Strategists as myth-busters: why you shouldn’t believe your own stories

People love stories. We have an insatiable tendency to put a sequence of facts into a logically connected narrative. Strategists, though, should be wary of the well-intentioned, but unreliable myth-maker.
The Strategy and Corporate Finance blog

– What is the only man-made structure visible from space? The Great Wall of China, many people will confidently reply.

This idea was first espoused in 1754, though it was clearly untestable at the time. In 1961, Soviet cosmonaut Yuri Gagarin, the first human in space, proved the conjecture to be bunk—the Great Wall is made of rocks the same color as the surrounding hills and it winds along the contours of those hills. Yet the myth persists, a piece of common wisdom that resists evidence to the contrary.

People like stories. It’s part of our design. Author NN Taleb calls it “narrative fallacy”—an insatiable tendency to put a sequence of facts into a seemingly logically connected storyline. Trouble is, all those logical links we make can be oh so wrong. We remain confident in the story because it is internally consistent and compelling —even when it has no basis in fact.

In a corporate setting, strategy development often succumbs to this weakness for hearing a good yarn. First, strategy depends on attributing causes: “We gained market share because…,” or “We make money because…,” or “After doing X, Y will happen.” Second, strategy has a protagonist in the form of a manager who, however well intentioned, is often an unreliable narrator who wants the story told his or her way.

Think about the routine act of understanding your business performance over the previous five years. It is a complex mix of where you started, what the market context was, and the moves you made along the way. But there is no accounting treatment that cleanly classifies these factors.

Just think about a seemingly simple number like market share. Did I gain market share because of exceptional execution (of course!), because of a strong presence in a high-growth category, or because I defined the market in a narrow (and perhaps convenient) way? Mostly, we jump to the most easily available explanation, a conclusion that’s prone to all sorts of biases, such as exaggerating the impact of your own action (called control fallacy) or selecting data that agrees with our views and dismissing data that does not (confirmation bias). And this assumes one is not purposely trying to spin a positive story in the first place!

Strategy development often succumbs to a weakness for hearing a good yarn, with the manager as an unreliable narrator who wants the story told his or her way

One way senior executives can address this challenge, I find, is by explicitly questioning received corporate wisdom—much as the U.S. television show MythBusters does when it puts popular assumptions and urban legends to real-life tests. In developing strategy, this approach means dispassionately identifying the elements that contribute to performance while discounting any factor contaminated by perceptions of the company’s supposed greatness.

I'll give you an example. The cost-to-sales ratio for banks or retailers can be artificially flattered in a higher price, higher inflation environment, because the denominator starts big and gets bigger. Based on this you could kid yourself you are truly efficient, and progressively becoming more so. But when the price rises stop happening - say because of a step-up in competition from a lower cost competitor—you find out the hard way that your supposed efficiency prowess was an illusion.

Myth-busting requires a curiosity that’s woefully lacking in some strategic-planning processes. We tend to assume that past patterns will continue. In fact, nearly eight in ten executives McKinsey surveyed told us that their companies are more geared to confirming existing hypotheses than to testing new ones.

To see how these dynamics play out in practice, consider the experience of a global retailer that was revisiting its strategy after the previous one had delivered five years of strong earnings. The positive results, most in the company believed, reflected good execution and the success of a recent initiative to refresh the store format. Still, the leader of the business felt there could be more to the story and worried that continuing along the same path might not produce the same results in the future. To determine what was actually driving performance, the leader met with the company’s strategy team and other executives.

This proved to be time well spent. The discussions sparked important insights—and revealed problems under the surface. While the company was improving its margins and winning customers from a higher-cost competitor, there was a worrisome decline in the productivity of older stores. The big drag on performance, the team discovered, was the loss of mainstream customers to a cheaper competitor. Hiking promotion had so far seemed to stem the march of this aggressive rival, but that was unlikely to last. Significant changes would be necessary.

One extremely common pitfall is mistaking performance for capability. This causes all sorts of problems, because performance cannot be divorced from the context in which it was created—both macroeconomic and industry. When a company performs poorly, management tends to carefully study the causes (with external causes and “unforeseen circumstances” usually topping the bill). Success, however, is usually far less scrutinized, and this is where some of the most powerful myths and misconceptions can be formed.

That’s why strategists should think of themselves as myth-busters. What untested myths lurk around your corporate boardroom? They may be great tales that you would really like to believe, but they can become horror stories if they doom you to bad decisions.

Want more? For a fuller treatment of this topic, please see this McKinsey Quarterly article I wrote with Angus Dawson and Antoine Montard, “Mastering the Building Blocks of Strategy.”

Chris Bradley is a partner in the Sydney office.

Originally published on LinkedIn.