In Pope John XXIII’s “daily decalogue”:
Only for today, I will be happy in the certainty that I was created to be happy, not only in the other world but also in this one.
But most people think differently, especially in China. There is a measurement of happiness called happiness index. Chinese scores very low in the index, which implies that Chinese are the most unhappy people in the planet. It is quite easy to understand that though. The pressure for living in China is quite high. Education, medication, employeement, housing and living in general all seem to be quite hard in this most populous country. People eke out to make their ends meet.
I admit that life is hard, but is life that hard ? We are quite short-sighted when we are looking at ourself in the real life. Human being is greedy. We desire things we don’t have. Consequently what we always think about is what we don’t have not that has already been in our possession. We want more money, bigger house, luxary car, higher position in the company, pretty wife or rich husband. Whereas we blindside ourselves over what is within our arm’s reach. A small but cozy apartment, a plain looking but devoted wife, a husband lives on salary but gets bread back to home etc. I could give a much longer list, and you can too if you just sit back and think what you have instead of what you don’t.
Of course events will sometimes derail us. Of course we won’t get everything we desire. Of course there will be real tragedies and tragic-seeming setbacks. But we can be happy — joyful-down-underneath — even in the face of these things.
Life is often hard. But it’s not supposed to be that hard. There’s supposed to be room there for happiness and enjoyment, not in the notional future, but in the here-and-now.
Tuesday, April 29, 2008
Wednesday, April 23, 2008
Define the strategy in a palpable way (2)
I received some comments over my blog from a friend. I quote it as follows:
I read one article of your blog named as define your strategy ...., I noticed that your wrote such sentences:
A good strategy should be articulated in a manner that every employee understands it, aligns with it and acts on it. In essence, a strategy should have three critical components, objective, scope and advantage.
I have some different views towards this: in my view, strategy is a result that got from very carefully analyzing a company's objectives ( or can be said as mission) combined with a company's self-resource and industry environment such as competitor, supplier, buyer and so. The result can be thought as code of business action.
The same thing seems as happened to scope and advantages. Unquote
And my counter comments would be
Probably we hold different definition of strategy thereof arrives at different conclusion.
The industrial environment analysis and internal resource evaluation are necessary, and they are useful when you try to figure out the advantage of your company (the advanage I defined in my article is that something you do different and where you strength lies on).
My point is that strategy should be on the top of company's operations. it is palpable and it put everyone marching in lockstep toward the same direction. whereas nowadays, many many strategy formulation becomes too dynamic and unstable, a company's strtegy could be re-defined every year. The arguement is that strategy should follow the path of market and the market is always dynamic. I don't agree so. I think this ever-changing strategy symptom either comes from the illusion of self-assessment or from the wrong judgement of the industry.
At tactical level, company has many options to adapt and fine-tune its operation. But at strategical level, company should hold one core strategy that could be existing for long. As I mentioned in my article, a strategy is a direction to guide, a magnet to unite. If it could not keep stable, the momentum toward the vision/mission will be scattered, then the company's performance will be tattered.
I read one article of your blog named as define your strategy ...., I noticed that your wrote such sentences:
A good strategy should be articulated in a manner that every employee understands it, aligns with it and acts on it. In essence, a strategy should have three critical components, objective, scope and advantage.
I have some different views towards this: in my view, strategy is a result that got from very carefully analyzing a company's objectives ( or can be said as mission) combined with a company's self-resource and industry environment such as competitor, supplier, buyer and so. The result can be thought as code of business action.
The same thing seems as happened to scope and advantages. Unquote
And my counter comments would be
Probably we hold different definition of strategy thereof arrives at different conclusion.
The industrial environment analysis and internal resource evaluation are necessary, and they are useful when you try to figure out the advantage of your company (the advanage I defined in my article is that something you do different and where you strength lies on).
My point is that strategy should be on the top of company's operations. it is palpable and it put everyone marching in lockstep toward the same direction. whereas nowadays, many many strategy formulation becomes too dynamic and unstable, a company's strtegy could be re-defined every year. The arguement is that strategy should follow the path of market and the market is always dynamic. I don't agree so. I think this ever-changing strategy symptom either comes from the illusion of self-assessment or from the wrong judgement of the industry.
At tactical level, company has many options to adapt and fine-tune its operation. But at strategical level, company should hold one core strategy that could be existing for long. As I mentioned in my article, a strategy is a direction to guide, a magnet to unite. If it could not keep stable, the momentum toward the vision/mission will be scattered, then the company's performance will be tattered.
Tuesday, April 22, 2008
Define your strategy in a palpable way
Tell you a secret, when you ask the CEOs to describle their company’s strategy in less than 35 words, most probably they will get stumbled. If you raise the question to their employees, most of them will have no clue to answer it. Although strategy might be the most frequently used word in the buisness sphere, it also might be the most obscure concept to be communicated.
To put one organization in a nutshell, we see the hierchies like the following:
Mission: Why we exist.
Vision: What we want to be.
Value: What we believe in and how things are done here.
Then Strategy.
Mission and vision of the company can be very broad concepts and not specific. However, most of the companies fall into the trap to define their strategy in the same manner, like we want to privide xxxx in a cost-efficient way to add value for our customer. This kind of out-of-touch strategy could stand for anybody, so what is good for?
A good strategy should be articulated in a manner that every employee understands it, aligns with it and acts on it. In essence, a strategy should have three critical components, objective, sope and advantage.
Objective
Objective gives a direction and a goal to realize. It must be specific, measurable and in a time frame. Like We would be the market leader of ABC before year 2015 with market share over 40%.
An unclearly defined objective will lose people’s attention and focus, not mention the sense of urgency.
Scope
In what region and in what area, vertically and horizontally speaking, the business should compete and grow. No company can excel in every business and with a clearly stated scope, every employees knows what business should take and what shouldn’t. So the company’s resource can be concentrated on the core business and set on the right path toward to the objective.
Advantage
Advange is the company’s distinct (distinct here means something you do differently. I truly disbelieve the copy of buisness model because any built-in model in a business has thousands of factors at the back to buttress it) strenth to propel and grow its business. This is the power of the company can wield to thrive in the market and fend off competitors. It is something no one can do better than you and something you can always count on to hit your objective.
If employees are likened to a handful of pins, when you throw them on one paper, the pins will point to different direction. But if you place a magnet near them, magically all the pin will point toward the same direction. That is also a clearly defined strategy would do. CEOs should wear a elevator strategy statement in their sleeves and communite it rentlessly to the employees. When this is done, the success is just around the corner.
To put one organization in a nutshell, we see the hierchies like the following:
Mission: Why we exist.
Vision: What we want to be.
Value: What we believe in and how things are done here.
Then Strategy.
Mission and vision of the company can be very broad concepts and not specific. However, most of the companies fall into the trap to define their strategy in the same manner, like we want to privide xxxx in a cost-efficient way to add value for our customer. This kind of out-of-touch strategy could stand for anybody, so what is good for?
A good strategy should be articulated in a manner that every employee understands it, aligns with it and acts on it. In essence, a strategy should have three critical components, objective, sope and advantage.
Objective
Objective gives a direction and a goal to realize. It must be specific, measurable and in a time frame. Like We would be the market leader of ABC before year 2015 with market share over 40%.
An unclearly defined objective will lose people’s attention and focus, not mention the sense of urgency.
Scope
In what region and in what area, vertically and horizontally speaking, the business should compete and grow. No company can excel in every business and with a clearly stated scope, every employees knows what business should take and what shouldn’t. So the company’s resource can be concentrated on the core business and set on the right path toward to the objective.
Advantage
Advange is the company’s distinct (distinct here means something you do differently. I truly disbelieve the copy of buisness model because any built-in model in a business has thousands of factors at the back to buttress it) strenth to propel and grow its business. This is the power of the company can wield to thrive in the market and fend off competitors. It is something no one can do better than you and something you can always count on to hit your objective.
If employees are likened to a handful of pins, when you throw them on one paper, the pins will point to different direction. But if you place a magnet near them, magically all the pin will point toward the same direction. That is also a clearly defined strategy would do. CEOs should wear a elevator strategy statement in their sleeves and communite it rentlessly to the employees. When this is done, the success is just around the corner.
Tuesday, April 8, 2008
Greenspan defends his legacy.
Once it appeared that Greenspan wrapped up his legendary career when his autobiography “the age of turbulence” published. Whereas now the ripple effect of the subprime crisis now second-guessed his previous shing 18 years as the chairman of federal reserve bank.
(Quoted from WSJ)
The prevailing view among critics faults Mr. Greenspan on two main counts
First, they say, his Fed lowered rates too much from 2001 to 2003 to cushion the economy from the bursting dotcom bubble. Then it took too long to raise them again. Low rates fueled mortgage borrowing, driving home prices to unsustainable heights.
Second, they say, the Fed was lax in its regulatory role. The central bank failed to press for stiffer rules for underwriting mortgages to people who ultimately couldn't afford them, they say. Also, they say, the Fed failed to anticipate banks' exposure to risky home buyers, leaving them with too little capital to absorb the eventual losses on those mortgages.
(Unquote)
I don’t want to judge who is wrong and who is right here. However, what rankles me is that whenever there is a trobule, some people (especially people always speak more than do) will play the blame game and ride on the critics. Hindsight is easy to pick but what these guys were doing when the decision was made back then. What makes me even furious is that many Greenspan’s peers now are also pouring their anti-Greenspan rhetorics. The question is why they didn’t not use their wisdom to challenge Greenspan back then ?.
Greenspan says “I was praised for things I didn't do, I am now being blamed for things that I didn't do." Even the agruement is right, Greenspan did lax to make those decision who probably led to this credit crisis. But who can gurantee that if Grennspan proposed something else, the economic condition will be better rather than worse?
Greenspan endorses laissez-faire regulatory oversight. I agree with him. I don’t believe heavy-handed government relation can eradiate financial or economic risks, if not make them higher. Market has its own self-correction mechanism, which is beyond human-being’s meddling. The history proves it in the past, and it will do now and in the future. What government should do is to ensure the play in the market is compliant with the rule.
(Quoted from WSJ)
The prevailing view among critics faults Mr. Greenspan on two main counts
First, they say, his Fed lowered rates too much from 2001 to 2003 to cushion the economy from the bursting dotcom bubble. Then it took too long to raise them again. Low rates fueled mortgage borrowing, driving home prices to unsustainable heights.
Second, they say, the Fed was lax in its regulatory role. The central bank failed to press for stiffer rules for underwriting mortgages to people who ultimately couldn't afford them, they say. Also, they say, the Fed failed to anticipate banks' exposure to risky home buyers, leaving them with too little capital to absorb the eventual losses on those mortgages.
(Unquote)
I don’t want to judge who is wrong and who is right here. However, what rankles me is that whenever there is a trobule, some people (especially people always speak more than do) will play the blame game and ride on the critics. Hindsight is easy to pick but what these guys were doing when the decision was made back then. What makes me even furious is that many Greenspan’s peers now are also pouring their anti-Greenspan rhetorics. The question is why they didn’t not use their wisdom to challenge Greenspan back then ?.
Greenspan says “I was praised for things I didn't do, I am now being blamed for things that I didn't do." Even the agruement is right, Greenspan did lax to make those decision who probably led to this credit crisis. But who can gurantee that if Grennspan proposed something else, the economic condition will be better rather than worse?
Greenspan endorses laissez-faire regulatory oversight. I agree with him. I don’t believe heavy-handed government relation can eradiate financial or economic risks, if not make them higher. Market has its own self-correction mechanism, which is beyond human-being’s meddling. The history proves it in the past, and it will do now and in the future. What government should do is to ensure the play in the market is compliant with the rule.
Sunday, March 30, 2008
Boeing takes schadenfreude back on itself
From Wall Street Journal, Boeing is scrambling to solve its own delay problem for its new dreamline 787. The memory of the delay of Aribus Jumbo A380 is still fresh. And once cheering furtively, Boeing has to swallow the same bitter pill by itself.
Boeing took a different strategy to develop its new airplane model. In short, it spread billions of dollars in development costs among a large number of suppliers, while also streamling its own manufacturing. But the web of suppliers crisscrossing the globe has contributed to several delays for the twin-aisle aircraft, hitting Boeing's share price and stirring concern among customers.
Boeing, in its new bid to get the 787 Dreamliner back on track, said Friday that it will buy out Vought Aircraft Industries Inc.'s interest in an assembly plant in North Charleston, S.C. The facility, called Global Aeronautica LLC, is a joint venture between Vought and Italy's Alenia Aeronautica.
Dallas-based Vought is a key player in Boeing's attempt to reinvent its production process for the 787 by giving more responsibility to suppliers who design, produce and integrate large sections of the jet. In this case, Vought and Alenia join large sections of the jetliner together before they are shipped to the Seattle area for final assembly.
Some suppliers, including Vought, have struggled with the new responsibilities, contributing to chronic delays in the 787 production process. Boeing is trying to overcome those problems by taking a direct stake in the assembly plant.
The fiasco hitting both Boeing and Airbus reminds me the other giant project stumbling occurred in the Heathrow Airport expansion project and others. It appears to me that the mistakes seems to be inavoidable when the size of the project becomes large. It is like the more complicate the machine is, the easier it will malfunction.
The lessons have been learned:
1.Never make a promise when the uncertainty is too high. Remember, the forecase to the furture could never be correct.
2.Be wary of your innovative idea bears potential risks that will bite at later stage
3.Always do what-if analysis in the project planning. Having a plan B never hurt you.
4.When the schedule is slipping, don’t expect the problem would solve by itself. Jump over it immediately and sort it out before it festers
Boeing took a different strategy to develop its new airplane model. In short, it spread billions of dollars in development costs among a large number of suppliers, while also streamling its own manufacturing. But the web of suppliers crisscrossing the globe has contributed to several delays for the twin-aisle aircraft, hitting Boeing's share price and stirring concern among customers.
Boeing, in its new bid to get the 787 Dreamliner back on track, said Friday that it will buy out Vought Aircraft Industries Inc.'s interest in an assembly plant in North Charleston, S.C. The facility, called Global Aeronautica LLC, is a joint venture between Vought and Italy's Alenia Aeronautica.
Dallas-based Vought is a key player in Boeing's attempt to reinvent its production process for the 787 by giving more responsibility to suppliers who design, produce and integrate large sections of the jet. In this case, Vought and Alenia join large sections of the jetliner together before they are shipped to the Seattle area for final assembly.
Some suppliers, including Vought, have struggled with the new responsibilities, contributing to chronic delays in the 787 production process. Boeing is trying to overcome those problems by taking a direct stake in the assembly plant.
The fiasco hitting both Boeing and Airbus reminds me the other giant project stumbling occurred in the Heathrow Airport expansion project and others. It appears to me that the mistakes seems to be inavoidable when the size of the project becomes large. It is like the more complicate the machine is, the easier it will malfunction.
The lessons have been learned:
1.Never make a promise when the uncertainty is too high. Remember, the forecase to the furture could never be correct.
2.Be wary of your innovative idea bears potential risks that will bite at later stage
3.Always do what-if analysis in the project planning. Having a plan B never hurt you.
4.When the schedule is slipping, don’t expect the problem would solve by itself. Jump over it immediately and sort it out before it festers
Wednesday, March 26, 2008
Negotiate smartly
Our negotiation with a potential acquision target hit the snug. All the team members are very frustrated except me. It is true that our counterparty is tricky and he rolled back some common understanding both sides achieved in the last round negotiation. His sincerity to make a deal with us is questioned and at our side the energy to pursue this option is sapping, apparently.
In my perspective, I think otherwise. (But the problem is that I don’t know whether I should present my idea to the team at the point of time because I am going to leave the project soon. Besides, I had the precedent of putting out my ideas without a positive response from my teams). Anyway, I should write another blog about the survival rules in a Chinese-German team. Back to the topic, I think we should not let our emotion to make our rationale get hostaged. So far, we only get two plausible options, and this one is the most wanted. I exchanged some ideas about it with my MBA classmate. Her words enlighten some unknown aspects, to me and surely to my teammates too. She told me that usually the assets with intrinsic value would be inevitably in the radar screen of a few value seekers. So we are not only approaching them. The owner might be in the talk with multiple parties. Therefore, his behavior of rolling back has a good explanation. Probably he is buying time to decide his best option.
The focal clash between two sides are the asset owner’s request to secure a price premium over the market average price. (the hidden assumption is that the premium will gurantee his profit in the deal). Frankly speaking, it is understandable at the first glance (benefit maximization). However, one question dwelling in my head is that as long as we are on the same boat (JV), the profit us will also means the profit for him, why he wants this kind of insurance in the contract which seems unrealistic? (at the end of the day, no such a business can gurantee profitable, not mention the price pre-fix in a M&A deal. The common sense is that the price should be set according to the market condition) My guess is that since our company will act as the sole sales agency to sell the product in the market, he worries about part of the profit we might block before it transfer to the JV. (actually this would be the case, because all the revenue will go back to JV directly). I raised this topic and want the team to calarify it with the asset owner, but my suggestion is ignored.
A fruitful negotion requires patience, hardwork and a somber mind. But what I can see is that the emontion is taking the front seat. The stamina is in short to bring the negotion into the direction we prefer. The team is too judgemental on the countparty’s personality to lose the sight of the big picture, what we want to get from this deal.
On 12-12-2007, I made my proposal in an e-mail as follows:
Refocus on the big picture
It looks that we are wrestling with T－H on the price premium the JV should impose over the average market price. We all know that Mr.owner’s goal is to be better-off after the formation of the JV. Better-off can be defined as the net value outcomes (NVO) created in the cooperation with Company X . And we have many ways to bring the NVO for Mr. Owner, like selling the capacity that can not be sold by themselves alone,reducing cost through Company X ’s management expertise, the good-will we are willing to pay, the sharing of business risk and of course the price-premium too. In light of the foreging, the price premium is only one the means to realize the NVO but it is not the NVO itself. I think now the means and the goal are mixed up, consequently we are battling for a tiny part of the whole big picture.
To break the stalemate, rather than tangle with Mr. Owner over the single issue----price premium, I think we can make a all-dimension scenario comparasion beween pre-deal and post-deal to Mr.owner by which to convince him that first, there are many roads leading to better-off instead of levying price premium only; second, a price premium commitment might not always work for him, if the volume is influenced negatively and thereof undercut the total revenue, the price premium will just backfire.
What is Mr Owner’s bottom line?
Up to date, Mr. Owner actually raised two issues, 3X3% Company X ’s surcharges and selling price premium. Without doubt, more issues will be coming along the way, but for any issues, we need to know what is Mr.owner's bottom line and what is negotiable? Bidding high and selling low is the common practice in a negotiation, there is always distance between the ideal situation and the minmium the negotiators want to accompish from a deal. So I think what Mr. Owner is asking for now might be something ideal in his mind, not the bottom line. We need to compromise, Mr.owner needs too. Then the consensus can be reached. But by any means, we should probe Mr Owner’s reservation price/bottom line in order to shape our offer in a best possible way.
Shall we craft a negotiation strategy?
What we are doing now in the negotiation is more responsive rather than pre-emptive. Maybe because we are still at a very early stage of negotiation and many things are unclear to us, therefore we don’t form a strategy yet. Nevertheless, since we have seen how fickle Mr.owner is and the impassee he placed right in front of us, probably it is time for us to give a thorough review on the building blocks of this negotiation, like the parties(Mr.owner), issues, postions, interests, priorites and BANTA(Best Alternative To a Negotiated Agreement). Afterwards, we can think about how to deal with him and move the negotiation toward our favoralbe direction.
To sum up, we could not the owner’s words just by their face value. We should fathom what is meaning behind. Chinese are high-context, right? When the countparty’s concerns, worries and motivation are all understood, then our strategy can be easiy developped to remove the roadblocks in the negotiation and get what we want from a deal, maybe with some compromise. A responsive approach in a negotiation won’t work because it is passive and too dependent on the
In my perspective, I think otherwise. (But the problem is that I don’t know whether I should present my idea to the team at the point of time because I am going to leave the project soon. Besides, I had the precedent of putting out my ideas without a positive response from my teams). Anyway, I should write another blog about the survival rules in a Chinese-German team. Back to the topic, I think we should not let our emotion to make our rationale get hostaged. So far, we only get two plausible options, and this one is the most wanted. I exchanged some ideas about it with my MBA classmate. Her words enlighten some unknown aspects, to me and surely to my teammates too. She told me that usually the assets with intrinsic value would be inevitably in the radar screen of a few value seekers. So we are not only approaching them. The owner might be in the talk with multiple parties. Therefore, his behavior of rolling back has a good explanation. Probably he is buying time to decide his best option.
The focal clash between two sides are the asset owner’s request to secure a price premium over the market average price. (the hidden assumption is that the premium will gurantee his profit in the deal). Frankly speaking, it is understandable at the first glance (benefit maximization). However, one question dwelling in my head is that as long as we are on the same boat (JV), the profit us will also means the profit for him, why he wants this kind of insurance in the contract which seems unrealistic? (at the end of the day, no such a business can gurantee profitable, not mention the price pre-fix in a M&A deal. The common sense is that the price should be set according to the market condition) My guess is that since our company will act as the sole sales agency to sell the product in the market, he worries about part of the profit we might block before it transfer to the JV. (actually this would be the case, because all the revenue will go back to JV directly). I raised this topic and want the team to calarify it with the asset owner, but my suggestion is ignored.
A fruitful negotion requires patience, hardwork and a somber mind. But what I can see is that the emontion is taking the front seat. The stamina is in short to bring the negotion into the direction we prefer. The team is too judgemental on the countparty’s personality to lose the sight of the big picture, what we want to get from this deal.
On 12-12-2007, I made my proposal in an e-mail as follows:
Refocus on the big picture
It looks that we are wrestling with T－H on the price premium the JV should impose over the average market price. We all know that Mr.owner’s goal is to be better-off after the formation of the JV. Better-off can be defined as the net value outcomes (NVO) created in the cooperation with Company X . And we have many ways to bring the NVO for Mr. Owner, like selling the capacity that can not be sold by themselves alone,reducing cost through Company X ’s management expertise, the good-will we are willing to pay, the sharing of business risk and of course the price-premium too. In light of the foreging, the price premium is only one the means to realize the NVO but it is not the NVO itself. I think now the means and the goal are mixed up, consequently we are battling for a tiny part of the whole big picture.
To break the stalemate, rather than tangle with Mr. Owner over the single issue----price premium, I think we can make a all-dimension scenario comparasion beween pre-deal and post-deal to Mr.owner by which to convince him that first, there are many roads leading to better-off instead of levying price premium only; second, a price premium commitment might not always work for him, if the volume is influenced negatively and thereof undercut the total revenue, the price premium will just backfire.
What is Mr Owner’s bottom line?
Up to date, Mr. Owner actually raised two issues, 3X3% Company X ’s surcharges and selling price premium. Without doubt, more issues will be coming along the way, but for any issues, we need to know what is Mr.owner's bottom line and what is negotiable? Bidding high and selling low is the common practice in a negotiation, there is always distance between the ideal situation and the minmium the negotiators want to accompish from a deal. So I think what Mr. Owner is asking for now might be something ideal in his mind, not the bottom line. We need to compromise, Mr.owner needs too. Then the consensus can be reached. But by any means, we should probe Mr Owner’s reservation price/bottom line in order to shape our offer in a best possible way.
Shall we craft a negotiation strategy?
What we are doing now in the negotiation is more responsive rather than pre-emptive. Maybe because we are still at a very early stage of negotiation and many things are unclear to us, therefore we don’t form a strategy yet. Nevertheless, since we have seen how fickle Mr.owner is and the impassee he placed right in front of us, probably it is time for us to give a thorough review on the building blocks of this negotiation, like the parties(Mr.owner), issues, postions, interests, priorites and BANTA(Best Alternative To a Negotiated Agreement). Afterwards, we can think about how to deal with him and move the negotiation toward our favoralbe direction.
To sum up, we could not the owner’s words just by their face value. We should fathom what is meaning behind. Chinese are high-context, right? When the countparty’s concerns, worries and motivation are all understood, then our strategy can be easiy developped to remove the roadblocks in the negotiation and get what we want from a deal, maybe with some compromise. A responsive approach in a negotiation won’t work because it is passive and too dependent on the
Tuesday, August 21, 2007
Hard to exit
Why is it so difficult to divest a business at the right time or to exit a failing project and redirect corporate resources? Many factors play a role, from the fact that managers who shepherd an exit often must eliminate their own jobs to the costs that companies incur for layoffs, worker buyouts, and accelerated depreciation. Yet a primary reason is the psychological biases that affect human decision making and lead executives astray when they confront an unsuccessful enterprise or initiative. Such biases routinely cause companies to ignore danger signs, to refrain from adjusting goals in the face of new information, and to throw good money after bad.
In contrast to other important corporate decisions, such as whether to make acquisitions or enter new markets, bad timing in exit decisions tends to go in one direction, since companies rarely exit or divest too early. An awareness of this fact should make it easier to avoid errors—and does, if companies identify the biases at play, determine where in the decision-making process they crop up, and then adopt mechanisms to minimize their impact. Techniques such as contingent road maps and tools borrowed from private equity firms can help companies to decide objectively whether they should halt a failing project or business and to navigate the complexities of the exit.
The decision-making process for exiting a project, business, or industry has three steps. First, a well-run company routinely assesses whether its products, internal projects, and business units are meeting expectations. If they aren't, the second step is the difficult decision about whether to shut them down or divest if they can't be improved. Finally, executives tackle the nitty-gritty details of exiting.
Each step of this process is vulnerable to cognitive biases that can undermine objective decision making. Four biases have significant impact: the confirmation bias, the sunk-cost fallacy, escalation of commitment, and anchoring and adjustment.
Confirmation bias
Managers who seek out the information supporting the argument and discount that which doesn’t usually get confirmation bias symptom..
Business evaluators rarely seek data to disprove the contention that a troubled project or business will eventually come around. Instead, they seek market research trumpeting a successful launch, quality control estimates predicting that a product will be reliable, or forecasts of production costs and start-up times that would confirm the success of the turnaround effort. Indeed, reports of weak demand, tepid customer satisfaction, or cost overruns often give rise to additional reports that contradict the negative ones.
Sunk cost fallacies and escalation of commitment
In deciding which project to exit, the sunk-cost fallacy is the key bias affecting the decision-making process. Executives often focus on the unrecoverable money already spent or on the project-specific know-how and capabilities already developed. A related bias is the escalation of commitment: yet more resources are invested, even when all indicators point to failure. This misstep, typical of failing endeavors, often goes hand in hand with the sunk-cost fallacy, since large investments can induce the people who make them to spend more in an effort to justify the original costs, no matter how bleak the outlook. When anyone in a meeting justifies future costs by pointing to past ones, red flags should go up; what's required instead is a levelheaded assessment of the future prospects of a project or business.
Anchoring and adjustment
Decision makers don't sufficiently adjust future estimates away from an initial value. Early estimates can influence decisions in many business situations, and this bias is particularly relevant in divestment decisions. There are three possible anchors. One is tied to the sunk cost, which the owner may hope to recover. Another is a previous valuation, perhaps made in better times. The third—the price paid previously for other businesses in the same industry—often comes up during merger waves, as it did recently in the consolidation of dot-com companies. If the first company sold for, say, $1 billion, other owners may think that their companies are worth that much too, even though buyers often target the best, most valuable company first.
To avoid falling into the above psychological trap, we can use the tools which have been already developed to overcome the universal human bias.
One tool that can help executives overcome biases and make more objective decisions is a contingent road map that lays out signposts to guide decision makers through their options at predetermined checkpoints over the life of a project or business. Signposts mark the points when key uncertainties must be resolved, as well as the ensuing decisions and possible outcomes. For a contingent road map to be effective, specific choices must be assigned to each signpost before the project begins (or at least well before the project approaches the signpost). This system in effect supplies a precommitment that helps mitigate biases when the time to make the decision arrives.
To get away from anchoring and adjustment, it is necessary to bring independent outsider to evaluate a business under divestment. Because the outsider have never seen the initial projections of its value, uninfluenced by these earlier estimates, the reviews of such people will take into account nothing but the project's actual experience, such as the evolution of market share, competition, and cost etc.
Although canceling a project or exiting a business may often be regarded as a sign of failure, such moves are really a perfectly normal part of the creative-destruction process. Companies need to realize that in this way they can free up their resources and improve their ability to embrace new market opportunities.
In contrast to other important corporate decisions, such as whether to make acquisitions or enter new markets, bad timing in exit decisions tends to go in one direction, since companies rarely exit or divest too early. An awareness of this fact should make it easier to avoid errors—and does, if companies identify the biases at play, determine where in the decision-making process they crop up, and then adopt mechanisms to minimize their impact. Techniques such as contingent road maps and tools borrowed from private equity firms can help companies to decide objectively whether they should halt a failing project or business and to navigate the complexities of the exit.
The decision-making process for exiting a project, business, or industry has three steps. First, a well-run company routinely assesses whether its products, internal projects, and business units are meeting expectations. If they aren't, the second step is the difficult decision about whether to shut them down or divest if they can't be improved. Finally, executives tackle the nitty-gritty details of exiting.
Each step of this process is vulnerable to cognitive biases that can undermine objective decision making. Four biases have significant impact: the confirmation bias, the sunk-cost fallacy, escalation of commitment, and anchoring and adjustment.
Confirmation bias
Managers who seek out the information supporting the argument and discount that which doesn’t usually get confirmation bias symptom..
Business evaluators rarely seek data to disprove the contention that a troubled project or business will eventually come around. Instead, they seek market research trumpeting a successful launch, quality control estimates predicting that a product will be reliable, or forecasts of production costs and start-up times that would confirm the success of the turnaround effort. Indeed, reports of weak demand, tepid customer satisfaction, or cost overruns often give rise to additional reports that contradict the negative ones.
Sunk cost fallacies and escalation of commitment
In deciding which project to exit, the sunk-cost fallacy is the key bias affecting the decision-making process. Executives often focus on the unrecoverable money already spent or on the project-specific know-how and capabilities already developed. A related bias is the escalation of commitment: yet more resources are invested, even when all indicators point to failure. This misstep, typical of failing endeavors, often goes hand in hand with the sunk-cost fallacy, since large investments can induce the people who make them to spend more in an effort to justify the original costs, no matter how bleak the outlook. When anyone in a meeting justifies future costs by pointing to past ones, red flags should go up; what's required instead is a levelheaded assessment of the future prospects of a project or business.
Anchoring and adjustment
Decision makers don't sufficiently adjust future estimates away from an initial value. Early estimates can influence decisions in many business situations, and this bias is particularly relevant in divestment decisions. There are three possible anchors. One is tied to the sunk cost, which the owner may hope to recover. Another is a previous valuation, perhaps made in better times. The third—the price paid previously for other businesses in the same industry—often comes up during merger waves, as it did recently in the consolidation of dot-com companies. If the first company sold for, say, $1 billion, other owners may think that their companies are worth that much too, even though buyers often target the best, most valuable company first.
To avoid falling into the above psychological trap, we can use the tools which have been already developed to overcome the universal human bias.
One tool that can help executives overcome biases and make more objective decisions is a contingent road map that lays out signposts to guide decision makers through their options at predetermined checkpoints over the life of a project or business. Signposts mark the points when key uncertainties must be resolved, as well as the ensuing decisions and possible outcomes. For a contingent road map to be effective, specific choices must be assigned to each signpost before the project begins (or at least well before the project approaches the signpost). This system in effect supplies a precommitment that helps mitigate biases when the time to make the decision arrives.
To get away from anchoring and adjustment, it is necessary to bring independent outsider to evaluate a business under divestment. Because the outsider have never seen the initial projections of its value, uninfluenced by these earlier estimates, the reviews of such people will take into account nothing but the project's actual experience, such as the evolution of market share, competition, and cost etc.
Although canceling a project or exiting a business may often be regarded as a sign of failure, such moves are really a perfectly normal part of the creative-destruction process. Companies need to realize that in this way they can free up their resources and improve their ability to embrace new market opportunities.
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