We are all susceptible to cognitive biases, but some of our biases are particularly problematic when dealing with strategic decision-making and innovations, writes Suvi Nenonen.
Every strategist is biased – and so are you. By Suvi Nenonen.
WE ALL LIKE to think that we are better than average drivers. And particularly we like to applaud ourselves as solid, rational thinkers.
Unfortunately, science does not agree with these notions. We are all susceptible to cognitive biases, irrespective of our IQ score or the number of degrees we have acquired. While heuristics and jumping to conclusions may have kept our ancestors alive, physiologically-speaking we still have the same “caveman” brain – and in business it can be our downfall.
The study of cognitive biases is deep, wide and established; voluminous enough to fill a bookcase. The following ones, however, are particularly problematic when dealing with strategic decision-making and innovations: • Sunk cost fallacy. Continuing to invest in a venture that clearly has odds against it because “we have invested too much to walk away now.” Unfortunately, the fact that you have spent a lot of money and time doesn't magically transform a turkey into an eagle, nor improve the probabilities of success. • Status quo bias. Ninety-nine percent of all business cases compare the new initiative against the current state – and the current state is almost always assumed to remain stable in the future. But in fact, in most cases the ‘current state' is just that: current. And looking forward, this state is deteriorating, suggesting that standing still means losing relative competitiveness. • Cognitive ease. Ever presented something complex – but rock-solid – to your top management and gotten a lukewarm response, while your colleague's simple but flawed proposal got standing ovations? Cognitive ease is playing its tricks again. This bias makes us favour simple and familiar solutions over complex and truly novel ones, as the former group is easier to understand.
Unfortunately, no-one can ever free themselves completely from cognitive biases or the use of heuristics; it is part and parcel of being human.
But being aware of the most common biases helps first to spot them and then to expose them. So, the next time you are in a strategy retreat and someone makes an argument for throwing good money after bad, you can call “sunk cost fallacy” and invite a more thorough discussion about the probabilities of success.
… BUT SOME BIASES ARE CRUCIAL FOR INNOVATION
Daniel Kahneman has called optimism bias – believing that you are not going to fail even though others have – as the most pervasive one of all cognitive biases. However, this particular bias is the magic ingredient that makes us innovative and entrepreneurial.
Just think of a society where every entrepreneur is perfectly rational. Nobody would start anything new, because entrepreneurs and managers would know that the odds are against them. So, even though on an individual level optimism bias may have catastrophic consequences, on organisational and societal levels it is absolutely crucial for innovation.
Therefore, innovative companies have to allow – or even foster – optimism bias, while mitigating the associated risks by having a large portfolio of development projects and a robust financial control.
WHEN IN DOUBT, CONDUCT A PRE-MORTEM
On an individual level, however, you have to live with the knowledge that you are suffering from a pervasive optimism bias, and still kick off your new venture.
How to do that without developing schizophrenia? After you have called out sunk cost fallacy, status quo bias, and cognitive ease, conduct a premortem.
In a pre-mortem, you try to improve the quality of your project plan by asking a seemingly simple question: “Imagine that we have executed this plan perfectly, but the project has failed spectacularly. Why?”
A proper pre-mortem helps to balance your inherent planning fallacy (overestimate benefits, underestimate costs and time) – and thus to avoid having to do a postmortem on your initiative. For those interested in cognitive biases, please read Thinking, Fast and Slow by Daniel Kahneman. Daniel Kahneman was awarded the 2002 Nobel Memorial Prize in Economic Sciences (with Vernon L. Smith), and he is often called the father of behavioural economics.
Human Resources managers and academics know that developing our people is one of the best ways to achieve company objectives and to create a competitive advantage.
Globally, companies realise that the effort one puts into people development leads to better engagement, better productivity, commitment and higher levels of staff retention.
Despite this, development is often one of the first things to be cut during tough times. Development is all too often seen as a corporate “extra”.
Just when companies need the best skills and the sharpest minds, some tend to cut back on the things most likely to help them trade through the challenging conditions.
And despite this being a pressing topic, relatively little is known about HR development practices in New Zealand.
To find out more, the Institute of Management New Zealand (IMNZ) commissioned MPOWER to study corporate education focusing on three key staff groups: executive/senior managers, middle managers and ‘high potentials’ (those likely to assume a leadership role). Working with local and international partners (such as Henley Business School in the UK which has results from 47 countries) MPOWER compiled information from respondents in New Zealand and Australia.
The New Zealand and wider Australasian respondents hailed from a wide range of positions, with executive/senior leaders best represented at 29.8 percent and 30.3 percent respectively. Organisations of all sizes and from a wide array of sectors were represented.
Women formed a slight majority of the New Zealand respondents while the opposite was so for the combined dataset.
However, females were underrepresented in each of the key staff groups, particularly among executives/senior managers and high potentials, with key HR implications (e.g. for gender-aware succession planning).
ORGANISATIONAL AND DEVELOPMENT PRIORITIES
• Major challenges facing New Zealand and Australasian organisations concern: addressing technological advances (almost half the respondents mentioned this); the speed of change; cost management; major re-organisations; and succession planning. Organisational size had some bearing on the priority of challenges. • Linked to this, the most commonly-cited people development objectives for New Zealand and Australasian organisations in 2016 were: talent retention; maintaining and building employee engagement; equipping leaders to deliver change. The same objectives re-appeared for 2017. • In New Zealand and the region, the top development priorities varied by and reflected the role emphasis of key staff groups (Figure 1). • At least two-fifths of each staff group in New Zealand and Australasian workplaces were considered ‘very likely’ to be included in people development plans.
L&D ACTIVITIES AND TRENDS
• In New Zealand, respondents indicated that a considerable array of learning and development (L&D) methods was expected to be used this year, particularly: individual coaching, peer-topeer activities; team coaching; blended learning; and individual online learning. The pattern was similar for the combined dataset but at more conservative levels. • It was perceived that executive/senior managers in NZ and the region would most prefer coaching, experiential L&D and blended learning formats. For middle managers, coaching was again the most favoured approach but this time followed by blended learning and classroom-based L&D. Coaching was also most favoured for high potentials, followed by blended learning and experiential L&D. • New Zealand respondents were generally positive towards online L&D though just under half strongly agreed or agreed that it was not possible to replicate classroom dynamics in an online environment. More than half (56.3 percent) agreed or strongly agreed that their organisation was comfortable about increasing the ratio of online to face-to-face learning, though 70.8 percent felt that it was suitable for many but not all aspects of leadership development. Two-thirds concurred that online learning was more cost effective than other development methods. The results for Australasia were similar. • Following executive development programmes, respondents from both datasets reported that the following were most regularly used in their workplace: formal feedback from the participating executive; a review of the executive’s KPIs; and a review of the KPIs for the executive’s team. • Some new areas addressed by the New Zealand and Australian surveys related to organisational objectives and performance. The vast majority of New Zealand respondents (85.8 percent) felt that executive education has at least some impact or relevance for attaining organisational objectives (22.9 percent felt that its impact was significant). Those most convinced of its impact stressed how it developed thinking, skills and behavioural approaches with which to respond to new situations; encouraged a cultural shift; sustained organisational performance; and kept the organisation ‘ahead’. Some felt that, without HR development, organisations ‘withered’. In Australasia, sceptics of executive education’s impact commented on the mediating effect of their organisation’s existing skill base (e.g. “Our management team is well established and small … see little value in investing in their training.”). • Most respondents, particularly in
Australasia, perceived a positive link between executive education and organisational productivity (Figure 2). Comments centred on its capacity to provide focus, purpose, motivation and innovation; handle change management well; and increase competitiveness and capabilities. Several added the caveat that the level of impact depended on executive education being accompanied by effective application support in the workplace. However, the significant minority of respondents, who were unsure of a connection, felt that it was difficult to gauge this without measurements or had only experienced limited use of formal executive education.
L&D SPENDING AND PROVIDERS
• For New Zealand organisations, L&D (external) expenditure was somewhat clustered at lower levels; the concentration was even higher for organisations in Australia (Figure 3). Figure 4 indicates that over 80 percent of New Zealand respondents anticipate spending stability or growth. As might be expected, L&D expenditure was higher in larger organisations. • A wide range of L&D providers were expected for key staff groups but their emphasis varied. For executives/senior managers in New Zealand and Australasia, the most cited were: a training provider; an external coach; and a consulting company. For middle managers, they were: a training provider; an internal trainer; and an internal coach. For high potentials, as with middle managers, there was a strong emphasis on internal provision: an internal coach; an internal trainer; and a training provider. Some variation in expected L&D provider use and staff group was also found in relation to organisational size (and thus, likely resources available for L&D). • Just under half of organisations’ L&D investment went to individual consultants/ coaches and training providers. Smaller firms were expected to invest most in 2017 in individual consultants/coaches and ‘boutique’ consulting companies. Larger organisations were likely to invest most in training providers (classroom-based) and individual consultants/coaches. • When considering using a business school, the most important considerations were: quality of teaching and learning resources; leading practice, methods and knowledge; and access to learning and networking from other sectors/organisations. With training providers, the key factors were: leading practice, methods and knowledge; quality of teaching and learning resources; a tailored approach; and learning delivered efficiently with minimal disruption. For Australasia, the top factor was value for money. For a consulting company, key concerns were: leading practice, methods and knowledge; and attention to implementation and follow-up.
The survey results provide an inaugural, yet indepth, picture of recent, current and projected L&D trends in New Zealand and Australasia. With their focus on three key staff groups, they reveal shared and more specific preferences around different L&D formats for executives/ senior managers, middle managers and high potentials in the two settings.
As well as stressing the need for tailored L&D initiatives, organisational size was found to matter, with larger entities having greater capacity to invest in formal HRD. However, executive/management education is widely regarded as having some impact or relevance for attaining organisational objectives, and as being linked to higher organisational productivity.
This makes HRD a critical plank of strategy development in organisations of all sizes. With many managers concerned about their company’s ability to deal with technological disruption and to cope with the speed of a changing workplace, a key people development objective is to equip leaders to respond to, develop and manage the challenges that this brings.
This foray into management education could be usefully followed by subsequent surveys so as to develop a national dataset for trend analysis and application. It also highlights areas for investigation.
In line with advocates of multiple L&D organisational initiatives, these include an examination of the most effective combinations of different L&D formats, and a focus on the development needs of worker groups who are currently underrepresented in management.
Figure 2: Perceptions of impact of executive education on organisational productivity, NZ and Australasia