The Decision is Yours.
Whether consciously or subconsciously, we make a large part of our decisions using mental models. In some instances, such as the simple problems of the mundane, choice is made without much thought. Complex strategic issues, on the other hand, require careful consideration. Unfortunately, we are cognitive misers. As a result, we gravitate towards answers and models with the speed at which they make intuitive sense to us and therefore often end up with basic hedonic approaches.
In essence, hedonic mental models are based on additive competitive attributes, such as quality or price, each one of which having an absolute value. For example, buyers will want higher quality, but lower price.
Obviously, these do not cancel each other out – the negative value of price is taken as an absolute. More (or less) of each value is thus always preferred, though individuals are allowed to attach different weight to each.
Using hedonic mental models in strategic decision-making, one would ultimately seek to be the best in a given competitive set in every single aspect. Though a seemingly common-sense approach, as it turns out, the end result is not what most would believe.
As Nick Bloom and Stephen Dorgan noted in Management Practices Across Firms and Nations, companies that adopt best practices across the board – from manufacturing and supply chain management to customer service, HR and finance – outperform laggard companies by no more than 10% on average.
Statistically significant, of course, but as an average out of 731 companies, the impact on individual companies may be zero. Considering the investment typically needed to ensure such standards, it may not be quite the go-to choice after all.
Additionally, a hedonic strategic approach is vulnerable to added dimensions, which is what a modern incumbent is likely to face. This is because of what, in game theoretic terms, is called the Colonel Blotto game, a zero sum game with multiple mixed strategy equilibria.
To take a very basic example, imagine two armies, both, say, 100 strong. Individually, each soldier is evenly matched. If an equal number of soldiers is placed on the battlefield, the outcome will be a tie.
Now imagine that there are three battlefields in which you have to place your soldiers. You have no insight into how your opponent will play. What will you do?
Practical strategy is competitive and works, it can be argued, in a very similar fashion. Of course, in practice, the two opponents are also very rarely evenly matched – there is resource asymmetry.
This changes the expected outcomes. In a three-battlefield game, a player with 25% more resources has a 60% expected win ratio and a player with twice the resources has a 78% expected win ratio. In other words, there is still randomness, but decisively less of it.
To improve the odds, the weaker player has to add dimensions to the game. The more dimensions a game has, the less certain the outcome, as the weaker player will force the stronger player into allocating resources more thinly, weakening the stronger player’s relative advantage.
This, ladies and gentlemen, is where we find the strategic argument for agile. Indeed, agile can, and sometimes should, actually be considered in strategy. If David wants to beat Goliath, he has to change the game.
Importantly, however, because the decision to refuse to engage where the strong player has a power advantage is a strategic one, it inherently requires a strategic process and must factor in market complexities, randomness etc. So, yes, my apologies, you still need a strategy.
Large companies can, and often should, deploy defensive cover strategies to deal with the asymmetry, but that is not the same thing as taking the hedonic route and covering everything. Resources, even for category leaders, are not endless.
Similarly, “pivoting to agile”, as is currently oft-argued for, is a strategically poor choice. The effort required to continuously change course is much larger for an aircraft carrier than a dinghy.
Instead, large companies should aim to be as antifragile as possible, acknowledge their weaknesses and play to their strengths to the extent possible. All of which should be considered in the strategic process.
So, the next time you hear someone say that their goal is to be the best at everything or that all brands should act like startups, well, you know that they are, strategically speaking, talking out of their arses.