In strategic decision making, there is always the temptation to do more analysis in the hope that it will reduce uncertainty. But beyond a certain point, which comes sooner than most people would like, more analysis does not equal more information.

Working with managers in a particularly competitive part of the car industry, we were discussing an analysis they had done using Porter’s Five Forces. Their bit of the industry came out as decidedly unattractive (to take one factor: the bargaining power of car makers over their suppliers is huge, to the point where they expect and get year on year price reductions). The managers were a bit surprised by the results of their own analysis since they are a successful, profitable company. “How do you do it then? Indeed why do you do it?” I asked. “Because we are car guys!” came the reply.

This was an important insight and a turning point in the discussion: most industries look pretty unattractive when analysed, but because these managers were car guys, they made the business work. They enthusiastically and ingeniously searched out the positions and activities that enabled them to turn a profit (The Five Forces framework is almost universally taught but is often misunderstood. It is a pointer to the average expected returns in an industry – there are many profitable companies in unattractive industries: Southwest and Ryanair are classic examples).

Uncertain times seem to favour technocrats: they project a safe-seeming competence, and their spreadsheets, fan charts and literal-minded analyses convey a reassuring impression of  understanding and control. But there is a real limit to how much leadership technocrats can provide, because, ultimately, leadership does not come from a spreadsheet. It comes from human beliefs about what is important to people, and what those people – customers, owners, managers and employees – prefer and so want to do with their time and money. It includes taste, judgement and will, and these factors can’t be completely appraised in terms of a set of formulas.

Analysis is invaluable, but we ought to recognise that it will rarely be conclusive. Once you reach that point, then if you are going to reach a decision, you need your own equivalent to: “Because we are car guys!”

© 2012. Andrew Bass. All Rights Reserved.

 

 

 


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