• Execution: The Discipline of Getting Things Done
• How Optimism Undermines Executive Decisions
• "Imagine" It's a Test

How Optimism Undermines Executives Decisions

Failed mergers. New market and product ventures gone awry. Capital investments that fail to deliver. New project undertakings mired in complexities.

Standard Economic Theory

Every business leader is familiar with these problems.According to standard economic theory, the high failure rates are easy to explain: the frequency of poor outcomes is an unavoidable result of companies taking rational risks in uncertain situations. In the long run the gains from a few successes outweigh the losses from many failures.

The Alternative Explanation

However, Dan Lovallo and Daniel Kahneman provide another explanation in the July 2003 issue of Harvard Business Review.

The authors propose that the high failure rate is a consequence of flawed decision making and that executives fall victim to what psychologists term "the planning fallacy". Under its spell, managers make decisions based upon delusional optimism rather than on a rational weighting of gains, losses and probabilities. Benefits are overestimated and costs are underestimated.

Native Optimism

This over-optimism can be traced to the way the mind processes information, or cognitive biases, and to organizational pressures. The problem starts with most people's native optimism which presents itself in the tendency of individuals to:

• exaggerate their own talents
• misperceive the causes of certain events and subsequently take credit for positive outcomes and attribute negative outcomes to external factors
• exaggerate the degree of control they have over events and discount the role of luck

Cognitive Biases

The problem is then further magnified by two other kinds of cognitive bias:

• Anchoring
• Competitor neglect

Anchoring is the tendency for people to project a future outcome very similar to a scenario they have previously formulated - irrespective of the realism of that scenario. In other words, once we have envisioned a future, we tend see all other future possibilities as minor variations around this baseline.

Competitor neglect describes executives' tendency to focus on their own company's capabilities and plans and neglect the potential abilities and actions of rivals. And this leads to underestimation of the potential for negative events such as price wars and overcapacity, to name only two.

Organizational Pressures

On top of these individual factors, organizational pressures often add one final influence into the mix. Competition for limited money for new projects, or competitive pressures demanding new initiatives, motivate managers to present the most attractive proposals and forecasts - with two ill effects.

As a result of the anchoring tendency described above, over-optimistic forecasts then distort all further analyses. And secondly, it raises the odds that the most optimistic forecast will be chosen for investment or action - and hence the highest probability of disappointment.

Take an "Outside View"

To combat these influences, the authors recommend taking an "outside view" in comparison to the "inside view" that is naturally adopted in the planning process. In the outside view, the details of the project at hand are completely ignored and a process of "reference forecasting" is used.

This approach examines the experiences of a class of similar projects, lays out a rough distribution of outcomes for this reference class and then positions the current project in that distribution. The resulting forecast generally turns out to be much more accurate.

A Balanced Approach

The conclusion is not that optimism is bad - simply that there needs to be a balance between optimism and realism - between goals and forecasts. Aggressive goals can motivate the troops and improve chances of success, but outside-view forecasts should be used to decide whether or not to make a commitment in the first place.

The complete HBR article, Delusions of Success, is well worth a read if you are venturing into this territory. In it, Lovallo and Kahneman provide detailed support for their premise along with real world examples and an in-depth discussion of "how to take the outside view".

If you can't find a print copy, you can always order an electronic version for about $10 Cdn from the HBR site - www.hbr.com

 

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Leadership Perspectives selects 2 or 3 key articles, learning stories & best practices each issue that offer fresh perspectives & new ideas on dealing with the challenges of:

• Formulating & communicating vision,
• Developing strategy,
• Motivating & inspiring stakeholders & team members,
• Discerning future trends, &
• Developing leadership skills

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Execution:
The Discipline of Getting Things Done

If you are struggling to bridge the gap between goals and results, even though you have solid plans, you are probably failing to execute properly. This is the premise of Execution by Honeywell CEO Larry Bossidy and management advisor Ram Charan.

According to the authors, executives typically do not think about execution as a discipline or cornerstone of their business' culture - but they should because execution is the most important collective set of activities which a company's management can undertake.

A Systematic Process

Bossidy and Charan maintain that execution is a systematic process of rigorously discussing hows and whats, questioning, tenaciously following through and ensuring accountability. It is, in fact, a discipline.

Many business leaders like to think that their prime responsibility is vision and the nitty gritty details of making it happen is the job of their managers. However, execution must be embedded in the reward systems and in the norms of behaviour of each member of the organization. It must be a core component of the culture. And for that to happen, the deep personal involvement of the leader of the organization is required.

Three Building Blocks

Simply delivering your vision to your managers and telling them to execute will be doomed to failure unless three primary building blocks are in place:

• Seven essential behaviours of the leader
• A framework for cultural change
• The right people at the right place

Seven Essential Behaviours

But for many leaders, a fear of being drawn into a process of micromanagement and dragged down in a sea of details keeps them detached from the execution process. The answer is to exhibit what the authors define as the seven essential behaviours of execution management:

• Know Your People & Your Business: Don't let yourself become out of touch with day to day realities or allow the information that reaches you to be filtered by direct reports who put their own spin on it.
• Insist On Realism: Many people try to ignore, avoid and deny a reality that is uncomfortable or revealing of mistakes. Without realism, you cannot execute.
• Set Clear Goals & Priorities: Focus on a few priorities (three or four) and you'll produce the best results from the resources at hand. Try to take on too many things and you'll spread yourself and your resources too thin. As the old saying goes, "do a few things well, not many things poorly".
• Follow Through: Clear simple goals are left as faint memories if there is no follow through to ensure progress towards them is made. This failure is widespread and is a major cause of poor execution in organizations today. Leaders mustbring roadblocks to the surface and create follow through mechanisms and processes.
• Reward The Doers: Measure performance, reward results and promote people who get things done. If you don't, people will not produce the specific results you are looking for.
• Expand People's Capabilities: Pass on your experience and wisdom to the new generation of leaders in your organization and expand the capabilities of the entire organization.
• Know Yourself: Strength of character and emotional fortitude are critical if you are going to face organizational realities and provide people forthright assessments. This fortitude comes from four core qualities: authenticity, self-awareness, self-mastery and humility.

Creating the Framework for Cultural Change

When it comes to cultural change, there's a lot of wisdom in the old adage - we don't think ourselves into a new way of acting; we act ourselves into an new way of thinking. Focus on changing the beliefs that influence specific behaviours - things that are conditioned by training and experience - because behaviours are beliefs turned to action.

You'll get the greatest behaviour change by defining what gets appreciated, respected and rewarded and linking these rewards to performance. Don't make the mistake of rewarding only on numbers. Reward on behaviours as well and you'll see your numbers improve correspondingly.

The Right People in the Right Place

Most leaders recognize that an organization's workers and their judgments, experiences and capabilities make the difference between success and failure. Yet so often, companies don't end up with the right people in the right jobs - for several reasons:

• Lack of knowledge - don't rely on vague or prejudice staff appraisals. Define the job in terms of a few "must-have" criteria and evaluate each candidate against these.
• Lack of courage - don't allow the wrong person to be kept in the wrong job because the person's leader doesn't have the emotional fortitude to make the necessary changes. Considerable damage to the business can result.
• Psychological Comfort Factor - don't promote people just because you are comfortable with them or because they think and act like you. Evaluate and promote based on requirements and capabilities. Sometimes the ideal candidate is an opposite personality type.

The Core Processes of Execution

Bossidy and Charan maintain that there are three core processes at the heart of execution:

• The People Process: The people process is the most important process because if you don't get that right you'll never fulfill the potential of your business. A robust people process does three essential things:
  • Evaluates individuals accurately and in depth
  • Provides a framework for identifying and developing the leadership talent the organization will need to execute its strategies in the future
  • Fills the leadership pipeline that is the basis of a strong succession plan
• The Strategy Process: A good strategic planning process requires the utmost attention to the hows of executing a strategy. It is an action plan not just a vision. The authors describe several key questions that a strong strategic plan must address and describe how link your strategy to your people process
• The Operations Process: The strategy process defines where a business wants to go and the people process defines who will get it there. The operating plan provides the path for these people and breaks long-term output into short-term targets.

The ability to execute is at the heart of business success. It's not easy and takes a lot of work on the part of the leader but in Execution, Bossidy and Charan provide a detailed roadmap of how to accomplish it. Definitely worth a read if you are struggling with a gap between goals and results.

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