The True Cost of Intuition

While strategic intuition and mental models are valuable and bring common overarching themes to assist managers in making decisions, there is potentially a strong downside to relying on them across the board. We find that this cost of intuition tends to remain hidden if the business landscape is relatively benevolent. When the times are good, organizations with both good and bad strategies survive and flourish because the external conditions provide a floor to poor performance. However, in the long run, or when times get tough, it is only prudent and considered strategic choices that lead to sustained market and financial performance. So how does one discover these prudent decisions? Does one really need to go beyond the routine due diligence that one follows when making key strategic choices? Is there a need to go beyond the mental models that influence decisions such as market entry, capacity planning, investment commitment, or competence development?

We believe the answer to these questions is a resounding yes. The decision making among the top leadership or the senior managers that constitute strategy teams is often constrained by two sets of factors. The first is the availability of well-processed information that helps them predict the impact of their choice alternatives over a period of time. For example, the top management at a firm might be contemplating a rationalization of its brand portfolio. While it will be able to assess the strength of each brand in the markets it serves and the product lines it supports, it will be hard-pressed to predict, at least over the long run, what the precise consequences of the rationalization process might be. And of course, it might even be difficult to pin down precisely what rationalization really means and what the possible branding scenarios that are either better or worse than the status quo really are.

The second factor is that top management does not have an overarching model that would tie all the available information coherently and parsimoniously and use data to connect actions to outcomes in order to separate good choices from bad ones. For example, a grocery chain might want to enhance productivity in its stores, a very common action undertaken during tough economic times. One option to increase such productivity might come from reducing the number of employees in each of its retail outlets. Such employee reduction can however have two counter forces. From a cost perspective, it can reduce semivariable costs immediately and lead to higher profits. However, from a customer experience perspective, it might lead to inferior customer trips, as more irate customers might need to wait longer at the checkout lines and find it tougher to locate an in-store employee to help them with their needs. This might lead to customer exodus over time, and therefore a reduction in the profits of these stores. The firm therefore needs to understand the nature and size of these two counter forces and identify if the net impact will lead to the desired results.

Management and their strategists compensate for this lack of information or the ability to forge it together by relying on mental models that include heuristics or simple rules of thumb. These mental models come in many shapes and forms and draw upon conventional wisdom in the industry, individual and collective past experiences of the management team, domain-specific data analyses, and good old-fashioned intuition. For example, the management models might create a link between productivity enhancements and a boost in profits based on some short-term observation from the past, and use it as a generalization of their business model. The strategy team might then rely on analogy to make a connection between past implementation of the mental models and their applicability to a current situation.

Consequently, in many cases, the primary reason for building strategy around the implementation of existing mental models is that they pass a face validity test. They sound and feel right and do not conflict with one’s intuition about how things should work. For example, a popular mental model is that product design should center on customer preferences because doing so will increase market share and reduce the cost of maintaining the customer base. The model sounds right, is believable, appears universally applicable, and easily passes the face validity test. How would one argue against its central premise? Managers then connect such mental models to a set of levers that need to be pulled in order to drive business performance. Additionally, sometimes a simple set of measures is identified and used to provide rudimentary quantitative support to the underlying mental model.

However, the outcomes from pulling strategic levers are often realized over a long period. For example, the real impact of a loosening of the lending policy that qualifies homeowners for mortgages may be seen years after the policy is instituted. A lot can change between the time a strategic choice is made and the outcome is realized. These changes could be in the external circumstances as well as the way the strategy is implemented within the firm. In the technology sector, for example, the successful choice of investing in a new technology is contingent on the ability to execute the plan quickly, before competition introduces a similar or a better offering. The pace of these changes can and does outpace the speed at which mental models themselves evolve. Consequently, as things change, there is an urge to fit the new realities into the old or existing mental models and somehow manage the business with the same set of levers.

More importantly, an unintended consequence of persistence with or a repeated implementation of a small set of mental models is that they gradually perpetuate both within and across firms and ultimately get embedded in their core belief structures. They form a common fabric of strategic intuition that everyone from individual managers to divisions to the entire firm and even the industry as a whole resort to when faced with a choice in the domain where the model is set. Over time, organizations rely increasingly on the intuition surrounding these models to solve simple to complex problems. The perpetuation and a lack of continuous verification of these mental models can often result in a destructive cycle that ultimately traps organizations into a strategy prison. And unless an organization adopts a concerted approach to break free, it would continue to fit the realities of today with the intuition-based lessons of yesteryears.