23 Reasons Not to Talk to Strangers? Or...

...Little Red Riding Hood?

My friend and former colleague Eric Pelletier blogs in a wonderful post, Croissants and fairy tales. How storytelling makes strategy happen that

...when people in a similar context, are exposed to the same facts, they tend to arrive at the same conclusions. And so, when they're in the same organization then, they're also likely to arrive at the same conclusion about the right strategy to take the organization forward.

While he focuses on the power of getting people on board via storytelling to implement strategies, I have little doubt he'd agree about the power of creating shared conclusions on formulating a winning strategy in the first place.

In The Biggest Problem in Strategy? Mindset, I noted how the railroads in post war America missed out on growth opportunities because they saw themselves in the railroad business, not the transportation business, and how Blockbuster missed out on digital distribution, ignoring intelligence on the looming threat. While railroad efficiency made enormous strides post deregulation in 1980, it basically kept the surviving companies in the game. Rail's share of freight traffic in the US (measured in ton-miles) declined from about 75% in 1930 (A Short History of US Freight Railroads, pp3) to 28% in 2000 (Freight-Rail Bottom Line Report, pp 14). Worse, its share of freight revenues dropped to a mere 6%. Blockbuster went bankrupt in 2011, shuttering the last of its outlets in 2013. Other examples of failed strategies aren't hard to find: cell phone manufacturers Nokia and Motorola; bookstores Borders and Barnes and Noble; computer manufacturer Sun; the plethora of desktop application software firms - remember VisiCalc, Lotus 1-2-3 and Freelance Graphics and WordPerfect, all of which dominated at one time?

Storytelling works because of the evolution of the prefrontal cortex of the human brain, which helps us recognize and act on patterns. It also works, as Eric notes, because it creates a shared context, or "experience" (even if vicarious) in the tribe. 

But this pattern-recognizing ability is both a help and a hindrance, for individuals and groups. It helps tremendously when the situation is reasonably stable, but often fails us in times of significant environmental change, when we are unable to recognize new patterns. And the worst failures occur when the "tribe," and especially the decision-making leadership, is unable to jettison outdated mindsets.

The most powerful stories are the ones collectively arrived at, through shared experiences. And the most powerful of these are crises. IBM (where I worked for the better part of a decade), was able to reinvent itself in the early 1990s because the tribe members (the employees) knew there was no other choice, enabling Lou Gerstner to drive a change in the collective mindset. But it was painful, to the tune of 200,000 layoffs.

So I return to a theme readers of my blog will recognize: why not create simulated "crises" to enable decision-makers to "experience" the consequences of potential actions. Militaries, governments and airline pilots (see Chance Only Favors Prepared Minds) do this regularly. And some companies regularly incorporate scenario planning or business wargaming (among other experiential planning techniques), designed and facilitated by experts for maximum effectiveness, into strategy development.

Companies that invest in these now, incorporating the latest available intelligence on potential opportunities or threats, reap huge future returns and often avoid debilitating disasters.

Chance Favors Only Prepared Minds

Creating Crises

On January 15, 2009, US Airways flight 1549, with 150 passengers and five crew, struck a flight of geese two minutes after take-off, losing power in both engines. Four minutes later, Captain Chesley B. "Sully" Sullenberger's crew landed the Airbus A320 in the middle of the Hudson River. Aided by first responders, there was no loss of life, and the five injuries and a number of cases of hypothermia were quickly treated.

How did these teams perform such an incredible feat? Was it a miracle? Perhaps. Most commercial flying is routine and pilots rarely experience a real crisis. The FAA reports the odds of a bird strike are one in 10,000, and experts estimate the odds of losing both engines are one in several million.

Yet the crew and first responders instinctively knew what to do. They had rehearsed responses to low-probability, high-impact events in simulated crisis conditions. It's part of their job.*

The chances of an employer going bankrupt in 2012 were 0.007%**, 70 times higher than a bird strike. How many executives rehearse responses to such a high-impact crisis? OK, maybe that's stretching the point. After all, company bankruptcies don't risk catastrophic loss of life.

But what if the odds of business failure were greater than one in two? Writes Harvard Marketing Professor John Gourville, "most studies estimate new product failure rates at 50% or more," ranging "from 40% to 90% across product categories."***

Alternatively, consider the difficulty of sustaining profitable growth. Columbia Business School professor Rita Gunther McGrath writes that only 8% of the 5,000 companies with over $1 billion in revenues grew sales by 5% annually over a 5 year period, and only 4% grew net income by at least 5% annually - that's less than one in 20.****

Why not increase the odds of success by taking a page from pilot training and have teams "rehearse" in launch or growth simulations?

Master motivator Lou Gerstner, who took over an IBM in its death throes in 1993, determined that the organization had the capability to perform incredible feats, if only he could refocus its efforts. Early on, he challenged his senior executives to attack their businesses as if they were their primary competitors, in effect "rehearsing" competitive responses.

Later, in the early 2000s, IBM embedded "crisis" simulation into the strategy process. Executive business unit teams went offsite to confront their biggest challenges, such as reversing a loss or identifying how to grow revenues by an order of magnitude, in response to likely market, competition and technology evolution. To make the "rehearsal" as consequential as possible, the teams had to present their solutions to the senior-most executives in the organization - the stakes were high. As English writer Samuel Johnson said, “nothing so focuses the mind as the possibility of being hanged in a fortnight.” At IBM, the teams had three days.

Organizations can similarly improve results by running simulations focusing on assessing and responding to growth opportunities, marketplace risks, untapped sources of customer value, the next generation of customers or emerging competitive threats.

While each simulation requires a different approach, the key to success is creating a realistic environment - a "crisis" - that challenges existing mental models and addresses the organization changes required to deliver a new initiative (structure, systems, people and culture).

It's hard work, but the results can be significant: IBM's EPS increased eight-fold over the decade following the launch of the strategy simulations, tripling the share price.

As Louis Pasteur said in a lecture at Lille University in 1854, "...chance favors only prepared minds."

*Newman, Rick, "How Sullenberger Really Saved US Airways Flight 1549," USNews & World Report, February 23, 2009
**42,008 bankruptcies in the US in 2012: "Bankruptcy Filings Down in Fiscal Year 2012," US Courts; 6,049,655 employers: "Statistics about Business Size," US Census Bureau
***Gourville, John, "The Curse of Innovation: Why Innovative New Products Fail," MSI Reports, Issue Four, 2005.
****McGrath, Rita Gunther, “How the Growth Outliers Did It,” Harvard Business Review, January – February 2012