Myth, Fear, Action & Explanation
We recently explored some of the typical myths about exporting. Although they are normally fallacious, they are commonly enough accepted that many companies with limited export experience may make decisions based on what they naively believe is a huge risk - and risk uniquely associated with export. Actually there are huuuuuuggee risks associated with business! Some which seem quite unusual to us, and therefore daunting, and others with which we live every day and therefore barely even notice. We correct for them instinctively.....or simply ignore them.
Eventually we need to simply take action - to be the man in the arena. But between irrational fear and bold action we need careful thought and a strong business case. A fascinating psychological phenomenon concerns the biases inherent in our analysis and decision making process. Why do executives make the decisions they do? What methods can we use to reduce subconscious error in our decision process? And directly relevant here, what might cause an executive to make a decision not to boldly pursue export - a decision which feels comfortably rational but which time would reveal to be a major strategic blunder?
A Primer on Decision Making
Skip this section if you have read about this and stayed current. A couple good articles (if you want more detail) are The Big Idea: Before You Make That Big Decision (by Kahneman, Lovallo & Sibony, from June '11, Harvard Business Review) and Hidden Flaws in Strategy (by Roxburgh, from May '03, McKinsey Quarterly). (Both actually include several book references to which you can refer for even greater depth.)
The former identifies typical cognitive biases (confirmation bias, anchoring, loss aversion)and modes of thinking (intuitive, which is our filter through which we see the world [remember the importance of "Rooted Maps"?]; and reflective, the put your thinking cap on and analyze the problem type.) Intuitive thinking is the most pernicious. They explain "An insidious feature of cognitive failures is that we have no way of knowing that they're happening: We almost never catch ourselves in the act of making intuitive errors. Experience doesn't help us recognize them."
The latter offers a digest of "eight insights from behavioral economics." Although focused on personal finance the principles are broadly applicable. Of particular note is the "Status Quo Bias" (self explanatory); "Anchoring" (becoming anchored to the past - as in assuming that a properly managed company can be successful selling only domestically; ignoring the present ubiquity of globalization); "Sunk-Cost Effect" (applicable to companies that have so much invested in entering a single market, China or India for instance, that they will continue to invest fruitlessly in that effort rather than direct new investment to markets in which they are more likely to succeed); and "Herding" (OK, we're going to export and we have to start in China!)
You're wasting my time! What could this possibly have to do with my company and Global Business Development?
In a fascinating new book Dynamic Economic Decision Making: Strategies for Financial Risk, Capital Markets, and Monetary Policy, John Silvia, Chief Economist at Wells Fargo combines themes from traditional economics, business and decision making disciplines. (John Mauldin recently excerpted the book in his "Outside the Box" newsletter and included a review from Jim McTague of Barron's who wrote "For the price of a book you receive the equivalent of a three-credit course from a top MBA program." In addition to his suggestion that one also read Know What You Don't Know: How Great Leaders Prevent Problems before They Happen by Michael Roberto, Silvia offers a number of salient points (and I include commentary):
- "Two aspects of successful decision-making in a changing economic world...First, a strategy is needed that recognizes the reality of fluctuations in economic growth....Second, this strategy should prevent economic shocks or change from causing business failures....decision makers have observations that suggest the future direction...mental barriers prevent (the decision-makers) from accepting such change." (Strategic diversification between countries and regions will ameliorate shocks in an, at least partially, "un-coupled" world. Globalization is real. Pretending otherwise, no matter how uncomfortable doing so would be to the individual and corporate status quo and identity, is negligent folly.)
- "Our first decision-making challenge is the normalization of deviance. In this situation we normalize, learn to live with, small deviations in the normal run of affairs. We learn to live with a dripping faucet, a toilet that runs a bit longer, a door that sticks." (Your domestic market is stagnating and margins are compressed. Ideas to extract incremental growth domestically yield diminishing returns. Stop wiggling the handle! It's time to replace the toilet fill valve! Indeed it's time to get serious about your global business development and export programs.)
- "most business decision-makers (don't) think in terms of the business cycle...Forecasting for most consists of straight-line projections from a spread sheet." (You may silence your banker or investors temporarily with reassuring projections. But when you routinely verge on violation of your covenants, the spread sheet becomes irrelevant. Where are you going to find your required growth? As Dan Nanigian says at 3:40 in this video from Inc Magazine, "revenue growth was key to the survival of the company.")
- "Decision traps limit the leader's ability to deal with cyclical but especially longer-term changes. Decision-makers tend to anchor their expectations about the future in the past...Decisions about the future of the firm tend to reflect the firms existing structure. Seldom do firms break out of character and set a new course. This causes them not to examine the marginal costs and benefits of moving to a new future." (News Flash - please excuse the sarcasm - this is a dramatically new present. Globalization is real. Making your strategic decisions for future activity based on your traditional model will fail. It's that simple. Exporting and globalization is central to future success. Like it or not. If you make a conscious decision to eschew that strategy, at least do so acknowledging the long-term decay which will result.)
- "barrier to effective decision-making is the failure to recognize change as a process and not an event." (If you are waiting for a trigger event to provide your go/no go signal, you will be disappointed. There isn't a clear decision point. There is a trend....this is a process. You need to embrace it now!)
Like it or not, It's REALITY
I can empathize. Getting in the arena is uncomfortable. Arriving in that distant airport, alone & exhausted is unnerving. And if you embark upon a broad, strategically conceived global business development program there will be successes and frustrating, discouraging failures. But there is no escaping the trend. Failure to embrace export opportunities will be a strategic error. Unfortunately, even an accidental or quasi-globalization effort will ultimately fail as well - but introduces the risk of self assurance that proper steps have been initiated to deal with the new reality.
Consilium can help. Contact us and let's get started developing a proper, strategic plan for your company's health and success.