October 23, 2023
Summary.
Formulas may be road-tested approaches to business challenges, but formulas have flaws. What worked yesterday might not be applicable or even plausible today. There are three primary weaknesses to relying on formulas to address business issues in a constantly changing environment: 1.) they don’t work the same in all contexts; 2) they can be replicated by the competition; and 3) they can have hidden risks. To manage a fluctuating business climate, companies need a different toolkit. Instead of relying on static formulas that worked in the past, organizations need to focus on changing the way people think. This requires focusing on refining people’s cognitive skills, so they can better identify, assess, and solve unique problems in unique ways. This article covers three ways that companies can sharpen cognitive skills in their own organizations. Because when we know how to adapt, we can position ourselves for future success in an unknown environment.
The only constant in business is change, and it’s recently accelerated to light-speed. If the rising rates of employee burnoutare any indicator, there are no signs of all this turbulence slowing down. People will continue to face increasing stress and anxiety from persistent uncertainty and ambiguity. To mitigate this barrage, organizations often turn to the familiar — those formulas that have had a track record of success in the past. However, what worked in the past can’t fully address today’s challenges, as they were spawned in a wholly different environment.
For example, one of our financial services clients was facing a chronic decline in membership. The attrition had reached a tipping point and was at risk of moving into a free fall. The sales team was tasked with the turnaround and moved to double the size of the sales force in the field. When membership had dropped before, an influx of new personnel had brought it back up, so it seemed like a reliable move. Yet this formula didn’t produce the anticipated results, as consumers’ engagement preferences had changed to conducting more business online.
Why You Can’t Rely on Former Formulas of Success
Formulas may be road-tested approaches to business challenges, but formulas have flaws. What worked yesterday might not be applicable or even plausible today. There are three primary reasons why you can’t rely on former formulas of success:
1. Formulas don’t work the same in all contexts.
McDonald’s is famous for using a formula of granting geographically nonexclusive licenses to franchisees. Because it is perceived as successful, many new franchisers adopted this same formula. However, research has shown that granting nonexclusive licenses increases the likelihood that a new franchiser will fail. Prospective franchisees fear their business will suffer if another unit of the same brand opens nearby. New franchisers need franchisees to grow, and the non-exclusive formula isn’t well suited to an up-and-coming brand.
Or consider JCPenney. In June 2011, Ron Johnson, the man in charge of Apple’s wildly profitable retail stores and former Target executive, took the helm of the flailing retailer. He focused on implementing the formula he found successful with his previous employers — using constant markdowns, turning stores into destinations filled with branded merchandise, and reducing the number of private-label brands. Sixteen months later, Johnson was fired. Same-store sales fell by 25%, the company recorded a $1 billion loss, and its stock fell 19.72%. What worked at Target and Apple didn’t transpose onto JCPenney because their customers weren’t looking for experiences — they were looking for consistent deals, hard-to-find specialty sizes, and an unpretentious environment with high-quality house brands. Ron Johnson’s formula ended up being the exact opposite of what the JCPenney consumer was seeking.
2. Formulas also have a limited shelf life because they can be replicated by the competition.
When Bill Walsh became head coach of the National Football League’s San Francisco 49ers in 1979, he implemented a formula known as “The West Coast Offense.” With the West Coast offense, Walsh led the 49ers to Super Bowl championships during the 1981, 1984, and 1988 seasons. While the team went on to win two more Super Bowls, the benefits of the West Coast offense declined after other coaches began implementing similar formulas with their teams.
Another example is the famed “Toyota Way,” the legendary management system popularized by Jeffrey K. Liker in his 2004 book. The framework centered on a set of principles around organizational culture and continuous improvement (Kaizen),focusing on the root cause of problems, and engaging in ongoing innovation. This formula enabled Toyota to gain significant market share in the American market between 1986 and 1997. However, since then, competitors including Ford, Honda, General Motors, and Stellantis all have adopted the system, significantly diminishing the competitive advantage the formula afforded.
3. Formulas can have hidden risks.
Research on technology startups in Silicon Valley found the “High-Commitment Management Model,” which focuses on hiring employees based on cultural fit and developing strong emotional bonds with them, is less likely to fail and more likely to ensure the company goes public as compared to startups that used other hiring approaches. However, the same study found that changing the hiring structure after a startup launch triples the likelihood of failure. While this may be an effective model for a small, flat organization, once the company begins to scale, the formula isn’t sustainable. This forces a major change in hiring practices, which in turn, puts the organization at risk.
The Just-In-Time production system was also a unique approach formulated by Toyota. Focused on making manufacturing as efficient as possible, Just-In-Time reduces the waiting time between work in progress procedures and lowers supply chain costs, by delivering raw materials only when needed, rather than holding excess inventory. Yet when the 2020 pandemic hit, manufacturers had little inventory to meet production demand, and no capability to resupply. As a result, global shortages are still reverberating across supply chains and manufacturers today.
To manage a fluctuating business climate, companies need a different toolkit. Instead of relying on static formulas that worked in the past, organizations need to focus on changing the way people think. This requires focusing on refining people’s cognitive skills, so they can better identify, assess, and solve unique problems in unique ways.
How to Sharpen Cognitive Skills in Your Organization
Cognitive skills are the mental processes that allow us to perceive, understand, and analyze information, and are essential for problem-solving, decision-making, and critical thinking. Psychologists Daniel Kahneman and Amos Tversky first researched these higher-order processes in their best-selling book, Thinking, Fast and Slow. They found that cognitive skills — which they deemed “slow” thinking — require more time and energy to effectively evaluate and apply reasoning to a problem. On the other hand, “fast thinking,” is a more automatic and reactive response. Essentially, we need to apply our “slow” thinking skills to make better decisions and more effectively solve complex challenges. Fortunately, cognitive thinking skills can be expanded and improved with practice and training. Here are three basic ways to sharpen your organization’s cognitive skills:
1. Analyze known unknowns
Donald Rumsfeld, George W. Bush’s secretary of defense, became well known for his famous statement, “As we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns — the ones we don’t know we don’t know.”
While Rumsfeld didn’t invent the concept, what’s deemed as the Rumsfeld Matrix is a cognitive method for defining the things you think you know that it turns out you did not know. There are four categories of thinking in this matrix: 1) Known knowns: things we are aware of and understand; 2) Known unknowns: things we are aware of but don’t understand; 3) Unknown knowns: things we understand but are not aware of; and 4) Unknown unknowns: things we are neither aware of nor understand. Using this approach can help to better identify blind spots, false assumptions, and information gaps.
For instance, an organization may know there’s a risk of losing 10% of their customers to a new competitor (known knowns) and can easily manage and quantify the impact. However, they may also know there is a risk that rain may affect business operations, but a lack of knowledge about how much rain will fall (known unknowns). This scenario requires multiple action plans for the most probable outcomes and to be ready to switch to the right plan of action once more information is available.
2. Encourage divergent thinking
Divergent thinking is a thought process used to generate creative ideas by exploring many possible solutions. It involves breaking a problem down into its various components to gain insight about its various components. Done in a spontaneous, free-flowing manner, ideas are generated in a random, unorganized fashion.
An example of divergent thinking would be generating as many uses as possible for a normal, everyday object. For instance, using a coin as a flathead screwdriver, using a fork to dig a hole. By looking at a situation from a unique perspective, it can give rise to a unique solution. Organizations can apply divergent thinking in a variety of ways. This can be something as simple as bringing groups of employees together who normally don’t engage with one another to practicing synetics — the act of stimulating thought processes to uncover alternative ways to overcome obstacles. For instance, instead of tasking employees with finding ways to retain customers, they could be challenged with developing a list of ways to lose them, uncovering new ideas which may never have been considered if approached the typical way.
3. Apply first-principles thinking
First-principles thinking is the idea of breaking down complicated problems into basic elements and then reassembling them from the ground up. Every play we see in the NBA was at some point created by someone who thought, “What would happen if the players did this?” and went out and tested the idea. Since then, thousands, if not millions, of plays have been created.
Coaches reason from first principles. The rules of basketball are the first principles: they govern what you can and can’t do. Everything is possible as long as it’s not against the rules. First-principles thinking allows for keeping better focus on the root components of problems rather than simply reacting to the symptoms.
For instance, Elon Musk, in his mission to transform space travelwith his company SpaceX, tried to buy rockets so he could launch them into orbit. However, the costsof buying a rocket outright were too high to make SpaceX a successful company. Instead, he applied first-principles thinking to boil down a rocket to its most fundamental components and materials. He realized the price of the materials to build a rocket were much lower than buying one outright. In other words, building a rocket ship would make more sense for the business model he was creating.
As is the case with so many things, success is found in moderation. Formulas can be a helpful guide, but complex challenges typically require unique insights and perspectives which only come from applying cognitive thinking skills. Focusing on these skills also helps employees to be more independent learners. If an individual knows how to learn, they will grow abilities and behaviors that are transferable to all kinds of contexts and problems thrown their way, which is inherent to the art of effectively navigating change. When we know how to adapt, we can position ourselves for future success in an unknown environment.
Andrea Belk Olson is a differentiation strategist, speaker, author, and customer-centricity expert. She is the CEO of Pragmadik, a behavioral science driven change agency, and has served as an outside consultant for EY and McKinsey. She is the author of 3 books, a 4-time ADDY® award winner, and contributing author for Entrepreneur Magazine, Rotman Management Magazine, Chief Executive Magazine, and Customer Experience Magazine
Article link: https://hbr.org/2023/10/old-formulas-wont-help-you-solve-todays-business-problems?
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