I worked in my family’s Italian restaurant as a pizza cook during my teen years and even today I still have to taste pasta to know for sure that it is done. Another way is to throw it against the wall and see if it sticks. That’s too messy.
So it is with a bad strategy. No matter how hard you try in implementing it, it will remain a bad strategy. Charles Roxburgh tackled this problem in his article, Hidden Flaws in Strategy, and why executives back them. His article addresses the problem from the point of veiw of the human brain function. I refer to that article from time to time, but will point out other practical aspects:
- Overconfidence: Roxburgh’s article discusses the overconfidence of companies like start-ups. In other words, “rose-colored glasses.” We prepare business plans in addition to strategic plans. I always try to interject a business strategy for those companies that hire us to prepare business plans. I have found that entrepenuers that are trying to impress their investors usually fall into this category. So, as a CPA, I have to gently bring them down to earth. One of my approaches is to lay out all assumptions so potential investors in order to inform potential investors. Another approach is to have the client embrace their weaknesses. Most clients ignore that, but want to dwell on their strengths. In several instances we were able to turn their weaknesses into strenghts. In any event, as CPA’s we have a special point a view because we see both the big picture and the minutia.
- The Sunk-cost effect: I like this concept from Roxburgh because I have seen so many small companies continue on a bad strategy until they implode. I have found it very hard to change the course of an executive whose company is plummeting downward. The gambling instinct comes out and they refuse to address the problem. I refer to it as the “ostrich stage,” because they will stick their heads in the sand and not make the hard decisions that usually require a different strategy. I have found the solution to this is to closely monitor your startegy with metrics, and if the metric(s) start pointing south, do not hesitate to explain it. This is why it is imperitive to have a current set of accurate accounting records, a condition we don’t find very often with new clients.
- The herding instinct: Roxburgh cautions about following the herd off a cliff. The situation that comes to my mind are bankers in the United Kingdom who backed the Southern Confederacy’s “Cotton Bonds” in 1863. Due to the taking of New Oleans and the Union’s victory of Vicksburg, the price of cotton skyrocketed because of the Union blockade. Some UK investors of that time herded together to buy the Confederate Bonds presumably backed by cotton) which supported the war. Unfortunately, they usualy couldn’t get their hands on the cotton collateral, the South lost, and so did the investors. This is a simplistic view of the events, but Illustrates how the herd can lead others into financial ruin.
Another example of the “herd” factor was when my brother-in-law tried to get my wife and I to buy into a ponzie scheme where people were doubling their money in a week. We laughed, but didn’t like hearing of family and friends who “bought” into the hype and lost their $1,500 investment within thirty days.
The main takeaway from this article is to measure. Like many say, “If you can’t measure it, you can’t manage it.” These points can help you to measure your strategy and to make the necessary adjustments.