Tuesday, September 29, 2009

A Behavioral Model of Strategy

Strategy is unique among all the domains and disciplines of a corporation. As opposed to various other disciplines which are relatively deterministic (such as operations, materials, information technology and quality), corporate strategy tends to be a domain of forecasts and aspirations, with all the imponderables that could emerge in future. This is in spite of the vast body of theories, techniques and tools that have been developed in the strategy domain over the last five decades (reference my blog on “Thought Leadership in Management” in “Strategy Musings” at cbrao2008.blogspot.com).

Strategy development uniquely requires the strategist to predict a future and lay out an execution pathway with commensurate resource deployment to achieve certain goals. The strategist needs to take professional decisions that could handle uncertainty in a successful manner. There are, of course, couple of other disciplines that are governed by certain non-quantifiable factors.  For example, R&D is as much science and technology driven as it is passion and perseverance driven. Safety is more a matter of behavior than a function of science and technology. Even these disciplines, however, do not provide a free play to emotional decision making as strategy does.

This paper argues that intrinsic attitudes of the strategy makers have an overarching influence on the eventual effectiveness of corporate strategies.  Several bold and successful as well as adventurous and unsuccessful actions taken by corporations are more easily explained when they are viewed in a behavioral decision making paradigm.

Strategic adventures

Corporate actions reflect the way the behavioral models of the key strategists pan out in a company.  Actions taken by corporations in recent years to acquire overseas assets at hefty valuations, for example, reflect irrational exuberance of the strategists.  Decisions relating to product range expansion or renewal, capacity expansion or reduction, business diversification or divestments, mergers and acquisitions require significant strategic thinking.  In such crucial strategies, an inappropriate behavioral component could cost the company dearly in terms of time and resources required to recover from any adventurous moves.

Strategic decisions that are taken without evaluating multiple scenarios of opportunities and risks could be suboptimal.  Strategic acquisitions undertaken without requisite due diligence on current business and future prospects could prove costly.  Examples from the national and international industries are pointers.  A premier private sector airline in India which was indeed flying high hit turbulent skies upon a hasty acquisition of another cash strapped airline.  A pioneering low cost airliner gave up the business all too soon when a longer stay would have provided greater value for the low cost model in a recessionary environment.  An operationally efficient diversified automobile manufacturer focusing on fuel efficient vehicles almost went into a tailspin by acquiring an overseas manufacturing infrastructure at a high cost for making ultra-luxury, ultra-expensive fuel guzzling cars.  Conservative outlook of Indian tractor manufacturers and three wheeler manufacturers have narrowed their business options to obsolete designs and products even as mainline automobile companies grew their product range aggressively.  Inadequate due diligence led an Indian pharmaceutical major and a Japanese pharmaceutical giant acquire companies at high cost and lose goodwill.  Inadequate understanding of the dynamics of generics market led several Indian pharmaceutical companies to establish capacities in excess of demand in a vain pursuit of market shares.

Japan’s leading electronics giant lost the innovation edge due to the short term distortions in strategy caused by its movie and music divisions.  A leading printing solutions and computer company of the US is still to extract the full value of a merger with another computer company.  The disastrous acquisition by the Germany’s leading car major of an ailing US automobile corporation is another example of behavior driven strategy gone astray. The world’s leading software company’s ego state refused to recognize the potent threat of the Internet search firm.  Another Internet search firm’s decision to spurn a takeover offer again was a behavioral response that flew against the dynamics of business.

The above examples suggest the need for a model of strategic thinking that optimizes behavioral approaches with classical conceptual and analytical tools of the strategy domain for effective corporate development.

Behavioral model

The basis of the behavioral model of strategy is that a strategist is essentially an individual as well as a professional who has correspondingly certain intrinsic behavioral traits and certain imparted behavioral traits. These traits influence how a strategist views the environmental opportunities and risks as well as how he understands the corporate competencies and capabilities. 

There are four key pairs of human emotions that influence how the individual in a strategist develops the corporate strategy. These are: (i) passion and diffidence, (ii) hope and despair, (iii) confidence and panic and (iv) ego and humility. There are three key pairs of behavioral traits that influence how the professional in a strategist develops the corporate strategy.  These are: (i) deliberative and impulsive, (ii) consultative and individualistic and (iii) deterministic and abstract.

The behavioral model governing a strategist’s actions is a complex interplay of the individual and the professional traits.

Individual behavioral facets

Fundamentally, a strategist’s role is to grow the company with passion, overcoming all anticipated and unanticipated hurdles. He has to play for the long term, looking beyond the obvious for opportunities and risks. Even as he develops a strategy encompassing and leveraging all the functions he needs to have the passion and perseverance to secure the buy-in of all the functions and ensure their commitment in execution. A strategist who is reluctant to draw up functional strategies and is diffident about securing the functional buy-in is like an engine decoupled from the bogies.

The strategist draws his strategic plans and undertakes course corrections in the context of the business and economic environment that the company faces. Economic volatility and business turbulence need a balanced mind to understand and handle the forces. Professionals whose strategic thinking is only skin deep get carried away by hope, especially in the years of boom and get drowned in despair in times of recession. During the last one year, for example, countless strategists mothballed valuable businesses while in the earlier years they splurged money on ambitious expansion and diversification projects. Strategists who took a balanced view of recession last year and persisted with creative product development activities would be smiling as the recovery gets underway.

The strategist needs to have the ability to handle both opportunities and crises with confidence. Confidence arises from own competencies as well as an understanding of the overall organizational competencies and competencies. Being in a state of eternal preparedness for opportunities and risks, through a continuous focus on developing and evaluating multiple scenarios, helps the strategist remain confident. Being in constant touch with functional performance also helps the strategist understand the potential play in times of growth as well as recession. A strategist who is unprepared with any scenario other than his own is bound to be panic stricken when faced with times of discontinuity.

A strategist’s job is arguably one of the most glamorous jobs in an organization. A responsibility to plan for the organization’s future, proximity to the CEO and the Board and a business practice which requires him to collaborate with the external world could lead to a sense of superiority and infallibility. An obsessive ego could influence the strategist to underestimate competition and land the company into difficulties with excess capacities. Ivory tower planning as a phrase is more a practical reality than an academic idiom in respect of such strategists. At the same time, extreme flexibility to pander to each and every viewpoint may not help the strategic planning process either. Successful strategies, executed with considerable corporate effort, need to be celebrated to reinforce rational risk-taking in the organization. A self-effacing backroom strategist who takes his successes in his silent strides is unlikely to inspire the organization at large.

Professional behavioral facets

It is important for the strategist to be deliberative rather than impulsive.  The domain of strategy involves taking the company successfully into uncharted territories.  It requires that the strategist is fully aware of the various internal and external factors that could support or derail the strategy.  A strategist who chooses appropriate strategies based upon deep deliberation has a much greater of success than one who frames strategies on impulse.  Not only he would have laid out a more enduring strategy, he would also have been prepared with course corrections having considered various alternative scenarios a priory. On the other hand, a strategist who is impulsive, taking decisions on the spur of the moment, can never be a good strategist.  As a matter of fact, impulsive behavior is counter-intuitive to strategic thinking.

A successful strategist would be consultative, rather than individualistic in his approach.  A strategist by virtue of his domain specialization ought to have a high degree of conceptual and analytical skills, acquired through formal education and the very nature of the job.  This by itself cannot be cited by a strategist to act individualistic in his methodology.  A strategist is perhaps like a master craftsman who assembles the several resources available to develop a meaningful program for the future.  The more consultations he has, the more would be the strategic alternatives he would have.

Being deliberative and consultative does not, however, mean that a strategist can be indecisive or flexible.  On the contrary, a strategist needs to be deterministic and quantitative at the end of his deliberative and consultative processes.  Strategies could be abstract and futuristic but it is the challenge of the strategist to convert the abstract concepts into a set of number-driven programs to enable management of the strategic planning process by relevant metrics (see my blog titled “Management by Metrics” in  “Strategy Musings” at cbrao2008.blogspot.com). 

The foregoing leads us to conclude us on an ideal behavioral profile of an effective and successful strategist; that of a deliberative, consultative and deterministic professional who is passionate and never diffident, is not driven unduly by either the hopes or the despairs of the times, and whose confidence and humility are enhanced by his capability.  The CEO and SBU Heads who work closely with the strategist obviously need to share the ideal behavioral profile of the strategist to perform successfully in tandem. A positive behavioral model of strategy would explain why some corporations are more consistently successful than others.

Posted by Dr CB Rao on September 29, 2009


Narayanan said...

A persuasive commentary on the behavior attributes of a master strategist. One fundamental assumption that is implicit in this commentary is on the effective translation of strategy to execution by the do-ers. Recent global events leading to the prolonged recession provides a note of caution to strategy professionals. The challenge is magnified several fold if a master strategist is shackled by an errant CEO or an incompetent SBU head; especially in the current resource constrained environment. Perhaps what is needed is a "choice architect" more than a strategist; a concept I borrow from a thought provoking book titled Nudge by Thaler and Sunstein. Choice architects recognize the intrinsic faults of "humans" and by judicious use of incentives, feedback and real time intelligence from the shop floor engineer an ecosystem for a sustainable corporation. This approach combined with strong operations (HR, Finance, Production etc) that fosters a culture of accountability is likely to bridge the gap between strategy and execution better leading to what really matters - RESULTS.

cb@strategy said...

It is as dangerous to shackle the master strategist as it is to unleash him without controls, especially if the strategist has certain facets of excess more fully described in the blog. The concept of choice architect probably mirrors the phrase "master craftsman" used in the blog. Thank you Narayanan for keeping the spirit of analysis flowing.

Narayanan said...

You're welcome and I have a reader's request....In the next installment of Strategy/Mgmt theme, can you please consider elaborating on the risk management facet of a master strategist. As some once said, a good strategist "keeps feet firmly on the ground, with head above in the skies" to highlight the complementary nature of synthesizing present reality and future state to offer a compelling strategic vision (regardless of organization's execution capability and resident governance mechanisms). Successful innovators and competitors are a source of valuable information, however, if you simply imitate them, you run the risk of obsolescence (much like the innovators). On the other hand, ponder intensely over risks and risk mitigation as a part of scenario planning you run the risk of being labeled an alarmist or as someone trapped in an analysis-paralysis mode. Successful strategists will get this right; wonder if the behavioral model of strategy would offer some unique perspectives on this topic.

Unknown said...

Full of information!

Institution Building || Faculty Development Program || Educational Leadership