Despite the best intentions, executives are caught up in the cognitive and organizational biases that hinder good decision making. In this series, we highlight some of them and provide some effective ways to deal with them.
Our topic this time?
When the crowd is not necessarily wise
Another year, another proposal, another transformation plant. The CEO of a large chemical company has a déjà vu feeling. The CEO and the committee are allocating more resources for capacity building and design and design resources for the two large and new plants in the region in the southern half of the United States. It’s not a completely unexpected proposition: most of the company’s competitors follow this ongoing development model, which could make it easier to raise money and get a purchase for large construction projects. Undoubtedly, carrying out such projects can make everyone famous, especially the company that can take on the newest and brightest facilities. But the CFO is also aware that there are financial concerns associated with following the crowd. If a new plant group is networked at the same time, for example, and creates overcapacity, prices across the industry could collapse. How can the CEO convince the CEO, the committee, and others to look at the proposed options and costs of this proposed construction in a different way?
The CFO is battling a herd mentality that is a common bias in the world of corporate strategy, finance, innovation and investment. He was first seen by journalist Charles Mackay in his 1841 study of crowd psychology. Extraordinary popular delusions and madness of the crowd, which predicts a rise in economic bubbles. The mentality of the herd generally occurs when the information available to the group is considered more useful than private knowledge, regardless of the source or quality of that information. Individuals buy collective wisdom, sometimes ignoring evidence to the contrary, especially when their reputation is at stake.
If a chemical company builds a new processing plant when all its competitors do, and if that strategy fails, the company’s CEO, board, and other stakeholders can’t be ridiculed because other companies have made the same mistake. But if the company follows a different and wrong approach from the public, its strategy can be criticized and managers can lose their jobs.
There is security in the herd. But if no one on the executive team looks the other way, their company may lose opportunities to create a competitive advantage, launch a new business model or industry, or achieve long-term success.
There is security in the herd. But if no one on the executive team is looking at the opposite view, their company may lose their chances of long-term success.
A company may never completely bend the will of the flock in its direction, but employers who take the opposite position may use the flock’s thinking to pressure their information before making critical business decisions. Taking a page from the book of entrepreneurial investors, business leaders can do a disassembly exercise. Red and blue teams can use scenarios, advanced analysis, and role-playing games to identify how the herd might react to a decision and to ensure that they can refute public perceptions with specific analysis.
In the case of the plant construction proposal, for example, the CEO and CEO may touch on a group of chief operating officers in the most important business units to review the data and create formal cases for and against the construction of the new plant. The CFO and CEO would encourage this team to explore the long-term strategic, operational and financial implications of the construction and the potential reactions of the company’s competitors and investors. For example, how could chemical demand be in two to five years? What are the cash flow forecasts for two to five years? When would the project be suspended? How much can prices fall in the event of overcapacity?
This dismantling exercise would create evidence that the CFO needs to calm the fears of the CEO, the board and others, possibly to break away from the conduct of the packages. It would also encourage the explicit recognition of these important stakeholders by explicitly recognizing the reputations and other risks associated with not following industry standards, and laying the groundwork for more effective avenues for growth.
Going against people can be awesome in any context; when careers and fame are at stake, it can be completely paralyzing. But to make a big difference in business and industry, employers may need to make bold moves, even when the crowd disagrees.