Date
24 September 2017
In 2010, chief executive Paul Bulcke redefined Nestle as a  'nutrition, health, and wellness' company, allowing the firm to offer dozens of new products and services. Photo: Bloomberg
In 2010, chief executive Paul Bulcke redefined Nestle as a 'nutrition, health, and wellness' company, allowing the firm to offer dozens of new products and services. Photo: Bloomberg

How companies can guard against costly blind spots

In a car, blind spots are the areas of the road that the rearview and side-view mirrors do not show. A driver must constantly be aware of them – and of the potentially deadly perils they can conceal.

Businesses can have blind spots, too – and they can be equally costly, causing companies to overinvest in risky ventures or fail to take advantage of emerging opportunities.

Successful leaders are careful to identify their company’s blind spots and introduce mechanisms to ensure that no harm will come from them.

One common source of businesses’ blind spots is judgment bias.

This arises when executives have overly narrow views of their industry, underestimate their competitors’ capabilities or fail to see how the competitive landscape is changing.

A good example of a company that suffered from this kind of blind spot is Nestlé.

For decades, the Swiss multinational defined itself strictly as one the world’s leading food companies.

The label created a self-imposed restriction, constraining Nestlé to sell a relatively narrow range of products.

In 2010, however, chief executive Paul Bulcke redefined Nestlé as a “nutrition, health, and wellness” company. It was a brilliant strategic decision, allowing the firm to offer dozens of new product lines and services.

Many executive teams are overconfident about their company’s competitive strength. In front of their board, they rattle off exaggerated claims about where the company stands; some 80 percent of annual reports claim that their company is “the leader in the market”.

Unfortunately, this kind of arrogance can lead to complacency and competitive failure.

Many financial institutions, for example, are inadequately prepared to confront the new players entering their markets. Google, which is quietly testing the car-insurance waters, holds a banking license.

Meanwhile, Square, Paypal, and the start-up company Affirm are already processing a large share of online payments.

In today’s fast-paced world, it takes only a single technological improvement, price advantage or great viral advertising campaign for a competitor to leap ahead.

New players can materialize seemingly out of nowhere. The taxi company Uber did not exist five years ago; it is now valued at more than US$40 billion. The rapid expansion of Alibaba threatens Western retailers who never expected to face a Chinese competitor.

Driverless cars and pilotless planes will soon transform many industries.

Another frequent cause of companies’ blind spots is historic bias or what psychologists call an “anchoring bias” – the assumption that something that was true in the past will continue to be true in the future.

A long track record of success can warp executives’ analysis, distort their decision-making and leave them blind to incipient paradigm shifts or rapid changes in a market.

When the American retailer Target opened its first store in Canada in March 2013, its management assumed that the recipe of its success in the United States could be replicated north of the border.

Instead, just 22 months later, the company announced that it would close all of its 133 Canadian stores and lay off 17,000 people. Target’s American experience turned out to be a bad predictor of what it could expect in Canada.

Overcoming historic biases requires questioning an industry’s taboos. For example, if the creators of television series like Game of Thrones, the most pirated show in history, stopped fighting copyright infringement, they could seize an opportunity.

Advertisements directly embedded in the show would reach five million additional – illegal – viewers, in effect doubling their audience.

The television industry is not alone in failing to question and revise its traditional models, methods and operations.

The postal industry, for example, could learn a lesson from airlines, train companies, travel agencies and hotels, all of which increase their prices during periods of high demand.

The assumption that the price of mailing a letter or shipping a package should remain constant throughout the year is ripe to be challenged.

Guarding against blind spots takes careful thought, but executives and boards can put processes in place to protect against them.

For starters, companies should diversify their talent pool. Managers should ensure that they have access to people who think differently from them. Iconoclasts and outside experts should be invited to share their views.

At least 20 percent of a company’s board should be composed of individuals from outside the industry. Views from other generations and other parts of the world should be sought and solicited.

Executives should make special efforts to break taboos, examine unchallenged assumptions and question their businesses’ most sacred rules.

Even simple methods, like writing down and challenging every assumption on which a company has based its strategy, can yield valuable insights. Every company should assign someone to play the role of “dissenter”.

Sometimes called the “China breaker”, this person should be given time during board meetings to throw the good dishware against the wall and see what can be made of the pieces.

Industries are becoming increasingly complex and global competition is mounting. The companies that will be best placed to survive will be those that took the proper precautions to avoid being run off the road.

Copyright: Project Syndicate

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RA

Founder of Competia and an adjunct professor at McGill University

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