December 10, 2008

The 5 Horsemen: Where do mistaken perceptions of reality come from?

[Excerpt from Chapter 2, Bigger Isn’t Always Better]

Mistaken perceptions come from faulty thinking processes. Robert Sternberg identified five forms of flawed thinking that can lead to counterproductive actions:

Unrealistic optimism. Optimism is a powerful enabler of growth. Too much of it, applied in situations where it is unwarranted, can backfire by leaving people feeling so capable and on such a roll that they mistakenly think that they can achieve anything they set out to do. Samsung thought its great success with consumer electronics would carry over to a completely different business, automobile manufacturing. It invested $5 billion to enter a market that was already oversaturated and nearly profit-free. Exaggerating benefits and discounting costs is a great way to set a business up for failure, as Samsung soon learned after it was forced to turn over the direction of its ailing car business to a more experienced French company, Renault.

Egocentrism. Individuals who come to think that they are the only ones who matter are likely to make many perceptual errors. They will take personal credit for the good luck of having been in a buoyant economy or a market that has just taken off. Egocentrists act in ways that benefit themselves, often without a clue to what impact these behaviors are having on others. Their illusion of personal preeminence leads them to miss a lot that is going on around them. MIT systems researchers have spent several decades examining the dynamics behind growth. They have noticed that all growth initiatives involve two distinct processes—one that generates a self-reinforcing spiral of success, and another that attempts to balance this forward momentum with feedback from the rest of the world telling the grower to slow down a bit. The first process always runs up against, and sometimes causes, the second. Egocentrism (acting as if the world revolves around you) basks in the first of these, while ignoring the early warnings of obstacles ahead provided by the second process. Even as its sales declined, legendary Levi Strauss still thought of itself as the company that defined jeans and smart casual wear, and dismissed reports that young, fashion-oriented consumers saw its clothes as stodgy and outdated.

Omniscience. People who feel that they know all they need to know and do not need to seek or heed advice are the ones who are most likely to make decisions without considering all the ramifications of their actions. The chief executive of Rubbermaid in the mid-1990s, Wolfgang Schmitt, cultivated a reputation with his managers as a lightning-fast thinker who behaved as through he knew "everything about everything."24 He ran one of the then most admired companies in the United States. Rubbermaid had a dominant position in many categories of household products and containers—at least, dominant until Schmitt missed that decade's shift of market power from makers of products to their sellers. Rubbermaid ignored Wal-Mart's demands for lower prices and deliveries at Wal-Mart's convenience, and found its place on this retailer's shelves quickly taken by cheaper items made by companies with retailer-friendly, just-in-time delivery systems. Rubbermaid's sales declined, and by the end of the decade the company was sold to a turnaround specialist.

Omnipotence. Feeling like an all-powerful master of the universe leads one to push harder in the same direction when obstacles arise, rather than heeding the potentially useful feedback the world is trying to provide. Assumptions about reality get confused with reality itself. After Nokia became the world's leading cell phone maker, it came to think that it could shape the industry because its market position was so strong. It resisted following its smaller competitors, forgetting how motivated these companies were to keep up with changes in customer needs that could offer a way to topple Nokia's dominance. As a result, when preferences shifted away from candy bar–style handsets and toward sleeker, clamshell phones, Nokia stayed with the older models too long and lost market share. Ironically, one of the companies it lost customers to was Motorola, the former wireless phone leader whose business had been devastated by Nokia's digital phones a few years earlier when Motorola clung too long to analog technology. Executives caught up in omnipotence overestimate how much control they have over events and completely discount the role that chance and one-time occurrences have played in their past successes. Their response to obstacles becomes stereotyped—they just push harder.

Invulnerability. Once thought to be only an affliction of teenage boys, the idea of being able to do whatever one wants to without fear of harm or exposure has crept into some boardrooms. Sometimes expressed by ignoring the law and social norms, and other times by failing to protect a strong position in the marketplace by adapting to evolving circumstances, this thinking fallacy leads to underestimating how aware and clever ones' opponents (and regulators) really are.


<< Home

This page is powered by Blogger. Isn't yours?