Based on research by Vikas Mittal
Executives, like everyone, tend to stay the course instead of trying something new. But the familiar path isn’t always the best one.
When it comes to choosing an electricity provider, researchers found that customers who had reliable service tended to stick with their current company. More surprisingly, so did those with unreliable service.
Many customers with spotty service stuck with unreliable providers because they found it easier to maintain the status quo. Even those who were often left in the dark valued the familiarity they had with their current provider. Despite the inconvenience of frequent power outages, they felt uncomfortable with change.
In another study, concertgoers waiting in line to buy tickets exhibited similar inertia. They stayed put in a long queue even after finding out the performer wasn’t one they liked. They stuck with it, not wanting to lose out after investing time in the endeavor.
It’s often the same for executives, who are prone to this so-called status quo bias, or a tendency to stay with a certain course of action regardless of its likelihood of success or failure. Consider a recent study in which senior executives participated in a strategy simulation to divvy up resources for a series of projects and initiatives.
Half of the executives received no input before making their choices. The other half were given prior year’s budget. The second group ended up allocating resources much like they had the previous year, even though there was little correlation with market conditions and the potential for future returns.
Many senior executives who set budgets, initiatives and priorities stubbornly stay with their initial priorities, often throwing good money after bad. But this tendency to stick with the status quo can seriously damage a firm’s strategy planning and execution. When executives stay put, they often continue allocating resources to the same initiatives, which increases costs even as revenues stagnate. As more and more initiatives are added to the strategy plan, it becomes more complicated to execute.
Executives stay put or even ramp up resources to multiple initiatives for a variety of reasons. For one, there’s comfort in what’s familiar. A project or initiative that has persisted for five or ten years is easy for an executive to understand. Analyzing an initiative that is already in place requires less time and mental effort than starting and evaluating a brand new endeavor.
Executives, like some investors, also succumb to loss aversion, or a tendency to take even bigger risks for an existing initiative to prevent further losses. They hope more money can revive the failing endeavor. It’s a tendency that researchers have found in a variety of settings. For example, long-shot bets at race tracks often balloon toward the end of the day as gamblers look to recoup their losses from earlier in the day.
Finally, executives fall victim to resource dependence. They’re reluctant to give up valuable resources — money and people — that will be allocated elsewhere. Many executives therefore find themselves using budget-based planning to maintain the status quo. They make only tiny changes to the prior year’s budget and keep most initiatives.
In our research, we found one company’s senior executives and frontline employees whittled down its 27 initiatives to 19 that should be discontinued. Yet, when executives from different functions, including marketing, HR, sales and finance, were then asked which of those 19 should ultimately be eliminated, the executives couldn’t agree on a single one.
One study found that firms with a high level of complexity in their operations and strategy lost an average of 13% to 15% in value. Multiple complex company initiatives were in part to blame for General Electric’s falling stock prices from 2008 to 2018.
Sticking with the status quo also makes executives more vulnerable to the planning fallacy, where people underestimate the cost of proposed initiatives while overestimating the benefits. There is a solution, however, for executives who want to change course.
To thrive, executives need to purposefully narrow their focus and dedicate resources only to projects that create the most customer value. This requires senior executives to shift their mindset and view customers as the biggest source of value for their company.
CEOs have to be steadfast, and sometimes even ruthless, in cutting initiatives that their senior executives might cling to. One way to ease into this is to evaluate all initiatives at the 50% complete mark. If a project is truly creating customer value, then it continues. If not, it’s scrapped.
Former ExxonMobil CEO Lee Raymond instructed his corporate-planning team to identify 3% to 5% of the company’s assets to dispose of each year. Divisions could keep assets only if they could prove their value. To use a similar approach, CEOs should first create measurable criteria to assess the success of initiatives and projects. Next, CEOs should insist that initiatives not meeting the criteria be scrapped.
When one manufacturing equipment distributor we studied took this tactic, they had dramatic success. After ranking 65 company-wide initiatives by their potential increase in customer value, they found that 10 of those initiatives lifted the company’s value by 71%.
Among those 10 initiatives, five alone boosted value by 61%. Executives funneled their resources into just those five, putting 14 initiatives on hold and dropping 46 projects entirely. Not only did they save $15 million from felled initiatives, they ultimately boosted growth due to a laser-focused customer strategy.
Vikas Mittal is the J. Hugh Liedtke Professor of Marketing at the Jones Graduate School of Business and author of “Focus: How to Plan Strategy and Improve Execution to Achieve Growth.”