Ice and snow, bringing in some wood and getting ready for the holidays: these rituals signal another year is winding down. For business owners and senior managers, strategic planning for the year ahead also happens now. As I’ve outlined in my book, The 100: Building Blocks for Business Leadership, annual strategic planning should be handled with care, precision and commitment. From gathering input from all employees, completing a SWOT analysis and even getting away from the office to limit interruptions, strategic planning is serious business.
But what if, despite these collective best efforts, your company is pursuing a failing strategy? How can this happen if a rigorous SWOT analysis is conducted every year, as we do at Intertech? An eye-opening article in the current issue of Harvard Business Review, “Stop Doubling Down on Your Failing Strategy,” explains not only why it happens, but what leaders can do to prevent this surprisingly common problem.
First the whys. Authors Freek Vermeulen, an associate professor of strategy and entrepreneurship at London Business School, and Niro Sivanathan, an associate professor of organizational behavior at London Business School, point out that “people have a tendency to stick to an existing course of action, no matter how irrational.” Academics who study this phenomenon even have a name for it: “escalation of commitment.”
Scratch the surface of any failed business case study and you’ll find commitment escalation was a major factor. Many mutually reinforcing biases apparently lead to this unfortunate syndrome, making it nearly impossible for leaders to abandon a failing strategy.
Some of these tie to great book Ego Is the Enemy. They include:
- Sunk cost fallacy—Leaders want to avoid losing costs already incurred.
- Loss aversion—Decision makers often prefer to allocate more resources in the hope of turning around a failing strategy and avoiding loss.
- Illusion of control—People habitually overestimate their ability to control the future.
- Preference for completion—People have an inherent bias toward completing tasks.
- Pluralistic ignorance–Dissenters often believe that they alone have reservations about a course of action and remain silent.
- Personal identification—Withdrawing from a commitment may result in a perceived loss of status or threat to one’s identity. (Who wants to be the executive who had to kill his or her own failed strategy?).
How can companies possibly avoid these business-killing pitfalls? No surprise here. Building systems, or practices, into the strategy-setting process can steer leaders away from the pitfalls and closer to consistent and objective decision making based on facts versus (often hidden) emotions or psychological predispositions. These include:
- Setting decision rules—Agreeing on decision rules or objective formulas in advance.
- Paying attention to voting rules—Vote on a variety of criteria, versus a simple “yes” or “no” to prevent people from digging in their heels to “save face.”
- Protecting dissenters—This is easily done by providing anonymous feedback channels (we do this at Intertech with our all-employee Town Halls), deploying larger teams, calibrating diversity, and modeling doubt by executives.
- Expressly considering alternatives—Framing strategic questions to include the possibility of alternatives is an effective way to avoid an escalation of commitment to one course of action.
- Separating advocacy and decision-making—You can reduce the likelihood of escalation if you give responsibility for a strategic move to people who did not advocate or initiate that move.
- Reinforcing the anticipation of regret—We’ve all experienced “buyer’s remorse,” the regret you feel after you make a choice and realize all other choices now are off the table. Anticipating that this may happen, no matter what decisions you and your team make, helps soften the blow when it occurs. (Read the full article for more details and examples.)
Bottom Line: If you or others in your leadership circle have hung on too long to a business strategy that’s failing, remember it’s one of the challenges of being human. But like those fall leaves, sometimes there’s wisdom in knowing when to let go.