall into the stay-at-the-party trap? Greedy or non-greedy people? Numerate people or innumerate people? Experienced people or novices? I suggest that those at the greatest risk are those who, due to how they interpret experience and numbers, are more likely to be fooled by “it’s working!”

• If you believe that action A leads to result B, then you are more likely to be fooled than a person who believes that result B comes from a whole cloud of activity, some done by you, some done by others.
• If you look at past performance (profits, market share, economic growth, foreclosure rates, product recalls, whatever) and conclude that a desirable trend means that your actions are working, then you are more likely to be fooled than someone who asks questions such as what would have happened if we did something else and do we have fewer product recalls because products are better or because we have cut funding on safety checks.
• If you work in an organization that aggressively values success (however defined), for instance by “weeding out underperformers,” then you are more likely to be fooled than someone who works in an organization that values what-if scenario thinking. I don’t mean we should keep underperformers. I mean we should define and measure underperformance carefully.
• If you look at lagging indicators and effects (sales, profits, etc.), then you are more likely to be fooled than a person who looks at leading indicators and causes (drivers of demand, where you are investing, where your competitors are investing, etc.).

In short, if you focus on nominal outcomes, then you are more likely to be fooled than someone who focuses on quality decisions. And when you are fooled, you are likely to stay too long at the party that is “working” so well.

Update: Newsweek columnist Robert J. Samuelson makes a similar argument in his Good Times Breed Bad Times column from the October 27, 2008, issue of the magazine.

Update: See an interesting article about confirmation bias, How to Ignore the Yes-Man in Your Head, by Jason Zweig in The Wall Street Journal, November 14, 2009.

Update: “A World in Denial of What It Knows,” by Geoffrey Wheatcroft in The New York Times on December 31, 2011. A powerful argument against what, in retrospect, seems wishful thinking about “it will work.” Wheatcroft notes Donald Rumsfeld’s known knows, known unknowns, and unknown unknowns, and argues we need to look at the fourth possibility: unknown knowns, or those things that we choose not to know even though we (can) know them.