My time is spent assisting SME’s to improve their performance. This covers their strategic, marketing, and operational performance. Deliberately, I initially try and downplay focus on financial performance as the primary measures, as they are outcomes of a host of other choices made throughout every business.
It is those choices around focus, and resource allocation that need to be examined.
Unfortunately, the financial outcomes are the easiest to measure, so dominate in every business I have ever seen.
When a business is profitable, even if that profit is less that the cost of capital, management is usually locked into current ways of thinking. Even when a business is marginal or even unprofitable, it is hard to drive change in the absence of a real catalyst, such as a creditor threatening to call in the receivers, or a keystone customer going elsewhere.
People are subject to their own experience and biases, and those they see and read about in others.
Convention in a wider context, status quo in their own environment.
Availability bias drives them to put undue weight in the familiar, while dismissing other and especially contrary information.
Confirmation bias makes us unconsciously seek information that confirms what we already believe, while obscuring the contrary.
Between them, these two forces of human psychology cements in the status quo, irrespective of how poor that may be.
Distinguishing between convention and principle is tough, as you need to dismiss these natural biases that exist in all of us. We must reduce everything back to first principles, incredibly hard, as we are not ‘wired’ that way.
The late Daniel Kahneman articulated these problems in his book ‘Thinking fast and Slow’ based on the data he gathered with colleague Amos Tversky in the seventies. This data interrogated the way we make decisions by experimentation, which enables others to quantitively test the conclusions, rather than relying on opinion.
That work opened a whole new field of research we now call ‘Behavioural Economics’ and won Kahneman the Nobel prize. Sadly however, while many have read and understand at a macro level these biases we all feel, it remains challenging to make that key distinction between convention, the way we do it, the way it has always been done, and the underlying principles that should drive the choices we make.
As Richard Feynman put it: “The first principle is that you must not fool yourself—and you are the easiest person to fool. So, you have to be very careful about that.”
