We know that cognitive biases affect nearly every decision we make, and in the world of
business, people need to make important choices every day.
Often these choices must be made without delay and have broad, far-reaching consequences.
How can we make sure that our choices remain rational and objective and free from our potentially
harmful cognitive biases?
As it turns out, there is a system, but it’s a lot more like a process or a habit than
a magic bullet.
New research has shown that the world’s best managers can overcome biases and reliably
make effective decisions by following an approach called diligence-based strategy.
Doing business in the 21st century isn’t easy.
No matter the industry, most organizations will eventually face a crisis: maybe new competitors
will appear out of nowhere or an existing brand will try to carve a slice out of your
customer base.
Today’s competitive conditions are forcing organizations to strategize and act quickly.
Thus it’s easy to see why many companies scramble to create a revolutionary new strategy
to cope with crisis -- conducting market research, analyzing trends, and evolving the core business
model.
But this is the wrong approach.
Following the traditional “big strategy” approach leaves room for more errors in judgment,
particularly during a crisis.
Instead, organizations should rely on diligence-based strategy by turning their attention to a small
number of ordinary business activities -- like sourcing inputs, managing customer relationships,
and developing the right people.
Diligence is about focusing on the fundamentals.
By optimizing their operations, organizations can promote the conditions that allow for
better, more thoughtful, long-range strategies to emerge inductively.
Developing diligence requires a different type of thinking.
The best executives attend relentlessly to what they can control.
They rely more heavily on measurement and empirical evidence and less on opinions or
persuasion.
Think of baseball executive Billy Beane, who set a famous precedent by using advanced statistical
analysis, overthrowing the more traditional methods of evaluating baseball talent.
The “moneyball phenomenon” has motivated a new surge of interest in optimization -- many
companies now find that big data can reliably inform their decision-making.
As an executive, your primary task is to know the levers that drive business performance,
and to pull those levers.
To identify fundamental activities, ask yourself this: does mastery of this activity contribute
significantly to the performance of the company?
And can the activity be reliably measured and monitored?
Companies should only have a handful of fundamental activities -- like “sourcing inputs,”
“managing the supply chain,” or “serving customers.”
It is only after isolating the company’s fundamental activities that the work of optimization
can occur.
Most importantly, managers should use every available technology and data source to compile
information on the company’s activities.
It’s easy to go astray when decisions are made based on emotional responses or incomplete
information -- which are a natural occurrence during a competitive crisis.
Diligence-based strategy allows companies to systematically focus on what matters most:
improving the fundamental operations that lead to success.
To find out more about diligence-based strategy, decision-making in organizations, and cognitive
biases, please read California Management Review’s special issue on Behavioral Strategy,
Volume 59, Issue 3.