Strategy’s Most Dangerous Dogma - And What To Do About It Evan M. Dudik Evan M. Dudik and...

Strategy’s Most DangerousDogma - And What To Do About It

Evan M. Dudik

Evan M. Dudik and Associates, Inc.


What are Strategy’s Basic Building Blocks?

First Class Corporate StrategyFirst Class Corporate Strategy

NeededResources

NeededResources

Cultural andOrganizational

Alignment

Cultural andOrganizational

Alignment

Sustainable Competitive Advantage

Concept

Sustainable Competitive Advantage

Concept

Other FactorsOther Factors

Verified Theories

about Markets and Competitors

Verified Theories

about Markets and Competitors


1. Create doubt in your mind about Verified Theories as the Foundation of Strategy

2. Propose an Alternative Mind-Set for developing Strategies

3. Gain some Feedback on these Ideas

Purpose of Today’s Discussion


• “Our cell phone market research shows that 23% of the market would pay a 12% premium for wireless email capability.”

• “In our industry you get superior returns if you are # 1 or #2.”

• “Our database of the past 25 years and 2 million transactions shows 95% of the time that the yields of interest-bearing bonds converge within 30 days.”

• “New products are more profitable than old ones. Our strategy is to have 80% of our sales from products that are less than 5 years old.”

1. Examples of Verified Theories


• Conclusions based on observation of data (“fact-based”)

• Synthesizes recognizable patterns

• Is expressed mathematically

• Has a track record of predictive success

What more could you want?

1. Ideas Behind Verified Theories


How Philosophers of Science Look at Drawing Conclusions from Data: Example 1: Raw Data


Example 1 continued


• Useful

• Beautiful

• Consistent

• Memorable

• Basis for Prediction– Hundreds of “confirming” examples

• No basis in reality

Observations from Example 1


Example 2: Danger of "The First Right Answer"


Example 3: Power of Past Experience


Example 4: Power of Context


• Provides checks for internal consistency

• Statistics can measure variations due to chance

• Strong associations suggest causality

• Makes for persuasive presentations

Will Mathematics Save Us From Misleading Inferences?


Linear Regression

Lower than averageLower than average

Higher than averageHigher than average

Low Income High

Demand

Example 5: Using Mathematical Models


Linear Regression



Low Income High

School Test Performance

Example 5: Context Makes Sense


Linear Regression



Low Income High

School Test Performance

Example 5: Ignore Outliers?


In particular, at Mt. Tabor and other high-performing schools:

• Scheduled routine teacher conferences with principal during regular working hours

• Implemented new teacher mentoring system• Dug into the test data: teachers, students, course

items• Identified specific weak spots: e.g.

understanding science texts literally, not just high-energy teaching

• Started homework clubs, extra work for those above grade level

• Created schools-within-schools (Bill & Melinda Gates Foundation

Lessons from the Outliers:Due to Chance?


Major discoveries and investigations due to examining the outliers:

• AIDS—the 2% of women who got HIV but never developed AIDS

• Discovery of H. Pylori—bacteria causing 80% of ulcers

• School teacher incentives encourage cheating: data in test scores where answers are same

• 220-Age = Maximum heart-rate: Bogus

• Discovery that extra-solar system planets may be stars

Lessons from the Outliers:Outliers: Crucial in Science


• Dot-com mania: A few, highly imitated business models, e.g. advertising-based; disintermediation-based; auction-based

• “Be #1 or #2 in every market you compete in”—repudiated 6 years ago in secret

• Learning curve-based strategies

• And now…Sustainable competitive advantage-based strategies

Business Strategies Not Immune to Astrological Thinking Verification Mania


If any business runs on statistics, it’s insurance. Yet:

• Merrill Lynch: Limiting health care costs by expanding benefits– Spells the end of managed care as we know it

– Anybody listening?

• Progressive Insurance: auto insurance paid by the mile instead of all-you-can drive– Exploits “new” technology for a more precise

matching of product to customer

Business Strategies and Outliers


• Outliers provoke good questions about causality– Merrill Lynch: better ideas about causes of high

health insurance claims– Progressive: better ideas about causes of high auto

insurance claims

• Outliers provoke good questions about mathematical models (summaries) of data

• Outliers provide suggestions about better ways to segment markets– Merrill Lynch: companies with long-term employees

and white collar jobs may be targets for highly interventionist medical insurance

– Progressive: Low-mileage, cost-sensitive drivers; highly congested areas.

Business Strategies and Outliers:Lessons Learned


• Difficult to separate facts from their interpretation: there are no “pure facts”– Consultants to the contrary not withstanding

• Math can obscure the true structure of a phenomena– Create patterns rather than show patterns (constellations)– Obscure 3rd variables– Often don’t handle extremes (quantum mechanics, light)– Better for falsifying rather than confirming

• Patterns are rhetorically persuasive but poor strategic guides– Patterns of others (e.g., GE, learning curve)– Mathematical patterns (e.g. regressions)

• Challenging outliers is one method for pursuing the essence of a strategy

Resting Data on Unshakeable Facts:Lessons Learned


No.Sir Karl Popper says: • A theory cannot be proved right• It can only be rendered so precise as to be

tested until it fails.• When it fails, it:

– Clarifies why it “passed” all prior tests– Provides deeper insight into the phenomenon it is

supposed to explain– Points the direction to the next test

• Outliers are sometimes true anomalies outliers - but sometimes they illustrate where theory fails.

Can We Rest Strategy on Verified Theories?


Vague/ General:“Everything” confirms it, e.g.:

• Being #1 or #2

• Our strategy is to focus on customer service

• Our strategy is innovative products

• Our competitive advantage is our people (knowledge base, philosophy of business, R&D, etc.)

Metaphysical:Articles of faith that can’t be falsified:

J&J Credo: mothers, employees, community, investors

“We don’t test for AIDS because there is no AIDS in China.”

What Are Poorly Constructed Business Theories?


• An hypothesis is a risky If…Then...Because statement that has guts enough to identify causality.

• The hypothesis must be specific: • “If we increase store lighting by x lumens per square foot and

widen aisles by y inches and employ greeters at $8.50/hours…

• “Then we can expect a sales increase of $x per square foot in the first 90 days $x + $y in the next 90 days in the a, b, and c departments…

• “Because x% more shoppers will be drawn to aisles in the A, B, and C departments and will spend y more minutes there”

• The hypothesis must be falsifiable:• We increased the store lighting and employed the greeters• We experienced a 5% per s.f. sales increase in departments A

and B, but sales in C (auto supplies) were flat• We experienced 6% more shoppers spending 1:39 minutes

more in department A, 5.2% and 1:07 minutes in B; nothing different in C (auto supplies)

Treat Strategies as Hypotheses Specific Enough to be Falsifiable:


• Perhaps the lighting changes made gender specific differences (auto department vs. others).

• The greeter had no effect on sales• The key to greater sales is getting

shoppers to spend more time in the aisles• And more…

The Test of the Strategic Hypothesis Leads to New Insights and a New Hypothesis


• Create competing hypotheses—and teams supporting each– The proponents of each will do their best to

falsify the opposing hypothesis– CIA: “B” team created to falsify “A” team– Gets rid of “my opinion is as good as your

opinion”• Pit consultants/strategic planning teams

against one another– Not (just) in the beauty contest

• Use market research for testing highly specific hypotheses—not fact-gathering

• Use math to falsify, not reveal patterns

This Approach Suggests Practical Affects for the Strategic Planning Process


“Keep looking around. There's always something you've missed.” - Australian Aviation Magazine

Conclusions About Strategic Theories

1. Don’t create strategies by looking for patterns in data—you’ll just see what you’ve already seen

2. Treat strategies as If—Then—Because Hypotheses

3. Make the strategic hypotheses testable and falsifiable

4. Create competing strategies and teams to defend them.

5. Understand the value of outliers.

6. Look for deeper layers of causality.

“General relativity theory is ephemeral.” - Albert Einstein


• Schools highly comparable on measures of income:

– Comparable percent of kids have taxpayer-provided lunches

– Comparable percent of parents college educated and no college

• Vastly different outcomes:

– Mt. Tabor had 77% vs. 64% reaching reading benchmark

– Mt. Tabor had 76% vs. 57% reaching math benchmark

• Over 1 grade level average difference

Lessons From the Outliers:Different Outcomes


Interviews suggest a much deeper causality:• Beaverton “Superintendent Yvonne Katz boasts that :

"Our scores remain consistently higher than the state average."

• “A traditional collection of stories, each followed by a routine list of questions, got the nod over a series with more challenging literature and deeper questionsThe reason? The district's influx of novice teachers needed something easy to work with

• “Principal Nancy Bush-Lange says preparation for the test was uneven at feeder schools and Heritage needs more time to jell. “

• "I'm proud of our kids, even though if you look at our (test) scores you'd say, 'Wow, I wouldn't send my kids there,' "

Lessons from the Outliers:Due to Chance?


• “All hell” was to break loose in Miami in December 1990 and January 1992 due to alignment of earth sun and moon—and did. (Lots did happen—but not more than at other times).

• Graphs prove homicides to peak at full moon (Only 3 of 48 tests showed any significant correlation).

• Full moon peaks changed to “underlying semi-monthly rhythm.” (Just average adjacent data points)

Voice of Authority

A Source for Confirming Data

Strategy’s Most Dangerous Dogma - And What To Do About It Evan M. Dudik Evan M. Dudik and...

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