The Opportunity Mirage:  How to Spot When A Rose Is Not A Rose.

Is that great looking opportunity a mirage?

Sometime last year I had a conversation with a CEO who was frustrated by the poor performance of his company's U.S. subsidiary.  Sales were down and the management was disappointing.  None of this was surprising since they were in a highly competitive market and offering little unique value. 

After some discussion, I suggested that it might be time to shut down the subsidiary and focus elsewhere where the company was stronger.  The CEO hemmed and hawed and finally confessed.  "You know, the United States is such a huge market.  I just can't believe that there's no room for us there."

A few months later I read in the papers that the U.S. subsidiary had defaulted on its loan terms and their bank was freezing their credit line.

This CEO was no dummy.  The parent company was a shambles when he arrived and he was responsible for huge improvements.  He trimmed the labor force and outsourced manufacturing.  And he opened this U.S. subsidiary.

But when it wasn't working, why couldn't he see that the opportunity was a mirage?  Why couldn't he see that this rose wasn't a rose?

The field of behavioral economics offers some explanations for why the best and brightest amongst us are liable to trip over the wires in our own brains.  Here is a brief overview of just three of our tendencies.

1.      Overconfidence and over-optimism.  Confidence and optimism give us the gall to venture out and start a business in the first place.  But they can also drive us to base our plans on unrealistic assumptions about the marketplace or our own capabilities.

2.      The status quo bias or the endowment effect�:  According to Charles Roxburgh in The McKinsey Quarterly*, this tendency gives people a strong desire to hang on to what we already own.  The very fact that I already own it leads me to perceive it as more valuable.  Richard Thaler tested this effect with coffee mugs imprinted with the Cornell University logo. Students given one of them wouldn't part with it for less than $5.25, on average, but students without a mug wouldn't pay more than $2.75 to acquire it. The gap implies an incremental value of $2.50 from owning the mug.

This bias, according to McKinsey research, makes CEO's reluctant to sell businesses, amongst other things.

3.      Misestimating future hedonic states.  We are bad at estimating how good or bad we will feel if our situation changes.  We tend to expect it will be worse or better than it usually turns out to be.  In truth, "People adjust surprisingly quickly and their level of pleasure (hedonic state) ends up, broadly, where it was before."

Dov Gordon's CEO Thought-Provoker Questions:

                    i.      Have you or anyone on your team recently expressed strong confidence in something when the evidence is in fact inconclusive, neutral or indicative at best?  If you've decided to act on this confidence, have you at least prepared thorough contingency plans should your assumptions be proven wrong?  (Perhaps go back to basics?)

                   ii.      Has your organization resisted making changes that must be made perhaps due to fuzzy fears or excessive concern for what might be?  (Status quo bias.   Misestimating future hedonic states.)

                 iii.      Do these first two questions, when taken together, strike you as something of a paradox?

*Read more about these and other "flaws" in our brains and how they affect our strategic thinking at The McKinsey Quarterly.  "Hidden Flaws In Strategy"� by Charles Roxburgh.  Registration is required, although at no charge.

http://www.mckinseyquarterly.com/article_page.aspx?ar=1288&L2=21&L3=37&srid=253&gp=0#foot9

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Dov Gordon helps senior executives at small and mid-sized companies around the world to earn the respect and admiration of their marketplace.  Clients benefit from clarifying their strategies, sharpening their focus, making better decisions, improved teamwork and growing into great leaders.

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