Three trapsmanagers should avoidFreek Vermeulen’s research identifies three systematic, common mistakes that trip managers up.

2

Managers make decisions today that will influence their company’s performance for years to come. But they don’t know how those decisions will pan out, or how their competitors and customers will respond.

Why being a manager isn’t easy

3

Having examined the impact of various strategic decisions and practices, and after interviewing senior executives, I now fear that managers make erroneous decisions and, what’s worse, are unable to correct their flawed courses of action.

The fear of flawed decision-making

4

Choices often have different long-term and short-term effects, so managers can find it difficult to grasp what’s causing their troubles, owing to the large time gap between cause and effect. As a result, they continue their faulty course of action.

Three traps

1 The short-term trap

5

I observed clinics in the UK In-Vitro Fertilisation (IVF) industry, which are obliged to publish the percentage of successful births resulting from treatment. To increase success rates, many clinics prefer treating ‘easy patients’, seeing short-term results shoot up, but long-term performance flatten.

Case study

1 Case study

6

LEARNING

DIFFICULT

EASY

The clinics with ‘difficult patients’ learn far more in the long-term, seeing success rates rise. The ‘easy-patient’ clinics deprive themselves of such learning opportunities and see lower success rates than their more inclusive peers.

Case study

1 Case study

7

Managers must grasp the relationship between cause and effect; by avoiding difficult patients, performance results lagged behind. If the effectiveness of a particular strategy is measured solely on its short-term effects, it could be wrong in the long run.

Three traps

1 Learning

8

A strategic decision, aimed at improving one part of the organisation, its business model or value chain, can have unexpected consequences in another part of the firm.

Three traps

2 The knock-on effect trap

9

Large, R&D-intensive firms often have two separate internal functions that deal with patents: one for patent applications (filing) and another for patent enforcement. Nowadays, firms choose to outsource the patent filing to reduce costs and improve delivery. What happens?

Case study

2 Case study

10

When patent filing is outsourced, the performance of the enforcement function decreases substantially. During filing, the firm learns about its competitors and how to anticipate their actions, so how can the enforcement function attack its competitors proactively without this crucial information?

Case study

2 Case study

11

Look out for the indirect effects that are difficult to foresee. Remember that organisations are complex systems with many parts: when problems materialise in one part of the firm, it’s often difficult to understand that the root of the trouble originates from another corner.

Three traps

2 Learning

12

Managers often misjudge the effectiveness of particular strategies and practices.

Three traps

3 The observation error trap

13

In the Chinese pharmaceutical industry, there is a belief that innovators – those engaged in new drug development – outperform non-innovators. This is not true. Over 10 years, on average, non-innovators outperformed innovators. How come industry insiders have such misconceptions?

Case study

3 Case study

14

A few innovators performed really well. However, much more often, innovators were disastrously unprofitable. By contrast, the profitability of the non-innovators was much more evenly distributed. It’s easy to notice the very top performers in any given industry and only pay attention to them.

Case study

3 Case study

15

The misconception that innovation spurs on profitability is a common observation error. If we do not observe the entire spectrum of firms in an industry, and we do not pay attention to the variance in performance figures, a strategy’s benefits can be overestimated.

Three traps

3 Learning

16

Traps like these can cause managers to seriously misjudge the effectiveness of their strategies. As a manager: what can you do about it?

■■ Pay explicit attention during the decision-making process

■■ Think through possible long-term effects, potential indirect consequences, and differences in variability

■■ Do not rely on simple observations, they will not suffice.

Summary

√ The trap fix

17

The full article was published in London Business School Review Volume 26, Issue 2 2015.

Visit the website: www.london.edu/lbsr