What Are You Missing?

Many errors are errors of perception, not logic.

How we look at the world affects the opportunities we pursue and the risks we mitigate. Over time, mindset and perspective shapes reality.

But we’re all susceptible to a range of biases.

We tend to find data that confirms what we already believe. We place too much weight on the status quo and avoid considering novel situations. We overestimate our influence. We seek more data, even when it’s not helpful. Our thinking is framed by the way information is presented. And we can be blind to useful data that is missing.

These are just a few of the many biases that lead to flawed decisions.

Focus on where the holes ain’t

(Source: Wikimedia Commons)

A classic example is a story about plane improvement in World War II. As bombers returned from battle, researchers analyzed the bullet holes in extensive detail. The military then reinforced the parts of the planes most often hit by bullets.

That is until one bright spark pointed out they were reinforcing the wrong parts of the plane. They had been looking at places where a plane could get hit and still return safe to base. Instead, they should reinforce the other parts, where a bullet stops you making it back!

This is a classic situation of information bias and survival bias. We have plenty of available data, so we jump straight into analyzing it. But it’s actually the data we don’t have that matters. That is, the data about where bullet holes cause the planes to crash.

Avoid the narrow frame

Here’s another example. Various initiatives exist to help more women progress to senior roles in organizations. For example, more attractive maternity leave, childcare subsidies, and gender specific quotas.

But a recent study found a surprising fact. What was the number one initiative linked to a higher percentage of women in senior roles? Paternity leave. That’s right, an initiative not aimed at women at all.

This is a good example of framing bias. If we see female advancement as a women’s issue, we focus our solutions specifically on women. But the narrow framing of the problem prevents us from seeing other effective solutions. It turns out that when men get more involved in family life, then women get more opportunities at work. Plus, they also get the support at home needed to pursue senior opportunities.

Don’t just listen to the usual suspects

One last example. Think of the last time you did some customer research for your organization. How did you source your participants? 

Chances are you used email, website notifications, in-store promotion and/or social posts. All these methods are convenient, easy to use, and very low cost (if not free). You may even have achieved a reassuringly large sample size.

But stop and think: did you hear from all the people you need to?

Did you go out of your way to survey people who are not currently your customers? What about inactive or occasional customers? What about those who haven’t even heard of your brand?

If not, you may have skewed the survey responses to those who are already most engaged with your brand. Hello sampling bias. And most likely also expectation and confirmation bias.

Your survey results could be like the bullet holes in WWII planes: obvious, available, and ready to analyze. But they may also be dangerously misleading.

Ask yourself: what am I missing?

So before you make a key decision or crunch some important data, stop and pause for a moment. Ask yourself: am I missing something?

Do I have the full picture? Have I got input from outside the usual suspects? Have I sought dissenting views or had people challenge my assumptions? Am I using too narrow a frame to define the problem?

Chances are you’re missing something important…

Overcoming the ROI roadblock: how to invest in innovative projects despite the uncertainty

“It’s an interesting project but do we have a strong enough business case? Let’s run some ROI calculations and see how it stacks up..”

This sort of eminently reasonable comment often sounds the death-knell for many a worthwhile innovation, despite the best intentions of all involved. Let’s have a closer look at why this is the case, why it’s a problem, and what you can do about it.

The siren song of ROI: why is it so compelling?

Every organization has a limited set of resources, and so it is only natural and prudent to seek a good return on any investment that you make. The heart of the issue is how we define what a “good” return on investment (ROI) actually is.

Commonly ROI is measured using well-established financial tools by looking at the present-value of the expected returns and comparing them to the costs.

However, this approach makes a number of critical assumptions:

  • We can accurately predict the costs that will be incurred
  • We can accurately predict revenue, asset sales, and other such returns
  • We can accurately predict the timing of all costs and returns
  • We understand our alternative opportunities and can apply an appropriate interest rate to discount future costs & returns back into what they are worth today.

In the case of a well-established business considering projects that it understands well from past experiences, these assumptions often hold true. There’ll still be some surprises but the actual ROI probably won’t differ too much from what is expected.

In such circumstances, using ROI assessments to choose which projects to fund and which to avoid is highly effective, which is why ROI has become a widely used approach.

Innovation killer: when is ROI the wrong tool?

The danger of having an effective and proven tool is that we tend to apply it to every situation, regardless of suitability. As a result, ROI is often applied where the underlying assumptions are clearly invalid, such as in entrepreneurial activities & innovative projects where costs, returns, timing and alternatives cannot be predicted with any meaningful level of accuracy.

(Note: another scenario where discounted cash flow and ROI analyses tend to give faulty outcomes is when failing to act has serious consequences – i.e. where “do nothing” is equivalent to “get left behind” – because the core business is declining or is vulnerable to erosion by competitors. For more on this, I strongly recommend reading Christensen, Kaufman & Shih’s HBR article “Innovation killers: How financial tools destroy your capacity to do new things“. )

Think of a project with potentially very high returns but also considerable uncertainty. Maybe you’re introducing a new product, expanding into an unfamiliar region, investing in a new technology, significantly changing your value proposition, or setting up a new distribution channel. You have good reasons for thinking that the return is worth the risk, but the outcome is far from guaranteed and the past is not a good predictor of the future.

When this sort of project comes up against the ROI hurdle, it struggles to win support because the future returns are uncertain, they probably won’t contribute to the next budget year, and there is a lack of robust “evidence” from past experience. So despite all its promise, the innovative project ends up being inherently hard for people to justify on traditional ROI metrics.

“Established enterprises struggle whenever they are required to reallocate resources away from established lines of business in order to fund the growth of new lines of business. The period of greatest pain is when the new business is big enough to demand a material amount of resource but not yet big enough to create a material return.” – Geoffrey Moore

As a result, innovative projects consistently lose out to incremental improvements and scaling opportunities.  The traditional ROI approach has a bias towards lower but more certain outcomes, and – over time – this kills the capacity of an organization to innovate and achieve above-market growth, despite the best intentions of all involved.

A better way to assess & manage innovative projects

When the future is uncertain, it makes good sense to focus on learning. No amount of planning & analysis can make up for a genuine lack of information & insight. So rather than building precise-looking spreadsheets that ultimately disappoint, why not focus instead on identifying and testing (in the real world) the key assumptions that will make or break your project.

As the saying goes, it’s better to be roughly right than precisely wrong.

One of my favourite approaches for managing investments in uncertain environments is Discovery Driven Growth (DDG), a powerful framework by Rita McGrath and Ian MacMillan. They suggest shifting from the conventional management focus of “making your numbers & hitting projections” to instead emphasize “learning as much as you can for the least possible cost”.

By focusing on key assumptions and reducing the cost of failure (rather than the frequency), you can systematically shrink uncertainty and limit your risk to the funds needed to reach the next learning milestone. All going well, you’ll eventually know enough to invest confidently to scale up the project. On the other hand, if key assumptions turn out to be false and the opportunity is flawed, you can simply disengage from the project, capture & share the insights for future use, pat everyone on the back, and redeploy people to the next opportunity.

Here are a few practical suggestions for helping your organization pursue innovative projects:

  • Frame the challenge: what growth is big enough to matter? Where is your strategic focus?
  • Set up small, focused projects, with funding contingent on validating key assumptions.
  • Reward the right behaviours: learning at least cost, adapting based on insights, etc.
  • Eliminate fear: growth initiatives should be career-enhancing, even if discontinued.
  • Create time to think about opportunities, free from the pressures of business-as-usual
  • …and of course, don’t apply conventional ROI tools to projects with high uncertainty!

Recommended reading:

  • Innovation Killers: How Financial Tools Destroy Your Capacity to Do New Things – a great HBR article from 2008 by Clayton Christensen, Stephen Kaufman, and Willy Shih that explores in depth how three specific issues (NPV/DCF analysis;  how fixed & sunk costs are handled; and a focus on earnings per share) conspire to derail successful innovation.
  • Learning to Escape the ROI Trap  – A very practical perspective with examples from Chuck Hollis, chief strategist at VMWare and previously at EMC for many years.  He argues that “because we don’t teach people how to evaluate imprecise opportunities, they fall back on tools that expect precision. And we end up with poor outcomes because we chose the wrong tools.” Chuck provides useful tips about reframing ROI in terms of the “risk of ignoring”.
  • Discovery Driven Growth – a powerful approach from Rita McGrath  & Ian McMillan based on the idea that capitalizing on uncertain opportunities requires a different mindset than pursuing business-as-usual growth in your core business. Some of the concepts here – e.g. investing small amounts of money to get useful information and make ‘roughly right’ decisions – have been widely embraced in the lean startup movement but are still not nearly common enough in more established businesses seeking innovation.
  • Escape Velocity – a fascinating book by Geoffrey Moore about how to escape the gravitational pull of business as usual and invest in breakthrough innovation.

Your perspective?

How does your organization support & fund innovative growth projects? What advice would you offer people with innovative projects that are stumbling at the ROI hurdle due to uncertainty?

What is Strategy?

“Good strategy is the exception, not the rule.  A word that can mean anything has lost its bite”  — Richard Rumelt

The problem with strategy today

“Strategy” is probably one of the over-used words in business today. To make a concept, decision or phrase sound important & expensive, just add the word “strategy” or “strategic”.

The net result of this modern buzzword bingo is a strategy for everything: a strategic plan, expansion strategy, online marketing strategy, cloud strategy, strategic offsite, strategic acquisition, even a strategy retreat. But by attaching strategy to everything, the risk is that it ends up meaning nothing. Or at least, nothing more than big, costly or important.

Related to this is the rise of template-driven strategy: that all-too-familiar “going through the motions” activity where you come up with a nice sounding vision and mission, maybe some big hairy audacious goals, do a SWOT analysis, publish a nice glossy document, make a big announcement.. and then keep doing whatever it was you were doing beforehand. All this activity might make you feel better but it is not strategy (and it probably won’t improve performance).

But for those who are genuinely concerned with substance over shine, the question remains: What exactly is strategy? And how do you do it well?

Note: The perspective on strategy I’ll outline here has been shaped by my own experiences & thoughts, but also strongly influenced by scholars like Richard Rumelt, Peter Drucker, A.G Lafley, Roger L. Martin, Catherine Eisenhardt, David Maister, Jeffrey Pfeffer, Robert I. Sutton, Rita Gunther McGrath, and Edward Hess.  I owe a debt of gratitude to them and encourage you to read their works directly.

Defining what strategy really is

At its heart, strategy is about choice.  You can’t be all things to all people. If you try to serve everyone in your market, if you try to match competitors on everything, or if you avoid making the hard decisions about how to organize your operations, then you don’t really have a strategy. Failing to choose is – in reality – choosing to fail.

“It is natural to want to keep options open as long as possible, rather than closing off possibilities by making explicit choices. But it is only though making and acting on choices that you can win. Yes, clear, tough choices force your hand and confine you to a path. But they also free you to focus on what matters” — A.G. Lafley & Roger L. Martin

As David Maister once put it, strategy is about saying no. If you’re not closing off options, you’re not making choices. His advice is that “the very essence of having a strategy is being selective about choosing the criteria on which a firm wishes to compete, and then being creative & disciplined in designing an operation that is finely tuned to deliver those particular virtues.”

In other words, good strategy is about focused and coherent action at a point of high leverage. Remember the Pareto principle or 80/20 rule, i.e. 80% of the results come from just 20% of the inputs.  In a similar way, strategy is about focusing a disproportionate amount of your attention and resources on those few things that really make a difference.

One approach I’ve found useful in my work is Richard Rumelt’s concept of “the kernel of strategy“, which consists of 3 vital elements:

  1. A diagnosis of the critical challenges facing the business
  2. A guiding policy or approach for how you will deal with the challenge
  3. A set of coherent actions and resource commitments

This is not dissimilar to the approach a doctor might take: first take the time to understand the situation and make a formal diagnosis of what needs to be addressed. All too often, people skip this step and end up focusing on the wrong actions. For example, if you think your product range is holding you back, then you might choose to focus on developing new & improved products, but if in fact the underlying issue is that your sales & distribution is woeful, then you’ve completely missed the point and your lovely new products will tank just like the previous ones.

You’ll also notice that the kernel of strategy includes action and resource commitments – in other words, strategy is not just ivory-tower thinking, it’s also fundamentally about making decisions and doing things. That leads us to a very good test of whether you have an effective strategy:  ask yourself if people throughout your organization are using it to help guide their decisions and actions. If the answer is no, your strategy is just an expensive waste of time and paper.

“Plans are only good intentions unless they immediately degenerate into hard work.” — Peter Drucker

How do you design a good strategy?

First up, notice the word “design” above: developing a strategy is a design process. Strategy is inherently creative, usually requires iteration to get it right, and involves piecing together many different elements into a cohesive whole. It also usually works best when a variety of people are involved in the process, bringing different perspectives and expertise to the table.

The best strategies – like the best designs – work because all the elements work together in a way that makes it more than just the sum of its parts. Each element not only works by itself, but also works hand-in-hand with the other elements to reinforce and strengthen the whole.

Rumelt describes this as “chain-link logic“, where the overall output of the system is only as good as its weakest element. For example, you might have superb products and a killer brand, but if your distribution channels struggle or your customer service is poor, then improving your brand further will not help – you need to fix the bottleneck to boost the overall system’s performance. This chain-link property makes it challenging to design & implement an effective strategy, but it also has the nice side-effect that competitors who try to copy it in part will get very little benefit.

So let’s drill down into the choices you need to make in crafting an effective strategy. One of the best approaches is set out by Lafley & Martin in their book Playing to Win: How Strategy Really Works with five fundamental questions to help design your strategy:

  1. What is your winning aspiration?
  2. Where will you play?
  3. How will you win?
  4. What capabilities must be in place?
  5. What management systems are required?

“Strategy is an integrated set of choices that uniquely position the firm in its industry so as to create sustainable advantage and superior value relative to the competition” — A.G Lafley & Roger L. Martin

Each of the choices you make in answering these five questions should make sense in light of the other choices. For example, if your answer to how to win involves a strong global brand, but you have no experience or skills in developing great brands or in marketing internationally, then maybe you should think again. That’s not to say that you can’t develop these capabilities over time, but you need to be realistic and honest with yourself. Effective strategies will usually involve a mix of leveraging what you already have, and investing in the development of new capabilities.

Why is good strategy so hard?

Given the benefits of getting strategy right and the fact so many people invest time and energy on it, you’d think more organizations would have an effective strategy … but the reality is they don’t. So why is a great strategy so rare? I suspect it’s because strategy turns out to be hard work.

One of the things that makes strategy hard is that there are no pre-prepackaged answers – you need to work it out for yourself, based on your organization’s specific circumstances, resources and objectives. This is why diagnosis is so important, because just applying someone else’s strategy won’t work. Frameworks can be useful to direct attention and focus your team’s thinking (which is why I’ve included a few above) but it still takes plenty of hard work to get genuine, actionable insights into your situation. If you just fill in a SWOT template with the first things that come to mind, then your strategy is nothing more than wishful thinking.

“Thinking is very hard work. And management fashions are a wonderful substitute for thinking” — Peter Drucker

Another reason why strategy is hard is that it requires tough choices. Truly difficult choices can arise when you have several great opportunities but can only choose one as your focus and need to say no to the others. Or when you face the temptation of maintaining the status quo (which is easier for you personally) instead of making a tough call that will upset some people and be disruptive in the short term but you know is necessary for long term success.

One final reason why strategy is hard is because it requires disciplined and coherent action. It’s one thing to know what should be done, it’s another to get on and consistently do the many difficult things that need to happen for it to be implemented properly. This is hard enough for an individual to do at a personal level, but when you have an organization of hundreds or thousands of people, it’s even more difficult to do. This need to inform, coordinate and motivate so many people is why the best approaches to strategy emphasize the need to distill it down into a simple, easy-to-communicate message – be it the guiding policy in Rumelt’s kernel, the simple rules that Eisenhardt advocates, or the 5 questions in Lafley & Martin’s framework.

Share your thoughts on strategy…

What do you think?  Does the view on strategy above resonate with your experience, or do you have a different perspective?  Do you have any advice or tips for people on what strategy is and how to do it well? Please take a moment to share your thoughts in the comments below.