Unique Nigerian food startup powered by Houston accelerator enters next phase
Life is full of intuitive leaps. Whenever we make a judgment or choice based on past experience, limited examples, or case studies, we are making assumptions to fill in the gaps in our knowledge.
Consider someone who wants to lose weight. They might assume that all they have to do is exercise to make the pounds go away. They attribute 100% of weight loss to exercise, when in reality physical activity is not the only variable to consider. Instead, multiple factors could be at play, including diet, lack of sleep, or even an underlying health condition.
When making intuitive leaps, you may mistakenly attribute success to a single factor, when in fact, many different factors may be behind an outcome. In this case, taking an intuitive leap rather than considering all the factors may not lead to the desired result: significant weight loss.
It’s the same in business, where intuitive leaps are rampant. Too often, leaders make intuitive leaps that end up derailing their strategic planning and negatively impacting business operations.
Take, for example, the executives of nursing homes that we studied during our research on “Focus”. Nursing homes were experiencing high turnover of staff that they needed to correct. After talking to a few dozen employees, executives believed that a higher salary would reduce turnover. They had taken an intuitive leap, assuming that salary was the sole driver of revenue.
When leaders stopped relying on intuitive jumps, they discovered many different factors causing turnover. They began to identify, analyze, and prioritize these factors, including opportunities for promotion, respect for supervisors, flexible hours, and access to health insurance. In the end, they succeeded in reducing turnover – not increasing wages. If they had relied on their intuitive leap, they would have spent money to increase salaries without reducing turnover.
Other companies also struggle with making intuitive leaps. Often the problem is that individual departments believe their leverage is 100% responsible for solving a certain problem, like poor sales. A human resources manager might believe that to increase sales, the right solution is to involve more front-line employees. A sales manager, however, is adamant that the company needs to hire more salespeople or adjust prices. Someone in charge of product development might say that the quality of the product needs to be improved. The marketing manager may believe that advertising will increase sales.
Intuitive jumps are useless for strategic planning. In fact, they often lead to an increase in silos within a company. CEOs exacerbate this tendency to silo when they request presentations from executives across departments on how they would contribute to strategy.
To stop making intuitive leaps, leaders must accept that their department alone cannot fully inform or implement a company’s strategy. They must realize and accept the fact that several factors are almost always at play. This requires humility and the ability to look beyond their own department.
For leaders, the first step is to identify all the factors that drive a company’s strategic goal, such as increasing sales. Factors that impede sales can include an understaffed sales force, poor quality product, inadequate marketing campaign, or even a lack of distribution.
Next, leaders must determine the relative weight of each factor in impacting sales. This is where statistics come in. Relying on statistical analysis rather than intuitive leaps tells leaders how much each factor weighs in driving sales. To build a solid strategy, leaders can rank the factors and focus their strategy on the top two or three. Almost always, the top two or three factors drive 70-80% of customer value.
Decades of research have shown how these types of statistical models are better than humans at capturing and quantifying how multiple inputs connect to and inform an output. Used correctly, they can also get rid of intuitive jumps.
In one study, members of the doctoral program admissions committee used data such as test scores and grade point averages to select students. Years later, in predicting student success, researchers compared expert ratings to those of a statistical model.
The model predicted success better. He assessed the data impartially, while committee members selected candidates based on intuitive leaps, taking into account their idiosyncrasies and biases. It is these types of models that make up an effective business strategy.
Microsoft is a great example of a company whose leaders consider multiple variables to prioritize those that drive customer value. Prior to 2014, when CEO Satya Nadella took the helm, CEO Steve Ballmer’s acquisition strategy was seen as more reactive than proactive. Nadella’s approach to the acquisition was more “forward-thinking,” and he added to the company’s focus on cloud and subscription services. He focused on delivering tangible benefits to Microsoft customers.
Berkshire Hathaway CEO Warren Buffet does too. When Buffet bought California-based candy maker See’s Candies, he rightly understood that the quality of the company’s chocolates was important. But that’s not the only factor at play.
Unlike some executives who would take the intuitive leap and say that chocolate has led to 100% success, Buffet has the humility to understand that the company’s success depends on much more than the taste of its chocolates. Buffet knows that a huge driver of customer value is the people’s experience inside See stores.
“In the weeks before Christmas and on Valentine’s Day, there are long queues. So, at 5:00 p.m., a woman sells the last person the last box of sweets, and that person is in line for 20 or 30 customers. If the salesperson smiles at that last customer, our gap widens,” he said in remarks to MBA students, referring to the company’s competitive advantage. “And if she growls at him, our moat is shrunk… That’s the key.” The total part of delivering the product is having everything associated with it, namely See’s Candy and something nice happening.
Buffet has prioritized the experience as well as the quality of the chocolates, and it continues to do so. Since buying See’s, the company has grown from $30 million in annual revenue to several hundred million. Humility allowed him to get rid of his intuitive leap and this led to success.
In “Focus,” we explore exactly how leaders can transition to a science-based approach to strategy to grow their business.
This article was originally published on Rice Business Wisdom and is based on research by Vikas Mittal, J. Hugh Liedtke Professor of Marketing at Jones Graduate School of Business. Other researchers included: Jenny van Doorn and Peter C. Verhoef from the University of Groningen, as well as Katherine N. Lemon of Boston College Carroll School of Management, Stephan Nass from the University of Münster, Doreén Pick from the Hochschule Merseburg, and Peter Pirner of Petlando, i-CEM and www.CX-Talks.com.